Item 3. Legal Proceedings
Item 3. LEGAL PROCEEDINGS
Settlement of Working Capital Dispute
In December 2018, the Company completed
the acquisition of WMI from Air Industries for a purchase price of $7.9 million, subject to a potential post-closing working capital
adjustment. Of the purchase price, $2 million was placed in escrow at closing and was to be released after the completion of the
working capital adjustment and for indemnification contingencies. Air Industries objected to the Company’s calculation of
the post-closing working capital adjustment and rejected the determination of BDO USA, LLP (“BDO”), the independent
accountant appointed by the parties to resolve the dispute. On September 27, 2019, the Company filed a notice of motion in the
Supreme Court of the State of New York, County of New York, against Air Industries seeking, among other things, a judgment against
Air Industries in the amount of approximately $4.1 million. In October 2019, Air Industries and the Company jointly authorized
the release to the Company of approximately $619,000 from escrow, which represented the value of certain undisputed items.
On October 1, 2020, the court denied the Company’s motion on procedural grounds, holding that the Company must commence a
special proceeding to obtain the relief sought. The court’s decision was made without prejudice and did not
resolve the working capital dispute.
The Company and Air Industries entered
into a settlement agreement dated as of December 23, 2020, to resolve the post-closing working capital adjustment dispute in exchange
for the release to the Company of the $1,381,000 cash remaining in escrow. Such amount was released from escrow to the Company
on December 28, 2020. As part of the settlement agreement CPI Aero agreed to give up the right to pursue the additional disputed
working capital amount of approximately $2.1 million.
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Class Action Lawsuit
As previously disclosed, a consolidated
class action lawsuit has been filed against the Company, Douglas McCrosson, the Company’s 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
through 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 through 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, subject to court approval. On July 9, 2021, Plaintiff filed an unopposed motion for preliminary approval of the settlement.
After satisfaction of our $750,000 retention, of which approximately $150,000 remained as of November 15, 2021, the settlement
will be covered in large part by our directors’ and officers’ insurance.
Shareholder Derivative Action
Four shareholder derivative actions have
been filed against current 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 in the United States District Court for the Eastern District of New York, and purports
to assert derivative claims against the individual defendants for violations of Section 10(b) and 21(d) of the Exchange Act and
breach of fiduciary duty, unjust enrichment, and contribution, 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), and purports to assert derivative claims against the individual defendants for breach of fiduciary duty and unjust enrichment,
and seeks to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’
alleged misconduct, along with declaratory, equitable, injunctive and monetary relief, as well as attorneys’ fees and other
costs. On December 22, 2020, the parties filed a joint stipulation staying the action pending further developments in the class
action.
The third action (captioned Berger v. McCrosson,
et al., No. 1:20-cv-05454) was filed on November 10, 2020, in the United States District Court for the Eastern District of New
York, and purports to assert derivative claims against current and former members of our board of directors, and certain of our
current and former officers. 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 and staying the consolidated action pending further developments
in the class action.
The fourth action (captioned Wurst v. Bazaar,
et al., Index No. 605244/2021) was filed on March 24, 2021, in the Supreme Court of the State of New York (Suffolk County), and
purports to assert derivative claims against the Company’s current and former executive officers, certain board members,
and the Company as a nominal defendant. 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.
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Each of these derivative actions is based
substantially on the same facts alleged in the class action complaint summarized above.
SEC Investigation
On May 22, 2020, the Company received a
subpoena from the Securities and Exchange Commission (the “Commission”) Division of Enforcement (the “Division”)
seeking documents and information relating, among other things, to previously disclosed errors in and restatement of the Company’s
financial statements, the Company’s October 16, 2018 equity offering and the recent separation of the Company’s former
Chief Financial Officers. By letter dated March 12, 2021, the Division Staff notified the Company that the Division has concluded
its investigation and, based on the information the Division has as of such date, it does not intend to recommend an enforcement
action by the Commission against the Company. The Division’s notice was provided under the guidelines described in the final
paragraph of Securities Act Release No. 5310 which states in part that the notice “must in no way be construed as indicating
that the party has been exonerated or that no action may ultimately result from the staff’s investigation.”
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II