UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended June 30, 20222023

OR

For the transition period from ___________ to __________

Commission File Number: 1-11398

CPI AEROSTRUCTURES, INC.

(Exact name of registrant as specified in its charter)

(631)586-5200

(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ☒  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:

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

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

As of September 27, 2022,August 17, 2023, the registrant had 12,335,896 12,639,244shares of common stock, $.001 par value, outstanding.

INDEX

Part I - Financial Information

Item 1 –- Consolidated Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

See Notes to Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

See Notes to Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICITEQUITY (DEFICIT) (UNAUDITED)

See Notes to Condensed Consolidated Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

See Notes to Condensed Consolidated Financial Statements

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

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”).

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 acondensed consolidated basis, accompanied by disaggregated information about revenues for purposes of making operating decisions and assessing financial performance. The Company has determined that it has a single operating and reportable segment.

The consolidatedinterim financial statements of the Company as of June 30, 20222023 and for the six months ended June 30, 20222023 and 20212022 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, 20212022 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, 20212022 (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 four financial institutions. The balances are insured by the Federal Deposit Insurance Corporation. From time to time, the Company’s balances may exceed insurance limits. As of June 30, 2022,2023, the Company had $2,417,0872,892,826 of uninsured balances. The Company limits its credit risk by selecting financial institutions considered to be highly creditworthy.

The Company currently has a shareholders’ deficit and has experienced losses from operations and negative cash flows from operations in prior periods that collectively represent significant risk toRecently Issued Accounting Standards - Adopted

In the Company to continue to operate as a going concern. To address this risk, the Company has (i) negotiated and executed a further amendment to its Amended and Restated Credit Agreement with the lenders named therein and BankUnited N.A. as Sole Arranger, Agent and Collateral Agent (as amended from time to time, the “Credit Agreement” or the “BankUnited Facility”), effective April 12, 2022 which extended the maturity date of the credit facility to September 30, 2023, (ii) obtained and is seeking additional progress payment and advance payment customer contract funding provisions, (iii) maintained procedures to reduce investments in inventory and contract assets, (iv) remained focused on its military segment which has proven to be less susceptible to COVID-19 related impacts and (v) maintained a strong (approximately $133 million) backlog of funded orders, 99% of which are for military programs. Based upon management’s assessment of the identified significant risks and the execution of the plans described above, management believes that substantial risk does not exist as to whether the Company’s liquidity and debt resources will be sufficient to meet its obligations as a going concern through a year and a day from the date of this filing.

The outbreak of the COVID-19 coronavirus was declared a pandemic by the World Health Organization during our first quarter of 2020. During2023, the latter partCompany adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement 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 industriesCredit Losses on Financial Instruments (ASU 2016-13), using a modified retrospective method, which did not result 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-19significant 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.Company’s financial statements.

TheIn accordance with Accounting Standards Codification Topic 606 (“ASC 606”), the Company recognizes revenue when it transfers control of a promised good or service to a customer in an amount that reflects the consideration it expects to be entitled to in exchange for the good or service. The majority of the Company’s performance obligations are satisfied over timeover-time as the Company (i) sells products with no alternative use to the Company and (ii) has an enforceable right to recover costs incurred plus a reasonable profit margin for work completed to date. Under the over timeover-time revenue recognition model, revenue and gross profit are recognized over the contract period as work is performed based on actual costs incurred and an estimate of costs to complete and resulting total estimated costs at completion.

The Company also has contracts that are considered point in time. Under the point in time revenue recognition model, revenue is recognized when control of the components has transferred to the customer; in most cases this will be based on shipping terms.

Contracts with Customers and Performance Obligations

The majority of the Company’s revenues are from long-term contracts with the U.S. government as well military and commercial contractors. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. For the Company, the contract under Accounting Standards Codification TopicASC 606 (“ASC 606”) is typically established upon execution of a purchase order either in accordance with a long-term customer contract or on a standalone basis.

To determine the proper revenue recognition for our contracts, we must evaluate whether two or more contracts should be combined and accounted for as a single contract, and whether the combined or single contract should be accounted for as one performance obligation or more than one performance obligation. This evaluation requires significant judgment, and the decision to combine a group of contracts or to separate a contract into multiple performance obligations could change the amount of revenue and profit recorded in a period. A performance obligation is a promise within a contract to transfer a distinct good or service to the customer in exchange for payment and is the unit of account for recognizing revenue. The Company’s performance obligations in its contracts with customers are typically the sale of each individual product contemplated in the contract or a single performance obligation representing a series of products when the contract contains multiple products that are substantially the same. The Company has elected to account for shipping performed after control over a product has transferred to a customer as fulfillment activities. When revenue is recognized in advance of incurring shipping costs, the costs related to the shipping are accrued. Shipping costs are included in costs of sales. The Company provides warranties on many of its products; however, since customers cannot purchase such warranties separately and they do not provide services beyond standard assurances, warranties are not separate performance obligations.

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when or as the performance obligation is satisfied. For contracts with more than one performance obligation, the Company allocates the transaction price to each performance obligation based on its estimated standalone selling price. When standalone selling prices are not available, the transaction price is allocated using an expected cost plus margin approach as pricing for such contracts is typically negotiated on the basis of cost.

