Quarterly Report

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 September 30, 2024

☐

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	CVU	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 November 12, 2024, the registrant had 13,000,670 shares of common stock, $.001 par value, outstanding.

	INDEX

Part I - Financial Information	1

Item 1 – Consolidated Financial Statements (Unaudited)	1

Condensed Consolidated Balance Sheets as of September 30, 2024 (Unaudited) and December 31, 2023	1

Condensed Consolidated Statements of Operations for the Three and Nine months ended September 30, 2024 and 2023 (Unaudited)	2

Condensed Consolidated Statements of Shareholders’ Equity for the Three and Nine months ended September 30, 2024 and 2023 (Unaudited)	3

Condensed Consolidated Statements of Cash Flows for the Nine months ended September 30, 2024 and 2023 (Unaudited)	4

Notes to Condensed Consolidated Financial Statements (Unaudited)	5

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3 – Quantitative and Qualitative Disclosures About Market Risk	18

Item 4 – Controls and Procedures	18

Part II - Other Information	19

Item 1 – Legal Proceedings	19

Item 1A – Risk Factors	19

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	19

Item 3 – Defaults Upon Senior Securities	19

Item 4 – Mine Safety Disclosures	19

Item 5 – Other Information	19

Item 6 – Exhibits	19

Signatures	20

Part I - Financial Information

Item 1 - Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS


	September 30, 2024 (Unaudited)			December 31, 2023
ASSETS
Current Assets:
Cash	$	1,708,987		$	5,094,794
Accounts receivable, net of allowance for credit losses		6,574,853			4,352,196
Contract assets, net		33,618,971			35,312,068
Inventory		1,052,286			1,436,647
Refundable income taxes		40,000			40,000
Prepaid expenses and other current assets		377,858			678,026
Total Current Assets		43,372,955			46,913,731

Operating lease right-of-use assets		3,334,992			4,740,193
Property and equipment, net		819,078			794,056
Deferred tax asset		19,425,407			19,938,124
Goodwill		1,784,254			1,784,254
Other assets		151,077			189,774
Total Assets	$	68,887,763		$	74,360,132

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	14,994,451		$	10,487,012
Accrued expenses		5,742,854			10,275,695
Contract liabilities		1,390,127			5,937,629
Loss reserve		24,888			337,351
Current portion of line of credit		2,730,000			2,400,000
Current portion of long-term debt		31,330			44,498
Operating lease liabilities, current		2,118,329			1,999,058
Income taxes payable		28,748			30,107
Total Current Liabilities		27,060,727			31,511,350

Line of credit, net of current portion		15,390,000			17,640,000
Long-term operating lease liabilities		1,494,942			3,100,571
Long-term debt, net of current portion		2,734			26,483
Total Liabilities		43,948,403			52,278,404

Commitments and Contingencies (see note 11)		—			—

Shareholders’ Equity:
Common stock - $.001 par value; authorized 50,000,000 shares, 12,933,408 and 12,771,434 shares, respectively, issued and outstanding		12,933			12,771
Additional paid-in capital		74,402,288			73,872,679
Accumulated deficit		(49,475,861	)		(51,803,722	)
Total Shareholders’ Equity		24,939,360			22,081,728
Total Liabilities and Shareholders’ Equity	$	68,887,763		$	74,360,132

See Notes to Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


	For the Three Months Ended September 30,						For the Nine months Ended September 30,
	2024			2023			2024			2023
Revenue	$	19,419,879		$	20,399,369		$	59,311,356		$	62,963,592
Cost of sales		15,200,210			16,693,279			46,422,514			49,990,986
Gross profit		4,219,669			3,706,090			12,888,842			12,972,606

Selling, general and administrative expenses		2,742,036			2,535,065			8,231,875			8,210,603
Income from operations		1,477,633			1,171,025			4,656,967			4,762,003

Interest expense		(573,366	)		(663,857	)		(1,793,472	)		(1,816,408	)
Income before provision for income taxes		904,267			507,168			2,863,495			2,945,595

Provision for income taxes		154,590			205,804			535,634			503,850
Net income	$	749,677		$	301,364		$	2,327,861		$	2,441,745

Income per common share, basic	$	0.06		$	0.02		$	0.19		$	0.19

Income per common share, diluted	$	0.06		$	0.02		$	0.18		$	0.19

Shares used in computing income per common share:
Basic		12,647,023			12,759,971			12,559,876			12,613,899
Diluted		12,717,128			12,793,133			12,650,340			12,647,061

