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

Basic and diluted (loss) income per common share for the three and six months ended March 31,September 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 142,58747,531 were not used in the calculation of diluted income per common share in the three months ended March 31, 2022, as the Company is in a loss position and these shares would be considered anti-dilutive. Incremental shares of 101,631 were used in the calculation of diluted income per common share in the three and nine months ended March 31,September 30, 2022. Incremental shares of 33,876 were used in the calculation of diluted income per common share in the three and nine months ended September 30, 2021.

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)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 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 thea Waiver and Eighth Amendment (defined below)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 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 thea Consent, Wavier and Ninth Amendment (defined below)to the Credit Agreement (the “Ninth Amendment”). 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, wethe Company entered into thea Consent, Waiver and Tenth Amendment (defined below)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 to5.0 to 1.0,, (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.

On November 10, 2022, the Company entered into an Eleventh Amendment to the Credit Agreement (the “Eleventh Amendment”). Under the Eleventh Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to November 30, 2023 or with respect to the Term Loan, if earlier, until the outstanding principal balance is paid in full (the “Term Loan Maturity Date”), (b) providing for regular monthly principal payments of $200,000 on the Term Loan from January 1, 2023 through the Term Loan Maturity Date (in addition to the Company’s existing obligation to make two principal payments on the term loan of $250,000 on each of December 31, 2022 and March 31, 2023) and (c) decreasing the interest rate on the Revolving Loan, the Term Loan and the Amendment Fee to the Prime Rate plus 3.5% effective as of November 1, 2022.

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 bearbore interest at the rate of 12.25% (the Prime Rate of 6.25% + 0.756.00%) as at March 31, 2022, or 4.25%.of September 30, 2022.

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

There is currently no availability for borrowings under the Revolving Loan and the Company finances its operations from internally generated cash flow.

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 Coronavirus Aid, Relief and Economic Security Act (“CARES Act.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 SBA reserves the right to audit any PPP Loan, for eligibility and other criteria, regardless of size. These audits may occur after forgiveness has been granted. In accordance with the CARES Act, all borrowers are required to maintain their PPP loan documentation for six years after the PPP Loan was forgiven and to provide that documentation to the SBA upon request.

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

Included in the long-term debt are financing leases and other notes payable of $367,572258,970 and $422,595 at March 31,September 30, 2022 and December 31, 2021, respectively, including a current portion of $204,318158,594 and $215,181, respectively.

The Company has cumulatively paid $846,000908,000 of total debt issuance costs in connection with the BankUnited Facility, of which $198,000174,219 is included in other assets at March 31,September 30, 2022.

During the threenine months ended March 31,September 30, 2022, ourthe Company’s three largest customers accounted for 3938%, 1714% and 12% of revenue. During the threenine months ended March 31,September 30, 2021, our twothe Company’s four largest customers accounted for 3934%, 21%,11% and 2510% of revenue.

At March 31,September 30, 2022, 3134%, 22%, 10% and 2810% of our contract assets were from twofour of our largest customers. At December 31, 2021, 34%, 16%, and 12% of our contract assets were from three of our largest customers.

At March 31,September 30, 2022, 3327%, 3017%, 16%, 12% and 2312% of our accounts receivable were from our threefive largest customers. At December 31, 2021, 30%, 23%, and 18% of accounts receivable were from our three largest customers.

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 nine months ended March 31,September 30, 2022, the Company’s operating lease expense was $534,991529,004. and $1,579,879, respectively. 

Future minimum lease payments under non-cancellable operating leases as of March 31,September 30, 2022 were as follows:

The following table sets forth the ROU assets and operating lease liabilities as of March 31,September 30, 2022:

The Company’s weighted average remaining lease term for its operating leases is 43.6.0 years.

Income taxes are accounted for under the asset and liability method whereby deferred tax assets and liabilities are recognized for future tax consequences attributable to the temporary differences between the consolidated financial statements carrying amounts of assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company’s policy is to record estimated interest and penalties related to uncertain tax positions in income tax expense.

The provision for income tax for the three months ended March 31,September 30, 2022 and 2021 was $1,2753,750 and $2,2503,374, respectively. The provision for income tax for the nine months ended September 30, 2022 and 2021 was $11,250 and $7,702, 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.