The contracts with the U.S. government and military contractors typically are subject to the Federal Acquisition Regulation, which provides guidance on the types of costs that are allowable in establishing prices for goods and services provided under U.S. government contracts. The pricing for commercial contracts is based on the specific negotiations with each customer and any taxes imposed by governmental authorities are excluded from revenue. The transaction price is primarily comprised of fixed consideration as the customer typically pays a fixed fee for each product sold. The Company does not adjust the amount of revenue to be recognized under a customer contract for the effects of the time value of money when the timing difference between receipt of payment and transferring the good or service is less than one year.

The majority of the Company’s performance obligations are satisfied over time as the Company (i) sells products with no alternative use to the Company and (ii) has an enforceable right to recover costs incurred plus a reasonable profit margin for work completed to date. The Company uses the cost-to-cost input method to measure progress for its performance obligations because it best depicts the transfer of control to the customer which occurs as the Company incurs costs on its contracts.

The Company generally utilizes the portfolio approach to estimate the amount of revenue to recognize for its contracts and groups contracts together that have similar characteristics. Contract gross profit margins are calculated using the estimated costs for either the individual contract or the portfolio as applicable. Significant judgment is used to determine which contracts are grouped together to form a portfolio. The portfolio approach is utilized only when the result of the accounting is not expected to be materially different than if applied to individual contracts.

The Company’s contracts are often modified to account for changes in contract specifications and requirements. The Company considers contract modifications to exist when the modification either creates new or changes the existing enforceable rights and obligations. The effect of a contract modification on the transaction price, and the measure of progress for the performance obligation to which it relates, are recognized prospectively when the remaining goods or services are distinct and on a cumulative catch-up basis when the remaining goods or services are not distinct.

The Company also has contracts that are considered point in time. Under the point in time revenue recognition model, revenue is recognized when control of the components has transferred to the customer; in most cases this will be based on shipping terms.

Contract Estimates

Certain contracts contain forms of variable consideration, such as price discounts and performance penalties. The Company generally estimates variable consideration using the most likely amount based on an assessment of all available information (i.e., historical experience, current and forecasted performance) and only to the extent it is probable that a significant reversal of revenue recognized will not occur when the uncertainty is resolved.

In applying the cost-to-cost input method, the Company compares the actual costs incurred relative to the total estimated costs expected at completion to determine its progress towards satisfying its performance obligation and to calculate the corresponding amount of revenue to recognize. For any costs incurred that do not depict the Company’s performance in transferring control of goods or services to the customer, the Company excludes such costs from its input method measure of progress as the amounts are not reflected in the price of the contract. Costs that are inputs to the satisfaction of a performance obligation include labor, materials and subcontractors’ costs, other direct costs and an allocation of indirect costs.

Changes to the original estimates may be required during the life of the contract. Estimates are reviewed quarterly and the effect of any change in the total estimated gross margin percentagecosts expected at completion for a contract is reflected in revenue in the period the change becomes known. ASC 606 involves considerable use of estimates and judgment in determining revenues, costs and profits and in assigning the amounts to accounting periods. For instance, management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from the customer, and overhead cost rates, among other variables. The Company continually evaluates all of the factors related to the assumptions, risks and uncertainties inherent with the application of the cost-to-cost input method; however, it cannot be assured that estimates will be accurate. If estimates are not accurate, or a contract is terminated which will affect estimates at completion, the Company is required to adjust revenue in the period the change is determined.

When changes are required for the estimated total revenue on a contract, these changes are recognized on a cumulative catch-up basis in the current period. A significant change in one or more estimates could affect the profitability of one or more of our performance obligations. If estimates of total costs to be incurred exceed estimates of total consideration the Company expects to receive, a provision for the remaining loss on the contract is recorded in the period in which the loss becomes evident.

Capitalized Contract Acquisition Costs and Fulfillment Costs

Contract acquisition costs are those incremental costs that the Company incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. The Company does not typically incur contract acquisition costs or contract fulfillment costs that are subject to capitalization in accordance with the guidance in Accounting Standards Codification Subtopic 340-40, “Other Assets and Deferred Costs—Contracts with Customers.”

Disaggregation of Revenue

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

Transaction Price Allocated to Remaining Performance Obligations

Our backlog represents the estimated transaction prices on performance obligations to our customers for which work remains to be performed. Backlog is converted into revenue in future periods as work is performed. As of June 30, 2022,2023, the aggregate amount of transaction price allocated to the remaining performance obligations was approximately $133118.2 million. This represents the amount of revenue the Company expects to recognize in the future on contracts with unsatisfied or partially satisfied performance obligations as of June 30, 2022.2023. The Company estimates that it will recognizemajority of the Company’s performance obligations have an average duration up to approximately 30three years% of this amount in fiscal year 2022 and the remainder by 2024..

3.        CONTRACT ASSETS AND CONTRACT LIABILITIES

Contract assets represent revenue recognized on contracts in excess of amounts invoiced to the customers and the where the Company’s right to consideration is conditional on something other than the passage of time. Amounts may not exceed their net realizable value. 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 contractor contracts therefore typically result in revenue recognized in excess of billings, which we present as contract assets. Contract assets are classified as current.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.current liabilities.

