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RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

6 Months Ended

Jun. 30, 2019

Accounting Changes and Error Corrections [Abstract]

RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

15. RESTATEMENT OF PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

On February 14, 2020, the Company filed a Form 8-K disclosing that the Audit & Finance Committee of the Company’s Board of Directors determined, based on the recommendation of management, that the Company’s consolidated financial statements which were included in its annual report on Form 10-K for the year ended December 31, 2018, quarterly reports on Forms 10-Q for the quarters ended March 31, 2018, June 30, 2018, and September 30, 2018 and quarterly reports on Forms 10-Q for the quarters ended March 31, 2019, June 30, 2019, and September 30, 2019 and related financial information should no longer be relied upon, and determined that the consolidated financial statements will be restated. The errors were uncovered as part of the preparation of the Company’s consolidated financial statements for the fiscal year ended December 31, 2019.

As a result, the Company restated the 2018 consolidated financial statements, which is referred to as the “Restatement.” The Restatement corrects errors which are discussed in detail within this footnote.

The errors primarily related to the timing of recognition of revenue from contracts with customers.

Restatement

The following is a discussion of the restatement adjustments that were made to the Company’s previously issued June 30, 2019 and June 30, 2018 consolidated financial statements.

(a) Revenue recognition

The Company recognizes revenues and profits for contracts with customers using the cost-to-cost percentage of completion method of accounting. Historically, for long-term programs, the Company applied the cost-to-cost percentage of completion method at the program level, that is, for the entire duration of expected production activity on a particular program. The Company estimated its revenue recognition utilizing the life of the program to both measure progress and estimate profit margin. Under this approach, the Company estimated the total expected customer purchases over the life of the program, which included unexercised and non-binding customer purchase options, which resulted in the recognition of $106.7 million and $100.9 million of misstated contract assets, contract liabilities and loss reserves for the three months ended June 30, 2019 and year ended December 31, 2018, respectively.

The Company has now concluded that its life of the program accounting was not an appropriate application of ASC Topic 606. Under ASC Topic 606, the performance obligation is the appropriate unit of accounting. The Company identifies performance obligations to customers once a contract is established in accordance with ASC Topic 606. For the Company, the contract under ASC Topic 606 is typically established upon execution of a purchase order either in accordance with a long-term customer agreement or on a standalone basis. The transaction price is also determined at the contract level and excludes amounts related to unexercised customer options. Similarly, the Company’s cost-to-cost input method to measure progress must consider only the costs incurred relative to the total expected costs of satisfying the performance obligations identified in the contract, exclusive of unexercised customer options.

To correct these errors, the related revenue was reversed in the period in which the accounting errors took place and recognized in subsequent periods as control of the goods or services in the contract passed to the customer over time based on a cost-to-cost input method measure of progress. Additionally, certain adjustments to contract assets and contract liabilities were made to the consolidated balance sheet at the end of the period in which the accounting errors occurred.

(b) Other

The Company corrected other immaterial misstatements relating to previously unrecorded audit adjustments.

The Company has recorded tax adjustments related to the impact of the Restatement.

Impact on Consolidated Statements of Operations

The effect of the Restatement described above on the accompanying consolidated statements of operations for the three and six months ended June 30, 2019 is as follows:

	Three Months Ended June 30, 2019
	As Previously Reported			Revenue Recognition			Other			Income Taxes			As Restated
Revenue	$	23,158,251		$	(3,056,538	)	$	—		$	—		$	20,101,713
Cost of sales		18,202,069			(175,696	)		(168,303	)		—			17,858,070
Gross profit		4,956,182			(2,880,842	)		168,303			—			2,243,643
Selling, general and administrative expenses		2,709,313			—			(161,551	)		—			2,547,762
Income (loss) from operations		2,246,869			(2,880,842	)		329,854			—			(304,119	)
Interest expense		575,412			—			—			—			575,412
Income (loss) before provision for (benefit from) income taxes		1,671,457			(2,880,842	)		329,854			—			(879,531	)
Provision for (benefit from) income taxes		(1,039,000	)		—			—			1,040,636			1,636
Net income (loss)	$	2,710,457		$	(2,880,842	)	$	329,854		$	(1,040,636	)	$	(881,167	)

