UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

For the quarterly period ended March 31,June 30, 2023

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 May 11,August 17, 2023, the registrant had 12,566,784 12,639,244shares of common stock, $.001 par value, outstanding.

INDEX

Part I - Financial Information

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’ EQUITY (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”).

The condensed consolidated interim financial statements of the Company as of March 31,June 30, 2023 and for the threesix months ended March 31,June 30, 2023 and 2022 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, 2022 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, 2022 (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 March 31,June 30, 2023, the Company had $3,830,1832,892,826 of uninsured balances. The Company limits its credit risk by selecting financial institutions considered to be highly creditworthy.

Recently Issued Accounting Standards - Adopted

In the first quarter of 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), using a modified retrospective method, which did not result in a significant impact on the Company’s financial statements.

In 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. This is known as the over time revenue recognition. 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 as a percentageand an estimate of costs to complete and resulting total estimated costs at completion of the contract.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.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 costs 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

As of March 31,June 30, 2023, the aggregate amount of transaction price allocated to the remaining performance obligations was approximately $113.3118.2 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 March 31,June 30, 2023. The majority of the Company’s performance obligations have an average duration up to approximately fourthree years.

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

Schedule of contract assets and liabilities

Revenue recognized for the threesix months ended March 31,June 30, 2023 and 2022 that was included in the contract liabilities balance as of January 1, 2023 and 2022, respectively, was approximately $1.51.9 million and $2.53.2 million, respectively.

The components of inventory consisted of the following:

Stock-based compensation expense for restricted stock in the consolidated 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 threesix months ended March 31,June 30, 2022, resulting in a reduction to stock-based compensation expense for the threesix months ended March 31,June 30, 2022 in selling, general and administrative expense of $263,148.

The following table summarizes activity related to outstanding RSUs and Restricted Stock Awards for the threesix months ended March 31,June 30, 2023:

As of March 31,June 30, 2023, unamortized stock-based compensation costs related to restricted share arrangements was $313,582514,880.

Fair Value

At March 31,June 30, 2023 and December 31, 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 (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. During the three months and six months ended March 31,June 30, 2023 and 2022, respectively, and as of March 31,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 (loss) per common share is computed using the weighted average number of common shares outstanding. Diluted income (loss) per common share is adjusted for the incremental shares attributed to unvested RSUs. Incremental shares of 87,89066,448 were used in the calculation of diluted income per common share for both the three and six months ended March 31,June 30, 2023. Incremental shares of 142,587 were not used in the calculation of diluted income per common share for the three months ended March 31, 2022, as the Company was in a loss position for the three months ended March 31, 2022 and these shares would be considered anti-dilutive.

For the three and six months ended March 31,June 30, 2023 and 2022, respectively, our income (loss) per common share was calculated as follows:

On March 24, 2016, the Company entered into the Amended and Restated Credit Agreement with the lenders named therein and BankUnited N.A. as Sole Arranger, Agent and Collateral Agent (as amended from time to time, the “Credit Agreement” or the “BankUnited Facility”). The BankUnited Facility originally provided for a revolving credit loan commitment of $30 million (the “Revolving Loan”) and a $10 million term loan (“Term Loan”). The Revolving Loan bears interest at a rate based upon a pricing grid, as defined in the Credit Agreement.

On March 23, 2023, the Company entered into a Twelfth Amendment to the Credit Agreement (the “Twelfth Amendment”). Under the Twelfth Amendment, the parties amended the Credit Agreement by : (a) extending the maturity date of the Company’s existing revolving line of credit and its existing term loan to November 30, 2024 (under the terms of the Credit Agreement, the outstanding principal balance of the term loan will bewas 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 March 31,June 30, 2024, $19,080,000$19,080,000 from April 1, 2024 through June 30, 2024, $18,360,000$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 capitalized fee incurred in connection with the Eighth Amendment to the Credit Agreement, which the Company entered into on October 28, 2021 (the “Eighth Amendment”) in two installments, the first installment to be paid on June 1, 2023 in the amount of $116,667 and the second installment to be paid July 1, 2023 in the amount of $133,333, together with all unpaid interest accrued at the term loan interest rate on the capitalized fee through each such date.date (the installments and interest accrued were paid on such dates).

