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,
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.
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.
Class
Action Lawsuit
As
previously disclosed, a consolidated class action lawsuit (captioned Rodriguez v. CPI Aerostructures, Inc., et al. ,
No. 20-cv-01026) has been filed in the U.S. District Court for the Eastern District of New York against the Company, Douglas
McCrosson, the Company’s former Chief Executive Officer, Vincent Palazzolo, the Company’s former Chief Financial Officer,
and the two underwriters of the Company’s October 16, 2018 offering of common stock, Canaccord Genuity LLC and B. Riley
FBR. The Amended Complaint in the action asserts claims on behalf of two plaintiff classes: (i) purchasers of the Company’s
common stock issued pursuant to and/or traceable to the Company’s offering conducted on or about October 16, 2018; and (ii)
purchasers of the Company’s common stock between March 22, 2018 and February 14, 2020. The Amended Complaint alleges that
the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act by negligently permitting false and misleading statements
to be included in the registration statement and prospectus supplements issued in connection with its October 16, 2018 securities
offering. The Amended Complaint also alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated by the SEC, by making false and misleading
statements in the Company’s periodic reports filed between March 22, 2018 and February 14, 2020. Plaintiff seeks unspecified
compensatory damages, including interest; rescission or a rescissory measure of damages; unspecified equitable or injunctive relief;
and costs and expenses, including attorney’s fees and expert fees. On February 19, 2021, the Company moved to dismiss the
Amended Complaint. Plaintiff submitted a brief in opposition to the motion to dismiss on April 23, 2021.
On
May 20, 2021, the parties reached a settlement in the amount of $3,600,000, subject to court approval. On July 9, 2021, Plaintiff
filed an unopposed motion for preliminary approval of the settlement. On November 10, 2021, a magistrate judge recommended that
the Court grant the motion for preliminary approval in its entirety. The Court adopted the recommendation on May 27, 2022, and
entered an order granting preliminary approval of the settlement on June 7, 2022. The magistrate judge will hold a hearing on
September 9, 2022 to decide whether to grant final approval of the settlement. After satisfaction of our $750,000 retention,
the Settlement Amount will be covered and paid by our directors’ and officers’ insurance carrier. As of March 31,
2021, we have previously paid or accrued to our financial statements covered expenses totaling $750,000, and have therefore met
our directors’ and officers’ retention requirement, which caps the Company’s expenses pertaining to the class
action suit.
As
of December 31, 2021, 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 $3,003,259 and an insurance recovery
receivable of $2,850,000; this obligation and receivable will be relieved from our balance sheet upon the payment of the Settlement
Amount to the Plaintiff by our directors’ and officers’ insurance carrier.
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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 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 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 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 motion remains pending. The settlement is subject
to Court approval and, if approved, will result in the dismissal of the shareholder derivative lawsuits. As part of
the proposed settlement, the Company has agreed to undertake (or confirm that it has undertaken already) certain corporate governance
reforms and to pay attorneys’ fees to plaintiffs’ counsel. The attorneys’ fees will be covered and paid by our
directors’ and officers’ insurance carrier, after satisfaction of our $750,000 retention.
SEC
Investigation
On
May 22, 2020, the Company received a subpoena from the SEC Division of Enforcement (the “Division”) seeking documents
and information relating, among other things, to previously disclosed errors in and restatement of the Company’s financial
statements, the Company’s October 16, 2018 equity offering and the recent separation of the Company’s former Chief
Financial Officers. By letter dated March 12, 2021, the Division Staff notified the Company that the Division has concluded its
investigation and, based on the information the Division has as of such date, it does not intend to recommend an enforcement action
by the SEC against the Company. The Division’s notice was provided under the guidelines described in the final paragraph
of Securities Act Release No. 5310 which states in part that the notice “must in no way be construed as indicating that
the party has been exonerated or that no action may ultimately result from the staff’s investigation.”
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Item 4.
MINE SAFETY DISCLOSURES
Not
applicable.
PART
II