Income (loss) per common share – basic	$	0.23											$	(0.07	)
Income (loss) per common share – diluted	$	0.23											$	(0.07	)

Shares used in computing earnings per common share:
Basic		11,607,415												11,817,713
Diluted		11,644,768												11,817,713

	Six Months Ended June 30, 2019
	As Previously Reported			Revenue Recognition			Other			Income Taxes			As Restated
Revenue	$	48,741,782		$	(6,651,686	)	$	—		$	—		$	42,090,096
Cost of sales		38,369,790			(838,449	)		(168,303	)		—			37,363,038
Gross profit		10,371,992			(5,813,237	)		168,303			—			4,727,058
Selling, general and administrative expenses		5,515,756			—			(62,309	)		—			5,453,447
Income (loss) from operations		4,856,236			(5,813,237	)		230,612			—			(726,389	)
Interest expense		1,086,181			—			—			—			1,086,181
Income (loss) before provision for (benefit from) income taxes		3,770,055			(5,813,237	)		230,612			—			(1,812,570	)
Provision for (benefit from) income taxes		(599,000	)		—			—			602,313			3,313
Net income (loss)	$	4,369,055		$	(5,813,237	)	$	230,612		$	(602,313	)	$	(1,815,883	)

Income (loss) per common share – basic	$	0.37											$	(0.15	)
Income (loss) per common share – diluted	$	0.37											$	(0.15	)

Shares used in computing earnings per common share:
Basic		11,710,357												11,776,107
Diluted		11,747,711												11,776,107

Impact on Consolidated Statements of Operations

The effect of the Restatement described above on the accompanying consolidated statements of operations for the three and six months ended June 30, 2018 is as follows:

	Three Months Ended June 30, 2018
	As Previously Reported		Revenue Recognition			Other			Income Taxes			As Restated
Revenue	$	20,261,239	$	(3,085,560	)	$	—		$	—		$	17,175,679
Cost of sales		15,676,421		452,682			—			—			16,129,103
Gross profit		4,584,818		(3,538,242	)		—			—			1,046,576
Selling, general and administrative expenses		2,557,759		—			(45,086	)		—			2,512,673
Income (loss) from operations		2,027,059		(3,538,242	)		45,086			—			(1,466,097	)
Interest expense		416,834		—			—			—			416,834
Income (loss) before provision for (benefit from) income taxes		1,610,225		(3,538,242	)		45,086			—			(1,882,931	)
Provision for (benefit from) income taxes		353,000		—			—			(351,825	)		1,175
Net income (loss)		1,257,225		(3,538,242	)		45,086			351,825			(1,884,106	)
Other comprehensive income net of tax – Change
in unrealized loss on interest rate swap		20,600		—			—			—			20,600
Comprehensive income (loss)	$	1,277,825	$	(3,538,242	)	$	45,086		$	351,825		$	(1,863.506	)

Income (loss) per common share – basic	$	0.14										$	(0.21	)
Income (loss) per common share – diluted	$	0.14										$	(0.21	)

Shares used in computing earnings per common share:
Basic		8,938,331											8,938,331
Diluted		8,980,155											8,938,331

	Six Months Ended June 30, 2018
	As Previously Reported		Revenue Recognition			Other			Income Taxes			As Restated
Revenue	$	38,452,862	$	(6,287,232	)	$	—		$	—		$	32,165,630
Cost of sales		29,818,176		480,544			(280,143	)		—			30,018,577
Gross profit		8,634,686		(6,767,776	)		280,143			—			2,147,053
Selling, general and administrative expenses		4,607,599		—			—			—			4,607,599
Income (loss) from operations		4,027,087		(6,767,776	)		280,143			—			(2,460,546	)
Interest expense		864,097		—			—			—			864,097
Income (loss) before provision for (benefit from) income taxes		3,162,990		(6,767,776	)		280,143			—			(3,324,643	)
Provision for (benefit from) income taxes		649,000		—			—			(646,630	)		2,370
Net income (loss)		2,513,990		(6,767,776	)		280,143			646,630			(3,327,013	)
Other comprehensive income net of tax – Change
in unrealized loss on interest rate swap		14,800		—			—			—			14,800
Comprehensive income (loss)	$	2,528,790	$	(6,767,776	)	$	280,143		$	646,630		$	(3,312,213	)