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, 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 (the “Ninth Amendment”) are excluded for purposes of calculating compliance with each of the financial covenants.

The BankUnited Facility is secured by all of the Company’s assets and both the Revolving Loan and Term Loan bear interest at the Prime Rate + 3.50%. The Prime Rate was 8.008.25% as of March 31,June 30, 2023 and as such, the Company’s interest rate on the Revolving Loan and Term Loan was 11.5011.75% as of March 31,June 30, 2023.

As of March 31,June 30, 2023 and December 31, 2022, the Company had $21,000,000 million outstanding under the Revolving Loan. $1,920,0002,640,000 of the Revolving Loan is payable by March 31,June 30, 2024 and the remaining balance of $19,080,00018,360,000 of the revolving line of credit matures and is payable by November 30, 2024.

The Term Loan had an aggregate principal amount of $983,333133,333, payable in monthly installments, as defined in the agreement,Credit Agreement, as of March 31,June 30, 2023 as compared to an aggregate principal amount outstanding as of December 31, 2022 of $1,583,333.

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

Included in long-term debt are financing leases and other notes payable of $163,254129,323 and $207,414 at March 31,June 30, 2023 and December 31, 2022, respectively, including a current portion of $114,50887,838 and $136,433, respectively.

The Company has cumulatively paid approximately $962,000 of total debt issuance costs in connection with the BankUnited Facility, of which approximately $119,000126,000 is included in other assets at March 31,June 30, 2023.

During the threesix months ended March 31,June 30, 2023, our two largest customers accounted for 3632% and 2829% of revenue. During the threesix months ended March 31,June 30, 2022, our three largest customers accounted for 3936%, 14% and 11% of revenue.

At June 30, 2023, 22%, 19%, 17% and 12% of revenue.

At March 31, 2023, 25%, 17%, 17%, and 15% of our contract assets were from four of our largest customers. At December 31, 2022, 27%, 20%, 16%, and 16% of our contract assets were related to our four largest customers.

At March 31,June 30, 2023, 2922%, 1617%, 1413%, 1211% and 1110% of our accounts receivable were from five of our five largest customers. At December 31, 2022, 38%, 21%, 17%, and 13% of accounts receivable were due from our four largest customers.

The Company leases manufacturing and office space under an agreement classified as an operating lease. On November 10, 2021, the Company executed the second amendment to the lease agreement for its manufacturing and office space, which extends the lease agreement’s expiration date to April 30, 2026.2026. The lease agreement does not include any renewal options. The agreement provides for an initial monthly base amount plus annual escalations through the term of the lease. In addition to the monthly base amounts in the lease agreement, the Company is required to pay real estate taxes and operating expenses during the lease terms.

The Company also leases office equipment in agreements classified as operating leases.

For the threesix months ended March 31,June 30, 2023 and 2022, the Company’s operating lease expense was $546,0821,084,968 and $534,9911,051,911, 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 March 31,June 30, 2023 were as follows:

The following table sets forth the ROU assets and operating lease liabilities as of:

The amortization expense of these assets under operating leases was $455,392 and $435,968 for the three months ended March 31, 2023 and 2022, respectively.

The Company’s weighted average remaining lease term for its operating leases is 3.22.9 years as of March 31,June 30, 2023. The Company’s weighted average discount rate for its operating leases is 5.4% as of March 31,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 six months ended June 30, 2023 and 2022 was $298,046 and $7,500, respectively. The provision for income tax for the three months ended March 31,June 30, 2023 and 2022 was $199,25798,789 and $1,2756,225, 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 three months ending Marchperiods subsequent to December 31, 20232022 being recorded through the Company’s statement of operations for the three months ending March 31, 2023.during such periods. For the three and six months ending March 31,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 the three months ending March 31, 2022.those periods.

