UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to __________

Commission File Number: 1-11398

CPI AEROSTRUCTURES, INC.

(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)

91 Heartland Blvd., Edgewood, NY	11717
(Address of principal executive offices)	(Zip code)

(631) 586-5200

(Registrant’s telephone number including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, $0.001 par value per share	CVUA	NYSE American

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 ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of September 27, 2022, the registrant had 12,335,896 shares of common stock, $.001 par value, outstanding.

INDEX

Part I - Financial Information	3

Item 1 – Consolidated Financial Statements (Unaudited)	3

Consolidated Balance Sheets as of June 30, 2022 (Unaudited) and December 31, 2021	3

Consolidated Statements of Operations for the Three and Six Months ended June 30, 2022 and 2021 (Unaudited)	4

Consolidated Statements of Shareholders’ Deficit for the Six Months ended June 30, 2022 (Unaudited) and 2021 (Unaudited)	5

Consolidated Statements of Cash Flows for the Six Months ended June 30, 2022 (Unaudited) and 2021 (Unaudited)	6

Notes to Consolidated Financial Statements (Unaudited)	7

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3 – Quantitative and Qualitative Disclosures About Market Risk	20

Item 4 – Controls and Procedures	20

Part II - Other Information	21

Item 1 – Legal Proceedings	21

Item 1A – Risk Factors	21

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	21

Item 3 – Defaults Upon Senior Securities	21

Item 4 – Mine Safety Disclosures	21

Item 5 – Other Information	21

Item 6 – Exhibits	21

Signatures	23

Exhibits

Part I - Financial Information

Item 1 – Consolidated Financial Statements

CONSOLIDATED BALANCE SHEETS

	June 30, 2022 (Unaudited)			December 31, 2021
ASSETS
Current Assets:
Cash	$	2,626,061		$	6,308,866
Accounts receivable, net		4,846,553			4,967,714
Insurance recovery receivable		3,500,693			2,850,000
Contract assets		27,491,183			24,459,339
Inventory		3,587,781			4,028,925
Refundable income taxes		42,335			40,000
Prepaid expenses and other current assets		508,968			625,075
Total current assets		42,603,574			43,279,919

Operating lease right-of-use assets		6,937,956			7,796,768
Property and equipment, net		1,390,929			1,646,863
Intangibles, net		62,500			125,000
Goodwill		1,784,254			1,784,254
Other assets		325,854			372,741
Total assets	$	53,105,067		$	55,005,545

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable	$	11,293,990		$	10,429,018
Accrued expenses		5,110,731			6,102,587
Litigation settlement obligation		3,600,000			3,003,259
Contract liabilities		5,027,832			5,122,766
Loss reserve		918,548			1,495,714
Current portion of long-term debt		3,332,391			3,365,181
Operating lease liabilities		1,641,243			1,580,453
Income tax payable		—			5,165
Total current liabilities		30,924,735			31,104,143

Line of credit		21,000,000			21,250,000
Long-term operating lease liabilities		5,604,664			6,445,728
Long-term debt, net of current portion		262,656			1,540,747
Total liabilities		57,792,055			60,340,618

Shareholders’ Deficit:
Common stock - $.001 par value; authorized 50,000,000 shares, 12,449,327 and 12,335,683 shares, respectively, issued and outstanding		12,449			12,336
Additional paid-in capital		72,997,009			72,833,742
Accumulated deficit		(77,696,446	)		(78,181,151	)
Total Shareholders’ Deficit		(4,686,988	)		(5,335,073	)
Total Liabilities and Shareholders’ Deficit	$	53,105,067		$	55,005,545

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
	2022		2021		2022		2021
Revenue	$	18,925,406	$	22,301,190	$	39,060,503	$	53,119,936
Cost of sales		15,265,716		18,704,588		31,966,204		44,603,246
Gross profit		3,659,690		3,596,602		7,094,299		8,516,690

Selling, general and administrative expenses		2,697,392		2,677,688		5,835,049		6,068,494
Income from operations		962,298		918,914		1,259,250		2,448,196

Interest expense		438,437		293,685		767,045		588,174
Income before provision for income taxes		523,861		625,229		492,205		1,860,022

Provision for income taxes		6,225		2,078		7,500		4,328
Net income	$	517,636	$	623,151	$	484,705	$	1,855,694

Income per common share – basic	$	0.04	$	0.05	$	0.04	$	0.15

Income per common share – diluted	$	0.04	$	0.05	$	0.04	$	0.15

Shares used in computing loss per common share:
Basic		12,439,000		12,188,197		12,401,281		12,086,299
Diluted		12,534,058		12,255,950		12,496,339		12,154,052

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT (UNAUDITED)


	Common Stock Shares			Common Stock Amount			Additional Paid-in Capital		Accumulated Deficit			Total Shareholders’ Deficit
Balance at January 1, 2021		11,951,271		$	11,951		$	72,005,841	$	(85,001,524	)	$	(12,983,732	)
Net Income		—			—			—		1,232,543			1,232,543
Stock-based compensation expense		33,881			34			343,693		—			343,727
Balance at March 31, 2021		11,985,152		$	11,985		$	72,349,534	$	(83,768,981	)	$	(11,407,462	)
Net Income		—			—			—		623,151			623,151
Common stock forfeited		(41,199	)		(42	)		—		—			(42	)
Stock-based compensation expense		323,977			325			224,773		—			225,098
Balance at June 30, 2021		12,267,930		$	12,268		$	72,574,307	$	(83,145,830	)	$	(10,559,255	)

Balance at January 1, 2022		12,335,683		$	12,336		$	72,833,742	$	(78,181,151	)		(5,335,073	)
Net Loss		—			—			—		(32,931	)		(32,931	)
Stock-based compensation expense		47,527			47			25,835		—			25,882
Balance at March 31, 2022		12,383,210		$	12,383		$	72,859,577	$	(78,214,082	)	$	(5,342,122	)
Net Income		—			—			—		517,636			517,636
Stock-based compensation expense		66,117			66			137,432		—			137,498
Balance at June 30, 2022		12,449,327		$	12,449		$	72,997,009	$	(77,696,446	)	$	(4,686,988	)