See Notes to Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (UNAUDITED)

	Common Stock Shares		Common Stock Amount		Additional Paid-in Capital		Accumulated Deficit			Total Shareholders’ Equity
Balance at January 1, 2024		12,771,434	$	12,771	$	73,872,679	$	(51,803,722	)	$	22,081,728
Net income		—		—		—		168,238			168,238
Issuance of common stock upon settlement of restricted stock, net		13,334		13		—		—			13
Stock-based compensation expense		—		—		281,510		—			281,510
Balance at March 31, 2024		12,784,768	$	12,784	$	74,154,189	$	(51,635,484	)	$	22,531,489
Net income		—		—		—		1,409,946			1,409,946
Issuance of common stock upon settlement of restricted stock, net		178,095		179		—		—			179
Stock-based compensation expense		—		—		175,356		—			175,356
Balance at June 30, 2024		12,962,863	$	12,963	$	74,329,545	$	(50,225,538	)	$	24,116,970
Net income		—		—		—		749,677			749,677
Issuance of common stock upon settlement of restricted stock, net		(29,455)		(30)		—		—			(30)
Stock-based compensation expense		—		—		72,743		—			72,743
Balance at September 30, 2024		12,933,408	$	12,933	$	74,402,288	$	(49,475,861	)	$	24,939,360

Balance at January 1, 2023		12,506,795	$	12,507	$	73,189,449	$	(69,004,926	)	$	4,197,030
Net income		—		—		—		983,305			983,305
Issuance of common stock upon settlement of restricted stock, net		19,247		19		—		—			19
Stock-based compensation expense		—		—		338,904		—			338,904
Balance at March 31, 2023		12,526,042	$	12,526	$	73,528,353	$	(68,021,621	)	$	5,519,258
Net income		—		—		—		1,157,076			1,157,076
Issuance of common stock upon settlement of restricted stock, net		201,125		201		—		—			201
Stock-based compensation expense		—		—		180,015		—			180,015
Balance at June 30, 2023		12,727,167	$	12,727	$	73,708,368	$	(66,864,545	)	$	6,856,550
Net income		—		—		—		301,364			301,364
Issuance of common stock upon settlement of restricted stock, net		33,164		34		—		—			34
Stock-based compensation expense		—		—		140,682		—			140,682
Balance at September 30, 2023		12,760,331	$	12,761	$	73,849,050	$	(66,563,181	)	$	7,298,630

See Notes to Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Nine months Ended September 30,
	2024			2023
Cash flows from operating activities:
Net income	$	2,327,861		$	2,441,745
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		305,260			350,974
Amortization of debt issuance cost		38,697			81,024
Stock-based compensation		529,771			659,855
Deferred income taxes		512,717			500,220
Provision for credit losses		144,565			—
Amortization of operating lease right-of-use assets		1,405,201			1,330,209
Changes in operating assets and liabilities:
Increase in accounts receivable		(2,367,222	)		(4,266,415	)
Decrease in insurance receivable		—			3,600,000
Decrease (increase) in contract assets		1,693,097			(3,646,028	)
Decrease in inventory		384,361			842,196
Decrease in prepaid expenses and other assets		300,168			305,526
Increase in accounts payable and accrued expenses		236,130			3,093,351
(Decrease) increase in contract liabilities		(4,547,502	)		667,615
Decrease in settlement of litigation obligation		—			(3,600,000	)
Decrease in operating lease liabilities		(1,486,359	)		(1,320,706	)
Decrease in loss reserve		(312,463	)		(204,916	)
(Decrease) increase in income taxes payable		(1,359	)		5,478
Net cash (used in) provided by operating activities		(837,077	)		840,128

Cash flows from investing activities:
Purchase of property and equipment		(330,282	)		(92,954	)
Net cash used in investing activities		(330,282	)		(92,954	)

Cash flows from financing activities:
Principal payments on line of credit		(1,920,000	)		—
Principal payments on long-term debt		(36,917	)		(1,930,372	)
Repayments of insurance financing obligation		(261,531	)		—
Debt issuance costs paid		—			(54,334	)
Net cash used in financing activities		(2,218,448	)		(1,984,706	)

Net decrease in cash		(3,385,807	)		(1,237,532	)
Cash at beginning of period		5,094,794			3,847,225
Cash at end of period	$	1,708,987		$	2,609,693

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	1,795,495		$	1,815,939
Income taxes	$	36,457		$	—

See Notes to Condensed Consolidated Financial Statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

INTERIM FINANCIAL STATEMENTS

Basis of Presentation

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”, “we”, “us”, or “our”).