Schedule of contract assets and liabilities

Revenue recognized for the periodssix months ended June 30, 20222023 and 20212022 that was included in the contract liabilities balance as of January 1, 20222023 and 2021,2022, respectively, was approximately $3.21.9 million and $1.53.2 million,, respectively.

The components of inventory consisted of the following:

The Company accounts for stock-based compensation based on the fair value of the stock or stock-based instrument on the date of grant. The Company recognized a net total of $137,498 and $225,098 of stock-basedStock-based compensation expense for restricted stock in the threeconsolidated statements of operations is summarized as follows:

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.

The Company grants shares of common stock (“Restricted Stock Awards”) to select employees. In the event that the employee’s employment is voluntarily terminated prior to certain vesting dates, portions of the shares may be forfeited. In addition, if certain Company performance criteria are not achieved, portions of these shares may be forfeited. 85,748 shares were forfeited during the six months ended June 30, 2022, and 2021, respectively, andresulting in a net total of $163,381 and $568,825 of stock- basedreduction to stock-based compensation expense for the six months ended June 30, 2022 in selling, general and 2021, respectively.administrative expense of $263,148.

DuringThe following table summarizes activity related to outstanding RSUs and Restricted Stock Awards for the three and six months ended June 30, 2022, the Company granted 2023:

0 and 190,114 restricted stock units (“RSUs”), respectively, to its boardAs of directors as partial compensation for the 2022 year, and during the three and six months ended June 30, 2021, the Company granted 0 and 135,512 RSUs, respectively, to its board of directors as partial2023, unamortized stock-based compensation for the 2021 year. RSUs vest quarterly on a straight-line basis over a one-year period. For the three and six months ended June 30, 2022, approximately $114,000 and $333,000, respectively, of non-cash compensation expensecosts related to the RSU grants to the board of directors are included selling, general and administrative expenses, and for the three and six months ended June 30, 2021, approximatelyrestricted share arrangements was $147,902514,880 and $432,345., respectively, of non-cash compensation expense related to the RSU grants to the board of directors are included in selling, general and administrative expenses.

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

Fair Value

At June 30, 20222023 and December 31, 2021,2022, the fair values of cash, accounts receivable and accounts payable approximated their carrying values because of the short-term nature of these instruments.

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

The Company complies with the accounting and disclosure requirements of FASB ASC Topic 260, “Earnings Per Share” and uses the two-class method in the calculation of earnings per share. Net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. During the three months and six months ended June 30, 2023 and 2022, respectively, and as of June 30, 2023 and 2022, respectively, the Company had restricted shares of common stock that were considered participating securities and unrestricted shares of common stock outstanding. Earnings and losses are shared pro rata.

Basic and diluted income per common share for the three and six months ended June 30, 2022 and 2021 is computed using the weighted average number of common shares outstandingoutstanding. Diluted income per common share is adjusted for the incremental shares attributed to outstanding options to purchase common stock, as well as unvested RSUs. Incremental shares of 95,058 were used in the calculation of diluted income per common share in the three months ended June 30, 2022. Incremental shares of 142,587 were not used in the calculation of diluted income per common share in the three months ended March 31, 2022, as the Company was in a loss position and these shares would be considered anti-dilutive for that period. Incremental shares of 67,75366,448 were used in the calculation of diluted income per common share infor both the three and six months ended June 30, 2021.2023.

For the three and six months ended June 30, 2023 and 2022, respectively, our income per common share was calculated as follows:

Credit Facility

On March 24, 2016, the Company entered into the Amended and Restated Credit Agreement.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 May 11, 2021,March 23, 2023, the Company entered into a Twelfth Amendment to the Seventh Amendment (defined below)Credit Agreement (the “Twelfth Amendment”). Under the SeventhTwelfth Amendment, the parties amended the Credit Agreement by : (a) extending the maturity date of the Revolving LoanCompany’s existing revolving line of credit and the Term Loanits existing term loan to July 31, 2022November 30, 2024, and (b) amending (under the leverage ratio covenant. Additionally, under the Seventh Amendment, BankUnited waived late deliveryterms of certain financial information.