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Six Months Ended June 30,
	2022			2021
Cash flows from operating activities:
Net income	$	484,705		$	1,855,694
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization		343,750			530,843
Amortization of debt issuance cost		46,888			28,107
Cash expended less than (in excess) of rent expense		78,538			(48,670	)
Stock-based compensation		163,380			568,783
Bad debt expense		3,189			127,413
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable		117,972			(2,235,735	)
Increase in contract assets		(3,031,844	)		(4,266,430	)
Decrease in inventory		441,144			1,105,127
Decrease (increase) in prepaid expenses and other assets		116,107			(271,157	)
Increase in refundable income taxes		(2,335	)		(647	)
(Decrease) increase in accounts payable and accrued expenses		(126,884	)		69,246
Decrease in contract liabilities		(94,934	)		(124,976	)
Increase in insurance receivable		(650,693	)		(2,850,000	)
Increase in settlement of litigation obligation		596,741			3,371,162
Decrease in income taxes payable		(5,165	)		(948	)
Decrease in loss reserve		(577,166	)		(344,443	)
Net cash used in operating activities		(2,096,607	)		(2,486,631	)

Cash flows from investing activities:
Purchase of property and equipment		(25,317	)		(11,952	)
Net cash used in investing activities		(25,317	)		(11,952	)

Cash flows from financing activities:
Payments on long-term debt		(1,560,881	)		(1,196,276	)
Proceeds from line of credit		—			261,315
Net cash used in financing activities		(1,560,881	)		(934,961	)

Net decrease in cash		(3,682,805	)		(3,433,544	)
Cash at beginning of period		6,308,866			6,033,537
Cash at end of period	$	2,626,061		$	2,599,993

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	645,423		$	588,174
Income taxes	$	—		$	5,923

See Notes to Consolidated Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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 June 30, 2022 and for the six months ended June 30, 2022 and 2021 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, 2021 has been derived from audited consolidated financial statements, 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 Annual Report on Form 10-K for the year ended December 31, 2021 (the “Form 10-K”). 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 June 30, 2022, the Company had $2,417,087 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 $133 million) backlog of funded orders, 99% 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 that quarter and subsequent to that 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 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 included in Part I, Item 1A of our Form 10-K.

REVENUE RECOGNITION

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, military 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 and military contractors 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.

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 and revenue recognition method:

	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Aerostructures	$	9,819,902	$	8,255,406	$	19,006,695	$	16,882,354
Aerosystems		5,984,045		6,167,283		12,670,873		16,171,720
Kitting and Supply Chain Management		3,121,459		7,878,501		7,382,935		20,065,862
	$	18,925,406	$	22,301,190	$	39,060,503	$	53,119,936

	Three months ended June 30,				Six months ended June 30,
	2022		2021		2022		2021
Revenue recognized using over time revenue recognition model	$	16,565,696	$	19,628,721	$	35,060,893	$	47,931,650
Revenue recognized using point in time revenue recognition model		2,359,710		2,672,469		3,999,610		5,188,286
	$	18,925,406	$	22,301,190	$	39,060,503	$	53,119,936

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 June 30, 2022, the aggregate amount of transaction price allocated to the remaining performance obligations was approximately $133 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 June 30, 2022. The Company estimates that it will recognize approximately 30% of this amount in fiscal year 2022 and the remainder by 2024.

3. CONTRACT ASSETS AND CONTRACT LIABILITIES

Contract assets represent revenue recognized on contracts in excess of amounts invoiced to the customers and the where the Company’s right to consideration is conditional on something other than the passage of time. Amounts may not exceed their net realizable value. 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.

	June 30,		December 31,
	2022		2021
Contract assets	$	27,491,183	$	24,459,339
Contract liabilities		5,027,832		5,122,766
Net Contract assets	$	22,463,351	$	19,336,573

Revenue recognized for the periods ended June 30, 2022 and 2021 that was included in the contract liabilities balance as of January 1, 2022 and 2021, respectively, was approximately $3.2 million and $1.5 million, respectively.

INVENTORY

The components of inventory consisted of the following:

	June 30, 2022			December 31, 2021
Raw materials	$	3,374,769		$	3,603,359
Work in progress		1,171,432			1,413,672
Finished goods		1,906,271			1,998,049
Gross inventory		6,452,472			7,015,080
Inventory reserves		(2,864,691	)		(2,986,155	)
Inventory, net	$	3,587,781		$	4,028,925

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 net total of $137,498 and $225,098 of stock-based compensation expense for the three months ended June 30, 2022 and 2021, respectively, and a net total of $163,381 and $568,825 of stock- based compensation expense for the six months ended June 30, 2022 and 2021, respectively.

During the three and six months ended June 30, 2022, the Company granted 0 and 190,114 restricted stock units (“RSUs”), respectively, to its board of directors as partial compensation for the 2022 year, and during the three and six months ended June 30, 2021, the Company granted 0 and 135,512 RSUs, respectively, to its board of directors as partial compensation for the 2021 year. RSUs vest quarterly on a straight-line basis over a one-year period. For the three and six months ended June 30, 2022, approximately $114,000 and $333,000, respectively, of non-cash compensation expense related to the RSU grants to the board of directors are included selling, general and administrative expenses, and for the three and six months ended June 30, 2021, approximately $147,902 and $432,345, respectively, of non-cash compensation expense related to the RSU grants to the board of directors are included in selling, general and administrative expenses.

