SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission File Number 1-11398
ended September 30, 2006
| | | |
| For the quarterly period ended March 31, 2007 | | | Commission File Number 1-11398 |
|
CPI AEROSTRUCTURES, INC.
(Exact
(Exact name of registrant as specified in its charter)
New York 11-2520310
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
60 Heartland Blvd., Edgewood, NY 11717
(Address of principal executive offices) (zip code)
| | | |
| New York | | | 11-2520310 |
| (State or other jurisdiction of incorporation or organization) | | | (IRS Employer Identification Number) |
| 60 Heartland Blvd., Edgewood, NY | | | 11717 |
| (Address of principal executive offices) | | | (zip code) |
|
(631) 586-5200
(Registrant's
(Registrant’s telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]![[X]](https://capedge.com/proxy/10-Q/0000950136-07-003515/xbox.gif){kind=small}
No [_]
![[ ]](https://capedge.com/proxy/10-Q/0000950136-07-003515/ebox.gif){kind=small}
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer"‘‘accelerated filer’’ and "large‘‘large accelerated filer"filer’’ in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
As of NovemberMay 10, 2006,2007, the number of shares of common stock, par value $.001 per share, outstanding was 5,447,042.
5,730,273.
INDEX
- --------------------------------------------------------------------------------
| ||
| | |
|
Part I: Financial Information:
Item 1 - Condensed— Financial Statements:
Condensed Balance Sheets as of September 30, 2006 (Unaudited) and
December 31, 2005 3
Condensed Statements of Operations for the Three Months and Nine
Months ended September 30, 2006 (Unaudited) and 2005 (Unaudited) 4
Condensed Statements of Cash Flows for the Nine Months ended
September 30, 2006 (Unaudited) and 2005 (Unaudited) 5
Notes to Condensed Financial Statements (Unaudited) 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3 - Quantitative and Qualitative Disclosures About Market
Risk 18
Item 4 - Controls and Procedures 18
Part II. Other Information
Item 1A. - Risk Factors 19
Item 2 - Unregistered Sales of Equity Securities 19
Item 6 - Exhibits 19
Signatures and Certifications 20
2
PART I: FINANCIAL INFORMATION:
ITEM 1 - FINANCIAL STATEMENTS:
CPI AEROSTRUCTURES, INC.
CONDENSED BALANCE SHEETS
- --------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31,
2006 2005
(UNAUDITED) (NOTE 1)
------------- ------------
ASSETS
Current Assets:
Cash $ 85,412 $ 877,182
Accounts receivable 2,016,089 1,849,796
Costs and estimated earnings in excess of billings on uncompleted
contracts 26,272,509 28,389,202
Prepaid expenses and other current assets 136,008 342,165
Refundable income taxes 878,987 --
----------- -----------
TOTAL CURRENT ASSETS 29,389,005 31,458,345
Plant and equipment, net 894,110 962,209
Other assets 249,775 267,230
----------- -----------
TOTAL ASSETS $30,532,890 $32,687,784
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,347,959 $ 4,559,181
Accrued expenses and other current liabilities 541,899 648,521
Current portion of long-term debt 57,568 87,617
Line of credit 350,000 --
Income taxes payable -- 133,110
----------- -----------
TOTAL CURRENT LIABILITIES 4,297,426 5,428,429
Long-term debt, net of current portion 2,474 42,188
Other liabilities 87,630 54,895
----------- -----------
TOTAL LIABILITIES 4,387,530 5,525,512
=========== ===========
Commitments
Shareholders' Equity:
Common stock - $.001 par value; authorized 50,000,000 shares, issued 5,478,057
and 5,475,057 shares, respectively, and
outstanding 5,447,042 and 5,444,042 shares, respectively 5,478 5,475
Additional paid-in capital 23,028,237 22,768,135
Retained earnings 3,432,501 4,709,518
Treasury stock, 31,015 shares of common stock (at cost) (320,856) (320,856)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 26,145,360 27,162,272
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $30,532,890 $32,687,784
=========== ===========
| |
| |
|
| | | | | | | | | | | | |
| | March 31, 2007 | | | December 31, 2006 | |||||||
| | (Unaudited) | | | (Note 1) | |||||||
| ASSETS | | | | | | | | | | | ||
| Current Assets: | | | | | | | | | | | ||
| Cash | | | | $ | 46,747 | | | | | $ | 38,564 | |
| Accounts receivable, net | | | | | 2,979,121 | | | | | | 1,422,135 | |
| Costs and estimated earnings in excess of billings on uncompleted contracts | | | | | 28,180,320 | | | | | | 28,783,708 | |
| Prepaid expenses and other current assets | | | | | 108,304 | | | | | | 133,618 | |
| Refundable income taxes | | | | | 628,470 | | | | | | 628,470 | |
| Total current assets | | | | | 31,942,962 | | | | | | 31,006,495 | |
| Plant and equipment, net | | | | | 816,689 | | | | | | 855,736 | |
| Deferred income taxes | | | | | 61,000 | | | | | | 78,000 | |
| Other assets | | | | | 214,137 | | | | | | 219,956 | |
| Total Assets | | | | $ | 33,034,788 | | | | | $ | 32,160,187 | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | ||
| Current liabilities: | | | | | | | | | | | ||
| Accounts payable | | | | $ | 5,208,163 | | | | | $ | 4,758,763 | |
| Accrued expenses | | | | | 101,091 | | | | | | 225,040 | |
| Current portion of long-term debt | | | | | 30,560 | | | | | | 42,188 | |
| Line of credit | | | | | 200,000 | | | | | | 350,000 | |
| Deferred income taxes | | | | | 508,000 | | | | | | 508,000 | |
| Income taxes payable | | | | | 150,000 | | | | | | — | |
| Total current liabilities | | | | | 6,197,814 | | | | | | 5,883,991 | |
| Other liabilities | | | | | 106,555 | | | | | | 98,541 | |
| Total Liabilities | | | | | 6,304,369 | | | | | | 5,982,532 | |
| Shareholders’ Equity: | | | | | | | | | | | ||
| Common stock – $.001 par value; authorized 50,000,000 shares, issued 5,618,807 and 5,478,807 shares, respectively, and outstanding 5,555,273 and 5,447,792 shares, respectively | | | | | 5,619 | | | | | | 5,479 | |
| Additional paid-in capital | | | | | 23,553,104 | | | | | | 23,048,520 | |
| Retained earnings | | | | | 3,712,702 | | | | | | 3,444,512 | |
| Treasury stock, 63,534 and 32,980 shares (at cost), respectively | | | | | (541,006 | ) | | | | | (320,856 | ) |
| Total Shareholders’ Equity | | | | | 26,730,419 | | | | | | 26,177,655 | |
| Total Liabilities and Shareholders’ Equity | | | | $ | 33,034,788 | | | | | $ | 32,160,187 | |
| ||||||||||||
See Notes to Condensed Financial Statements
3
CPI AEROSTRUCTURES, INC.