The condensed consolidated interim financial statements of the Company as of September 30, 2024 and for the three and nine months ended September 30, 2024 and 2023 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, 2023 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, 2023 (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.

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 for purposes of making operating decisions and assessing financial performance. The Company has determined that it has a single operating and reportable segment.

The Company maintains its cash in multiple financial institutions. The balances are insured by the Federal Deposit Insurance Corporation. From time to time, the Company’s balances may exceed insurance limits. As of September 30, 2024, the Company had $1,476,844 of uninsured balances. The Company limits its credit risk by selecting financial institutions considered to be highly creditworthy.

Recently Issued Accounting Standards – Not Adopted

In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which focuses on the rate reconciliation and income taxes paid. ASU No. 2023-09 requires a public business entity (“PBE”) to disclose, on an annual basis, a tabular rate reconciliation using both percentages and currency amounts, broken out into specified categories with certain reconciling items further broken out by nature and jurisdiction to the extent those items exceed a specified threshold. In addition, all entities are required to disclose income taxes paid, net of refunds received disaggregated by federal, state/local, and foreign and by jurisdiction if the amount is at least 5% of total income tax payments, net of refunds received. For PBEs, the new standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. An entity may apply the amendments in this ASU prospectively by providing the revised disclosures for the period ending December 31, 2025 and continuing to provide the pre-ASU disclosures for the prior periods, or may apply the amendments retrospectively by providing the revised disclosures for all period presented. We expect this ASU to only impact our disclosures with no impacts to our results of operations, cash flows, and financial condition.

In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which focuses on a PBE to disclose entity-wide and segment information in the notes to financial statements. This includes the measure of profit or loss that the CODM uses to assess segment performance and decide how to allocate resources, as well as certain specified amounts included in that measure – e.g. revenue, depreciation and amortization, interest and income tax expense. For PBEs, the new standard is effective for annual periods beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. We expect this ASU to only impact our disclosures with no impacts to our results of operations, cash flows, and financial condition.

REVENUE

Disaggregation of Revenue

The following tables present the Company’s revenue disaggregated by contract type and revenue recognition method:

	Three months ended September 30,				Nine months ended September 30,
	2024		2023		2024		2023
Government subcontracts	$	16,986,106	$	15,375,337	$	48,951,748	$	50,550,256

Prime government contracts		1,673,483		3,943,723		7,056,711		8,062,682
Commercial contracts		760,290		1,080,309		3,302,897		4,350,654
	$	19,419,879	$	20,399,369	$	59,311,356	$	62,963,592

	Three months ended September 30,				Nine months ended September 30,
	2024		2023		2024		2023
Revenue recognized using over time revenue recognition model	$	19,092,000	$	20,053,771	$	58,558,552	$	59,353,845

Revenue recognized using point in time revenue recognition model		327,879		345,598		752,804		3,609,747
	$	19,419,879	$	20,399,369	$	59,311,356	$	62,963,592

Favorable/(Unfavorable) Adjustments to Gross Profit

We review our Estimates at Completion (“EAC”) at least quarterly. Due to the nature of the work required to be performed on many of the Company’s performance obligations, the estimation of total revenue and cost at completion is complex, subject to many inputs, and requires significant judgment by management on a contract-by-contract basis. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities, and the related changes in estimates of revenues and costs. The risks and opportunities relate to management’s judgment about the ability and cost to achieve the schedule, consideration of customer-directed delays or reductions in scheduled deliveries, technical requirements, customer activity levels, and related variable consideration. Management must make assumptions and estimates regarding contract revenue and costs, including estimates of labor productivity and availability, the complexity and scope of the work to be performed, the availability and cost of materials including any impact from changing costs or inflation, the length of time to complete the performance obligation, the availability and timing of funding from our customer, and overhead cost rates, among others.

Changes in estimates of net sales, cost of sales, and the related impact to operating profit on contracts recognized over time are recognized on a cumulative catch-up basis, which recognizes the cumulative effect of the profit changes on current and prior periods based on a performance obligation’s percentage-of-completion in the current period. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations. Our EAC adjustments also include the establishment of, and changes to, loss provisions for our contracts accounted for on a percentage-of-completion basis.