On October 28, 2021, the Company entered into the Eighth Amendment (defined below). Under the Eighth Amendment, the parties amended the Credit Agreement, by (a) extending the maturity date of the Revolving Loan and the Term Loan to December 31, 2022, (b) reducing the availability under the Revolving Loan from $24 million to $21 million while eliminating the requirement to maintain a minimum $3.0 million in a combination of Revolving Loan availability and unrestricted cash, (c) providing for the repayment of an additional $750,000 of theoutstanding principal balance of the Term Loan in three installmentsterm loan was repaid by June 30, 2023); (b) providing for reduction of the aggregate maximum principal amount of all revolving line of credit loans to $20,520,000 from October 1, 2023 through December 31, 2023, $19,800,000 from January 1, 2024 through June 30, 2024, $19,080,000 from April 1, 2024 through June 30, 2024, $18,360,000 from July 1, 2024 through September 30, 2024, and $17,640,000 from October 1, 2024 and thereafter, 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 (c) payment of a $250,000 on November 30, 2021, December 31, 2021 and March 31, 2022capitalized fee incurred 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, 2022Credit Agreement, which the Company entered into on October 28, 2021 in two installments, the Ninth Amendment (defined below). Underfirst installment paid on June 1, 2023 in the Ninth Amendment, the parties amended the Credit Agreement by (a) extending the maturity dateamount of the Revolving Loan$116,667 and the Term Loan to September 30,second installment paid July 1, 2023, (b) providing for in the repayment of an additional $750,000 of the principal balance of the Term Loan in three installmentsamount of $250,000133,333 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, together with all unpaid interest accrued at the term loan interest rate on the Revolving Loan, Term Loan,capitalized fee through each such date (the installments 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 covenantsinterest accrued 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.paid on such dates).

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

The Credit Agreement, as amended, requires us to maintain the following financial covenants (subject to the exclusions provided for in the previous paragraph):covenants: (a) minimum debt service coverage ratio of no less than 1.5 to 1.0 for the trailing four fiscal 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;periods; (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 fiscal quarter periods thereafter;periods; (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 fiscal quarter of no less than $1.0 million (waived for the quarter ended March 31, 2022).million. The additional principal payments, increase in interest and the Amendment Fee provided for in the Eight Amendment and Ninth Amendment to the Credit Agreement, which the Company 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 and both the Revolving Loan and Term Loan bear interest at the rate of 7.25% (the Prime Rate + 2.503.50%). The Prime Rate was 8.25% as of June 30, 2022.2023 and as such, the Company’s interest rate on the Revolving Loan and Term Loan was 11.75% as of June 30, 2023.

As of June 30, 2023 and December 31, 2022, the Company had $21,000,000 million outstanding under the Revolving Loan. $2,640,000 of the Revolving Loan as compared tois payable by June 30, 2024 and the remaining balance of $21,250,00018,360,000 as of December 31, 2021.the revolving line of credit matures and is payable by November 30, 2024.

PPP Loan

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

On November 2, 2020, the Company applied to the lender for full forgiveness of the PPP Loan as calculated in accordance with the terms of the CARES Act, as modified by the Paycheck Protection Flexibility Act. All amounts have been classified as current or long term in accordance with the Note terms.

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

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

Included in the long-term debt are financing leases and other notes payable of $311,714129,323 and $422,595207,414 at June 30, 20222023 and December 31, 2021,2022, respectively, including a current portion of $182,39187,838 and $215,181136,433, respectively.

The Company has cumulatively paid approximately $908,000962,000 of total debt issuance costs in connection with the BankUnited Facility, of which approximately $217,774126,000 is included in other assets at June 30, 2022.2023.

During the six months ended June 30, 2023, our two largest customers accounted for 9.32% and MAJOR CUSTOMERS29

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

At June 30, 2022,2023, 2522%, 2519%, 1617% and 1015% of our contract assets were from four of our largest customers. At December 31, 2021,2022, 3427%, 20%, 16%, and 1216% of our contract assets were from three ofrelated to our four largest customers.

At June 30, 2022,2023, 2422%, 17%, 13%, 11% and 1310% of our accounts receivable were from five of our three largest customers. At December 31, 2021,2022, 3038%, 2321%, 17%, and 1813% of accounts receivable were due from our threefour largest customers.

10.        LEASES

The Company leases a building and equipment. Under ASC 842, at contract inception we determine whether the contract is or contains a lease and whether the lease should be classified as an operating or a financing lease. Operating leases are included in ROU (right-of-use) assets and operating lease liabilities in our consolidated balance sheets.

The Company leases manufacturing and office space under an agreement classified as an operating lease.

The On November 10, 2021, the Company executed the second amendment to the lease agreement as amended, expires onfor its manufacturing and office space, which extends the lease agreement’s expiration date to April 30, 2026 and. 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 three and six months ended June 30, 2023 and 2022, the Company’s operating lease expense was $516,9201,084,968 and $1,051,911, respectively. For the three months ended June 30, 2023 and 2022, the Company’s operating lease expense was $550,942 and $516,920, respectively.

Future minimum lease payments under non-cancellable operating leases as of June 30, 20222023 were as follows:

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

The Company’s weighted average remaining lease term for its operating leases is 3.82.9 years.years as of June 30, 2023. The Company’s weighted average discount rate for its operating leases is 5.4% as of June 30, 2023.

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 threesix months ended June 30, 20222023 and 20212022 was $6,225298,046 and $2,0787,500, respectively. The provision for income tax for the three months ended June 30, 2023 and 2022 was $98,789 and $6,225, respectively. The increase in the year-over-year provision for income tax is the result of the Company’s valuation allowance on its deferred tax asset being partially released at December 31, 2022, resulting in the periodic change in the deferred asset for the periods subsequent to December 31, 2022 being recorded through the Company’s statement of operations during such periods. For the three and six months ending June 30, 2022 the company’s deferred tax assets were fully offset by the valuation allowance, therefore there was only minimum state tax income expense recorded to the Company’s statement of operations during those periods.