CONDENSED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2006 2005 2006 2005
(UNAUDITED) (UNAUDITED)
-------------------------- ---------------------------
Revenue $4,412,931 $6,452,246 $11,900,141 $19,010,780
Cost of sales 3,651,385 4,769,256 11,077,893 13,763,040
---------- ---------- ----------- -----------
Gross profit 761,546 1,682,990 822,248 5,247,740
Selling, general and administrative expenses 774,123 803,492 2,756,265 2,570,393
---------- ---------- ----------- -----------
Income (loss) before provision for (benefit from)
income taxes (12,577) 879,498 (1,934,017) 2,677,347
---------- ---------- ----------- -----------
Provision for (benefit from) income taxes -- 331,000 (657,000) 1,041,000
---------- ---------- ----------- -----------
Net income (loss) $ (12,577) $ 548,498 $(1,277,017) $ 1,636,347
Income (loss) per common share - basic $ 0.00 $ 0.10 $ (0.23) $ 0.30
Income (loss) per common share - diluted $ 0.00 $ 0.09 $ (0.23) $ 0.27
========== ========== =========== ===========
Shares used in computing earnings (loss) per common share:
Basic 5,447,042 5,421,650 5,446,526 5,419,411
Diluted 5,447,042 6,115,014 5,446,526 6,120,977
---------- ---------- ----------- -----------
| |
| |
|
| | | | | | | | | | | | |
| | For the Three Months Ended March 31, | ||||||||||
| | 2007 | | | 2006 | |||||||
| | (Unaudited) | ||||||||||
| Revenue | | | | $ | 5,471,968 | | | | | $ | 5,030,193 | |
| Cost of sales | | | | | 4,113,287 | | | | | | 4,065,002 | |
| Gross profit | | | | | 1,358,681 | | | | | | 965,191 | |
| Selling, general and administrative expenses | | | | | 923,492 | | | | | | 848,297 | |
| Income before provision for income taxes | | | | | 435,189 | | | | | | 116,894 | |
| Provision for income taxes | | | | | 167,000 | | | | | | 48,000 | |
| Net income | | | | $ | 268,189 | | | | | $ | 68,894 | |
| Basic net income per common share | | | | $ | 0.05 | | | | | $ | 0.01 | |
| Diluted net income per common share | | | | $ | 0.05 | | | | | $ | 0.01 | |
| Shares used in computing income per common share: | | | | | | | | | | | ||
| Basic | | | | | 5,501,060 | | | | | | 5,445,475 | |
| Diluted | | | | | 5,919,262 | | | | | | 6,126,967 | |
| ||||||||||||
See Notes to Condensed Financial Statements
4
CPI AEROSTRUCTURES, INC.
CONDENSED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 2005
- ------------------------------------------------------------------------- ----------- -----------
(UNAUDITED)
Cash flows from operating activities:
Net income (loss) $(1,277,017) $ 1,636,347
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 158,633 143,685
Deferred rent 21,822 41,172
Stock-based compensation expense 241,054 --
Tax benefit from stock option exercise (4,600) --
Deferred portion of provision for income taxes (48,000) 36,000
Changes in operating assets and liabilities:
Increase in accounts receivable (166,293) (116,745)
(Increase) decrease in costs and estimated earnings in excess of
billings on uncompleted contracts 2,116,692 (1,841,575)
Decrease in prepaid expenses and other assets 223,612 48,484
Increase in refundable income taxes (878,987) --
Decrease in accounts payable, accrued expenses and other current
liabilities (1,258,931) (1,000,878)
Increase (decrease) in income taxes payable (133,110) 330,000
----------- -----------
Net cash used in operating activities (1,005,125) (723,510)
----------- -----------
Cash used in investing activities - purchase of plant and equipment (90,532) (255,581)
----------- -----------
Cash flows from financing activities:
Net repayment of long-term debt (69,763) (51,570)
Proceeds from line of credit 350,000 --
Proceeds from exercise of stock options 19,050 47,591
Tax benefit from stock option exercise 4,600 --
----------- -----------
Net cash provided by (used in) financing activities 303,887 (3,979)
----------- -----------
Net decrease in cash (791,770) (983,070)
Cash at beginning of period 877,182 1,756,350
----------- -----------
Cash at end of period $ 85,412 $ 773,280
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 8,891 $ 10,739
=========== ===========
Income taxes $ 403,093 $ 675,000
=========== ===========
| ||
| | |
|
| | | | | | | | | | | | |
| | For the Three Months Ended March 31, | ||||||||||
| | 2007 | | | 2006 | |||||||
| | (Unaudited) | ||||||||||
| Cash flows from operating activities: | | | | | | | | | | | ||
| Net income | | | | $ | 268,189 | | | | | $ | 68,894 | |
| Adjustments to reconcile net income to net cash used in operating activities: | | | | | | | | | | | ||
| Depreciation and amortization | | | | | 55,929 | | | | | | 50,751 | |
| Other liabilities | | | | | 8,014 | | | | | | 10,912 | |
| Stock compensation expense | | | | | 109,223 | | | | | | 98,823 | |
| Tax benefit from stock option exercise | | | | | (207,000 | ) | | | | | (4,600 | ) |
| Changes in operating assets and liabilities: | | | | | | | | | | | ||
| (Increase) decrease in accounts receivable | | | | | (1,556,986 | ) | | | | | 260,978 | |
| Decrease in costs and estimated earnings in excess of billings on uncompleted contracts | | | | | 603,388 | | | | | | 234,283 | |
| (Increase) decrease in prepaid expenses and other assets | | | | | 48,133 | | | | | | (62,713 | ) |
| Increase (decrease) in accounts payable, accrued expenses and other current liabilities | | | | | 325,451 | | | | | | (865,370 | ) |
| Increase (decrease) in income taxes payable | | | | | 150,000 | | | | | | (133,110 | ) |
| Net cash used in operating activities | | | | | (195,659 | ) | | | | | (341,152 | ) |
| | | | | | | | | | |||
| Cash used in investing activities – purchase of plant and equipment | | | | | (16,880 | ) | | | | | (8,533 | ) |
| Cash flows from financing activities: | | | | | | | | | | | ||
| Payment of long-term debt | | | | | (11,628 | ) | | | | | (28,508 | ) |
| Repayment of line of credit | | | | | (150,000 | ) | | | | | — | |
| Proceeds from exercise of stock options | | | | | 175,350 | | | | | | 19,050 | |
| Tax benefit from stock option exercise | | | | | 207,000 | | | | | | 4,600 | |
| Net cash provided by (used in) financing activities | | | | | 220,722 | | | | | | (4,858 | ) |
| Net increase (decrease) in cash | | | | | 8,183 | | | | | | (354,543 | ) |
| Cash at beginning of period | | | | | 38,564 | | | | | | 877,182 | |
| Cash at end of period | | | | $ | 46,747 | | | | | $ | 522,639 | |
| Supplemental disclosures of cash flow information: | | | | | | | | | | | ||
| Cash paid during the period for: | | | | | | | | | | | ||
| Interest | | | | $ | 9,342 | | | | | $ | 1,941 | |
| Income taxes | | | | $ | — | | | | | $ | 403,093 | |
| ||||||||||||
See Notes to Condensed Financial Statements
5
CPI Aerostructures, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
| |
| |
|
1. INTERIM FINANCIAL InterimFinancialStatements:
The financial statements of CPI Aerostructures, STATEMENTS: Inc. ("the Company"(the ‘‘Company’’) as of September 30, 2006March 31, 2007 and for the three and nine months ended September 30,March 31, 2007 and 2006 and 2005 are unaudited, however, in the opinion of the management of the Company, these financial statements reflect all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the financial position of the Company and its results of operations and cash flows. The results of operations for such interim periods are not necessarily indicative of the results to be obtained for a full year.