Net EAC adjustments had the following impact on our gross profit during the nine months ended September 30, 2024 and 2023:

	Nine months ended
	September 30, 2024			September 30, 2023
Favorable adjustments	$	1,835,489		$	2,383,071
Unfavorable adjustments		(4,059,160	)		(3,396,171	)
Net adjustments	$	(2,223,671	)	$	(1,013,100	)

Transaction Price Allocated to Remaining Performance Obligations

As of September 30, 2024, the aggregate amount of transaction price allocated to the remaining performance obligations was approximately $91.5 million. This represents the amount of revenue the Company expects to recognize in the future on contracts with unsatisfied or partially satisfied performance obligations as of September 30, 2024.

3.	CONTRACT ASSETS AND LIABILITIES

Contract assets represent revenue recognized on contracts in excess of amounts invoiced to the customers and the Company’s right to consideration is conditional on something other than the passage of time. Amounts may not exceed their net realizable value. Under the typical payment terms of our government as well as military contractor contracts, the customer retains a portion of the contract price until completion of the contract, as a measure of protection for the customer. Our government and military contract or contracts therefore typically result in revenue recognized in excess of billings, which we present as contract assets. Contract assets are classified as current assets. 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 liabilities.

September 30,

2024

December 31,

2023

Contract assets

33,618,971

35,312,068

Contract liabilities

1,390,127

5,937,629

Revenue recognized for the nine months ended September 30, 2024 and 2023 that was included in the contract liabilities balance as of January 1, 2024 and 2023, respectively, was approximately $5.0 million and $3.0 million, respectively.

4.	INVENTORY

The components of inventory consisted of the following:

	September 30, 2024		December 31, 2023
Raw materials	$	440,016	$	648,264
Work in progress		103,390		75,795
Finished goods		508,880		712,588
Inventory	$	1,052,286	$	1,436,647

5.	STOCK-BASED COMPENSATION

In 2009, the Company adopted the Performance Equity Plan 2009 (the “2009 Plan”). The 2009 Plan reserved 500,000 common shares for issuance. The 2009 Plan provides for the issuance of either incentive stock options or nonqualified stock options to employees, consultants or others who provide services to the Company. The Company has 2,364 shares available for grant under the 2009 Plan as of September 30, 2024.

In 2016, the Company adopted the 2016 Long Term Incentive Plan (the “2016 Plan”). The 2016 Plan reserved 600,000 common shares for issuance, provided that no more than 200,000 common shares be granted as incentive stock options. Awards may be made or granted to employees, officers, directors and consultants in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards. Any shares of common stock granted in connection with awards other than stock options and stock appreciation rights are counted against the number of shares reserved for issuance under the 2016 Plan as one and one-half shares of common stock for every one share of common stock granted in connection with such award. Any shares of common stock granted in connection with stock options and stock appreciation rights are counted against the number of shares reserved for issuance under the 2016 Plan as one share for every one share of common stock issuable upon the exercise of such stock option or stock appreciation right awarded. In the fourth quarter of 2020, the Company added 800,000 shares to the 2016 Plan, which increased the number of shares reserved for issuance under the 2016 Plan to 1,400,000 shares. In the second quarter of 2023, the Company added an additional 800,000 shares to the 2016 Plan, which increased the number of shares for reserved for issuance under the 2016 Plan to 2,200,000 shares. The Company has 376,094 shares available for grant under the 2016 Plan as of September 30, 2024.

Stock-based compensation expense for restricted stock in the consolidated statements of operations is summarized as follows:


	Three months ended September 30,				Nine months ended September 30,
	2024		2023		2024		2023
Cost of sales	$	14,430	$	6,612	$	3,675	$	58,860
Selling, general and administrative		58,283		134,104		526,096		600,995
Total stock-based compensation expense	$	72,713	$	140,716	$	529,771	$	659,855

The Company grants restricted stock units (“RSUs”) to its board of directors as partial compensation. These RSUs vest quarterly on a straight-line basis over a one-year period and will fully vest on October 1, 2024.

The following table summarizes activity related to outstanding RSUs for the nine months ended September 30, 2024:

	RSUs			Weighted Average Grant Date Fair Value of RSUs
Non-vested – January 1, 2024		—		$	—
Granted		181,323		$	2.45
Vested		(135,900	)	$	2.45
Forfeited		—		$	—
Non-vested – September 30, 2024		45,423		$	2.45

The Company grants shares of common stock (“Restricted Stock Awards” or “RSAs”) to select employees. These shares have various vesting dates, ranging from vesting on the grant date to as late as four years from the date of grant. In the event that the employee’s employment is voluntarily terminated prior to certain vesting dates, portions of the shares may be forfeited. At September 30, 2024, the weighted average remaining amortization period was 2.7 years.