The effective income tax rate for the six months ended June 30, 2022 and 2021 was $2023 is 7,50012.2 and $4,328, respectively.

%. The difference between the Company’s statutoryeffective income tax rate for the six months ended June 30, 2023 and its effectivethe statutory income tax rate of 21% for the six months ended June 30, 2023 is due to the estimated R&D credit, the partial release of approximately $121,000 of the Company’s valuation allowance taken on its deferred tax asset recorded during the Company’s net operating loss carryforwards.three months ending June 30, 2023, state income taxes and permanent tax differences.

Class Action Lawsuit

As previously disclosed, aA consolidated class action lawsuit (captioned Rodriguez v. CPI Aerostructures, Inc., et al., No. 20-cv-00982) has been20-cv-01026) was filed in the U.S. District Court for the Eastern District of New York against the Company, Douglas McCrosson;McCrosson, the Company’s former Chief Executive Officer;Officer, Vincent Palazzolo, the Company’s former Chief Financial Officer;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 assertsasserted 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 allegesalleged 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 Company’s registration statement and prospectus supplements issued in connection with itsthe Company’s October 16, 2018 securities offering. The Amended Complaint also allegesalleged 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 seekssought 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 (the “Settlement Amount”), subject to court approval. On July 9, 2021, Plaintiffplaintiff filed an unopposed motion for preliminary approval of the settlement. On November 10, 2021, a magistrate judge recommended that the Courtcourt grant the motion for preliminary approval in its entirety. The Courtcourt 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 Plaintiffplaintiff filed an unopposed motion for final approval. The magistrate judge held a hearing on the final approval motion on September 9, 2022, and is now deciding whether to recommend2022. On February 16, 2023, the magistrate judge recommended that the Court grant the final approval ofmotion in its entirety. The Court adopted that recommendation in its entirety on March 10, 2023, and terminated the settlement. As of June 30, 2022, we have previously paid or accruedcase on March 13, 2023. On May 5, 2023, the Settlement Amount was transferred to our financial statements covered expenses totaling $750,000, and have therefore met our insurance carrier’s directors’ and officers’ retention requirement, which capsplaintiff’s counsel from the Company’s expenses pertaining to the class action suit.escrow account established for this purpose.

At June 30, 2022, in order to reflect the amounts owed from our directors’ and officers’ insurance carrier and to the Plaintiffs, we have recorded to our balance sheet a litigation settlement obligation of $3,600,000Shareholder Derivative Action and an insurance recovery receivable of $3,500,693 to reflect the liability owed by the Company to the Plaintiffs as well as the amount receivable owing from the Company’s insurance carrier to the Company with respect to the settlement obligation.

Shareholder Derivative Action

Four shareholder derivative actions, each based on substantially the same facts as those alleged in the class action discussed above, have been filed against certain current and former members of our board of directors and certain of our current and former directors and officers.

The first action (captioned Moulton v. McCrosson, et.al., No. 20-cv-02092) was filed on May 7, 2020, in the United StatesU.S. 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 Courtcourt 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 StatesU.S. 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, et al. 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 Courtcourt 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 Courtcourt referred the motion to the magistrate judge; the motion remains pending.judge. The magistrate judge held a conference on September 9, 2022 in the consolidated federal action. On February 14, 2023, the magistrate judge recommended that the court grant the motion in its entirety. On March 6, 2023, the court granted preliminary approval of the proposed settlement.

On May 17, 2023, plaintiffs in the consolidated federal action filed an unopposed motion for final approval of the settlement. The magistrate judge held a final approval hearing on June 7, 2023. The final approval motion remains pending.

The terms of the proposed settlement is subjectare set forth in the stipulation of settlement agreed to by the Company and plaintiffs. Should the proposed settlement receive final approval from the Court, approval and, if approved,it 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 andreforms. In addition, the Company and/or its insurer have agreed to pay a total of $585,000 in attorneys’ fees to plaintiffs’ counsel.

Litigation Settlement Obligation and Insurance Recovery Receivable Pertaining to the Class Action Lawsuit and Shareholder Derivative Action

The attorneys’ fees for both the class action lawsuit and the shareholder derivative actions were covered and paid by our directors’ and officers’ insurance carrier, after satisfaction of our $750,000 retention. As of June 30, 2023, we had previously paid and accrued to our financial statements covered expenses totaling $750,000, and had therefore met our insurance carrier’s directors’ and officers’ retention requirement, which capped the Company’s expenses pertaining to the class action suit at $750,000. Because the Settlement Amount was transferred to counsel for plaintiff in the class action lawsuit on May 5, 2023, from the escrow account established for this purpose, we have relieved from our balance sheet, as of that date, the amounts previously owed from our directors’ and officers’ insurance carrier and to that plaintiff.

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, 20212022 (the “Form 10-K”). We undertakehave no obligation to publicly updaterelease 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 defensecommercial and commercialdefense markets. We also have a strong and growing presence in the aerosystems segmentsector 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 Manufacturersoriginal equipment manufacturers (“OEMs”) or a Tier 2 subcontractor to major Tier 1 manufacturers. We also are a prime contractor to the U.S.United States Department of Defense (“DOD”), primarily the U.S.United States Air Force.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.