The balance sheet at December 31, 20052006 has been derived from the audited financial statements at that datedate; but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the financial statements and notes thereto included in the Company'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2005.
Certain reclassifications have been made in the
prior period financial statements to conform to
the current period presentation.
2006.
2. STOCK-BASED COMPENSATION stock-based compensation
Effective January 1, 2006, the Company began recording compensation expense associated with stock options in accordance with Statement of Financial Accounting Standard ("SFAS"Standards (‘‘SFAS’’) No. 123R, "Share-Based‘‘Share-Based Payment." Prior to January
1, 2006 the Company accounted for stock-based
compensation related to stock options under the
recognition and measurement principles of
Accounting Principles Board Opinion No. 25;
therefore, the Company measured compensation
expense for its stock option plans using the
intrinsic value method, that is, as the excess,
if any, of the fair market value of the
Company's stock at the grant date over the
amount required to be paid to acquire the
stock, and provided the disclosures required by
SFAS No. 123 and 148. The Company has adopted
the modified prospective transition method
provided under SFAS 123R, and as a result, has
not retroactively adjusted results from prior
periods. Under this transition method,
compensation expense associated with stock
options in the three and nine month periods
ended September 30, 2006 includes: (1) period
expense related to the remaining unvested
portion of all stock option awards granted
prior to January 1, 2006, based on the grant
date fair value estimated in accordance with
the original provisions of SFAS 123; and (2)
expense related to all stock option awards
granted subsequent to January 1, 2006, based on
the grant date fair value estimated in
accordance with the provisions of SFAS 123R.
As a result of the adoption of SFAS 123R, the
Company's net loss for the nine months ended
September 30, 2006 includes approximately
$252,000 of non-cash compensation expense
related to the Company's stock options. The
Company recorded no compensation expense
related to stock options for the three month
period ended September 30, 2006. The non-cash
compensation expense related to all of the
Company's stock-based compensation arrangements
is recorded as a component of selling, general
and administrative expense. Prior to the
Company's adoption of SFAS 123R, the Company
presented tax benefits resulting from the
exercise of stock options as cash flows from
operating activities on the Company's
consolidated statements of cash flows. SFAS
123R requires cash flows resulting from tax
deductions in excess of the cumulative
compensation cost recognized for options
exercised (excess tax benefits) be classified
as cash inflows from financing activities and
cash outflows from operating activities.
6
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
’’
In November 2005, the FASBFinancial Accounting Standards Board (‘‘FASB’’) issued FASB Staff Position No. FAS 123R-3, "Transition‘‘Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards."’’ The Company has elected to adopt the alternative transition method provided in the FASB Staff Position for calculating the tax effects of share-based compensation pursuant to SFAS 123R. The alternative transition method includes a simplified method to establish the beginning balance of the additional paid-in capital pool related to the tax effects of employee share-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of SFAS 123R.
In April 1992,
As a result of the Company adoptedadoption of SFAS 123R, the 1992
Stock Option Plan (the "1992 Plan"). The 1992
Plan, for which 83,334 common shares are
reserved for issuance, providesCompany’s net income for the issuancethree months ended March 31, 2007 and 2006 includes approximately $109,000 and $99,000, respectively, of either incentive stock options or
nonqualified stock options to employees,
consultants, directors or others who provide
servicesnon-cash compensation expense related to the Company.Company’s stock options. The options may not be
exercised more than five years from the date of
issuance. No more options may be granted under
the 1992 Plan.
In 1995, the Company adopted the 1995 Stock
Option Plan (the "1995 Plan"), as amended, for
which 200,000 common shares are reserved for
issuance. The 1995 Plan provides for the
issuance of either incentive stock options or
nonqualified stock optionsnon-cash compensation expense related to employees,
consultants, directors or others who provide
services to the Company. The options' exercise
price is equal to the closing priceall of the Company's shares on the dayCompany’s stock-based compensation arrangements is recorded as a component of issuance, except
for incentive stock options granted to the
Company's former president, which are
exercisable at 110%selling, general and administrative expense.
CPI Aerostructures, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
average assumptions were used for option grants
during the nine month period ended September
30, 2006 and 2005:
September 30,
2006 2005
------- ------
Risk-free interest rate 4.2% 3.9%
Expected volatility 22% 32%
Dividend yield 0% 0%
Expected option term 5 years 5years
The risk free interest rate for the nine months
ended September 30, 2006 and 2005 is based on
the 5 year U.S. Treasury note rate on the day
of grant. The expected volatility computation
is based on the average of the volatility over
the most recent two year period. The Company
has never paid a dividend, and is not expected
to pay a dividend in the foreseeable future,
therefore the dividend yield is assumed to be
zero.
| |
| |
|
A summary of the status of the Company'sCompany’s stock option plans as of September 30, 2006March 31, 2007 and changes during the period is as follows:
Weighted Weighted
average average remaining Aggregate
Exercise contractual Intrinsic
Fixed Options Options Price term (in years) Value
------------------------- --------- -------- ----------------- ----------
Outstanding
at beginning of period 1,130,085 $4.89
Granted during period 85,000 8.57
Exercised (3,000) 6.35
Forfeited/Expired --
--------- ----- ---- ----------
Outstanding and vested
at end of period 1,212,085 $5.14 4.55 $1,542,050
========= ===== ==== ==========
The weighted-average fair value of each option
granted during the nine months ended September
30, 2006 and 2005, estimated as of the grant
date using the Black-Scholes option valuation
model was $2.45 and $3.49, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed Options | | | Options | | | Weighted average Exercise Price | | | Weighted average remaining contractual term (in years) | | | Aggregate Intrinsic Value | ||||||||||||
| Outstanding at beginning of period | | | | | 1,240,418 | | | | | $ | 5.17 | | | | | | | | | | | | ||
| Granted during period | | | | | 25,000 | | | | | | 7.24 | | | | | | | | | | | | ||
| Exercised | | | | | (140,000 | ) | | | | | 2.83 | | | | | | | | | | | | ||
| Outstanding at end of period | | | | | 1,125,418 | | | | | $ | 5.51 | | | | | | 4.24 | | | | | $ | 2,394,864 | |
| Vested at end of period | | | | | 1,100,418 | | | | | $ | 5.48 | | | | | | 4.12 | | | | | $ | 2,394,602 | |
| ||||||||||||||||||||||||
As of September 30, 2006March 31, 2007, there was no$83,979 of unrecognized compensation cost related to non-vested stock option awards.
The net income forawards which will be amortized through December 2008.
During the three months and nine
months ended September 30, 2005 does not
include any compensation charges relatedMarch 31, 2007, 55,000 stock options were exercised for cash resulting in proceeds to
options granted to employees. The following
table illustrates the pro forma effect on net
loss and loss per share assuming the Company had appliedof $175,350. In addition, 85,000 stock options were exercised on a cashless basis, pursuant to provisions of the stock option plans. The Company received 30,554 shares of its common stock in exchange for the 85,000 shares issued in the exercise. The 30,554 shares that the Company received were valued at $220,150, the fair market value recognition
provisions of SFAS 123 instead of the intrinsic
value method under APB No. 25shares on the date of exercise, and were added to stock-based
employee compensation for the three month and
nine month periods ended September 30, 2005:
8
treasury stock.