The following table summarizes activity related to outstanding Restricted Stock Awards for the nine months ended September 30, 2024:

	Restricted Stock Awards			Weighted Average Grant Date Fair Value of Restricted Stock Awards
Non-vested – January 1, 2024		167,071		$	3.25
Granted		107,604		$	2.39
Vested		(58,587	)	$	3.18
Forfeited		(63,213	)	$	2.78
Non-vested – September 30, 2024		152,875		$	2.86

The Company grants shares of common stock (“Performance Restricted Stock Awards” or “PRSAs”) to select officers as part of our long-term incentive program that will result in that number of PRSAs being paid out if the target performance metric is achieved. The award vesting is based on specific performance metrics related to accounts payable delinquency, debt, and net income during the performance period. The PRSAs vest at 0% or 100% and all three metrics must be met to vest at 100%. The PRSAs granted under this program will vest on the fourth anniversary of the grant date, subject to the aforementioned performance criteria. At September 30, 2024, the weighted average remaining amortization period was 2.6 years.

The following table summarizes activity related to outstanding PRSAs for the nine months ended September 30, 2024:

	PRSAs			Weighted Average Grant Date Fair Value of PRSAs
Non-vested – January 1, 2024		48,050		$	3.27
Granted		64,611		$	2.91
Vested		—		$	—
Forfeited		(68,585	)	$	3.12
Non-vested – September 30, 2024		44,076		$	2.98

The fair value of all RSUs, PRSAs and RSAs is based on the closing price of our common stock on the grant date. All RSUs, PRSAs, and Restricted Stock Awards vest and settle in common stock (on a one-for-one basis).

As of September 30, 2024, unamortized stock-based compensation costs related to restricted share arrangements was $284,780.

6.	NET INCOME PER SHARE

Basic and diluted income per common share is computed using the weighted average number of common shares outstanding. Diluted income per common share is adjusted for the incremental shares attributed to unvested RSUs and RSAs. Incremental shares of 70,105 and 90,463 were used in the calculation of diluted income per common share for the three and nine months ended September 30, 2024, respectively. Incremental shares of 33,162 were used in the calculation of diluted income per common share for both the three and nine months ended September 30, 2023.

7.	LINE OF CREDIT AND LONG-TERM DEBT

On March 24, 2016, the Company entered into the 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 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 February 20, 2024, the Company entered into a Thirteenth Amendment to the Credit Agreement (the “Thirteenth Amendment”). Under the Thirteenth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Company’s existing revolving line of credit to August 31, 2025; and (b) setting the aggregate maximum principal amount of all revolving line of credit loans to $19,800,000 from January 1, 2024 through March 31, 2024, $19,080,000 from April 1, 2024 through June 30, 2024, $18,360,000 from July 1, 2024 through September 30, 2024, $17,640,000 from October 1, 2024 through December 31, 2024, $16,920,000 from January 1, 2025 through March 31, 2025, $16,200,000 from April 1, 2025 through June 30, 2025 and $15,480,000 from July 1, 2025 onward, and for payments to be made by the Company to comply therewith (if any such payments are necessary), on the first day of each such period.

On November 13, 2024, the Company entered into a Fourteenth Amendment to the Credit Agreement (the “Fourteenth Amendment”). Under the Fourteenth Amendment, the parties amended the Credit Agreement by: (i) extending the maturity date of the Company’s existing revolving line of credit (the “Revolving Credit Loans”) to August 31, 2026; (ii) reducing the Base Rate Margin (as defined in the Credit Agreement) from 3.50% to 2.0%; (iii) resetting the aggregate maximum principal amount of all Revolving Credit Loans to $16,890,000 from January 1, 2025 through March 31, 2025, $16,140,000 from April 1, 2025 through June 30, 2025, $15,390,000 from July 1, 2025 through September 30, 2025, $14,640,000 from October 1, 2025 through December 31, 2025, $13,890,000 from January 1, 2026 through March 31, 2026, $13,140,000 from April 1, 2026 through June 30, 2026, and $12,390,000 from July 1, 2026 onward and for payments to be made by the Company to comply therewith (if any such payments are necessary), on the first day of each such period; and (iv) requiring the Company, if it does not deliver to BankUnited, N.A. by December 31, 2025, a commitment letter with banks and terms and conditions reasonably acceptable to the Lenders for refinancing the obligations under the Credit Agreement, to make a payment by January 31, 2026, equal to 2% of the aggregate outstanding principal amount of the Revolving Credit Loans as of December 31, 2025, with 50% of such payment applied to reduce the aggregate outstanding principal and the remaining 50% retained by the Lenders as an amendment fee with respect to the Fourteenth Amendment.