During the three and six months ended June 30, 2022, the Company granted 0 and 18,588 shares of common stock (“Restricted Stock”) to an employee. In the event that this employee’s employment is voluntarily terminated prior to certain dates, portions of the shares may be forfeited. For the three and six months ended June 30, 2022, approximately $17,000 and $(189,000), respectively, of compensation expense are included in selling, general and administrative expenses, which includes forfeitures during the three months ended March 31, 2022 of 85,748 shares totaling approximately ($263,000) of credit. For the three and six months ended June 30, 2022, approximately $6,000 and $20,000, respectively, of compensation expense are included in cost of sales for shares of common stock granted to employees between 2016 and 2020. For the three and six months ended June 30, 2021, approximately $63,653 and $112,102, respectively, of compensation expense are included in selling, general and administrative expenses and approximately $13,543 and $24,378, respectively, of compensation expense are included in cost of sales for shares of common stock granted to employees between 2016 and 2020.

FAIR VALUE

Fair Value

At June 30, 2022 and December 31, 2021, the fair values of cash, accounts receivable and accounts payable approximated their carrying values because of the short-term nature of these instruments.

	June 30, 2022
	Carrying Amount		Fair Value
Debt
Short-term borrowings and long-term debt	$	24,595,047	$	24,595,047

	December 31, 2021
	Carrying Amount		Fair Value
Debt
Short-term borrowings and long-term debt	$	26,155,928	$	26,155,928

We estimated the fair value of debt using market quotes and calculations based on market rates.

INCOME PER COMMON SHARE

Basic and diluted income per common share for the three and six months ended June 30, 2022 and 2021 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 95,058 were used in the calculation of diluted income per common share in the three months ended June 30, 2022. Incremental shares of 142,587 were not used in the calculation of diluted income per common share in the three months ended March 31, 2022, as the Company was in a loss position and these shares would be considered anti-dilutive for that period. Incremental shares of 67,753 were used in the calculation of diluted income per common share in the three and six months ended June 30, 2021.

DEBT

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 May 11, 2021, the Company entered into the Seventh Amendment (defined below). 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. Additionally, under the Seventh Amendment, BankUnited waived late delivery of certain financial information.

On October 28, 2021, the Company entered into the Eighth Amendment (defined below). 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, (e) amending the maximum leverage ratio covenant. 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. As at December 31, 2021, the Amendment Fee payable was posted by BankUnited to the Revolving Loan and on February 11, 2022, in agreement with the Company, the Amendment Fee was reclassified by BankUnited to the Term Loan. The Company has recorded this payable to its financial statements accordingly.

On April 12, 2022 the Company entered into the Ninth Amendment (defined below). 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. 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.

On August 19, 2022, we entered into the Tenth Amendment (defined below). Under the Tenth Amendment, the parties amended the Credit Agreement by (a) increasing the maximum leverage ratio applicable for the fiscal quarter ending September 30, 2022 to 5.0, (b) waiving and/or consenting to the exclusion from the Company’s covenant compliance requirements for the fiscal quarters ended December 31, 2021, March 31, 2022, June 30, 2022 and September 30, 2022 up to (i) $566,024.81 of losses incurred and reserves taken under the Borrower’s welded product contracts, and (ii) $367,044.51 of reserves taken with respect to the Borrower’s welded product inventory, and (c) waiving and/or consenting to the exclusion from the Company’s covenant compliance requirements for the fiscal quarters ended March 31, 2022, June 30, 2022, September 30, 2022 and December 31, 2022 up to $795,997.06 of accrued severance and COBRA costs and employer taxes incurred by the Company during the fiscal quarter ending March 31, 2022. Additionally, under the Tenth Amendment, BankUnited waived or consented to late delivery of certain financial information required by the Credit Agreement.

The Credit Agreement, as amended, requires us to maintain the following financial covenants (subject to the exclusions provided for in the previous paragraph): (a) minimum debt service coverage ratio of no less than 1.5 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 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 5.0 to 1.0 for the trailing four quarter period ended September 30, 2022 and 4.0 to 1.0 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 rate of 7.25% (the Prime Rate + 2.50%) as of June 30, 2022.

As of June 30, 2022, the Company had $21,000,000 outstanding under the Revolving Loan as compared to $21,250,000 as of December 31, 2021.

The Term Loan, as amended by the Tenth Amendment, had an aggregate principal amount of $3,283,333, payable in monthly installments, as defined in the agreement, as of June 30, 2022 as compared to an aggregate principal amount outstanding as of December 31, 2021 of $4,483,333.

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. The PPP Loan was evidenced by a promissory note (the “Note”). Subject to the terms of the Note, the PPP Loan bore interest at a fixed rate of one percent (1%) per annum, with the first six months of interest deferred, had an initial term of two years, and was unsecured and guaranteed by the Small Business Administration (“SBA”). The Note provided for customary events of default including, among other things, cross-defaults on any other loan with the lender. The PPP Loan could have been accelerated upon the occurrence of an event of default.

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. All amounts have been classified as current or long term in accordance with the Note terms.

On July 13, 2021, the Company received notification through Dime that the PPP Loan and accrued interest thereon had been fully forgiven by the SBA and that the forgiveness payment date was July 1, 2021. The forgiveness of the PPP Loan was recognized as other income during the Company’s third fiscal quarter ending September 30, 2021.

The maturities of long-term debt (excluding unamortized debt issuance costs) are as follows:

Twelve months ending June 30,
2023	$	3,332,391
2024		221,171
2025		30,663
2026		10,822
Total	$	3,595,047

Included in the long-term debt are financing leases and other notes payable of $311,714 and $422,595 at June 30, 2022 and December 31, 2021, respectively, including a current portion of $182,391 and $215,181, respectively.

The Company has cumulatively paid $908,000 of total debt issuance costs in connection with the BankUnited Facility, of which $217,774 is included in other assets at June 30, 2022.

9. MAJOR CUSTOMERS

During the six months ended June 30, 2022, the Company’s three largest customers accounted for 36%, 14% and 11% of revenue. During the six months ended June 30, 2021, the Company’s two largest customers accounted for 35% and 23% of revenue.

At June 30, 2022, 25%, 25%, 16% and 10% of our contract assets were from four of our largest customers. At December 31, 2021, 34%, 16%, and 12% of our contract assets were from three of our largest customers.