CPI Aerostructures, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
| |
| |
|
Three Months Nine Months
------------ -----------
Net income, as reported $548,498 $1,636,347
Stock compensation expense, net3. costs and estimated earnings in excess of tax 76,287 406,918
-------- ----------
Net income, pro forma $472,211 $1,229,429
======== ==========
Basic net income per common share, as reported $0.10 $0.30
Diluted net income per common share, as reported $0.09 $0.27
Basic net income per common share, pro forma $0.09 $0.23
Diluted net income per common share, pro forma $0.08 $0.20
billings on uncompleted contracts
Cash received from stock option exercises for
the nine months ended September 30, 2006 and
2005 was $19,050 and $47,591, respectively. The
income tax benefit from stock option exercises
totaled $4,600 and $73,000 for the nine months
ended September 30, 2006 and 2005,
respectively.
9
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
3. COSTS AND ESTIMATED :
Costs and estimated earnings in excess of EARNINGS IN EXCESS OF billings on uncompleted contracts consist of:
BILLINGS ON UNCOMPLETED
CONTRACTS:
| | | | | | | | | | | | | | | | | | |
| | March 31, 2007 | ||||||||||||||||
| | U.S. Government | | | Commercial | | | Total | ||||||||||
| Costs incurred on uncompleted contracts | | | | $ | 48,371,436 | | | | | $ | 15,433,471 | | | | | $ | 63,804,907 | |
| Estimated earnings | | | | | 29,190,897 | | | | | | 6,721,367 | | | | | | 35,912,264 | |
| Sub-total | | | | | 77,562,333 | | | | | | 22,154,838 | | | | | | 99,717,171 | |
| Less billings to date | | | | | 51,154,802 | | | | | | 20,382,049 | | | | | | 71,536,851 | |
| Costs and estimated earnings in excess of billings on uncompleted contracts | | | | $ | 26,407,531 | | | | | $ | 1,772,789 | | | | | $ | 28,180,320 | |
| ||||||||||||||||||
| | | | | | | | | | | | | | | | | | |
| | December 31, 2006 | ||||||||||||||||
| | U.S. Government | | | Commercial | | | Total | ||||||||||
| Costs incurred on uncompleted contracts | | | | $ | 45,799,483 | | | | | $ | 15,312,176 | | | | | $ | 61,111,659 | |
| Estimated earnings | | | | | 27,022,765 | | | | | | 6,666,257 | | | | | | 33,689,022 | |
| Sub-total | | | | | 72,822,248 | | | | | | 21,978,433 | | | | | | 94,800,681 | |
| Less billings to date | | | | | 45,978,150 | | | | | | 20,038,823 | | | | | | 66,016,973 | |
| Costs and estimated earnings in excess of billings on uncompleted contracts | | | | $ | 26,844,098 | | | | | $ | 1,939,610 | | | | | $ | 28,783,708 | |
| ||||||||||||||||||
September 30, 2006
---------------------------------------
U.S.
Government Commercial Total
----------- ----------- -----------
Costs incurred on uncompleted
contracts $44,486,743 $15,251,819 $59,738,562
Estimated earnings 26,665,989 6,639,980 33,305,969
----------- ----------- -----------
71,152,732 21,891,799 93,044,531
Less billings to date 47,132,716 19,639,306 66,772,022
----------- ----------- -----------
COSTS AND ESTIMATED EARNINGS
IN EXCESS OF BILLINGS ON
UNCOMPLETED CONTRACTS $24,020,016 $ 2,252,493 $26,272,509
=========== =========== ===========
December 31, 2005
---------------------------------------
U.S.
Government Commercial Total
----------- ----------- -----------
Costs incurred on uncompleted
contracts $41,075,851 $14,400,603 $55,476,454
Estimated earnings 25,430,030 6,273,397 31,703,427
----------- ----------- -----------
66,505,881 20,674,000 87,179,881
Less billings to date 39,878,934 18,911,745 58,790,679
----------- ----------- -----------
COSTS AND ESTIMATED EARNINGS
IN EXCESS OF BILLINGS ON
UNCOMPLETED CONTRACTS $26,626,947 $ 1,762,255 $28,389,202
=========== =========== ===========
10
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
4. INCOMEincome PER COMMON SHARE: SHARE:
Basic income per common share is computed using the weighted average number of shares outstanding. Diluted income per common share for the three month and nine month periods ended September 30, 2005March 31, 2007 and 2006 is computed using the weighted-average number of shares outstanding adjusted for the incremental shares attributed to outstanding options and warrants to purchase common stock. Incremental shares of 693,364418,202 and 701,566681,492 were used in the calculation of diluted income per common share in the three month period ended March 31, 2007 and nine month periods ended September 30, 2005,2006, respectively. Incremental shares of 648,388383,750 and 640,186235,000 were not included in the diluted earnings per share calculations for the three month and nine month periods ended September
30, 2005,March 31, 2007 and 2006, respectively, as their exercise price was in excess of the Company'sCompany’s average stock price for the respective period and, accordingly, these shares are not assumed to be exercised for the diluted earnings per share calculation, as theyth ey would be anti-dilutive.
Incremental shares of 1,407,085 were not
included in the diluted earnings per share
calculation at September 30, 2006 because of
the reported net loss, and accordingly their
effect would be anti-dilutive.
5. CREDIT FACILITY:
In September 2003, the Companywe entered into a three year, $5.0 million revolving credit facility with JP Morgan Chase Bank ("(the ‘‘Chase Facility"Facility’’), secured by the assets of the
Company. The facility specified interest rates
ranging between the Prime Rate and 225 basis
points over LIBOR, depending on certain terms
and conditions.
our assets.
In October 2006, the Chase Facility was amended and restated to provide for a $1.0 million
revolving credit facility, secured by the
assets of the Company.restated. The facility specifies an interest rate equal to the greater of (a) the prime rate and (b) the federal funds rate, ,
plus 0.5%. The facility expiresChase Facility expired on December 31, 2006.
As2006 and was extended until April 30, 2007.
In May 2007, the Chase Facility was further amended to provide for a $200,000 revolving credit facility and extended until June 30, 2007. Amounts borrowed under this agreement must be repaid at the expiration of September 30,the agreement.
CPI Aerostructures, Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
| |
| |
|
In August 2006, the Company had borrowed $350,000 under the Chase Facility. As of March 31, 2007, $200,000 remained outstanding and as of May 11, 2007, $100,000 remained outstanding.
6. recent accounting pronouncements
In June 2006, the FASB issued FASB Interpretation 48, ‘‘Accounting for Uncertainty in Income Taxes (as amended) — an interpretation of Statement of Accounting Standards 109’’ (‘‘FIN 48’’). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS 109, ‘‘Accounting for Income Taxes,’’ and prescribes a recognition threshold and measurement attribute for the financial statements recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. During the three months ended March 31, 2007, the Company adopted FIN 48 and the impact of adoption was not material to its financial position and results of operations.