The Credit Agreement, as amended, requires us to maintain the following financial covenants: (a) minimum debt service coverage ratio of no less than 1.5 to 1.0 for trailing four fiscal quarter periods; (b) maximum leverage ratio of no less than 4.0 to 1.0 for trailing four fiscal quarter periods; (c) minimum net income after taxes as of the end of each fiscal quarter being no less than $1.00; and (d) a minimum adjusted EBITDA at the end of each fiscal quarter of no less than $1.0 million. The additional principal payments, increase in interest and the Amendment Fee provided for in the Eighth Amendment (entered into on October 28, 2021) and Ninth Amendment to the Credit Agreement (entered into on April 12, 2022) 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. Prior to the Fourteenth Amendment, the Revolving Loan bore interest at the Prime Rate + 3.50%. The Prime Rate was 8.0% as of September 30, 2024 and as such, the Company’s interest rate on the Revolving Loan was 11.5% as of September 30, 2024.

As of September 30, 2024 and December 31, 2023, the Company had $18,120,000 and $20,040,000 outstanding under the Revolving Loan, respectively. $2,730,000 of the Revolving Loan is payable by September 30, 2025 and the remaining balance of $15,390,000 of the revolving line of credit matures and is payable by August 31, 2026, as amended November 13, 2024.

The Company has cumulatively paid approximately $962,000 of total debt issuance costs in connection with the BankUnited Facility, of which approximately $43,000 and $82,000 is unamortized and is included in other assets at September 30, 2024 and December 31, 2023, respectively.

Also included in long-term debt are financing leases of $34,064 and $70,981 at September 30, 2024 and December 31, 2023, respectively, including a current portion of $31,330 and $44,498, respectively. The maturities of the September 30, 2024 balance of these financing leases are as follows:

For the Year Ending December 31,
Remainder of 2024	$	7,581
2025		26,483
Total	$	34,064

8.	MAJOR CUSTOMERS AND VENDORS

During the nine months ended September 30, 2024, our four largest customers accounted for 35%, 24%, 12%, and 12% of revenue. During the nine months ended September 30, 2023, our four largest customers accounted for 31%, 26%, 12% and 10% of revenue. During the three months ended September 30, 2024, our three largest customers accounted for 40%, 23% and 11% of revenue. During the three months ended September 30, 2023, our four largest customers accounted for 28%, 21%, 19% and 13% of revenue.

At September 30, 2024, 38%, 25%, and 13% of our accounts receivable were from three of our largest customers. At December 31, 2023, 30%, 17%, 12%, and 11% of accounts receivable were due from our four largest customers.

At September 30, 2024, 27%, 26%, 15% and 12% of our contract assets were from four of our largest customers. At December 31, 2023, 26%, 23%, 18%, and 15% of our contract assets were related to our four largest customers.

At September 30, 2024, 10% of our accounts payable was from one of our largest vendors. At December 31, 2023 no vendors accounted for 10% of our accounts payable.

9.	LEASES

The Company leases manufacturing and office space under an agreement classified as an operating lease. On November 10, 2021, the Company executed the second amendment to the lease agreement for its manufacturing and office space, which extends the lease agreement’s expiration date to April 30, 2026. The lease agreement 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 nine months ended September 30, 2024 and 2023, the Company’s operating lease expense was $1,611,487 and $1,612,713, respectively. For the three months ended September 30, 2024 and 2023, the Company’s operating lease expense was $528,127 and $529,624, respectively.

Future minimum lease payments under non-cancellable operating leases as of September 30, 2024 were as follows:

For the Year Ending December 31,
Remainder of 2024	$	560,249
2025		2,283,354
2026		850,276
2027		111,065
2028		9,228
Total undiscounted operating lease payments		3,814,172
Less imputed interest		(200,901	)
Present value of operating lease payments	$	3,613,271

The following table sets forth the right-of-use assets and operating lease liabilities as of:

	September 30, 2024		December 31, 2023
Assets
Right-of-use assets, net	$	3,334,992	$	4,740,193

Liabilities
Current operating lease liabilities	$	2,118,329	$	1,999,058
Long-term operating lease liabilities		1,494,942		3,100,571
Total lease liabilities	$	3,613,271	$	5,099,629

The Company’s weighted average remaining lease term for its operating leases is 1.7 years as of September 30, 2024. The Company’s weighted average discount rate for its operating leases is 5.5% as of September 30, 2024.