Income (loss) per common share – basic	$	0.28										$	(0.37	)
Income (loss) per common share – diluted	$	0.28										$	(0.37	)

Shares used in computing earnings per common share:
Basic		8,913,394											8,913,394
Diluted		8,953,321											8,913,394

Impact on Consolidated Balance Sheets

The effect of the Restatement described above on the accompanying consolidated balance sheets as of June 30, 2019 and December 31, 2018 is as follows:

	As of June 30, 2019
	As Previously Reported		Revenue Recognition			Other			Income Taxes			As Restated
ASSETS
Current Assets:
Cash	$	752,607	$	—		$	—		$	—		$	752,607
Restricted cash		2,000,000		—			—			—			2,000,000
Accounts receivable, net		8,399,920		—			161,551			—			8,561,471
Contract assets		120,254,379		(104,091,748	)		—			—			16,162,631
Inventory		11,956,006		—			(182,083	)		—			11,773,923
Refundable income taxes		435,000		—			(47,035	)		273,249			661,214
Prepaid expenses and other current assets		1,118,620		—			—			—			1,118,620
Total Current Assets		144,916,532		(104,091,748	)		(67,567	)		273,249			41,030,466

Operating lease right-of-use assets		4,626,916		—			—			—			4,626,916
Property and equipment, net		3,362,084		—			—			—			3,362,084
Refundable income taxes		—		—			—			434,903			434,903
Deferred income taxes		488,319		—			435,000			(923,319	)		—
Other assets		230,258		—			—			—			230,258
Total Assets	$	153,624,109	$	(104,091,748	)	$	367,433		$	(215,167	)	$	49,684,627

Liabilities and Shareholders’ Equity (Deficit)
Current Liabilities:
Accounts payable	$	11,540,234	$	—		$	—		$	—		$	11,540,234
Accrued expenses		927,672		—			—			—			927,672
Contract liabilities		3,272,217		(38,340	)		—			—			3,233,877
Loss reserve		216,606		2,615,485			—			—			2,832,091
Current portion of long-term debt		2,507,060		—			—			—			2,507,060
Operating lease liabilities		1,637,869		—			—			—			1,637,869
Income taxes payable		453,828		—			387,965			(724,488	)		117,305
Total Current Liabilities		20,555,486		2,577,145			387,965			(724,488	)		22,796,108

Line of credit		25,738,685		—			—			—			25,738,685
Long-term operating lease liabilities		3,464,146		—			—			—			3,464,146
Long-term debt, net of current portion		2,981,869		—			—			—			2,981,869
Deferred income taxes		2,638,415		—			—			(2,638,415	)		—
Total Liabilities		55,378,601		2,577,145			387,965			(3,362,903	)		54,980,808

Shareholders’ Equity (Deficit):
Common stock		11,820		—			—			—			11,820
Additional paid-in capital		71,104,418		—			—			—			71,104,418
Retained earnings (accumulated deficit)		27,129,270		(106,668,893	)		(20,532	)		3,147,736			(76,412,419	)
Total Shareholders’ Equity (Deficit)		98,245,508		(106,668,893	)		(20,532	)		3,147,736			(5,296,181	)

Total Liabilities and Shareholders’ Equity (Deficit)	$	153,624,109	$	(104,091,748	)	$	367,433		$	(215,167	)	$	49,684,627