The effective income tax rate for the threesix months ended March 31,June 30, 2023 is 16.812.2%. The difference between the effective income tax rate for the threesix months ended March 31,June 30, 2023 and the statutory income tax rate of 21% for the threesix months ended March 31,June 30, 2023 is due to the estimated R&D credit, the partial release of approximately $121,000 of the Company’s valuation allowance on its deferred tax asset recorded during the three months ending June 30, 2023, state income taxes and permanent tax differences.

The difference between the Company’s statutory tax rate and its effective rate is due to R&D credit and permanent tax differences.

Class Action Lawsuit

A consolidated class action lawsuit (captioned Rodriguez v. CPI Aerostructures, Inc., et al., No. 20-cv-01026) was 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 asserted 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 alleged 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 Company’s registration statement and prospectus supplements issued in connection with itsthe Company’s October 16, 2018 securities offering. The Amended Complaint also alleged 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 sought 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 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 Plaintiffplaintiff filed an unopposed motion for final approval. The magistrate judge held a hearing on the final approval motion on September 9, 2022. On February 16, 2023, the magistrate judge recommended that the Court grant the final approval motion in its entirety. The Court adopted that recommendation in its entirety on March 10, 2023, and terminated the case on March 13, 2023. On May 5, 2023, the Settlement Amount was transferred to the Plaintiffplaintiff’s counsel from the escrow account established for this purpose.

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 officers.

The first action (captioned Moulton v. McCrosson, et.al., No. 20-cv-02092) was filed on May 7, 2020, in the U.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 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 U.S. District Court for the Eastern District of New York. The complaint, which is based 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 court that the Company and all defendants had reached an agreement in principle with all plaintiffs to settle the 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 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 proposed settlement is subject tomagistrate judge held a final approval by the court. In addition to requiringhearing on June 7, 2023. The final approval by the court, the proposed settlement is subject to certain conditions, including the filing with the SEC of the stipulation of settlement agreed to by the Company and plaintiff (the “Stipulation of Settlement”), and sending notice to potential class members. motion remains pending.

The terms of the proposed settlement are set forth in the Stipulationstipulation of Settlement.settlement agreed to by the Company and plaintiffs. Should the proposed settlement receive final approval from the Court, 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. 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 Lawsuitclass action lawsuit and the Shareholder Derivative Action will beshareholder derivative actions were covered and paid by our directors’ and officers’ insurance carrier, after satisfaction of our $750,000 retention. As of March 31,June 30, 2023, we havehad previously paid and accrued to our financial statements covered expenses totaling $750,000, and havehad therefore met our insurance carrier’s directors’ and officers’ retention requirement, which capscapped the Company’s expenses pertaining to the class action suit at $750,000. AsBecause 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 March 31, 2023, in order to reflectthat date, 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 $3,600,000 owing from the Company’s insurance carrier to the Company with respect to the settlement obligation; this obligation and receivable will be relieved from our balance sheet following the transfer of the Settlement Amount to the Plaintiff from the escrow account established for this purpose.

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, 2022 (the “Form 10-K”). We have no obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.

Business Operations

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

Impact of COVID-19

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 could adversely impact our results of operations and financial condition. In response to the COVID-19 impact on our business, we have 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

On March 17,May 5, 2023, we received notice from NYSE American (the “Exchange”) thata settlement amount of $3,600,000, after approval by the Court, of which the Company ishad paid amounts totaling $750,000 as its retention limit under its directors’ and officers’ insurance policy, was transferred to counsel for plaintiff in compliance with allthe consolidated class action lawsuit (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 NYSE AmericanCompany’s October 16, 2018 offering of common stock, Canaccord Genuity LLC continued listing standards set forth in Part 10and B. Riley FBR. Accordingly, we have relieved from our balance sheet, as of that date, the NYSE American Company Guide (“Company Guide”),amounts previously owed from our directors’ and officers’ insurance carrier and to that specifically, the Company has resolved the continued listing deficiency with respect to Sections 1003(a)(i) and (ii) of the Company Guide referenced in the Exchange’s letter to the Company dated September 17, 2021, which was previously disclosed by the Company.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 March 31,June 30, 2023 and December 31, 2022 was as follows:

Approximately 98% of the total amount of our backlog at March 31,June 30, 2023 was attributable to government and military contractor contracts. Our backlog attributable to government and military contractor contracts at March 31,June 30, 2023 and December 31, 2022 was as follows:

Our backlog attributable to commercial contracts at March 31,June 30, 2023 and December 31, 2022 was as follows:

The total backlog at March 31,June 30, 2023 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), Northrop Grumman (E-2D), 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)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), Sikorsky IR Module Assembly (HIRSS)Pods), Lockheed Martin F-16 Rudder Island,RI/DCC’s, Raytheon (Advanced Tactical Pods) and Northrop Grumman (E-2D) and Raytheon (Next Generation Jammer – Mid Band Pod)(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 March 31,June 30, 2023.

Results of Operations

Revenue

Total Revenue for the three months ended March 31,June 30, 2023 was $22,016,668$20,547,555 compared to $20,135,097$18,925,406 for the same period last year, an increase of $1,881,571 or 9.3%. The increase was primarily related to increases in Raytheon Next Generation Jammer (“NGJ”) Pods and Lockheed Martin F-16V Rudder Island and Drag Chute Canisters (“RI/DCC”), partly offset by decreases in Northrop Grumman E-2D Advanced Hawkeye Wet Outer Wing Panels (“WOWP”) , Sikorsky UH-60 BLACKHAWK Hover Infrared Suppression System (“HIRSS”) Module Assemblies and GKN UH-60 BLACKHAWK Inlet Ducts.

Revenue from military subcontracts was $18,672,893 for the three months ended March 31, 2023 compared to $17,196,495 for the three months ended March 31, 2022, an increase of $1,476,398$1,622,149 or 8.6%. The increase was primarily related to increases in Raytheon NGJ Pods and Lockheed Martin F-16V RI/DCC Module Assemblies,Raytheon B-52 Radar Racks, partly offset by decreases in Northrop Grumman WOWP’s, Sikorsky UH-60 BLACKHAWK HIRRSHover Infrared Suppression System (“HIRSS”) Module Assemblies.

Total Revenue for the six months ended June 30, 2023 was $42,564,223 compared to $39,060,503 for the same period last year, an increase of $3,503,720 or 9.0%. The increase was primarily related to increases in Raytheon NGJ Pods and Raytheon B-52 Radar Racks, partly offset by decreases in Sikorsky UH-60 BLACKHAWK HIRSS Module Assemblies.

Revenue from military 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, an increase of $981,690 or 6.3%. The increase was primarily related to increases 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 Ducts.

Revenue from military subcontracts was $35,174,919 for the six months ended June 30, 2023 compared to $32,716,830 for the six months ended June 30, 2022, an increase of $2,458,089 or 7.5%. The increase was primarily related to increases 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 Fuel Panels.Gunner Windows.

Revenue from government military contracts was $1,408,034$2,710,925 for the three months ended March 31,June 30, 2023 compared to $1,529,472$1,887,074 for the three months ended March 31,June 30, 2022, a decreasean increase of $121,438$823,851 or 7.9%43.7%. The decreaseincrease was primarily related to a decreaseincreases 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 $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, partly offset by an increase in USAF T-38 Pacer Classic Structural Modification Kits.Services.

Revenue from commercial subcontracts was $1,935,741$1,334,604 for the three months ended March 31,June 30, 2023 compared to $1,409,130$1,517,996 for the three months ended March 31,June 30, 2022, a decrease of $183,392 or 12.1%. The decrease was primarily the result of lower revenue recognized on the Gulfstream G650 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, an increase of $526,610$343,219 or 37.4%11.7%. The increase was primarily the result of higher revenue recognized on Embraer Phenom 300 Engine Inlet Assemblies, partly offset by lower revenue recognized on the Gulfstream G650 Wing Fixed Leading Edges.

Cost of Sales

Total Cost of Sales for the three months ended March 31,June 30, 2023 and 2022 was $17,354,152$15,943,555 and $16,700,488,$15,265,716, respectively, an increase of $653,664$677,839 or 3.9%4.4%.