Class Action Lawsuit

As previously disclosed, a consolidated class action lawsuit (captioned(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 will holdheld a hearing on the final approval motion on September 9, 2022, to decideand is now deciding whether to recommend final approval of the settlement. As of March 31, 2021,September 30, 2022, we have previously paid orand 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 March 31,September 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 $3,474,4243,600,000, which is lower than to reflect the totalliability owed by the Company to the Plaintiffs byas well as the amount of covered expenses thatreceivable owing from the Company’s insurance carrier to the Company has not yet paid in cash as of March 31, 2022 (the “Covered Expenses”); once the Company has paid the remaining Covered Expenses in cash, the insurance recovery receivable will be equalized with the litigation settlement obligation. Both this obligation and receivable will be relieved from our balance sheet upon the payment of the Settlement Amountrespect to the Plaintiff by our directors’ and officers’ insurance carrier. 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 will holdheld 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. The attorneys’ fees will be covered and paid by our directors’ and officers’ insurance carrier, in light of our satisfaction of our $750,000 retention.

SEC Investigation

On May 22, 2020, the Company received a subpoena from the SEC Division of Enforcement (the “Division”) seeking documents and information relating, among other things, to previously disclosed errors in and restatement of the Company’s financial statements, the Company’s October 16, 2018 equity offering and the recent separation of the Company’s former Chief Financial Officers. By letter dated March 12, 2021, the Division Staff notified the Company that the Division has concluded its investigation and, based on the information the Division has as of such date, it does not intend to recommend an enforcement action by the SEC against the Company. The Division’s notice was provided under the guidelines described in the final paragraph of Securities Act Release No. 5310 which states in part that the notice “must in no way be construed as indicating that the party has been exonerated or that no action may ultimately result from the staff’s investigation.”

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 haveundertake no obligation to publicly release the result of any revisions which may be made toupdate 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

The impact that the recent COVID-19 pandemic will have on our business remains uncertain.

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.

During late 2020, we began to experience an increased rate of employees testing positive for COVID-19 and we took steps to mitigate virus transmission within the workplace. These steps included adding a second manufacturing shift to lessen employee density on the manufacturing floor and to require most non-manufacturing personnel to work from home. These measures continued into 2021. Despite these measures, we experienced a relatively high level of absenteeism directly or indirectly related to COVID-19. We have taken mitigating steps in an attempt to reduce the adverse effects of COVID-19 on our business. For example, we have curtailed discretionary spending and business travel, and taken other steps to preserve cash. We have also taken action to more closely manage the flow of materials to be more responsive to unanticipated changes in customer delivery schedules. Since May 2021 and through the date of our Annual Report on Form 10-K, we have experienced a decrease in the impact of COVID-19. However, we believe that the impact of COVID-19 on illness and absence rates, workflows and productivity at the Company and our business providers has been a contributing factor to the time required for our financial statement closing processes and the delayed filing of our SEC reports. Most non-manufacturing personnel have now returned to their regular in-person work schedules and we have returned to a single day shift manufacturing operation, although we do continue to experience employees and business partners with new COVID-19 diagnoses on an intermittent basis and we take needed steps to mitigate these impacts on the Company’s operation as they occur.

Recent Developments

NYSE American Trading Resumption and Delinquency NoticesNotice

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 which was initially scheduled to be held onOn September 7,29, 2022, has been rescheduled to 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 will becomewe became current with our SEC reports upon the filing of our Quarterly Report on Form 10-Q for the quarterquarterly period ended June 30, 2022. On September 30, 2022, (the “2022 Q2 Form 10-Q”). The Company believeswe were informed by the filingExchange that the Exchange terminated its proceeding to delist our common stock. Trading of the 2022 Q2 Form 10-Q will resolve the condition that led to NYSE American suspending trading in the Company’sour common stock recommenced on the Exchange and its determination to commence proceedings to deliston October 5, 2022, under 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.symbol “CVU.”

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 isCompany (i) does not delisted frommake progress consistent with the Exchange as a result ofPlan during the Company’s delayed filings as described above and (i) the Companyplan period or (ii) 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

The Company is not current in its SEC reporting obligations with respect to its 2022 Q2 Form 10-Q. 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 intends to become current with its SEC reporting obligations by filing its 2022 Q2 Form 10-Q. The Company anticipates that after it becomes current in its SEC reporting obligations its common stock will become 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.Agreement (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 (defined below) provided for in the Eighth Amendment (defined below) 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, to 1.0, (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.

On November 10, 2022, the Company entered into the Eleventh Amendment(defined below). Under the Eleventh Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to November 30, 2023 or with respect to the Term Loan, if earlier, until the outstanding principal balance is paid in full (the “Term Loan Maturity Date”), (b) providing for regular monthly principal payments of $200,000 on the Term Loan from January 1, 2023 through the Term Loan Maturity Date (in addition to the Company’s existing obligation to make two principal payments on the Term Loan of $250,000 on each of December 31, 2022 and March 31, 2023) and (c) decreasing the interest on the Revolving Loan, the Term Loan and the Amendment Fee to the Prime Rate plus 3.5%, effective as of November 1, 2022.

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 will holdheld a hearing on September 9, 2022, to decideand 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 March 31, 2021,September 30, 2022, we have previously paid orand 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.

At March 31,September 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 $3,474,424, which is lower than$3,600,000 to reflect the totalliability owed by the Company to the Plaintiffs byas well as the amount of covered expenses thatreceivable owing from the Company’s insurance carrier to the Company has not yet paid in cash as of March 31, 2022 (the “Covered Expenses”); once the Company has paid the remaining Covered Expenses in cash, the insurance recovery receivable will be equalized with the litigation settlement obligation. Both this obligation and receivable will be relieved from our balance sheet upon the payment of the Settlement Amountrespect to the Plaintiff by our directors’ and officers’ insurance carrier. settlement obligation.

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 March 31,September 30, 2022 and December 31, 2021 was as follows:

Approximately 98% of the total amount of our backlog at March 31,September 30, 2022 was attributable to government contracts. Our backlog attributable to government contracts at March 31,September 30, 2022 and December 31, 2021 was as follows:

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

The total backlog at March 31,September 30, 2022 is primarily comprised of long-term programs with Raytheon (Next Generation Jammer – Mid Band Pod), Raytheon (Advanced Tactical Pod), USAF (T-38), Boeing (A-10 Main Landing Gear Pod), Northrop Grumman (E-2D),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 Embraer Phenom 300 Inlets. Funded backlog is primarily from purchase orders under long-term contracts with USAF (T-38), Boeing (A-10 Main Landing Gear Pod), Sikorsky IR Module Assembly (HIRSS), Lockheed Martin F-16 Rudder Island, Northrop Grumman (E-2D) and Raytheon (Next Generation Jammer – Mid Band Pod), Northrop Grumman (E-2D), Lockheed Martin F-16 Rudder Island 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 March 31,September 30, 2022.

Results of Operations

Revenue

Total Revenue for the three months ended March 31,September 30, 2022 was $20,135,097$20,196,913 compared to $30,818,746$23,898,748 for the same period last year, a decrease of $10,683,649$3,701,835 or 34.7%15.5%. The decrease was primarily related to decreases in revenue from the Northrop Grumman E2D MYP II.

Total Revenue for the nine months ended September 30, 2022 was $59,257,416 compared to $77,018,684 for the same period last year, a decrease of $17,761,268 or 23.1%. The decrease was primarily related to decreases in the Raytheon NGJ MB Pods, Northrop Grumman E2D MYP II and Northrop Grumman E2D WOWP programs partly offset by increases in the Sikorsky HIRRS and the Raytheon NGJ Mid-band LRIP programs.

Revenue from government subcontracts was $17,213,747 for the three months ended September 30, 2022 compared to $21,873,152 for the three months ended September 30, 2021, a decrease of $4,659,405 or 21.3%. The decrease was primarily to decreases in the Northrop Grumman E2D MYP II, and the Northrop Grumman E2D WOWP, the Sikorsky Weapons Pylon and the Raytheon Missile Wings programs partly offset by an increase in the Raytheon NGJ MB Pods program.

Revenue from government subcontracts was $18,526,662$49,930,578 for the threenine months ended March 31,September 30, 2022 compared to $28,397,023$70,167,598 for the threenine months ended March 31,September 30, 2021, a decrease of $9,870,361$20,237,020 or 34.8%28.8%. The decrease was primarily related to decreases in the Raytheon Next Generation Jammer (“NGJ”) Pod program,NGJ MB Pods, the Northrop Grumman E2D OWP MYP II and Northrop Grumman E2D WOWP, partly offset by an increaseincreases in the Sikorsky HIRRS program.

Revenue from direct military contracts was $199,305$1,660,913 for the three months ended March 31,September 30, 2022 compared to $538,745$922,443 for the three months ended March 31,September 30, 2021, a decreasean increase of $339,440$738,470 or 63.0%80.1%. The decrease in revenueincrease is primarily driven byrelated to an increase in the T-38 Pacer Classic program andprogram.

Revenue from direct military contracts was $5,077,459 for the F-16nine months ended September 30, 2022 compared to $2,820,981 for the nine months ended September 30, 2021, an increase of $2,256,478 of 80.0%. The increase revenue is primarily related to an increase in the T-38 Pacer Classic program.

Revenue from commercial subcontracts was $1,409,130$1,322,253 for the three months ended March 31,September 30, 2022 compared to $1,882,978$1,103,153 for the three months ended March 31,September 30, 2021, an increase of $219,100 or 19.9%. 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 $4,249,379 for the nine months ended September 30, 2022 compared to $4,030,104 for the nine months ended September 30, 2021, an increase of $473,848$219,275 or 25.2%5.4%. The decreaseincrease is primarily the result of lower revenue froman 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 March 31,September 30, 2022 and 2021 was $16,700,488$14,869,100 and $25,898,658,$20,246,764, respectively, a decrease of $9,198,170$5,377,664 or 35.5%26.6%. 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 nine months ended September 30, 2022 and 2021 was $46,835,304 and $64,850,010, respectively, a decrease of $18,014,706 or 27.8%. 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:

Procurement for the three months ended March 31,September 30, 2022 was $11,171,725$9,867,224 compared to $19,412,054$14,373,181 for the three months ended March 31,September 30, 2021, a decrease of $8,240,329$4,505,957 or 42.4%31.3%. This decrease is primarily related to decreases in the result of the reduction in Northrop Grumman E2D MYP II, Raytheon NGJ MB Pods and Northrop Grumman E2D WOWP program requirements.programs.

Procurement for the nine months ended September 30, 2022 was $31,455,680 compared to $47,709,154 for the nine months ended September 30, 2021, a decrease of $16,253,474 or 34.1%. This decrease is primarily related to decreases in the Northrop Grumman E2D MYP II, Raytheon NGJ MB Pods and Northrop Grumman E2D WOWP programs.

Labor costs for the three months ended March 31,September 30, 2022 were $1,986,268$1,561,910 compared to $1,939,434$2,055,353 for the three months ended March 31,September 30, 2021, an increasea decrease of $46,834$493,443 or 2.4%24%. This decrease is primarily related to decreases in the Raytheon NGJ MB Pods program.

Labor costs for the nine months ended September 30, 2022 were $5,255,245 compared to $5,945,219 for the nine months ended September 30, 2021, a decrease of $689,974 or 11.6%. This decrease is primarily related to decreases in the Raytheon NGJ MB Pods program.

Factory overhead for the three months ended March 31,September 30, 2022 was $4,267,639$3,785,304 compared to $5,272,855$4,860,469 for the three months ended March 31,September 30, 2021, a decrease of $1,005,216$1,075,165 or 19.1%22.1%. This decrease is primarily the result of lower salary and benefit costs.

Factory overhead for the nine months ended September 30, 2022 was $11,794,369 compared to $14,934,140 for the nine months ended September 30, 2021, a decrease of $3,139,771 or 21.0%. This decrease is primarily the result of lower salary and benefit costs, partially offset by a $134,628 severance charge recorded in the first quarter of 2022.

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 September 30, 2022 were $(345,338) compared to $(1,042,239) for the three months ended September 30, 2021, a decrease of the credit of $696,901, or 66.9%. The change in the three months ended September 30, 2022 is primarily due to changes in inventory levels, reductions in the inventory reserves and reductions in the loss reserve.

Other costs (credit), net for the nine months ended September 30, 2022 were $(1,669,990) compared to $(3,738,503) for the nine months ended September 30, 2021, a decrease of the credit of $2,068,513, or 55.3%. The change in the nine months ended September 30, 2022 is primarily due to changes in inventory levels, reductions in the inventory reserves and reductions in the loss reserve.

Gross Profit

Gross profit for the three months ended March 31,September 30, 2022 was $3,434,609$5,327,813 compared to $4,920,088$3,651,984 for the three months ended March 31,September 30, 2021, a decreasean increase of $1,485,479$1,675,829, or 45.9% for the reasons noted above. Gross profit percentage (“gross margin”) for the three months ended March 31, 2021September 30, 2022 was 17.1%26.4% compared to 16.0%15.3% for three months ended March 31,September 30, 2021. The increase in gross margin was primarily due to margin improvements in our welded product linesa favorable job mix and operating efficiencies during the three months ended March 31,September 30, 2022 as compared to the three months ended March 31,September 30, 2021.

Gross profit for the nine months ended September 30, 2022 was $12,422,112 compared to $12,168,674 for the nine months ended September 30, 2021, an increase of $253,438, or 2.1% for the reasons noted above. Gross profit percentage (“gross margin”) for the nine months ended September 30, 2022 was 21.0% compared to 15.8% for the nine months ended September 30, 2021. The increase in gross margin was primarily due to a favorable job mix and operating efficiencies during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

Favorable/UnfavorableFavorable (Unfavorable) Adjustments to Gross Profit (Loss)

During the threenine months ended March 31,September 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:

For the threenine months ended March 31,September 30, 2022, we evaluated all contractual data and revised estimated gross profit percentages accordingly. We had 2829 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 March 31,September 30, 2022 were $3,138,932$2,744,265 compared to $3,390,806$2,765,849 for the three months ended March 31,September 30, 2021, a decrease of $251,874$21,584 or 7.4%0.8%.

Selling, general and administrative expenses for the nine months ended September 30, 2022 were $8,579,314 compared to $8,834,343 for the nine months ended September 30, 2022, a decrease of $255,029 or 2.9%. This decrease was primarily driven by a decrease in professionallower legal fees, incurred, partiallypartly offset by an increaseincreases in insurance expenses and higher salaries expense as a result of a $637,206 severance charge recorded in the first quarter of 2022.

(Loss) Income Before Provision for Income Taxes

(Loss) Income before provision for income taxes for the three months ended March 31,September 30, 2022 was ($32,931)$1,862,502 compared to $1,234,793$5,428,629 for the same period last year, a decrease inof $3,566,127 or 65.7% for the reasons noted above.

Income before provision for income taxes for the nine months ended September 30, 2022 was $2,354,707 compared to $7,288,651 for the same period last year, a decrease of $1,267,724$4,933,944 or 102.7%67.7% for the reasons noted above.

Provision for Income Taxes

Provision for income taxes was $2,250$3,750 for the three months ended March 31,September 30, 2022, and March 31, 2021.compared to a provision for income taxes of $3,374 for the three months ended September 30, 2021, an increase of $376 or 11.1%.

Provision for income taxes was $11,250 the nine months ended September 30, 2022, compared to a provision for income taxes of $7,702 for the nine months ended September 30, 2021, an increase of $3,548 or 46.1%.

Net (Loss) Income

Net (loss)income for the three months ended March 31,September 30, 2022 was $(35,181)$1,858,752 or ($0.00)$0.15 per basic share, compared to net income of $1,232,543$5,425,255 or $0.10,$0.44 per basic share for the same period last year. Diluted lossincome per share was ($0.00)$0.15 for the three months ended March 31,September 30, 2022 calculated utilizing 12,363,14312,349,283 weighted average shares outstanding versus diluted income per share of $0.44 for the same period last year calculated utilizing 12,320,588 weighted average shares outstanding.

Net income for the nine months ended September 30, 2022 was $2,343,457 or $0.19 per basic share, compared to net income of $7,820,949 or $0.60 per basic share for the same period last year. Diluted income per share was $0.10$0.19 for the threenine months ended March 31, 2021September 30, 2022 calculated utilizing 12,084,90112,410,491 weighted average shares outstanding. The decrease was primarily driven byoutstanding versus diluted income per share of $0.60 for the decrease in revenue as described above.same period last year calculated utilizing 12,187,714 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 threenine months ended March 31,September 30, 2022 was $736,653,$3,115,291, a decrease over the prior year of $495,890$4,705,658 or 40.2%60.2%. Excluding the aforementioned severance charge, our basic and diluted earnings per share was $0.06$0.25 for the threenine months ended March 31,September 30, 2022 as compared to the $0.10$0.60 income per basic and diluted share for the threenine months ended March 31,September 30, 2021.

Liquidity and Capital Resources

General

At March 31,September 30, 2022, we had working capital of $11,515,543$13,618,489 compared to working capital of $12,175,776 at December 31, 2021, a decreasean increase of $660,233$1,442,713 or 5.4%11.8%.

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”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 March 31,September 30, 2022, we had a cash balance of $2,932,910$4,627,379 compared to $6,308,866 at December 31, 2021. Our accounts receivable balance at March 31, 2022 decreased to $4,852,337 from $4,967,714 at December 31, 2021.2021, a decrease of $1,681,487, or 26.7%. The decrease was comprised of $2,463,625 in debt paydowns and $25,317 in purchase of property and equipment, partly offset by cash provided by operating activities of $807,455.

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.

On November 10, 2022, the Company entered into an Eleventh Amendment to the Credit Agreement (the “Eleventh Amendment”). Under the Eleventh Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to November 30, 2023 or with respect to the Term Loan, if earlier, until the outstanding principal balance is paid in full (the “Term Loan Maturity Date”), (b) providing for regular monthly principal payments of $200,000 on the Term Loan from January 1, 2023 through the Term Loan Maturity Date (in addition to the Company’s existing obligation to make two principal payments on the term loan of $250,000 on each of December 31, 2022 and March 31, 2023) and (c) decreasing the interest on the Revolving Loan, the Term Loan and the Amendment Fee to the Prime Rate plus 3.5%, effective as of November 1, 2022.

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.

The BankUnited Facility is secured by all of the Company’s assets and both the Revolving Loan and Term Loan bore interest at the rate of 12.25% (the Prime Rate of 6.25% + 6.00%) as of September 30, 2022.

As of September 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 Eleventh Amendment, had an aggregate principal amount of $2,433,333, payable in monthly installments, as defined in the agreement, as of September 30, 2022 as compared to an aggregate principal amount outstanding as of December 31, 2021 of $4,483,333.

There is currently no availability for borrowings under the Revolving Loan and the Company finances its operations from internally generated cash flow.

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 March 31,September 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:

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 March 31,September 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

On February 7, 2022, pursuant to the Company’s non-employee director incentive plan and the Company’s 2016 Long Term Incentive Plan (the “Plan”), the Company issued an aggregate of 190,114 restricted stock units (“RSUs”) to the Company’s non-employee directors, as compensation for services. Each RSU represents the right to receive one share of the Company’s common stock, subject to the terms of the Plan and a restricted stock unit agreement with each non-employee director. The RSUs vested or vest in four equal installments on February 7, 2022, April 1, 2022, July 1, 2022 and October 3, 2022.None.

On March 9, 2022, pursuant to the Plan, the Company issued 18,588 shares of the Company’s common stock (“Restricted Stock”) to Dorith Hakim, the Company’s chief executive officer and president as compensation for services. The Restricted Stock is subject to a restricted stock agreement between the Company and Ms. Hakim. The Restricted Stock vests in two equal installments on March 9, 2023 and March 9, 2024.

The RSUs and the Restricted Stock were issued pursuant to Section 4(a)(2) of the Securities Act, and Rule 506(b) promulgated thereunder, which provides an exemption from Securities and Exchange Commission registration for transactions by an issuer that do not involve a public offering of securities.

None.Item 3 – Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not applicable.

Item 5 – Other Information

None.