Impact of COVID-19

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.

Recent Developments

NYSE American Delinquency Notices

On May 19, 2022,5, 2023, a settlement amount of $3,600,000, after approval by the NYSE American exchange (the “Exchange”) announced the suspensionCourt, of trading of our common stock due to non-compliance with the SEC annual and quarterly report timely filing criteria provided for in Section 1007 of the Exchange’s Company Guide (the “Company Guide”) and announced that it was initiating proceedings to delist our common stock. The Company filed a request for review of the Exchange’s determination to initiate delisting proceedings to a Committee of the Board of Directors of NYSE Regulation (the “Committee”). A hearing for this review before a Listing Qualification Panel of the Committee has been scheduled for November 9, 2022 (the “Hearing”). The delisting action has been stayed pending the outcome of the review although trading of our common stock on the Exchange remains suspended.

We have become current with our SEC reports upon the filing of this Quarterly Report on Form 10-Q. The Company believes the filing of this quarterly report resolves the condition that led to NYSE American suspending trading in the Company’s common stock on the Exchange and its determination to commence proceedings to delist the common stock from the Exchange. We cannot assure you thatwhich the Company becoming current with our SEC reports or the outcome of the Hearing will resulthad paid amounts totaling $750,000 as its retention limit under its directors’ and officers’ insurance policy, was transferred to counsel for plaintiff in the Exchange changing its delisting determination or that our common stock will resume trading on the Exchange in the future.

On September 17, 2021, we received notice from the Exchange indicating that the Company does not meet the continued listing standards set forth in Part 10 of the Company Guide. The Company is not in compliance with Section 1003(a)(i) of the Company Guide since it has stockholders’ equity of less than $2.0 million and losses from continuing operations and/or net losses in two of its three most recent fiscal years and Section 1003(a)(ii) of the Company Guide since it has stockholders’ equity of less than $4.0 million and losses from continuing operations and/or net losses in three of its four most recent fiscal years. The Company is therefore subject to the procedures and requirements of Section 1009 of the Company Guide and was required to, and timely did, submit a plan to the Exchange addressing how the Company intends to regain compliance with the continued listing standards by March 17, 2023 (the “Plan”). On November 19, 2021, we received notice from the Exchange that it accepted the Plan, subject to periodic review, including quarterly monitoring, for compliance with the Plan. If the Company’s common stock is not delisted from the Exchange as a result of the Company’s delayed filings as described above and (i) the Company is not in compliance with the continued listing standards by March 17, 2023 or (ii) the Company does not make progress consistent with the Plan during the plan period, the Exchange staff may initiate delisting proceedings as appropriate.

Trading of Common Stock on Expert Market

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

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

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

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

Amendment and Waiver to our BankUnited Credit Facility

On April 12, 2022 the Company entered into the Ninth Amendment (defined below) to the Credit Agreement. Under the Ninth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to September 30, 2023, (b) providing for the repayment of an additional $750,000 of the principal balance of the Term Loan in three installments of $250,000 on September 30, 2022, December 31, 2022 and March 31, 2023 in addition to $200,000 regular monthly principal payments through December 31, 2022 and (c) increasing the interest on the Revolving Loan, Term Loan, and the Amendment Fee as follows: through June 30, 2022, Prime Rate (as defined in the Credit Agreement) plus 2.5%; from July 1, 2022 through August 31, 2022, Prime Rate plus 5%; from September 1, 2022 through October 31, 2022, Prime Rate plus 6%; from November 1, 2022 through December 31, 2022, Prime Rate plus 7%; and from January 1, 2023 through September 30, 2023, Prime Rate plus 8%. Additionally, under the Ninth Amendment, the Credit Agreement financial covenants were amended. BankUnited also waived or consented to certain covenant non-compliance, waived temporarily or consented to, late delivery of certain financial information and waived permanently late delivery of certain pro-forma budget information.

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

The Credit Agreement, as amended, requires us to maintain the following financial covenants (subject to the exclusions provided for in the previous paragraph): (a) minimum debt service coverage ratio of no less than 1.5 to 1.0 for the trailing four quarter period ended March 31, 2022, 0.95 to 1.0 for the trailing four quarter period ended June 30, 2022, and 1.5 to 1.0 for the trailing four quarter period ended September 30, 2022 and for the trailing four quarter periods ended thereafter; (b) maximum leverage ratio of no less than 7.30 to 1.0 for the trailing four quarter period ended March 31, 2022, 6.30 to 1.0 for the trailing four quarter period ended June 30, 2022, 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(captioned Rodriguez v. CPI Aerostructures, Inc., et al., No. 20-cv-01026) against the Company, Douglas McCrosson, the Company’s former Chief Executive Officer, Vincent Palazzolo, the Company’s former Chief Financial Officer, and the two underwriters of the Company’s October 16, 2018 offering of common stock, Canaccord Genuity LLC and B. Riley FBR. The Amended Complaint in the action asserts claims on behalf of two plaintiff classes: (i) purchasers of the Company’s common stock issued pursuant to and/or traceable to the Company’s offering conducted on or about October 16, 2018; and (ii) purchasers of the Company’s common stock between March 22, 2018 and February 14, 2020. The Amended Complaint alleges that the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act by negligently permitting false and misleading statements to be included in the registration statement and prospectus supplements issued in connection with its October 16, 2018 securities offering. The Amended Complaint also alleges that the defendants violated Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated by the SEC, by making false and misleading statements in the Company’s periodic reports filed between March 22, 2018 and February 14, 2020. Plaintiff seeks unspecified compensatory damages, including interest; rescission or a rescissory measure of damages; unspecified equitable or injunctive relief; and costs and expenses, including attorney’s fees and expert fees. On February 19, 2021, the Company moved to dismiss the Amended Complaint. Plaintiff submitted a brief in opposition to the motion to dismiss on April 23, 2021.