Total Cost of Sales for the six months ended June 30, 2023 and 2022 was $33,297,707 and $31,966,204, respectively, an increase of $1,331,503 or 4.2%.

The components of the cost of sales were as follows:

Procurement for the three months ended March 31,June 30, 2023 was $12,074,601$9,655,932 compared to $11,171,725$10,416,731 for the three months ended March 31,June 30, 2022, a decrease of $760,799 or 7.3%. The decrease was primarily related to a lower amount of material procurement and favorable material adjustments, primarily in Lockheed Martin F-16 RI/DCC’s, Sikorsky UH-60 BLACKHAWK Gunner Windows, and Sikorsky UH-60 BLACKHAWK HIRSS Module Assemblies, partly offset by a higher amount of material procurement and favorable material adjustments in Raytheon NGJ Pods and USAF T-38 Pacer Classic Structural Modification Kits.

Procurement for the six months ended June 30, 2023 was $21,730,533 compared to $21,588,456 for the six months ended June 30, 2022, an increase of $902,876$142,077 or 8.1%0.7%. The increase, which was partly offset by favorable material adjustments, was primarily related to a higher amount of material procurement in Sikorsky UH-60 BLACKHAWK HIRSS Module Assemblies, Northrop Grumman E-2D Advanced Hawkeye WOWP’s and Sikorsky UH-60 BLACKHAWK Gunner Windows, partly offset by a lower amount of material procurement and favorable material adjustments in Raytheon NGJ Pods, USAF T-38 Pacer Classic Structural Modification Kits, Lockheed Martin F-16 RI/DCC’s and Raytheon B-52 Radar Racks.

Labor costs for the three months ended June 30, 2023 were $1,867,283 compared to $1,707,066 for the three months ended June 30, 2022, an increase of $160,217 or 9.4%. The increase was primarily related to increases in Raytheon NGJ Pods and Lockheed Martin RI/DCC Module Assemblies, partly offset by decreases in the Northrop Grumman WOWP’s and Sikorsky HIRRS Module Assemblies.Boeing A-10 Main Landing Gear Pods.

Labor costs for the threesix months ended March 31,June 30, 2023 were $1,854,863$3,722,146 compared to $1,986,268$3,693,335 for the threesix months ended March 31,June 30, 2022, a decreasean increase of $131,405$28,811 or 6.6%0.8%. The decreaseincrease was primarily related to decreasesincreases in Northrop Grumman WOWP’sRaytheon NGJ Pods and Sikorsky HIRRS Module Assemblies.Boeing A-10 Main Landing Gear Pods.

Factory overhead for the three months ended March 31,June 30, 2023 was $3,779,878$4,266,566 compared to $4,267,639$3,754,557 for the three months ended June 30, 2022, an increase of $512,009 or 13.6%. This increase was primarily the result of higher salary and benefit costs.

Factory overhead for the six months ended June 30, 2023 was $8,046,445 compared to $8,045,129 (which included a $134,628 severance charge recorded in factory overhead during the threesix months ended March 31,June 30, 2022) for the threesix months ended March 31,June 30, 2022, a decreasean increase of $487,761 or 11.4%. This decrease was primarily the result of lower salary and benefit costs, factory supplies and delivery charges.$1,316. Excluding the $134,628 severance charge recorded during the threesix months ended March 31,June 30, 2022, the factory overhead for the threesix months ended March 31,June 30, 2023 decreased $353,133increased $135,944 or 7.8%1.7% from the factory overhead for the threesix months ended March 31,June 30, 2022. This decreaseincrease was primarily the result of lowerhigher salary and benefit costs, factory suppliespartly offset by lower delivery service and delivery charges.building maintenance.

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. For the three months ended March 31,June 30, 2023, there was a reduction of these costs in the amount of $355,190 $153,774 compared to a reduction of these costs in the amount of $725,144 $612,638 for the three months ended March 31,June 30, 2022, a decreasean increase of $369,954 $766,412 or 51.0%125.1%. The decreaseincrease is primarily the result of a changes in inventory levels, and a lower level of inventory and loss contract reservereserves reduction for the three months ended March 31,June 30, 2023 as compared to the three months ended March 31,June 30, 2022.