10.

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 September 30, 2024 and 2023 was $154,590 and $205,804, respectively. The provision for income tax for the nine months ended September 30, 2024 and 2023 was $535,634 and $503,850, respectively.

The effective income tax rate for the nine months ended September 30, 2024 is 18.7 %. The difference between the effective income tax rate for the nine months ended September 30, 2024 and the statutory income tax rate of 21.0% for the nine months ended September 30, 2024 is due primarily to the estimated R&D credit, state income taxes and permanent tax differences. The effective income tax rate for the nine months ended September 30, 2023 was 17.1%. The difference between the effective income tax rate for the nine months ended September 30, 2023 and the statutory income tax rate of 21% for the nine months ended September 30, 2023 was due to the estimated R&D credit, the partial release of approximately $122,500 of the Company’s valuation allowance on its deferred tax asset recorded during the nine months ending September 30, 2023, state income taxes and permanent tax differences.

11.

COMMITMENTS AND CONTINGENCIES

The Company may be involved in various claims, suits, assessments, investigations, and legal proceedings that arise from time to time in the ordinary course of its business. The Company accrues a liability when it is both probable a liability has been incurred and the amount of the loss can be reasonably estimated. The Company reviews these accruals at least quarterly and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant information. To the extent new information is obtained and the Company’s views on the probable outcomes of claims, suits, assessments, investigations, or legal proceedings change, changes in the Company’s accrued liabilities would be recorded in the period such determination is made. For some matters, the amount of liability is not probable or the amount cannot be reasonably estimated and, therefore, accruals have not been made.

The Company reached a settlement with the SEC on June 20, 2024 related to the Company’s previously announced and filed restatements of certain of its financial statements for fiscal periods between January 1, 2018 and December 31, 2022. Under the terms of this settlement, if the Company fails to comply with various undertakings, a civil monetary penalty in the amount of $400,000 will be due to the SEC by June 30, 2025 (the “Undertakings”). The Undertakings are as follows: (a) the Company shall fully remediate its outstanding material weaknesses in Internal Controls over Financial Reporting (“ICFR”) and have effective ICFR and disclosure controls and procedures (“DCP”) by December 31, 2024; (b) the Company shall publicly disclose, concurrent with the filing of the 2024 Form 10-K, whether in management’s opinion, the Company has fully remediated its material weaknesses in ICFR and has effective ICFR and DCP; and (c) the Company shall certify, in writing, compliance with the undertaking(s) set forth above. The certification shall be made by the Company’s CEO and identify the undertaking(s), provide written evidence of compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate compliance. The certification and supporting material shall be submitted to the SEC no later than sixty (60) days from the date of the completion of the undertakings.

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, 2023 (the “Form 10-K”). We have no obligation to publicly release the result of any revisions which may be made to 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 commercial and defense markets. We also have a strong and growing presence in the aerosystems sector 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 (“OEMs”) or a Tier 2 subcontractor to major Tier 1 manufacturers. We also are a prime contractor to the United States Department of Defense (“DOD”), primarily the United States Air Force (“USAF”). In conjunction with our assembly operations, we provide engineering, program management, supply chain management and kitting, and maintenance, repair and overhaul (“MRO”) services.

Recent Developments

None.

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 September 30, 2024 and December 31, 2023 is shown below.

Backlog (Total)	September 30, 2024		December 31, 2023
Funded	$	91,502,000	$	118,218,000
Unfunded		414,519,000		395,133,000
Total	$	506,021,000	$	513,351,000

Approximately 96% of the total amount of our backlog at September 30, 2024 was attributable to government and military contractor contracts. Our backlog attributable to government contracts at September 30, 2024 and December 31, 2023 was as follows:

Backlog (Government)	September 30, 2024		December 31, 2023
Funded	$	87,528,000	$	115,681,000
Unfunded		398,319,000		383,574,000
Total	$	485,847,000	$	499,255,000

Our backlog attributable to commercial contracts at September 30, 2024 and December 31, 2023 was as follows:

Backlog (Commercial)		September 30, 2024		December 31, 2023
Funded	$	3,974,000	$	2,537,000
Unfunded		16,200,000		11,559,000
Total	$	20,174,000	$	14,096,000

The total backlog at September 30, 2024 is primarily comprised of long-term programs with Raytheon (Next Generation Jammer-Mid Band Pods and Advanced Tactical Pods), Lockheed Martin (F-16 RI/DCC’s), Raytheon (B-52 Radar Racks), USAF (T-38 Classic Structural Modification Kits), Sikorsky (UH-60 BLACKHAWK Gunner Windows and CH-53K Welded Tubes), Raytheon (Airborne Reconnaissance Pods), Embraer (Phenom 300 Engine Inlets), and L3Harris (Next Generation Jammer-Low Band Pods (“NGJ-LB”) .