	As of December 31, 2018
	As Previously Reported		Revenue Recognition			Other			Income Taxes			As Restated
ASSETS
Current Assets:
Cash	$	4,128,142	$	—		$	—		$	—		$	4,128,142
Restricted cash		2,000,000		—			—			—			2,000,000
Accounts receivable, net		8,623,329		—			99,242			—			8,722,571
Contract assets		113,333,491		(95,744,625	)		—			—			17,588,866
Inventory		9,711,997		—			(350,386	)		—			9,361,611
Refundable income taxes		435,000		—			—			(97	)		434,903
Prepaid expenses and other current assets		1,972,630		—			—			—			1,972,630
Total Current Assets		140,204,589		(95,744,625	)		(251,144	)		(97	)		44,208,723

Property and equipment, net		2,545,192		—			—			—			2,545,192
Refundable income taxes		435,000		—			—			(97	)		434,903
Deferred income taxes		279,318		—			—			(279,318	)		—
Other assets		249,575		—			—			—			249,575
Total Assets	$	143,713,674	$	(95,744,625	)	$	(251,144	)	$	(279,512	)	$	47,438,393

Liabilities and Shareholders’ Equity (Deficit)
Current Liabilities:
Accounts payable	$	9,902,481	$	—		$	—		$	—		$	9,902,481
Accrued expenses		1,558,160		—			—			—			1,558,160
Contract liabilities		3,588,500		1,664,079			—			—			5,252,579
Loss reserve		216,606		3,446,952			—			—			3,663,558
Current portion of long-term debt		2,434,981		—			—			—			2,434,981
Income taxes payable		115,000		—			—			(1,008	)		113,992
Total Current Liabilities		17,815,728		5,111,031			—			(1,008	)		22,925,751

Line of credit		24,038,685		—			—			—			24,038,685
Long-term debt, net of current portion		3,876,238		—			—			—			3,876,238
Deferred income taxes		4,028,553		—			—			(4,028,553	)		—
Other liabilities		531,124		—			—			—			531,124
Total Liabilities		50,290,328		5,111,031			—			(4,029,561	)		51,371,798

Shareholders’ Equity (Deficit):
Common stock		11,718		—			—			—			11,718
Additional paid-in capital		70,651,413		—			—			—			70,651,413
Retained earnings (accumulated deficit)		22,760,215		(100,855,656	)		(251,144	)		3,750,049			(74,596,536	)
Total Shareholders’ Equity (Deficit)		93,423,346		(100,855,656	)		(251,144	)		3,750,049			(3,933,405	)

Total Liabilities and Shareholders’ Equity (Deficit)	$	143,713,674	$	(95,744,625	)	$	(251,144	)	$	(279,512	)	$	47,438,393

Cumulative Effect of Prior Period Adjustments

The following table presents the impact of the Restatement on the Company’s shareholders’ equity (deficit) as of January 1, 2018:


	Common Stock		Additional Paid-in Capital		Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity (Deficit)
Balance, January 1, 2018
(As previously reported)	$	8,864	$	53,770,617	$	20,548,652		$	(14,800	)	$	74,313,333
Adjustments:
Revenue recognition		—		—		(86,621,280	)		—			(86,621,280	)
Other		—		—		(280,143	)		—			(280,143	)
Income taxes		—		—		(697,012	)		—			(697,012	)

Cumulative restatement adjustments		—		—		(87,598,435	)		—			(87,598,435	)
Balance, January 1, 2018
(As Restated)	$	8,864	$	53,770,617	$	(67,049,783	)	$	(14,800	)	$	(13,285,102	)

Impact on Consolidated Statements of Cash Flows

The effect of the Restatement described above on the accompanying consolidated statements of cash flows for the six months ended June 30, 2019 and 2018 is as follows:

	Six Months Ended June 30, 2019
	As Previously Reported			Restatement Adjustments			As Restated
Cash flows from operating activities:
Net income (loss)	$	4,369,055		$	(6,184,938	)	$	(1,815,883	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		483,982			—			483,982
Amortization of debt issuance cost		44,317			16,929			61,246
Cash expended in excess of rent expense		(56,024	)		—			(56,024	)
Stock-based compensation		540,354			—			540,354
Common stock issued as employee compensation		32,324			—			32,324
Bad debt expense		—			(62,309	)		(62,309	)
Deferred income taxes		(1,599,139	)		1,599,139			—
Changes in operating assets and liabilities:
Decrease in accounts receivable		223,409			—			223,409
(Increase) decrease in contract assets		(6,920,888	)		8,347,122			1,426,234
Increase in inventory		(2,244,009	)		(168,303	)		(2,412,312	)
(Increase) decrease in refundable income taxes		435,000			(661,311	)		(226,311	)
Decrease in prepaid expenses and other current assets		645,522			(17,053	)		628,469
Increase in accounts payable and accrued expenses		1,007,265			—			1,007,265
Decrease in contract liabilities		(694,408	)		(1,702,294	)		(2,396,702	)
Decrease in loss reserve		—			(831,467	)		(831,467	)
Increase in income taxes payable		338,828			(335,515	)		3,313
Net cash used in operating activities		(3,394,412	)		—			(3,394,412	)
Cash flows from investing activities:
Purchase of property and equipment		(314,462	)		—			(314,462	)
Net cash used in investing activities		(314,462	)		—			(314,462	)
Cash flows from financing activities:
Payments of long-term debt		(1,222,090	)		—			(1,222,090	)
Proceeds from line of credit		2,000,000			—			2,000,000
Payments of line of credit		(300,000	)		—			(300,000	)
Stock offering costs paid		(119,571	)		—			(119,571	)
Debt issuance costs		(25,000	)		—			(25,000	)
Net cash provided by financing activities		333,339			—			333,339
Net decrease in cash and restricted cash		(3,375,535	)		—			(3,375,535	)
Cash and restricted cash at beginning of period		6,128,142			—			6,128,142
Cash and restricted cash at end of period	$	2,752,607		$	—		$	2,752,607

Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	1,329,678		$	—		$	1,329,678
Cash paid during the period for income taxes	$	141,702		$	—		$	141,702
Supplemental schedule of noncash investing and financing activities:
Equipment acquired under financing lease	$	399,800		$	—		$	399,800

	Six Months Ended June 30, 2018
	As Previously Reported			Restatement Adjustments			As Restated
Cash flows from operating activities:
Net income (loss)	$	2,513,990		$	(5,841,003	)	$	(3,327,013	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		333,276			—			333,276
Amortization of debt issuance cost		42,785			—			42,785
Cash expended in excess of rent expense		(35,384	)		—			(35,384	)
Stock-based compensation		459,716			—			459,716
Common stock issued as employee compensation		45,913			—			45,913
Adjustment for maturity of interest rate swap		20,600			(5,800	)		14,800
Bad debt expense		—			—			—
Deferred income taxes		755,500			(755,500	)		—
Changes in operating assets and liabilities:
Increase in accounts receivable		(10,724	)		—			(10,724	)
(Increase) decrease in contract assets		(4,021,904	)		6,638,916			2,617,012
Increase in inventory		(125,526	)		—			(125,526	)
Increase in prepaid expenses, other current assets and refundable income taxes		(158,636	)		(130	)		(158,766	)
Decrease in accounts payable and accrued expenses		(3,619,073	)		(280,143	)		(3,899,216	)
Increase in contract liabilities		292,317			(2,658	)		289,659
Increase in loss reserve		44,933			131,518			176,451
Decrease in other liabilities		(10,976	)		5,800			(5,176	)
Decrease in income taxes payable		(109,327	)		109,000			(327	)
Net cash used in operating activities		(3,582,520	)		—			(3,582,520	)
Cash flows from investing activities:
Purchase of property and equipment		(369,738	)		—			(369,738	)
Net cash used in investing activities		(369,738	)		—			(369,738	)
Cash flows from financing activities:
Payments of long-term debt		(946,521	)		—			(946,521	)
Proceeds from line of credit		4,500,000			—			4,500,000
Net cash used in financing activities		3,553,479			—			3,553,479
Net decrease in cash		(398,779	)		—			(398,779	)
Cash at beginning of period		1,430,877			—			1,430,877
Cash at end of period	$	1,032,098		$	—		$	1,032,098

Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	1,047,457		$	—		$	1,047,457
Supplemental schedule of noncash investing and financing activities:
Equipment acquired under financing lease	$	497,602		$	—		$	497,602