On May 20, 2021, the parties reached a settlement in the amount of $3,600,000, subject to court approval. On July 9, 2021, Plaintiff filed an unopposed motion for preliminary approval of the settlement. On November 10, 2021, a magistrate judge recommended that the Court grant the motion for preliminary approval in its entirety. The Court adopted the recommendation on May 27, 2022, and entered an order granting preliminary approval of the settlement on June 7, 2022. On August 5, 2022, the Plaintiff filed an unopposed motion for final approval. The magistrate judge held a hearing on September 9, 2022, and is now deciding whether to grant final approval of the settlement. After satisfaction of our $750,000 retention, the Settlement Amount will be covered and paid by our directors’ and officers’ insurance carrier. As of June 30, 2022,Accordingly, we have previously paid or accrued torelieved from our financial statements covered expenses totaling $750,000, and have therefore met our directors’ and officers’ retention requirement, which capsbalance sheet, as of that date, the Company’s expenses pertaining to the class action suit.

At June 30, 2022, in order to reflect the amounts previously owed from our directors’ and officers’ insurance carrier and to the Plaintiffs, we have recorded to our balance sheet a litigation settlement obligation of $3,600,000 and an insurance recovery receivable of $3,500,693 to reflect the liability owed by the Company to the Plaintiffs as well as the amount receivable owing from the Company’s insurance carrier to the Company with respect to the settlement obligation.that plaintiff.

Backlog

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

Our total backlog as of June 30, 20222023 and December 31, 20212022 was as follows:

Approximately 99%98% of the total amount of our backlog at June 30, 20222023 was attributable to government and military contractor contracts. Our backlog attributable to government and military contractor contracts at June 30, 20222023 and December 31, 20212022 was as follows:

Our backlog attributable to commercial contracts at June 30, 20222023 and December 31, 20212022 was as follows:

The total backlog at June 30, 20222023 is primarily comprised of long-term programs with Raytheon (Next Generation Jammer (“NGJ”) – Mid Band Pod)Pods), Raytheon (Advanced Tactical Pods), USAF (T-38)(T-38 Classic Structural Modification Kits), Collins Aerospace (Pods), Lockheed Martin (F-16 RI/DCC’s), Raytheon (B-52 Radar Racks), Sikorsky (CH-53K Welded Tubes, Sikorsky (UH-60 BLACKHAWK Gunner Windows), Embraer (Phenom 300 Engine Inlets), Northrop Grumman (E-2D Advanced Hawkeye), Boeing (A-10 Main Landing Gear Pod), Lockheed Martin F-16 RI/DCC, Raytheon (B-52 Radar Rack), Collins Aerospace (MS-110 Pod),Pods) and Sikorsky UH-60 Gunner Window, (UH-60 BLACKHAWK Stabilator MRO and IR Module Assembly (HIRSS), and Northrop Grumman (E-2D)MRO). Funded

The funded backlog is primarily from purchase orders under long-term contracts with Raytheon NGJ – Mid Band Pods, USAF (T-38)(T-38 Classic Structural Modification Kits), Collins Aerospace (Pods), Boeing (A-10 Main Landing Gear Pod), Raytheon (Next Generation Jammer – Mid Band Pod)Pods), Lockheed Martin F-16 Rudder Island,RI/DCC’s, Raytheon (Advanced Tactical Pods) and Northrop Grumman (E-2D) and Sikorsky IR Module Assembly (HIRSS)(E-2D Advanced Hawkeye).

Critical Accounting Policies

We make a number of significant estimates, assumptions and judgments in the preparation of our financial statements. See Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Form 10-K, for a discussion of our critical accounting policies. There have been no significant changes to the application of our critical accounting policies during the quarter ended June 30, 2022.2023.

Results of Operations

Revenue

Total Revenue for the three months ended June 30, 20222023 was $18,925,406$20,547,555 compared to $22,301,190$18,925,406 for the same period last year, a decreasean increase of $3,375,784$1,622,149 or 15.1%8.6%. The decreaseincrease was primarily related to decreasesincreases in the Northrop Grumman E2D MYP II, Northrop Grumman E2D WOWPRaytheon NGJ Pods and Raytheon NGJ MB Pods programs,B-52 Radar Racks, partly offset by increasesdecreases in the Sikorsky HIRRS and Collins Aerospace MS-110 Pods programs.UH-60 BLACKHAWK Hover Infrared Suppression System (“HIRSS”) Module Assemblies.