At June 30, 2022, 24%, 17%, 13% and 13% of our accounts receivable were from our three largest customers. At December 31, 2021, 30%, 23%, and 18% of accounts receivable were from our three largest customers.

10. LEASES

The Company leases a building and equipment. Under ASC 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 six months ended June 30, 2022, the Company’s operating lease expense was $516,920 and $1,051,911, respectively.

Future minimum lease payments under non-cancellable operating leases as of June 30, 2022 were as follows:

Twelve months ending June 30,
2023	$	1,967,171
2024		2,079,572
2025		2,130,223
2026		1,817,820
Total undiscounted operating lease payments		7,994,786
Less imputed interest (between 4.0% - 6.0%)		(748,879)
Present value of operating lease payments	$	7,245,907

The following table sets forth the ROU assets and operating lease liabilities as of June 30, 2022:

Assets
ROU assets-net	$	6,937,956

Liabilities
Current operating lease liabilities	$	1,641,243
Long-term operating lease liabilities		5,604,664
Total ROU liabilities	$	7,245,907

The Company’s weighted average remaining lease term for its operating leases is 3.8 years.

11.

INCOME TAXES

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 June 30, 2022 and 2021 was $6,225 and $2,078, respectively. The provision for income tax for the six months ended June 30, 2022 and 2021 was $7,500 and $4,328, 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-00982) has been filed in the U.S. District Court for the Eastern District of New York 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 and February 14, 2020. The Amended Complaint alleges that the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended (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 and 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.

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 Court adopted the recommendation on May 27, 2022, and entered an order granting preliminary approval of the settlement on June 7, 2022. On August 5, 2022, the Plaintiff filed an unopposed motion for final approval. The magistrate judge held a hearing on the final approval motion on September 9, 2022, and is now deciding whether to recommend final approval of the settlement. As of June 30, 2022, we have previously paid or accrued to our financial statements covered expenses totaling $750,000, and have therefore met our insurance carrier’s directors’ and officers’ retention requirement, which caps the Company’s expenses pertaining to the class action suit.

At June 30, 2022, 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 $3,600,000 and an insurance recovery receivable of $3,500,693 to reflect the liability owed by the Company to the Plaintiffs as well as the amount receivable owing from the Company’s insurance carrier to the Company with respect to the settlement obligation.

Shareholder Derivative Action

Four shareholder derivative actions, each based on substantially the same facts as those alleged in the class action discussed above, have been filed against certain of our current and former directors and 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. It purports to assert derivative claims against the individual defendants for violations of Section 10(b) and 21D of the Exchange Act, 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. 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). It 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. The complaint, which is based in part 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). 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.

On June 13, 2022, the plaintiffs in the consolidated federal action informed the Court that the Company (as nominal defendant) and all individual defendants had reached an agreement in principle with all plaintiffs to settle the four shareholder derivative lawsuits described above. On June 16, 2022, the plaintiffs in the consolidated federal action filed an unopposed motion for preliminary approval of the settlement. On July 22, 2022, the Court referred the motion to the magistrate judge; the motion remains pending. The magistrate judge held a conference on September 9, 2022 in the consolidated federal action. The settlement is subject to Court approval and, if approved, will result in the dismissal of the shareholder derivative lawsuits. As part of the proposed settlement, the Company has agreed to undertake (or confirm that it has undertaken already) certain corporate governance reforms and to pay attorneys’ fees to plaintiffs’ counsel.

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in this report.

Forward Looking Statements

When used in this Form 10-Q and in future filings by us with the Securities and Exchange Commission (the “SEC”), 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, each of which speaks only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The risks are included in Part I, Item 1A – Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2021 (the “Form 10-K”). We undertake no obligation to publicly update any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.

Business Operations

We are engaged in the contract production of structural aircraft parts for fixed wing aircraft and helicopters in both the defense and commercial markets. We also have a strong and growing presence in the aerosystems segment of the market, with our production of various reconnaissance pod structures and fuel panel systems. Within the global aerostructure and aerosystem supply chain, we are either a Tier 1 supplier to aircraft Original Equipment Manufacturers or a Tier 2 subcontractor to major Tier 1 manufacturers. We also are a prime contractor to the U.S. Department of Defense, primarily the U.S. Air Force. In conjunction with our assembly operations, we provide engineering, program management, supply chain management and kitting, and maintenance repair and overhaul services.

Impact of COVID-19

Recent Developments

NYSE American Delinquency Notices

On May 19, 2022, the NYSE American exchange (the “Exchange”) announced the suspension of trading of our common stock due to non-compliance with the SEC annual and quarterly report timely filing criteria provided for in Section 1007 of the Exchange’s Company Guide (the “Company Guide”) and announced that it was initiating proceedings to delist our common stock. The Company filed a request for review of the Exchange’s determination to initiate delisting proceedings to a Committee of the Board of Directors of NYSE Regulation (the “Committee”). A hearing for this review before a Listing Qualification Panel of the Committee has been scheduled for November 9, 2022 (the “Hearing”). The delisting action has been stayed pending the outcome of the review although trading of our common stock on the Exchange remains suspended.

We have become current with our SEC reports upon the filing of this Quarterly Report on Form 10-Q. The Company believes the filing of this quarterly report resolves the condition that led to NYSE American suspending trading in the Company’s common stock on the Exchange and its determination to commence proceedings to delist the common stock from the Exchange. We cannot assure you that the Company becoming current with our SEC reports or the outcome of the Hearing will result in the Exchange changing its delisting determination or that our common stock will resume trading on the Exchange in the future.

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.

Trading of Common Stock on Expert Market

Prior to the filing of this Quaterly Report on Form 10-Q, the Company was not current in its SEC reporting obligations. Companies that are not current in their SEC reporting obligations in accordance with the provisions of Rule 15c-11 (“Rule 15c2-11”) promulgated under the Securities Exchange Act of 1934, as amended, do not have current information publicly available and do not meet the requirements for ongoing quoting of their securities on one of the public markets (the “OTC Markets”) operated by the OTC Markets Group. Effective July 15, 2022, the Company’s common stock is only quoted on the OTC Markets Group’s “Expert Market.”