The funded backlog at September 30, 2024 is primarily from purchase orders under long-term contracts with Raytheon (NGJ – Mid Band Pods and Advanced Tactical Pods), USAF (T-38 Classic Structural Modification Kits), Sikorsky (CH-53K Welded Tubes), Sikorsky (UH-60 BLACKHAWK Gunner Windows), Raytheon (Airborne Reconnaissance Pods), Boeing (A-10 Main Landing Gear Pods), Lockheed Martin (F-16 RI/DCC’s), Embraer (Phenom 300 Engine Inlets) and L3Harris (NGJ-Low Band Pods).

Critical Accounting Estimates

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 estimates. There have been no significant changes to the application of our critical accounting estimates during the quarter ended September 30, 2024.

Results of Operations

Revenue

Total Revenue for the three months ended September 30, 2024 was $19,419,879 compared to $20,399,369 for the same period last year, a decrease of $979,490 or 4.8%, driven primarily by decreases in our USAF T-38 Pacer Classic Structure Modification Kits program and Northrop Grumman E-2D Advanced Hawkeye Outer Wing Panels (“OWP”), partly offset by increases in our Raytheon NGJ – Mid Band Pods.

Total Revenue for the nine months ended September 30, 2024 was $59,311,356 compared to $62,963,592 for the same period last year, a decrease of $3,652,236 or 5.8%, driven primarily by decreases in our Sikorsky UH-60 BLACKHAWK Hover Infrared Suppression System (“HIRSS”) Module Assemblies program, Northrop Grumman E-2D Advanced Hawkeye OWP program and Lockheed Martin F-16 Rudder Island program, partly offset by increases in our Raytheon NGJ – Mid Band Pods program, and Collins MS-110 program.

Revenue from military subcontracts was $16,986,106 for the three months ended September 30, 2024 compared to $15,375,337 for the three months ended September 30, 2023, an increase of $1,610,769 or 10.5%, driven primarily by increases in our Raytheon NGJ – Mid Band Pods program partly offset by decreases in our Lockheed Martin F-16 Rudder Island program.

Revenue from military subcontracts was $48,951,748 for the nine months ended September 30, 2024 compared to $50,550,256 for the nine months ended September 30, 2023, a decrease of $1,598,508 or 3.2%, driven primarily by decreases in our Sikorsky UH-60 BLACKHAWK HIRSS Module Assemblies program partly offset by increases in our Raytheon NGJ – Mid Band Pods program.

Revenue from government military contracts was $1,673,483 for the three months ended September 30, 2024 compared to $3,943,723 for the three months ended September 30, 2023, a decrease of $2,270,240 or 57.6%, driven primarily by a decrease in our USAF T-38 Pacer Classic Structural Modification Kits program due to push out of customer inductions of aircraft.

Revenue from government military contracts was $7,056,711 for the nine months ended September 30, 2024 compared to $8,062,682 for the nine months ended September 30, 2023, a decrease of $1,005,971 or 12.5%, driven primarily by decreases in our USAF T-38 Pacer Classic Structural Modification Kits program and DLA F-16 Wing Skins program.

Revenue from commercial subcontracts was $760,290 for the three months ended September 30, 2024 compared to $1,080,309 for the three months ended September 30, 2023, a decrease of $320,019 or 29.6%, primarily on a decrease in our Embraer Phenom-300 Engine Inlet Assemblies program.

Revenue from commercial subcontracts was $3,302,897 for the nine months ended September 30, 2024 compared to $4,350,654 for the nine months ended September 30, 2023, a decrease of $1,047,757 or 24.1%, primarily on a decrease in our Embraer Phenom-300 Engine Inlet Assemblies program.

Cost of Sales

Total Cost of Sales for the three months ended September 30, 2024 and 2023 was $15,200,210, and $16,693,279, respectively, a decrease of $1,493,069 or 9%.

Total Cost of Sales for the nine months ended September 30, 2024 and 2023 was $46,422,514 and $49,990,986, respectively, a decrease of $3,568,472 or 7%.

SEC Form 10-Q filed by CPI Aerostructures Inc.