Other cost of sales for the six months ended June 30, 2023 was a reduction of these costs in the amount of $201,417 compared to a reduction of these costs in the amount of $1,360,716 for the six months ended June 30, 2022, an increase of $1,159,299 or 85.2%. The increase is primarily the result of changes in inventory levels, and a lower level of inventory and loss contract reserves reduction for the six months ended June 30, 2023 as compared to the six months ended June 30, 2022.

Gross Profit

Gross profit and gross profit percentage (“gross margin”) for the three months ended March 31,June 30, 2023 was $4,662,516$4,604,000 and 21.2%22.4%, respectively, compared to $3,434,609$3,659,690 and 17.1%19.3%, respectively, for the three months ended March 31,June 30, 2022, an increase of $1,227,907$944,310 and 410310 basis points, respectively, for the reasons noted above.

Gross profit and gross profit percentage (“gross margin”) for the six months ended June 30, 2023 was $9,266,516 and 21.8%, respectively, compared to $7,094,299 and 18.2%, respectively, for the six months ended June 30, 2022, an increase of $2,172,217 and 360 basis points, respectively, for the reasons noted above.

Favorable/Unfavorable Adjustments to Gross Profit

During the threesix months ended March 31,June 30, 2023 and 2022, 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 threesix months ended March 31,June 30, 2023, we evaluated all contractual data and revised estimated gross profit percentages accordingly. We had 2324 contracts with favorable adjustments and 3132 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,June 30, 2023 were $2,869,058$2,806,480 compared to $3,137,657$2,697,392 for the three months ended June 30, 2022, an increase of $109,088 or 4.0 %. The increase was primarily the result of higher salary and benefit expenses, partly offset by lower insurance and legal expenses.

Selling, general and administrative expenses for the six months ended June 30, 2023 were $5,675,538 compared to $5,835,049 (which included a $637,206 severance charge recorded in selling, general and administrative expenses during the threesix months ended March 31,June 30, 2022) for the threesix months ended March 31,June 30, 2022, a decrease of $268,599$159,511 or 8.6%2.7%. The decrease was primarily the result of lower salary and benefit expenses as well as lower insurance expenses. Excluding the aforementioned $637,206 severance charge as well as $263,148 of restricted stock forfeitures recorded during the threesix months ended March 31,June 30, 2022, the selling, general and administrative expenses for the threesix months ended March 31,June 30, 2023 increased $105,459$740,843 or 3.8%15.0% from the selling, general and administrative expenses for the threesix months ended March 31,June 30, 2022. This increase was primarily the result of increased salary and benefits partly offset by lower insurance expenses.

Interest expense

Interest expense for the three months ended March 31,June 30, 2023 was $610,896,$541,655, compared to $328,608$438,437 for the three months ended March 31,June 30, 2022, an increase of $282,288$103,218 or 85.9%23.5%. The increase was the result of higher year-over-year interest rates charged on our outstanding debt under the Credit Agreement, partially offset by a year-over-year decrease in the amount of our outstanding debt under the Credit Agreement.

Interest expense for the six months ended June 30, 2023 was $1,152,551, compared to $767,045 for the six months ended June 30, 2022, an increase of $385,506 or 50.3%. The increase was the result of higher year-over-year interest rates charged on our outstanding debt under the Credit Agreement, partially offset by a year-over-year decrease in the amount of our outstanding debt under the Credit Agreement.

Income (Loss) Before Provision for Income Taxes

Income (Loss) before provision for income taxes for the three months ended March 31,June 30, 2023 was $1,182,562$1,255,865 compared to $(31,656)$523,861 for the three months ended March 31,June 30, 2022, an increase of $1,214,218$732,004 or 139.7% for the reasons noted above.

Income before provision for income taxes for the six months ended June 30, 2023 was $2,438,427 compared to $492,205 for the six months ended June 30, 2022, an increase of $1,946,222 or 395.4% for the reasons noted above.