The Expert Market is available for unsolicited quotes only, meaning broker-dealers may use the Expert Market to publish unsolicited quotes representing orders from retail and institutional investors who are not affiliates or insiders of the Company. Quotations in Expert Market securities are made available to broker-dealers, institutions, and other sophisticated investors. Accordingly, investors are not assured of the opportunity to purchase or sell their shares when they desire to do so or at all.

The Company believes that now that it is current in its SEC reporting obligations its common stock is eligible to be quoted on one of the OTC Markets through the filing of a Form 211 with the Financial Industry Regulatory Authority (or reliance on OTC Market Group’s current information designations in lieu thereof). There can be no assurance that the Company’s common stock will be quoted on an OTC Market or any other market or exchange or when that may occur in the future.

For more information regarding trading of the Company’s common stock on the Expert Market, See Part I Item 1A Risk Factors of our Annual Report on Form 10-K

Amendment and Waiver to our BankUnited Credit Facility

On April 12, 2022 the Company entered into the Ninth Amendment (defined below) 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. 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 (subject to the exclusions provided for in the previous paragraph): (a) minimum debt service coverage ratio of no less than 1.5 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 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, 5.0 to 1.0 for the trailing four quarter period ended September 30, 2022 and 4.0 to 1 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.

Settlement of Class Action

As previously disclosed, a consolidated class action lawsuit 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 and 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 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 and 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.

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 Court adopted the recommendation on May 27, 2022, and entered an order granting preliminary approval of the settlement on June 7, 2022. On August 5, 2022, the Plaintiff filed an unopposed motion for final approval. The magistrate judge held a hearing on September 9, 2022, and is now deciding whether to grant final approval of the settlement. After satisfaction of our $750,000 retention, the Settlement Amount will be covered and paid by our directors’ and officers’ insurance carrier. As of June 30, 2022, 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.

Backlog

We produce custom assemblies pursuant to long-term contracts and customer purchase orders. Funded backlog consists of aggregate funded values under such contracts and purchase orders, excluding the portion previously included in operating revenues pursuant to Accounting Standards Codification Topic 606 (“ASC 606”). Unfunded backlog is the estimated amount of future orders under the expected duration of the programs. Substantially all of our backlog is subject to termination at will and rescheduling, without significant penalty. Funds are often appropriated for programs or contracts on a yearly or quarterly basis, even though the contract may call for performance that is expected to take a number of years. Therefore, our funded backlog does not include the full value of our contracts.

Our total backlog as of June 30, 2022 and December 31, 2021 was as follows:

Backlog (Total)	June 30, 2022		December 31, 2021
Funded	$	133,416,111	$	134,722,000
Unfunded		370,890,058		366,997,000
Total	$	504,306,169	$	501,719,000

Approximately 99% of the total amount of our backlog at June 30, 2022 was attributable to government contracts. Our backlog attributable to government contracts at June 30, 2022 and December 31, 2021 was as follows:

Backlog (Government)	June 30, 2022		December 31, 2021
Funded	$	131,594,564	$	132,499,000
Unfunded		364,204,182		358,133,000
Total	$	495,798,747	$	$490,632,000

Our backlog attributable to commercial contracts at June 30, 2022 and December 31, 2021 was as follows:

Backlog (Commercial)	June 30, 2022		December 31, 2021
Funded	$	1,821,546	$	2,223,000
Unfunded		6,685,876		8,864,000
Total	$	8,507,422	$	11,087,000

The total backlog at June 30, 2022 is primarily comprised of long-term programs with Raytheon (Next Generation Jammer – Mid Band Pod), USAF (T-38), Boeing (A-10 Main Landing Gear Pod), Lockheed Martin F-16 RI/DCC, Raytheon (B-52 Radar Rack), Collins Aerospace (MS-110 Pod), and Sikorsky UH-60 Gunner Window, Stabilator MRO and IR Module Assembly (HIRSS), and Northrop Grumman (E-2D). Funded backlog is primarily from purchase orders under long-term contracts with USAF (T-38), Boeing (A-10 Main Landing Gear Pod), Raytheon (Next Generation Jammer – Mid Band Pod), Lockheed Martin F-16 Rudder Island, Northrop Grumman (E-2D) and Sikorsky IR Module Assembly (HIRSS).

Critical Accounting Policies

We make a number of significant estimates, assumptions and judgments in the preparation of our financial statements. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K, for a discussion of our critical accounting policies. There have been no significant changes to the application of our critical accounting policies during the quarter ended June 30, 2022.

Results of Operations

Revenue

Total Revenue for the three months ended June 30, 2022 was $18,925,406 compared to $22,301,190 for the same period last year, a decrease of $3,375,784 or 15.1%. The decrease was primarily related to decreases in the Northrop Grumman E2D MYP II, Northrop Grumman E2D WOWP and Raytheon NGJ MB Pods programs, partly offset by increases in the Sikorsky HIRRS and Collins Aerospace MS-110 Pods programs.

Total Revenue for the six months ended June 30, 2022 was $39,060,503 compared to $53,119,936 for the same period last year, a decrease of $14,059,433 or 26.5%. The decrease was primarily related to decreases in the Northrop Grumman E2D MYP II, Northrop Grumman E2D WOWP and Raytheon NGJ MB Pods programs, partly offset by increases in the Sikorsky HIRRS, Boeing A-10 Pods, USAF T-38 Pacer Classic and GKN Ducts programs.

Revenue from government subcontracts was $15,520,336 for the three months ended June 30, 2022 compared to $19,912,052 for the three months ended June 30, 2021, a decrease of $4,391,716 or 22.1%. The decrease was primarily to decreases in the Northrop Grumman E2D MYP II, Northrop Grumman E2D WOWP and Raytheon NGJ MB Pods programs, partly offset by an increase in the Sikorsky HIRRS program.

Revenue from government subcontracts was $32,716,830 for the six months ended June 30, 2022 compared to $48,294,446 for the six months ended June 30, 2021, a decrease of $15,577,616 or 32.3%. The decrease was primarily related to decreases in the Raytheon NGJ MB Pods, Northrop Grumman E2D OWP MYP II and Northrop Grumman E2D WOWP, partly offset by increases in the Sikorsky HIRRS program.

Revenue from direct military contracts was $1,887,074 for the three months ended June 30, 2022 compared to $1,359,793 for the three months ended June 30, 2021, an increase of $527,281 or 38.8%. The increase is primarily related to an increase in the USAF Pacer Classic T-38 Pacer Classic program.

Revenue from direct military contracts was $3,416,546 for the six months ended June revenue is primarily related to an increase in the USAF Pacer Classic T-38 Pacer Classic program.

Revenue from commercial subcontracts was $1,517,996 for the three months ended June 30, 2022 compared to $1,029,345 for the three months ended June 30, 2021, an increase of $488,651 or 47.5%. The increase is primarily related to an increase in the Embraer Inlets program, partly offset by a decrease in the Gulfstream G650 program.

Revenue from commercial subcontracts was $2,927,126 for the six months ended June 30, 2022 compared to $2,926,952 for the six months ended June 30, 2021, an increase of $174. The decrease is primarily the result of an increase in the Embraer Inlets program, partly offset by decrease in the Gulfstream G650 program and the Sikorsky S-92 Kits program.

Cost of Sales

Total Cost of Sales for the three months ended June 30, 2022 and 2021 was $15,265,716 and $18,704,588, respectively, a decrease of $3,438,872 or 18.4%. This decrease is the result of the comparable decrease in revenue and the specific program related factors noted below.

Total Cost of Sales for the six months ended June 30, 2022 and 2021 was $31,966,204 and $44,603,246, respectively, a decrease of $12,637,042 or 28.3%. This decrease is the result of the comparable decrease in revenue and the specific program related factors noted below.

The components of the cost of sales were as follows:

	Three months ended						Six months ended
	June 30, 2022			June 30, 2021			June 30, 2022			June 31, 2021
Procurement	$	10,416,731		$	13,923,919		$	21,588,456		$	33,335,973
Labor		1,707,066			1,950,432			3,693,335			3,889,866
Factory overhead		3,754,557			4,800,817			8,045,129			10,073,672
Other cost of sales		(612,638	)		(1,970,580	)		(1,360,716	)		(2,696,265	)
Cost of sales	$	15,265,716		$	18,704,588		$	31,966,204		$	44,603,246

Procurement for the three months ended June 30, 2022 was $10,416,731 compared to $13,923,919 for the three months ended June 30, 2021, a decrease of $3,507,188 or 25.2%. This decrease is primarily related to decreases in the Northrop Grumman E2D MYP II, Northrop Grumman E2D WOWP and Raytheon NGJ MB Pods programs, partly offset by increases in the Sikorsky HIRRS and Collins Aerospace MS-110 Pods programs.

Procurement for the six months ended June 30, 2022 was $21,588,456 compared to $33,335,973 for the six months ended June 30, 2021, a decrease of $11,747,517 or 35.2%. This decrease is primarily related to decreases in the Northrop Grumman E2D MYP II, Northrop Grumman E2D WOWP and Raytheon NGJ MB Pods programs, partly offset by increases in the Sikorsky HIRRS, Boeing A-10 Pods, USAF T-38 Pacer Classic and GKN Ducts programs.

Labor costs for the three months ended June 30, 2022 were $1,707,066 compared to $1,950,432 for the three months ended June 30, 2021, a decrease of $243,366 or 12.5%. This decrease is primarily related to decreases in the Raytheon NGJ MB Pods program.

Labor costs for the six months ended June 30, 2022 were $3,693,335 compared to $3,889,866 for the six months ended June 30, 2021, a decrease of $196,531 or 5.1%. This decrease is primarily related to decreases in the Raytheon NGJ MB Pods program.

Factory overhead for the three months ended June 30, 2022 was $3,754,557 compared to $4,800,817 for the three months ended June 30, 2021, a decrease of $1,046,260 or 21.8%. This decrease is primarily the result of lower salary and benefit costs.

Factory overhead for the six months ended June 30, 2022 was $8,045,1297 compared to $10,073,672 for the six months ended June 30, 2021, a decrease of $2,028,543 or 20.1%. This decrease is primarily the result of lower salary and benefit costs.

Other cost of sales relates to items that can increase or decrease cost of sales such as changes in inventory levels, changes in inventory valuation, changes to inventory reserves, changes in loss contract provisions, absorption variances and direct charges to cost of sales. Other costs (credit), net for the three months ended June 30, 2022 were $(612,638) compared to $(1,970,580) for the three months ended June 30, 2021, a decrease of the credit of $1,357,568, or 68.9%. The change in the three months ended June 30, 2022 is primarily due to changes in inventory levels, reductions to in the inventory reserves and reductions in the loss reserve.

Other costs (credit), net for the six months ended June 30, 2022 were $(1,360,716) compared to $(2,696,265) for the six months ended June 30, 2021, a decrease of the credit of $1,335,549, or 49.5%. The change in the six months ended June 30, 2022 is primarily due to changes in inventory levels, reductions to in the inventory reserves and reductions in the loss reserve.

Gross Profit

Gross profit for the three months ended June 30, 2022 was $3,659,690 compared to $3,596,602 for the three months ended June 30, 2021, an increase of $63,088, or 1.3% for the reasons noted above. Gross profit percentage (“gross margin”) for the three months ended June 30, 2022 was 19.3% compared to 16.1% for three months ended June 30, 2021. The increase in gross margin was primarily due to a favorable job mix during the three months ended June 30, 2022 as compared to the three months ended June 30, 2021.

Gross profit for the six months ended June 30, 2022 was $7,094,299 compared to $8,516,690 for the six months ended June 30, 2021, a decrease of $1,422,391, or 28.9% for the reasons noted above. Gross profit percentage (“gross margin”) for the six months ended June 30, 2022 was 18.2% compared to 16.0% for the six months ended June 30, 2021. The increase in gross margin was primarily due to a favorable job mix during the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

Favorable (Unfavorable) Adjustments to Gross Profit

During the six months ended June 30, 2022 and 2021, circumstances required that we make changes in estimates to various contracts. Such changes in estimates resulted in changes in total gross profit as follows:

	Six months ended
	June 30, 2022			June 30, 2021
Favorable adjustments	$	2,725,554		$	2,659,715
Unfavorable adjustments		(2,186,363	)		(3,005,324	)
Net adjustments	$	539,191		$	(345,609	)

For the six months ended June 30, 2022, we evaluated all contractual data and revised estimated gross profit percentages accordingly. We had 29 contracts with favorable adjustments and 24 contracts with unfavorable adjustments, all due to changes in estimates.

Selling, General and Administrative Expenses

Selling, general and administrative expenses for the three months ended June 30, 2022 were $2,697,392 compared to $2,677,688 for the three months ended June 30, 2021, an increase of $19,704 or 0.7%.

Selling, general and administrative expenses for the six months ended June 30, 2022 were $5,835,049 compared to $6,068,494 for the six months ended June 30, 2022, a decrease of $233,445 or 3.8%. This decrease was primarily driven by lower legal fees, partly offset by higher salaries expense as a result of a $637,206 severance charge recorded in the first quarter of 2022.

Income Before Provision for Income Taxes

Income before provision for income taxes for the three months ended June 30, 2022 was $523,861 compared to $625,229 for the same period last year, a decrease of $101,368 or 8.2% for the reasons noted above.

Income before provision for income taxes for the six months ended June 30, 2022 was $492,205 compared to $1,860,022 for the same period last year, a decrease of $1,367,817 or 110.8% for the reasons noted above.

Provision for Income Taxes

Provision for income taxes was $6,225 for the three months ended June 30, 2022, compared to a provision for income taxes of $2,078 for the three months ended June 30, 2021, an increase of $4,147 or 199.6%.

Provision for income taxes was $7,500 the six months ended June 30, 2022, compared to a provision for income taxes of $4,328 for the six months ended June 30, 2021, an increase of $3,172 or 73.3%.

Net Income

Net income for the three months ended June 30, 2022 was $517,636 or $0.04 per basic share, compared to net income of $623,151 or $0.05 per basic share for the same period last year. Diluted income per share was $0.04 for the three months ended June 30, 2022 calculated utilizing 12,534,058 weighted average shares outstanding versus diluted income per share of $0.05 for the same period last year calculated utilizing 12,255,950 weighted average shares outstanding.

Net income for the six months ended June 30, 2022 was $484,705 or $0.04 per basic share, compared to net income of $1,855,694 or $0.15 per basic share for the same period last year. Diluted income per share was $0.04 for the six months ended June 30, 2022 calculated utilizing 12,496,339 weighted average shares outstanding versus diluted income per share of $0.15 for the same period last year calculated utilizing 12,154,052 weighted average shares outstanding.

Excluding the $771,834 severance charge recorded in the first quarter of 2022 as referred to above under Cost of Sales and Selling, General and Administrative Expenses, our net income for the six months ended June 30, 2022 was $1,256,539, a decrease over the prior year of $599,155 or 32.3%. Excluding the aforementioned severance charge, our basic and diluted earnings per share was $0.10 for the six months ended June 30, 2022 as compared to the $0.15 income per basic and diluted share for the six months ended June 30, 2021.

Liquidity and Capital Resources

General

At June 30, 2022, we had working capital of $11,678,839 compared to working capital of $12,175,776 at December 31, 2021, a decrease of $496,937 or 4.1%.

Cash Flow

A large portion of our cash flow is used to pay for materials and processing costs associated with contracts that are in process and which do not provide for progress payments. Costs for which we are not able to bill on a progress basis are components of “Contract Assets” on our consolidated balance sheets 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 ASC 606 requires us to use estimates in determining revenue, costs and profits and in assigning the amounts to accounting periods, there can be a significant disparity between earnings (both for accounting and tax purposes) as reported and actual cash that 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, or to raise additional capital, until the reported earnings materialize into actual cash receipts.

Several of our programs require us to expend up-front costs that may have to be amortized over a portion of production units. In the case of significant program delays and/or program cancellations, we could be required to bear impairment charges, which may be material for costs that are not recoverable. Such charges and the loss of up-front costs could have a material impact on our liquidity and results of operations.

We continue to work to obtain better payment terms with our customers, including accelerated progress payment arrangements, as well as exploring alternate funding sources.

At June 30, 2022, we had a cash balance of $2,626,061 compared to $6,308,866 at December 31, 2021, a decrease of $3,682,805, or 58.4%. The decrease was comprised of a net cash used in operations of $2,096,607 during the six months ended June 30, 2022, primarily driven by an increase of $3,031,844 in contract assets on the ramp up of new programs, partly offset by a $441,144 decrease in inventory, coupled with $1,560,881 in debt paydowns.

Bank Credit Facilities

On March 24, 2016, the Company entered into an 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”). The Credit Agreement 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 as defined in the Credit Agreement.

On May 11, 2021, the Company entered into a Waiver and Seventh Amendment to the Credit Agreement (the “Seventh Amendment”). Under the Seventh Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the $24 million Revolving Loan and $6.36 million 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 to the Credit Agreement (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 aggregate revolving line of credit from $24 million to $21 million while eliminating the requirement to maintain a minimum $3.0 million in a combination of line of credit 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 maturity, (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. As at December 31, 2021, the Amendment Fee payable was posted by BankUnited to the Revolving Loan and on February 11, 2022, in agreement with the Company, the Amendment Fee was reclassified by BankUnited to the Term Loan. The Company has recorded this payable to its financial statements accordingly.

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. 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.

On August 19, 2022, we entered into a Consent, Waiver and Tenth Amendment to the Credit Agreement (the “Tenth Amendment”). Under the Tenth Amendment, the parties amended the Credit Agreement by (a) increasing the maximum leverage ratio applicable for the fiscal quarter ending September 30, 2022 to 5.0, (b) waiving and/or consenting to the exclusion from the Company’s covenant compliance requirements for the fiscal quarters ended December 31, 2021, March 31, 2022, June 30, 2022 and September 30, 2022 up to (i) $566,024.81 of losses incurred and reserves taken under the Borrower’s welded product contracts, and (ii) $367,044.51 of reserves taken with respect to the Borrower’s welded product inventory, and (c) waiving and/or consenting to the exclusion from the Company’s covenant compliance requirements for the fiscal quarters ended March 31, 2022, June 30, 2022, September 30, 2022 and December 31, 2022 up to $795,997.06 of accrued severance and COBRA costs and employer taxes incurred by the Company during the fiscal quarter ending March 31, 2022. Additionally, under the Tenth Amendment, BankUnited waived or consented to late delivery of certain financial information required by the Credit Agreement.

The Credit Agreement, as amended, requires us to maintain the following financial covenants (subject to the exclusions provided for in the previous paragraph): (a) minimum debt service coverage ratio of no less than 1.5 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 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, 5.0 to 1.0 for the trailing four quarter period ended September 30, 2022 and 4.0 to 1 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.

PPP Loan

On April 10, 2020, we entered into the PPP Loan with Dime as the Lender, in an aggregate principal amount of $4,795,000, pursuant to the Paycheck Protection Program under the CARES Act. The PPP Loan was evidenced by a promissory note (“Note”). Subject to the terms of the Note, the PPP Loan bore interest at a fixed rate of one percent (1%) per annum, with the first six months of interest deferred, had an initial term of two years, and was unsecured and guaranteed by the SBA. The Note provided for customary events of default including, among other things, cross-defaults on any other loan with the Lender. The PPP Loan could have been accelerated upon the occurrence of an event of default.

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 had been fully forgiven by the SBA and that the forgiveness payment date was July 1, 2021. The forgiveness of the PPP Loan was recognized during the Company’s third fiscal quarter ending September 30, 2021.

We believe that our existing resources will be sufficient to meet our current working capital needs for at least the next 12 months from the date of issuance of our consolidated financial statements. However, our working capital requirements can vary significantly, depending in part on the timing of new program awards and the payment terms with our customers and suppliers. If our working capital needs exceed our cash flows from operations, we would look to our cash balances and availability for borrowings under our borrowing arrangement to satisfy those needs, as well as potential sources of additional capital, which may not be available on satisfactory terms and in adequate amounts, if at all.

Liquidity

We believe that our existing resources as of June 30, 2022 will be sufficient to meet our current working capital needs for at least the next 12 months from the date of issuance of our consolidated financial statements. However, our working capital requirements can vary significantly, depending in part on the timing of new program awards and the payment terms with our customers and suppliers. If our working capital needs exceed our cash flows from operations, we would look to our cash balances and availability for borrowings under our borrowing arrangement to satisfy those needs, as well as potential sources of additional capital, which may not be available on satisfactory terms and in adequate amounts, if at all.

Contractual Obligations

For information concerning our contractual obligations, see Contractual Obligations under Item 7 of Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K for the year ended December 31, 2021.

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Not applicable.

Item 4 – Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were not effective due to the material weaknesses described below.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that:

●

pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

●

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and

●

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted an evaluation of the effectiveness of internal control over financial reporting based on criteria established in Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In connection with this evaluation of the Company’s internal control over financial reporting, management identified deficiencies that constituted a material weakness in our internal control over financial reporting as of December 31, 2021. For more information on these deficiencies, see Item 9A. Controls and Procedures, included in our Annual Report on Form 10-K.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

During 2021, the Company did, and during 2022, intends to continue to implement new controls designed to remediate the aforementioned 2021 material weaknesses.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended June 30, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II - Other Information

Item 1 – Legal Proceedings

See Footnote 12 – Commitments and Contingencies.

Item 1A – Risk Factors

“Item 1A. Risk Factors” of our Form 10-K for the year ended December 31, 2021, includes a discussion of significant factors known to us that could materially adversely affect our business, financial condition, or results of operations.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

None.

Item 6 – Exhibits


Exhibit No. 10.1 10.2 31.1*	Description Consent, Waiver and Ninth Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 12, 2022). Consent, Waiver and Tenth Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 19, 2022). Section 302 Certification by Chief Executive Officer and President
31.2*	Section 302 Certification by Chief Financial Officer (Principal Accounting Officer)
32.1**	Section 906 Certification by Chief Executive Officer and Chief Financial Officer
101.INS*	Inline XBRL Instance Document. The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH*	Inline XBRL Taxonomy Extension Schema Document.
101.CAL*	Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*	Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*	Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*	Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104*	Cover Page Interactive Data File. The cover page XBRL tags are embedded within the Inline XBRL document.

* Filed herewith

** Furnished herewith

Attached as Exhibit 101 to this report are the following formatted in Inline XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Statement of Operations for the three and six months ended June 30, 2022 and 2021 (ii) Condensed Consolidated Balance Sheet as of June 30, 2022 and December 31, 2021, (iii) Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2022 and 2021, (iv) Condensed Consolidated Statement of Changes in Shareholders’ Deficit for the three and six months ended June 30, 2022 and 2021 and (v) Notes to Condensed Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CPI AEROSTRUCTURES, INC.

Dated: September 29, 2022	By:	/s/ Dorith Hakim
		Dorith Hakim
		Chief Executive Officer and President (Principal Executive Officer)

Dated: September 29, 2022	By:	/s/ Andrew L. Davis
		Andrew L. Davis
		Chief Financial Officer (Principal Financial and Accounting Officer)

SEC Form 10-Q filed by CPI Aerostructures Inc.