We may, from time to time, be assessed interest and/or penalties by major taxing jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. In the event we have received an assessment for interest and/or penalties, it has been classified in the statement of operations as other general and administrative expenses.
CPI AEROSTRUCTURES, INC.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
— Management’s Discussion and Analysis of Financial Condition and Results of Operations
| |
| |
|
The following discussion should be read in conjunction with the Company'sCompany’s Condensed Financial Statements and footnotes thereto contained in this report.
FORWARD LOOKING STATEMENTS
The statements discussed
Forward Looking Statements
When used in this report include forward lookingForm 10-Q and in future filings by us with the Commission, the words or phrases ‘‘will likely result,’’ ‘‘management expects’’ or ‘‘we expect,’’ ‘‘will continue,’’ ‘‘is anticipated,’’ ‘‘estimated’’ or similar expressions are intended to identify ‘‘forward-looking statements’’ within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward-looking statements, that
involveeach of which speaks only as of the date made. As such statements are subject to certain risks and uncertainties includingthat could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The risks are included in ‘‘Item 1A: Risk Factors’’ included in our Annual Report on F orm 10-K for the timely deliveryyear ended December 31, 2006 and acceptance‘‘Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ included in this Form 10-Q. We have no obligation to publicly release the Company's products andresult of any revisions, which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the other risks detailed from time to timedate of such statements.
Business Operations
We are engaged in the Company's reports filed with the Securities and Exchange Commission.
BUSINESS OPERATIONS
The operations of CPI Aerostructures, Inc. consist of the design andcontract production of structural aircraft parts principally for the United States Air Force and other branches of the U.S. armed forces.forces and, to a lesser extent, for prime military aircraft contractors. We also provide aircraft parts to the commercial sector of the aircraft industry, but we are not
currently pursuing business in this sector.industry. Our strategy for growth includes de-emphasizing our commercial operations and concentrating on sales to the
government and tomilitary sales as a prime contractors.
We compete withcontractor and as a subcontractor for other defense prime contractors to win contracts through a process
of competitive bidding. contractors.
Notwithstanding defense budget increases and the Department of Defense'sDoD’s commitment to maintaining support for aging aircraft as
affirmed induring the DoD'stwo-year period through August 2006, Quadrennial Defense Review, there has beenwas a significant slowdown in government contract awards as well as releases under previously awarded contracts. Faced with the uncertainties of appropriations and timetiming of contract awards and releases under previously awarded contracts, a key
elementwhich we believe have been driven by the uncertainties of our strategy has been to expandwar and market and economic trends, we have expanded our activities to include operating as a subcontractor to leading aerospace prime contractors. While the slowdown in government contract awards also has affected these prime contractors, because they are able to bid on and receive contract awards for different programs than we are, we believe that pursuing such opportunities will enable us to access programs that we would not otherwise be able to access given our smaller size and resources. By increasingincre asing our customer base, we arehave positioned our company to take advantage of additional market opportunities and reduce the impact of the slowdown in government contract awards and releases. These subcontracting opportunities have begun to materialize, and we have beenwere awarded some subcontracts.approximately $7.0 million of subcontracts during 2006 compared to $2.2 million in 2005. We currently have proposals submitted to multiple prime contractors, and while we cannot predict the timing of awards, some of our outstanding proposals are significant.
After winning a contract, theso significant in size that any single award could increase our revenue and net income substantially.
The length of the contract varies but is typically between onesix months and two years for U.S. government contracts (although our T-38 contract and our C-5 TOP contract are for periods of 10 years and 7 years, respectively), and up to 10 years for commercial contracts. Our one commercial contract has an indefinite life. Except in cases where contract terms permit us to bill on a progress basis, we must incur upfront costs in producing assemblies and bill our customers upon delivery. Because of the upfront costs incurred, the timing of our billings and the nature of the percentage-of-completion method of accounting described below, there can be a significant disparity between the periods in which (a) costs are expended, (b) revenue and earnings are recorded and (c) cash is received.
12
CPI AEROSTRUCTURES, INC.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
— Management’s Discussion and Analysis of Financial Condition and Results of Operations
| |
| |
|
Critical Accounting Policies
Revenue Recognition
We recognize revenue from our contracts over the contractual period under the percentage-of-completion (POC) method of accounting. Under the POC method of accounting, sales and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at the completion of the contract. Recognized revenues that will not be billed under the terms of the contract until a later date are recorded as an asset captioned "Costs‘‘Costs and estimated earnings in excess of billings on uncompleted contracts."’’ Contracts where billings to date have exceeded recognized revenues are recorded as a liability captioned "Billings‘‘Billings in excess of costs and estimated earnings on uncompleted contracts."’’ Changes to the original estimates may be required during the life of the contract. Estimates are reviewed monthly and the effect of any change in the estimated gross margin percentage for a contract is reflected in cost of sales in the period the change becomes known. When the current estimates
of total contract revenue and contract costs indicate a loss, a provision for
the entire estimated loss on the contract is recorded. The use of the POC method of accounting involves considerable use of estimates in determining revenues, costs and profits and in assigning the amounts to accounting periods. As a result, there can be a significant disparity between earnings (both for accounting and taxes) as reported and actual cash received by us during any reporting period. We continually evaluate all of the issues related to the assumptions, risks and uncertainties inherent with the application of the POC method of accounting; however, we cannot assure you that our estimates will be accurate. If our estimates are not accurate or a contract is terminated, we will be forced to adjust revenue in later periods. Furthermore, even if our estimates are accurate, we may have a shortfall in our cash flow and we may need to borrow money to fund our work in process or to pay taxes until the reported earnings materialize to actual cash receipts.
SHARE-BASED PAYMENT
Stock Based Compensation
Effective January 1, 2006, the Companywe adopted SFAS No. 123 R, "Share-Based
Payment"123R, ‘‘Share-Based Payment’’ for employee options, using the modified prospective transition method. SFAS 123 R123R revised SFAS 123 to eliminate the option to use the intrinsic value method and required the Company to expense the fair value of all employee stock-based compensation over the vesting period. Under the modified prospective transition method, the Companywe recognized compensation cost for the nine monthsyear ended September 30,December 31, 2006, which includes (1) period compensation cost related to share-based payments granted prior to, but not yet vested as of, January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (2) compensation cost related to share-based payments granted within the period, which vested fully upon grant. In accordance
with the modified prospective method, the Company has not restated prior period
results.
13
ITEM2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
REVENUE
Results of Operations
Revenue
Revenue for the three months ended September 30, 2006March 31, 2007 was $4,412,931$5,471,968 compared to $6,452,246$5,030,193 for the same period last year, representing a decreasean increase of $2,039,315$441,775 or 32%9%. For the nine months ended September 30, 2006, revenue decreased
$7,110,639, or 37% to $11,900,141, compared to $19,010,780 for the same period
last year. The decreaseThis increase was due to fewermore contract awards and releases inenduring the second half of 2006 as compared to 2005, which resulted from2005. In the overall slowdownsecond half of 2006, we received approximately $22 million of new contract awards. Included in 2006 contract awards are approximately $7 million for subcontracting work. Revenue increased in the government
contract award process and smaller than anticipated releasesfirst quarter of 2007 as we have begun to perform on our multiyear
contracts during the 18 month period from February 2005 through August 2006.
these contracts.
We generate revenue primarily from government contracts and, to a lesser extent, from one commercial contract. Revenue from government contracts (including subcontract work for government aircraft) for the ninethree months ended September 30, 2006March 31, 2007 was $10,682,342$5,295,562 compared to $18,526,114$4,411,694 for the ninethree months ended September 30, 2005, a decreaseMarch 31, 2007, an increase of $7,843,772$883,868 or 42%20%.
CPI AEROSTRUCTURES, INC.
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
| |
| |
|
During the ninethree months ended September 30, 2006,March 31, 2007, we received new contract awards of $21,270,306.$1,417,000 compared to $6,900,000 in the same period last year. Included in thislast years’ award amount is approximately $6.7a $5.0 million related to
therelease on our C-5 TOP contract. AlthoughGiven the large amount of contract is valued at up to $215 million overawards we received in the seven-year lifesecond half of the program, orders under2006 this program, including the
$6.7 million award, have totaled only $13.5 million as of September 30, 2006.decrease was not totally unexpected. As of September 30, 2006,March 31, 2007, we had over $290$300 million in bids outstanding,
representing approximately 25% of the 2005 solicitations and approximately 70%
of the 2006 solicitations.outstanding. We continue to make bids on contracts on a weekly basis.
Although we are not actively pursuing commercial contract work, our one remaining commercial contract accounted for revenue of $1,217,799approximately $176,000 for the ninethree months ended September 30, 2006March 31, 2007 compared to $484,666approximately $619,000 for the ninethree months ended September 30, 2005.
14
ITEM2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
GROSS PROFIT
March 31, 2006.
Gross Profit
Gross profit for the three months ended September 30, 2006March 31, 2007 was $761,546$1,358,681 compared to $1,682,990$965,191 for the three months ended September 30, 2005, a decreaseMarch 31, 2006, an increase of $921,444.$393,490. As a percentage of revenue, gross profit for the three months ended September 30, 2006March 31, 2007 was 17%25% compared to gross profit of 26%19% for the same period last year. For the nine months ended September 30, 2006, gross profit was
$822,248, or 7% of revenue, compared with $5,247,740, or 28% of revenue for the
first nine months of last year. The decreaseincrease in gross profit percentage was due to overtimebetter control over suppliers and rework costs incurred to correct poor supplier workmanship and
delays in deliveries by some of our suppliers.
Additionally, as previously reported,an improved factory overhead application rate.
During the three months ended March 31, 2006, we had maintained our factory overhead levels
through June 2006and labor cost structure in anticipation of new awards and releases on contracts that we hadhave already been awarded. Since theseawarded, including the C-5 TOP contract, as well as additional awards and releases have not materialized to
increase profitability, at the endon some of the second quarter,our major outstanding bids. In mid-2006, we reduced our stafflabor force by approximately 12%. These staff reductions, along with tighter control over11% and took other overhead costs, reduced factory overhead by approximately $60,000cost saving measures in an attempt to increase gross profit. The increased gross profit percentage in the three month periodmonths ended September 30, 2006 as comparedMarch 31, 2007 is a result of these cost saving measures.
We anticipate that our overhead costs for the remainder of the year will remain consistent with those incurred in the quarter ended March 31, 2007. Therefore, if the level of shop activity remains similar to the three month
period ended June 30, 2006.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
our present level, our overhead rates and gross margin should remain similar to our current rates.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended September 30, 2006March 31, 2007 were $774,123$923,492 compared to $803,492$848,297 for the three months ended September 30, 2005, a decrease of $29,369, or 4%. This decrease was the result
of tighter control over expenses during the three month period ended September
30, 2006. For the nine months ended September 30,March 31, 2006, selling, general and
administrative expenses were $2,756,265 compared to $2,570,393 for the same
period last year, an increase of $185,872,$75,195, or 7%9%. This increase was primarily due to recording non-casha $47,000 increase in travel expenses related to trips for vendor management and subcontracting sales. Additionally, we had a $17,000 increase in stock compensation expense and increased consulting fees of approximately $252,000$100,000 related to stock options as required pursuant to SFAS 123R as described in Note 2 of the
Condensed Financial Statements,bids and proposals, offset by decreases in officers' bonusessalaries of approximately $44,000$50,000 and travelpublic company fees of $70,000. Public company fees include fees paid for investor relations, fees for printing of our annual reports and entertainment of approximately $20,000.
INCOME (LOSS) BEFORE PROVISION FOR (BENEFIT FROM) INCOME TAXES
LossSEC filings, transfer agent fees and other expenses associated with being a public company.
Income Before Provision for Income Taxes
Income before benefitprovision from income taxes for the three months ended September 30,
2006March 31, 2007 was $12,577$435,189 compared to income before provision for income taxes of
$879,498$116,894 for the same period last year For the nine months ended September 30,
2006, loss before benefit from income taxes was $1,934,017 compared to income
before provision for income taxes of $2,677,347 for the same period last year.
The decreaseThis increase was primarily due to the decreaseincrease in gross profit described above.
PROVISION FOR (BENEFIT FROM) INCOME TAXES
There was a benefit from
Provision for Income Taxes
Provision for income taxes of $657,000was $167,000 for the ninethree months ended September 30, 2006, which was the resultMarch 31, 2007, or 38% of a recovery of federal taxes paid in
2005 which are refundable through the filing of a net operating loss carryback
claim.pre-tax income. This compares to a provision for income taxes of $331,000 and $1,041,000
for the three and nine months ended September 30, 2005, respectively.
15
ITEM2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
NET INCOME (LOSS)
As a result, basic net loss$48,000, or 41% of pre-tax income, for the three months ended September 30, 2006March 31, 2006.
CPI AEROSTRUCTURES, INC.
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
| |
| |
|
Net Income
As a result, net income for the three months ended March 31, 2007 was $12,577,$268,189, or $0$0.05 per basic and diluted share, compared to net income of $548,498,$68,894, or $0.10$0.01 per basic share, for the same period last year. For the nine months ended September
30, 2006, basic net loss was $1,277,017, or $0.23 per basic share, compared with
net income of $1,636,347, or $0.30 per basicand diluted share, for the same period last year. Diluted earnings per share for the three months ended September 30, 2005March 31, 2007 was $0.09, calculated utilizing 6,115,0145,919,262 diluted average shares outstanding. Diluted income per share for the ninethree months ended September 30, 2005March 31, 2006 was $0.27, calculated utilizing 6,120,9776,126,967 diluted average shares outstanding. IncrementalAt March 31, 2007 and 2006, incremental shares of 850,678383,750 and 235,000, respectively, were not included in the diluted earnings per share calculation at September 30, 2006 because their exercise price exceeded the fair market value of our common stock during the reported net loss,period, and accordingly their effect would be anti-dilutive
LIQUIDITY AND CAPITAL RESOURCES
anti-dilutive.
Liquidity and Capital Resources
General
At September 30, 2006,March 31, 2007, we had working capital of $25,091,579$25,745,148 compared to $26,029,916$25,122,504 at December 31, 2005, a decrease2006, an increase of $938,337,$622,644, or 4%2%.
CASH FLOW
Cash Flow
A large portion of our cash is used in payingto pay for materials and processing costs associated with contracts that are in process and which do not provide for progress payments. Additionally, contractsContracts that permit us to bill on a progress basis must be classified as "on time"‘‘on time’’ for us to apply for progress payments. DueIn February 2007, we agreed to delayspay $75,000 to have the late delivery orders on the C-5 TOP contract classified as ‘‘on time.’’ Accordingly, beginning in deliveries from some of our suppliers,February 2007, we are presently late on two
of our contracts for which progress payments are available. Accordingly, we are
precluded from applyingwere able to apply for progress payments on these contracts. During the
year ended December 31, 2005,under this program. Costs for which we incurred approximately $2,358,000 of costs
related to contracts in excess of the amounts that we were permittedare not able to bill on such contracts. These costsa progress basis are components of "Costs‘‘Costs and estimated earnings in excess of billings on uncompleted contracts"contracts’’ on our balance sheet and represent the aggregate costs and related earnings for uncompleted contracts for which the customer has not yet been billed. These costs and earnings are recovered upon shipment of products and presentation of billings in accordance with contract terms.
Because the POC method of accounting requires us to use estimates in determining revenues, costs and profits and in assigning the amounts to accounting periods, there can be a significant disparity between earnings (both for accounting and taxes)tax purposes) as reported and actual cash received by usthat we receive during any reporting period. Accordingly, it is possible that we may have a shortfall in our cash flow and may need to borrow money until the reported earnings materialize into actual cash receipts.
16
At March 31, 2007, we had a cash balance of $46,747 compared to $38,564 at December 31, 2006. In addition to the nominal increase in cash during the three months ended March 31, 2007, our accounts receivable increased by approximately $1,557,000, while our liabilities only increased by approximately $268,000. The increase in accounts receivable was primarily due to an increase in amounts due for subcontract work, which we were collecting on 60 day terms, compared to standard 30 day terms that we have with the government. In April 2007, we entered into an agreement with one of our major subcontract customers to receive electronic payments on our accounts receivable, which we expect will reduce the payment timing to less than 30 days. In April 2007, we received approximately $1,192,000 from this customer for payment of accounts receivable.
During the years ended December 31, 2006, 2005 and 2004, we used cash of $1,015,151, $676,767 and $560,768, respectively, to fund our operations. Because of our historical use of cash, and the expiration of a long term line of credit, beginning in June 2006, we began to reduce expenses and implement a plan to improve cash flow. As described earlier, the reduction of expenses has resulted in improved gross margin and profitability.
CPI AEROSTRUCTURES, INC.
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
| |
| |
|
At March 31, 2007, we had costs in excess of billings on uncompleted contracts of $28,180,320, which represents unbilled receivables of which we expect approximately 90% to be converted into cash within the next year. This amount represents $25,362,000 of funded delivery orders, or funded backlog, to be shipped and collected by March 31, 2008. In addition, we will be filing a tax refund of approximately $628,000 for the carryback of our net tax loss recorded during the year ended December 31, 2006.
Based on the positive results in the three months ended March 31, 2007, our projected cash expenses and the above described sources of cash, we expect to have positive cash flow during the twelve month period ending March 31, 2008.
JP MORGAN CHASE CREDIT FACILITY
Morgan Chase Credit Facility
In September 2003, we entered into a three year, $5.0 million revolving credit facility with JP Morgan Chase Bank ("(the ‘‘Chase Facility"Facility’’), secured by our assets.
The facility specified interest rates ranging between the Prime Rate and 225
basis points over LIBOR, depending on certain terms and conditions.
In October 2006, the Chase Facility was amended and restated to provide for a
$1.0 million revolving credit facility, secured by our assets.restated. The facility specifies an interest rate equal to the greater of (a) the prime rate and (b) the federal funds rate, , plus 0.5%. The facility expiresChase Facility expired on December 31, 2006.
As2006 and was extended until April 30, 2007.
In May 2007, the Chase Facility was further amended to provide for a $200,000 revolving credit facility and extended until June 30, 2007. Amounts borrowed under this agreement must be repaid at the expiration of September 30,the agreement.
In August 2006, we had borrowed $350,000 under the Chase Facility. We anticipate either extending the line or securing a new lineAs of credit prior
to its expiration. March 31, 2007, $200,000 remained outstanding and as of May 11, 2007, $100,000 remained outstanding.
Although we are currently in the process of negotiating an
extension to the line ofsecure a long term credit agreement with JP Morgan Chase Bank, or with another financial institution, there is no assurance that an extension, or a new line of credit can be secured on terms acceptable to us.
We believe that our existing resources, together with the availability under our
credit facility, will be sufficient to meet our current working capital needs
for at least the next 12 months.
CONTRACTUAL OBLIGATIONS
Contractual Obligations
The table below summarizes information about our contractual obligations as of September 30, 2006March 31, 2007 and the effects these obligations are expected to have on our liquidity and cash flow in the future years.
PAYMENTS DUE BY PERIOD ($)
-------------------------------------------------------------
LESS THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS AFTER 5 YEARS
- ----------------------------------- --------- --------- --------- --------- -------------
Short-Term Debt 350,000 350,000 -0- -0- -0-
Long-Term Obligations 60,042 57,568 2,474 -0- -0-
Operating Leases 3,634,267 394,941 825,781 876,071 1,537,474
Employment Agreement Compensation * 657,118 548,830 108,288 -0- -0-
Total Contractual Cash Obligations 4,701,427 1,351,339 936,543 876,071 1,537,474
* The employment agreements provide for bonus payments that are excluded from
these amounts.
17
ITEM
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Contractual Obligations | | | Payments Due By Period ($) | |||||||||||||||||||||||||||
| Total | | | Less than 1 year | | | 1-3 years | | | 4-5 years | | | After 5 years | |||||||||||||||||
| Short-Term Debt | | | | | 230,560 | | | | | | 230,560 | | | | | | -0- | | | | | | -0- | | | | | | -0- | |
| Operating Leases | | | | | 3,438,245 | | | | | | 400,821 | | | | | | 838,077 | | | | | | 889,116 | | | | | | 1,310,231 | |
| Employment Agreement Compensation * | | | | | 1,294,163 | | | | | | 666,863 | | | | | | 627,300 | | | | | | -0- | | | | | | -0- | |
| Total Contractual Cash Obligations | | | | | 4,962,968 | | | | | | 1,298,244 | | | | | | 1,465,377 | | | | | | 889,116 | | | | | | 1,310,231 | |
| ||||||||||||||||||||||||||||||
| * The employment agreements provide for bonus payments that are excluded from these amounts. |
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
— Quantitative and Qualitative Disclosure About Market Risk
None
ITEM
Item 4 - CONTROLS AND PROCEDURES
— Controls and Procedures
An evaluation of the effectiveness of our disclosure controls and procedures was made as of September 30, 2006March 31, 2007 under the supervision and with the participation of our management, including our
CPI AEROSTRUCTURES, INC
chief executive officer and chief financial officer. During the first quarter of 2006,2007, we remediatedimplemented a plan to remediate the material weaknessweaknesses identified by our independent registered public accounting firm and discussed in detail in our Annual Report on Form 10-K for the year ended December 31, 2005. This2006. These material weaknessweaknesses related to our internal failure to detect that (i) costsproperly recognize revenue, cost incurred revenue recognized and billingbillings to the customer on certain contracts duringin that:
| | |
| • | the sales and cost estimates used to recognize revenue on a significant contract did not reflect the most current available information. As a result, the 2006 margin with respect to this contract was overstated; and |
| | |
| • | gross margin was overstated on certain contracts because we recognized revenue on change orders where the customer approval had not been obtained. |
These two errors resulted in an overstatement of net income in our statement of operations for the year ended December 31, 20052006, which errors were corrected prior to filing of our Annual Report on Form 10-K.
Our internal control over reviewing and recording revenue recognition did not recognized
properly duedetect these matters and therefore was not effective at preventing or detecting material misstatement of the financial statements. Although we have begun remediation of these deficiencies, we have not had sufficient time to an error made during our conversion from a manual accounting
system to MAPICS, an enterprise-wide electronic processing system, and that (ii)
there had been a misapplication of percentage of completion accounting with
respect to our commercial contract. test whether these actions will be effective.
To remediate these material weaknesses, during the material weakness,quarter ended March 31, 2007, our senior management implemented a new procedure and began monitoring all costs and
control total amounts generated through the MAPICS system and related to
billings and expenses and cross checked such amounts to the general ledger and
the applicable master job cost sheet. Senior management is continually
monitoring the effectiveness of the remedial measures to ensure the
effectiveness ofrequiring our disclosure controls and procedures for future periods. With
these remedial actions in place, our chief executive officer and chief financial officer and vice president of operations to review sales and cost estimates used to recognize revenue subsequent to the preparation of the financial statements to insure that such estimates used the most current available information. In addition, a procedure was designed to insure that all change orders have concluded thatcustomer approval before being reflected in our disclosure controls and procedures were
effective as of September 30, 2006 in recording, processing, summarizing and
reporting, on a timely basis, information requiredcontract estimates.
In addition, we began to be disclosed by us in
reports that we file or submit undertake the Securities Exchange Act of 1934.
following corrective actions:
| | |
| • | We began the interview process to add resources to our accounting department to manage the estimating process necessary to properly and timely report our revenue. Subsequent to March 31, 2007 we hired a new accounting supervisor for our accounting department. |
| | |
| • | We started planning a regular education program for additional members of our accounting department to diversify the task of financial reporting management and allow a higher level of review. |
During the most recently completed fiscal quarter, except as described above, there has been no change in our internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
18
.
CPI AEROSTRUCTURES, INC
Part II: OTHER INFORMATION
ITEMOther Information
Item 1A: RISK FACTORS
— Risk Factors
There are no material changes from the risk factors set forth in Item 1A, "Risk‘‘Risk Factors,"’’ of our Annual Report on Form 10-K for the year ended December 31, 2005.2006. Please refer to that section for disclosures regarding the risks and uncertainties to our business.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES
None
ITEM
Item 6 - EXHIBITS
Exhibit 10.23 Amended and Restated Revolving Credit Agreement
between the Company and JPMorgan Chase Bank N.A.
Exhibit 10.24 Amended and Restated Revolving Credit Note made by
the Company and payable to JPMorgan Chase Bank, N.A.
Exhibit 10.25 Amended and Restated Security Agreement between the
Company and JPMorgan Chase Bank, N.A.
Exhibit 31.1 Section 302 Certification by Chief Executive Officer
Exhibit 31.2 Section 302 Certification by Chief Financial Officer
Exhibit 32 Section 906 Certification by Chief Executive Officer
and Chief Financial Officer
19
— Exhibits
| | | |
| Exhibit 10.23 | | | Third Amendment to Amended and Restated Revolving Credit Agreement between the Company and JPMorgan Chase Bank N.A. |
| Exhibit 31.1 | | | Section 302 Certification by Chief Executive Officer |
| Exhibit 31.2 | | | Section 302 Certification by Chief Financial Officer |
| Exhibit 32 | | | Section 906 Certification by Chief Executive Officer and Chief Financial Officer |
|
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CPI AEROSTRUCTURES, INC.
Dated: November 14, 2006 By /S/ Edward J. Fred
-------------------------------------
Edward J. Fred
Chief Executive Officer, President,
and Secretary
Dated: November 14, 2006 By: /S/ Vincent Palazzolo
------------------------------------
Vincent Palazzolo
Chief Financial Officer
20
EXHIBIT 31.1
SECTION 302 CERTIFICATION PURSUANT TO
RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES ACT OF 1934, AS AMENDED
I, Edward J. Fred, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of CPI
Aerostructures, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the issuer as of, and for, the periods presented in this report;
4. The issuer's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
issuer, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this report is being prepared;
(b) [intentionally omitted];
(c) Evaluated the effectiveness of the issuer's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the issuer's internal
control over financial reporting that occurred during the
issuer's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the issuer's
internal control over financial reporting; and
5. The issuer's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the issuer's auditors and to the audit committee of the
issuer's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the issuer's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the issuer's
internal control over financial reporting.
Date: November 14, 2006
By: /S/ Edward J. Fred
------------------------------------
Name: Edward J. Fred
Title: Chief Executive Officer,
President and Secretary
21
EXHIBIT 31.2
SECTION 302 CERTIFICATION PURSUANT TO
RULE 13a-14 AND 15d-14 UNDER
THE SECURITIES ACT OF 1934, AS AMENDED
I, Vincent Palazzolo, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of CPI
Aerostructures, Inc.;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows
of the issuer as of, and for, the periods presented in this report;
4. The issuer's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the issuer
and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
issuer, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the
period in which this report is being prepared;
(b) [intentionally omitted];
(c) Evaluated the effectiveness of the issuer's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the issuer's internal
control over financial reporting that occurred during the
issuer's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the issuer's
internal control over financial reporting; and
5. The issuer's other certifying officer(s) and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the issuer's auditors and to the audit committee of the
issuer's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the issuer's
ability to record, process, summarize and report financial
information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the issuer's
internal control over financial reporting.
Date: November 14, 2006
By: /S/ Vincent Palazzolo
------------------------------------
Name: Vincent Palazzolo
Title: Chief Financial Officer
22
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CPI Aerostructures, Inc.
(the "Company") on Form 10-Q for the period ended September 30, 2006 as filed
with the Securities and Exchange Commission (the "Report"), the undersigned, in
the capacities and on the date indicated below, hereby certifies pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that:
1. the Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934; and
2. the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operation of the Company.
Dated: November 14, 2006 /S/ Edward J. Fred
----------------------------------------
Edward J. Fred
Chief Executive Officer, President and
Secretary
Dated: November 14, 2006 /S/ Vincent Palazzolo
----------------------------------------
Vincent Palazzolo
Chief Financial Officer
23
| | | | | | |
| | CPI AEROSTRUCTURES, INC. | ||||
| Dated: May 14, 2007 | | | By: | | | /S/ Edward J. Fred |
| | | | Edward J. Fred Chief Executive Officer, President, and Secretary | ||
| Dated: May 14, 2007 | | | By: | | | /S/ Vincent Palazzolo |
| | | | Vincent Palazzolo Chief Financial Officer | ||
| ||||||