Provision for Income Taxes

Provision for income taxes for the three months ended March 31,June 30, 2023 was $199,257$98,789 compared to $1,275$6,225 for the three months ended March 31,June 30, 2022, an increase of $197,982.$92,564. The increase in the 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 change in the deferred tax asset for the three months ending June 30, 2023 being recorded through the Company’s statement of operations for the three months ending June 30, 2023. For the three 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 the three months ending June 30, 2022.

The effective income tax rate for the three months ended June 30, 2023 is 7.9%. The difference between the effective income tax rate for the three months ended June 30, 2023 and the statutory income tax rate of 21% for the three months ended June 30, 2023 is primarily due to the estimated R&D credit, the partial release of approximately $121,000 of the Company’s valuation allowance on its deferred tax asset, state income taxes and permanent tax differences.

Provision for income taxes for the six months ended June 30, 2023 was $298,046 compared to $7,500 for the six months ended June 30, 2022, an increase of $290,546. The increase in the 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 change in the deferred asset for the threesix months ending March 31,June 30, 2023 being recorded through the Company’s statement of operations for the threesix months ending March 31,June 30, 2023. For the threesix months ending March 31,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 the threesix months ending March 31,June 30, 2022.

The effective income tax rate for the threesix months ended March 31,June 30, 2023 is 16.8%12.2%. The difference between the effective income tax rate for the threesix months ended March 31,June 30, 2023 and the statutory income tax rate of 21% for the threesix months ended March 31,June 30, 2023 is primarily due to the estimated R&D credit, the partial release of approximately $121,000 of the Company’s valuation allowance on its deferred tax asset, state income taxes and permanent tax differences.

Net Income (Loss) and Earnings (Loss) per Share

Net income (loss) for the three months ended March 31,June 30, 2023 of $983,305$1,157,076 or $0.08$0.09 per basic and diluted share, compared to $(32,931)$517,636 or $(0.00)$0.04 per basic and diluted share for the three months ended March 31,June 30, 2022, an increase of $1,016,236$639,440 or 123.5% for the reasons noted above. Basic and diluted income per share for the three months ended March 31,June 30, 2023 was calculated using 12,520,18912,558,793 and 12,608,18912,625,241 weighted average basic and diluted shares outstanding, respectively. Basic and diluted (loss)income per share for the three months ended March 31,June 30, 2022 was calculated using 12,363,14312,439,000 and 12,534,058 weighted average basic and diluted shares outstanding.outstanding, respectively.

Net income for the six months ended June 30, 2023 of $2,140,381 or $0.17 per basic and diluted share, compared to $484,705 or $0.04 per basic and diluted share for the six months ended June 30, 2022, an increase of $1,655,676 or 341.6% for the reasons noted above. Basic and diluted income per share for the six months ended June 30, 2023 was calculated using 12,539,652 and 12,606,100 weighted average basic and diluted shares outstanding, respectively. Basic and diluted income per share for the six months ended June 30, 2022 was calculated using 12,401,281 and 12,496,339 weighted average basic and diluted shares outstanding, respectively.

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, net income for the threesix months ended March 31,June 30, 2023 increased $244,402$883,842 or 33.1%70.3% from net income for the threesix months ended March 31,June 30, 2022.

Excluding the aforementioned severance charge, basic and diluted earnings per share for the threesix months ended March 31,June 30, 2023 increased $0.02$0.07 or 33.3%58.8% from basic and diluted earnings per share for the threesix months ended March 31,June 30, 2022.

Liquidity and Capital Resources

General

At March 31,June 30, 2023, we had working capital of $13,736,671$14,484,217 compared to $12,896,602 at December 31, 2022, an increase of $840,069$1,587,615 or 6.5%12.3%. This increase was primarily the result of an increase in contract assets and accounts receivable and a decrease in accrued expenses, partly offset by an increase in accounts payable and contract liabilities and accounts payable.liabilities.

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 and related earnings for which we do not bill on a progress basis, and which, as a result, we bill upon shipment of products, are components of contract assets on our consolidated balance sheets and represent the aggregate costs and related earnings for uncompleted contracts for which the customer has not yet been billed. These costs and earnings are recovered upon shipment of products and presentation of billings in accordance with contract terms.