Total Revenue for the six months ended June 30, 20222023 was $39,060,503$42,564,223 compared to $53,119,936$39,060,503 for the same period last year, a decreasean increase of $14,059,433$3,503,720 or 26.5%9.0%. The decreaseincrease was primarily related to decreasesincreases in the Northrop Grumman E2D MYP II, Northrop Grumman E2D WOWPRaytheon NGJ Pods and Raytheon NGJ MB Pods programs,B-52 Radar Racks, partly offset by increasesdecreases in the Sikorsky HIRRS, Boeing A-10 Pods, USAF T-38 Pacer Classic and GKN Ducts programs.UH-60 BLACKHAWK HIRSS Module Assemblies.

Revenue from governmentmilitary subcontracts was $16,502,026 for the three months ended June 30, 2023 compared to $15,520,336 for the three months ended June 30, 2022, comparedan increase of $981,690 or 6.3%. The increase was primarily related to $19,912,052increases in Raytheon NGJ Pods and Raytheon B-52 Radar Racks, partly offset by decreases in Sikorsky UH-60 BLACKHAWK HIRSS Module Assemblies and GKN UH-60 BLACKHAWK Inlet Ducts.

Revenue from military subcontracts was $35,174,919 for the threesix months ended June 30, 2021, a decrease of $4,391,716 or 22.1%. The decrease was primarily2023 compared to decreases in the Northrop Grumman E2D MYP II, Northrop Grumman E2D WOWP and Raytheon NGJ MB Pods programs, partly offset by an increase in the Sikorsky HIRRS program.

Revenue from government subcontracts was $32,716,830 for the six months ended June 30, 2022, comparedan increase of $2,458,089 or 7.5%. The increase was primarily related to $48,294,446increases in Raytheon NGJ Pods and Raytheon B-52 Radar Racks, partly offset by decreases in Sikorsky UH-60 BLACKHAWK HIRSS Module Assemblies, Northrop Grumman E-2D Advanced Hawkeye Wet Outer Wing Panels (“WOWP”) and Sikorsky UH-60 BLACKHAWK Gunner Windows.

Revenue from government military contracts was $2,710,925 for the sixthree months ended June 30, 2021, a decrease of $15,577,616 or 32.3%. The decrease was primarily related2023 compared to decreases in the Raytheon NGJ MB Pods, Northrop Grumman E2D OWP MYP II and Northrop Grumman E2D WOWP, partly offset by increases in the Sikorsky HIRRS program.

Revenue from direct military contracts was $1,887,074 for the three months ended June 30, 2022, an increase of $823,851 or 43.7%. The increase was primarily related to increases in USAF T-38 Pacer Classic Structural Modification Kits and DLA F-16 Structural Wing Components and MRO Services.

Revenue from government military contracts was $4,118,959 for the six months ended June 30, 2023 compared to $1,359,793$3,416,546 for the six months ended June 30, 2022, an increase of $702,413 or 20.6%. The increase was primarily related to increases in USAF T-38 Pacer Classic Structural Modification Kits and Defense Logistics Agency (“DLA”) F-16 Structural Wing Components and MRO Services.

Revenue from commercial subcontracts was $1,334,604 for the three months ended June 30, 2021, an increase of $527,281 or 38.8%. The increase is primarily related2023 compared to an increase in the USAF Pacer Classic T-38 Pacer Classic program.

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

Revenue from commercial subcontracts was $1,517,996 for the three months ended June 30, 2022, compared to $1,029,345 for the three months ended June 30, 2021, an increasea decrease of $488,651$183,392 or 47.5%12.1%. The increase isdecrease was primarily related to an increase in the Embraer Inlets program, partly offset by a decrease inresult of lower revenue recognized on the Gulfstream G650 program.Wing Fixed Leading Edges.

Revenue from commercial subcontracts was $3,270,345 for the six months ended June 30, 2023 compared to $2,927,126 for the six months ended June 30, 2022, compared to $2,926,952 for the six months ended June 30, 2021, an increase of $174.$343,219 or 11.7%. The decrease isincrease was primarily the result of an increase in thehigher revenue recognized on Embraer Inlets program,Phenom 300 Engine Inlet Assemblies, partly offset by decrease inlower revenue recognized on the Gulfstream G650 program and the Sikorsky S-92 Kits program.Wing Fixed Leading Edges.

Cost of Sales

Total Cost of Sales for the three months ended June 30, 2023 and 2022 was $15,943,555 and 2021 was $15,265,716, and $18,704,588, respectively, a decreasean increase of $3,438,872$677,839 or 18.4%4.4%. This decrease is the result of the comparable decrease in revenue and the specific program related factors noted below.

Total Cost of Sales for the six months ended June 30, 2023 and 2022 was $33,297,707 and 2021 was $31,966,204, and $44,603,246, respectively, a decreasean increase of $12,637,042$1,331,503 or 28.3%4.2%. 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: