CPI AEROSTRUCTURES INC 10-K

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis includes forward-looking statements involving risks and uncertainties and should be read together with the “Risk Factors” section of this Annual Report on Form 10-K. Such risks and uncertainties could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Recent Developments On March 17, 2023, we received notice from NYSE American (the “Exchange”) that the Company is in compliance with all of the NYSE American LLC continued listing standards set forth in Part 10 of the NYSE American Company Guide (“Company Guide”), and 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. 22 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 : (i) 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 be repaid by June 30, 2023); (ii) 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, 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 (iii) payment of a $250,000 capitalized fee incurred in connection with the Eighth Amendment to the Credit Agreement 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. 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 OEMs or a Tier 2 subcontractor to major Tier 1 manufacturers. We also are a prime contractor to the U.S. DOD, primarily the USAF. In conjunction with our assembly operations, we provide engineering, program management, supply chain management and kitting, and MRO services. Critical Accounting Policies Revenue Recognition In accordance with 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 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 overtime 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. See Part II, Item 8, Note 2 “Revenue Recognition” in the notes to the consolidated financial statements included in this Form 10-K for additional information regarding the Company’s revenue recognition policy. Inventory Inventory is stated at the lower of cost or estimated net realizable value. Cost is determined using the weighted average method. The Company capitalizes labor, material, subcontractor and overhead costs as work-in-process for contracts where control has not yet passed to the customer. The Company regularly reviews inventory quantities on hand, future purchase commitments with its suppliers, and the estimated usability for its inventory. If the Company’s review indicates a reduction in usability below carrying value, it reduces its net inventory to a new cost basis. Leases The Company does not recognize right-of-use (“ROU”) assets or lease liabilities for existing short-term leases. In addition, the Company does not separate lease and non-lease components for certain classes of assets (office building). The Company’s ROU assets and lease liabilities at December 31, 2022 were approximately $6.5 million and $6.9 million, respectively, using an estimated incremental borrowing rate of 10.5%, as compared to ROU assets and lease liabilities as of December 31, 2021 of $7.8 million and $8.0 million, respectively. Goodwill In testing goodwill for impairment, the Company has the option to begin with a qualitative assessment, commonly referred to as “Step 0,” to determine whether it is more likely than not that the fair value of a reporting unit containing goodwill is less than its carrying value. This qualitative assessment may include, but is not limited to, reviewing factors such as macroeconomic conditions, industry and market considerations, cost factors, entity-specific financial performance and other events, such as changes in the Company’s management, strategy and primary customer base. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company performs a quantitative goodwill impairment analysis by comparing the carrying amount to the fair value of the reporting unit. If the carrying amount exceeds the fair value, goodwill will be written down to the fair value and recorded as impairment expense in the consolidated statements of operations. The Company performs its impairment testing annually and when circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company performed its annual impairment assessment of goodwill as of December 31, 2022 and concluded that goodwill was not impaired. 23 Results of Operations The following discussion provides an analysis of our results of operations and should be read in conjunction with the accompanying consolidated financial statements and notes thereto. Revenue Revenue for the year ended December 31, 2022 was $83,335,764 compared to $103,369,544 for the year ended December 31, 2021, representing a decrease of $20,033,780 or 19.4%. The decrease was primarily related to decreases in the Raytheon - SDTA program, NGC E-2D MYP II and NGC E-2D WOWP programs, partly offset by increases in the Sikorsky HIRRS program . Revenue generated from prime government contracts for the year ended December 31, 2022 was $8,663,308 compared to $7,551,743 for the year ended December 31, 2021, an increase of $1,111,565, or 14.7%. This increase is primarily a result of increased revenue recognized on the T-38 Pacer Classic program. Revenue generated from government subcontracts for the year ended December 31, 2022 was $69,023,729 compared to $89,770,022 for the year ended December 31, 2021, a decrease of $20,746,293, or 23.1%. The decrease in revenue related to decreases in the NGC E-2D OWP and WOWP programs and the Raytheon - SDTA program, partly offset by increases in the Sikorsky HIRRS program. Revenue generated from commercial contracts for the year ended December 31, 2022 was $5,648,727 compared to $6,047,779 for the year ended December 31, 2021, a decrease of $399,052, or 6.6%. The decrease in revenue resulted from decreased revenue recognized on the Gulfstream G650 and HondaJet programs, largely offset by increases in the Embraer Phenom 300 program. Cost of sales Cost of sales for the year ended December 31, 2022 was $67,031,502 compared to $88,364,452 for the year ended December 31, 2021, a decrease of $21,332,950 or 24.1%. The components of cost of sales were as follows: Years ended December 31, 2022 December 31, 2021 Procurement $ 46,094,088 $ 64,628,025 Labor 6,829,405 7,843,520 Factory overhead 15,730,682 19,462,924 Other cost of sales (1,622,673 ) (3,570,017 ) Cost of sales $ 67,031,502 $ 88,364,452 Procurement for the year ended December 31, 2022 was $46,094,088 compared to $64,628,025 for the year ended December 31, 2021, a decrease of $18,533,937 or 28.7%. This decrease is primarily the result of a decrease in procurement for the NGC E-2D MYP II OWP program, the Northrop Grumman E2D WOWP program, the Bell AH-1Z program, the Gulfstream G650 program and the Raytheon - SDTA program. Labor costs for the year ended December 31, 2022 were $6,829,405 compared to $7,843,520 for the year ended December 31, 2021, a decrease of $1,014,115 or 12.9%. The decrease is primarily the result of lower labor cost incurred on the Raytheon – SDTA program. Factory overhead costs for the year ended December 31, 2022 were $15,730,682 compared to $19,462,924 for the year ended December 31, 2021, a decrease of $3,732,242 or 19.2%. The decrease is primarily the result of improved productivity on programs such as the Raytheon - SDTA program, the NGC welded tubes program, the NGC E-2D MYP II OWP program, the Sikorsky - Gunner Windows program and the Bell AH-1Z program, which led to higher labor absorption rates and lower overhead costs. 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 and direct charges to cost of sales. For the year ended December 31, 2022, there was a reduction of costs in the amount of $1,622,673 compared to a reduction of costs in the amount of $3,570,017 for the year ended December 31, 2021, a decrease of $1,947,344 or 54.5%. The decrease is primarily the result of a lower level of cost decrease in 2022 related to changes in inventory levels and loss contract reserve reductions. 24 Gross profit Gross profit for the year ended December 31, 2022 was $16,304,262 compared to $15,005,092 for the year ended December 31, 2021, an increase of $1,299,170 or 8.7%. Gross profit percentage (“gross margin”) for the year ended December 31, 2022 was 19.6% compared to 14.5% for year ended December 31, 2021. The increase was driven by year-over-year improvements in operating efficiencies and decreased factory overhead costs. Favorable/(Unfavorable) Adjustments to Gross Profit During the years ended December 31, 2022 and 2021, we made changes in estimates to various contracts. Such changes in estimates resulted in changes in total gross profit as follows: Years Ended December 31, 2022 December 31, 2021 Favorable adjustments $ 4,962,675 $ 4,066,857 (Unfavorable) adjustments (3,207,099 ) (4,277,930 ) Net adjustments $ 1,755,577 $ (211,073 ) Selling, general and administrative expenses Selling, general and administrative expenses (“SG&A”) for the year ended December 31, 2022 were $11,410,067 compared to $11,823,921 for the year ended December 31, 2021, a decrease of $413,854 or 3.5%. This decrease was primarily due to decreased accounting and legal fees, partially offset by increases in insurance expense. Other income Other income for the year ended December 31, 2022 was nil, compared to $4,795,000 for the year ended December 31, 2021. The other income in 2021 was due to the forgiveness of the PPP loan by the SBA on July 31, 2021. Interest expense Interest expense for the year ended December 31, 2022 was $2,271,101, compared to $1,141,189 for the year ended December 31, 2021, an increase of $1,129,912 or 99%. The increase is 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 before provision for income taxes We had income before provision for income taxes for the year ended December 31, 2022 of $2,623,094 compared to $6,834,982 for the year ended December 31, 2021, a decrease of $4,211,888 or 61.6%. Excluding the $4,795,000 PPP loan forgiveness by the SBA on July 31, 2021, our income before provision for income taxes for the year ended December 31, 2021 was $2,039,982. Excluding the PPP loan forgiveness, income before provision for income taxes for 2022 increased by $583,112, or 28.6%, over 2021. The increase was driven by the aforementioned increase in gross profit and decrease in SG&A, partially offset by the increase in interest expense described above. Provision (benefit) for income taxes The income tax (benefit) for the year ended December 31, 2022 was ($6,553,131), an effective tax (benefit) rate of (249.8%), as compared to the income tax provision of $14,609, an effective tax rate of 0.2%, for the year ended December 31, 2021. The income tax (benefit) in 2022 was primarily due to a $6,473,532 reduction in the valuation allowance recorded by the Company during the fourth quarter of 2022 on its deferred tax asset balance related to its net operating loss carryforwards (the “Fourth Quarter 2022 Valuation Allowance Decrease”). The income tax provision in 2021 is mostly the result of state franchise and minimum taxes. Net income Net income for the year ended December 31, 2022 was $9,176,225 compared to $6,820,373 for the year ended December 31, 2021, an increase of $2,355,852 or 32.4%. The increase in net income was driven by the aforementioned increase in gross profit, decrease in SG&A and the 2022 income tax (benefit), partially offset by the aforementioned increase in interest expense. 25 Excluding the $6,473,532 Fourth Quarter 2022 Valuation Allowance Decrease, a $771,834 first quarter 2022 severance charge and the 2021 $4,795,000 PPP loan forgiveness, our net income for the years ended December 31, 2022 and December 31, 2021 was $3,474,527 and $2,025,373, respectively, representing a year-over-year increase in 2022 net income of $1,449,154, or 71.5%. Earnings per share Earnings per share was $0.74 ($0.73 per unrestricted share and $0.01 per restricted share) for the year ended December 31, 2022 calculated utilizing 12,389,890 weighted average shares outstanding (“WASO”) (12,286,781 WASO unrestricted and 103,109 WASO restricted) as compared to $0.56 ($0.55 per unrestricted share and $0.01 per restricted share) for the year ended December 31, 2021 calculated utilizing 12,193,826 WASO (11,960,134 WASO unrestricted and 233,692 WASO restricted), an increase of $0.18 per share, or 32.1%. Excluding the aforementioned Fourth Quarter 2022 Valuation Allowance Decrease, the aforementioned first quarter 2022 severance charge and the aforementioned 2021 PPP loan forgiveness, our earnings per share was $0.28 per share for the year ended December 31, 2022 as compared to $0.17 per share for the year ended December 31, 2021, an increase of $0.11 per share, or 64.7%. Business Outlook The statements in the “Business Outlook” section and other forward-looking statements of this Annual Report on Form 10-K are subject to revision during the course of the year in our quarterly earnings releases and SEC filings and at other times. Liquidity and Capital Resources General . At December 31, 2022, we had working capital of $12,896,602 compared to working capital of $12,175,776 at December 31, 2021, an increase of $720,826, or 5.9%. This increase is primarily the result of a decrease in accounts payable and accrued expenses. Cash Flow . A large portion of our cash is used to pay for materials and processing costs associated with contracts that are in process and which do not provide for progress payments. Costs for which we are not able to bill on a progress basis are components of contract assets on our consolidated balance sheet and represent the aggregate costs and related earnings for uncompleted contracts for which the customer has not yet been billed. These costs and earnings are recovered upon shipment of products and presentation of billings in accordance with contract terms. Because ASC 606 requires us to use estimates in determining revenues, costs and profits and in assigning the amounts to accounting periods, there can be a significant disparity between earnings (both for accounting and tax purposes) as reported and actual cash that we receive during any reporting period. Accordingly, it is possible that we may have a shortfall in our cash flow and may need to borrow money or take steps to defer cash outflows until the reported earnings materialize into actual cash receipts. Several of our programs require us to expend up-front costs that may have to be amortized over a portion of production units. In the case of significant program delays and/or program cancellations, we could experience margin degradation, which may be material for costs that are not recoverable. Such charges and the loss of up-front costs could have a material impact on our liquidity and results of operations. We continue to work to obtain better payment terms with our customers, including accelerated progress payment arrangements, as well as exploring alternative funding sources. At December 31, 2022, our cash balance was $3,847,225 compared to $6,308,866 at December 31, 2021, a decrease of $2,461,641, or 39.0%. The decrease was driven by our pay down of outstanding debt during 2022 of $3,365,181, partly offset by $944,329 in cash provided by operations. BankUnited Facility On March 24, 2016, the Company entered into the Credit Agreement. The BankUnited Facility originally provided for a revolving credit loan commitment of $30 million (the “Revolving Loan”) and a $10 million term loan (“Term Loan”). The Revolving Loan bears interest at a rate based upon a pricing grid, as defined in the Credit Agreement. On May 11, 2021, the Company entered into a Waiver and Seventh Amendment (“Seventh Amendment”) to the Credit Agreement. Under the Seventh Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to July 31, 2022, and (b) amending the leverage ratio covenant. Additionally, under the Seventh Amendment, BankUnited waived late delivery of certain financial information. 26 On October 28, 2021, the Company entered into a Waiver and Eighth Amendment (the “Eighth Amendment”) to the Credit Agreement. Under the Eighth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to December 31, 2022, (b) reducing the availability under the Revolving Loan from $24 million to $21 million while eliminating the requirement to maintain a minimum $3.0 million in a combination of Revolving Loan availability and unrestricted cash, (c) providing for the repayment of an additional $750,000 of the principal balance of the Term Loan in three installments of $250,000 on November 30, 2021, December 31, 2021 and March 31, 2022 in addition to $200,000 regular monthly principal payments through December 31, 2022, (d) amending the minimum debt service coverage ratio covenant, and (e) amending the maximum leverage coverage ratio. 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 of December 31, 2021, the Amendment Fee payable was posted by BankUnited to the Revolving Loan and on February 11, 2022, in agreement with the Company, the Amendment Fee was reclassified by BankUnited to the Term Loan. The Company has recorded this payable to its financial statements accordingly. On April 12, 2022 the Company entered into a Consent, Waiver and Ninth Amendment (the “Ninth Amendment”) to the Credit Agreement. Under the Ninth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to September 30, 2023, (b) providing for the repayment of an additional $750,000 of the principal balance of the Term Loan in three installments of $250,000 on September 30, 2022, December 31, 2022 and March 31, 2023 in addition to $200,000 regular monthly principal payments through December 31, 2022 and (c) increasing the interest on the Revolving Loan, Term Loan, and the Amendment Fee as follows: through June 30, 2022, Prime Rate (as defined in the Credit Agreement) plus 2.5%; from July 1, 2022 through August 31, 2022, Prime Rate plus 5%; from September 1, 2022 through October 31, 2022, Prime Rate plus 6%; from November 1, 2022 through December 31, 2022, Prime Rate plus 7%; and from January 1, 2023 through September 30, 2023, Prime Rate plus 8%. Additionally, under the Ninth Amendment, the Credit Agreement financial covenants were amended. BankUnited also waived or consented to certain covenant non-compliance, waived temporarily or consented to, late delivery of certain financial information and waived permanently late delivery of certain pro-forma budget information. On August 19, 2022, we entered into a Consent, Waiver and Tenth Amendment (the “Tenth Amendment”) to the Credit Agreement. Under the Tenth Amendment, the parties amended the Credit Agreement by (a) increasing the maximum leverage ratio applicable for the fiscal quarter ending September 30, 2022 to 5.0 to 1.0, (b) waiving and/or consenting to the exclusion from the Company’s covenant compliance requirements for the fiscal quarters ended December 31, 2021, March 31, 2022, June 30, 2022 and September 30, 2022 up to (i) $566,025 of losses incurred and reserves taken under the Borrower’s welded product contracts, and (ii) $367,045 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 of accrued severance and COBRA costs and employer taxes incurred by the Company during the fiscal quarter ending March 31, 2022. Additionally, under the Tenth Amendment, BankUnited waived or consented to late delivery of certain financial information required by the Credit Agreement. On November 10, 2022, the Company entered into an Eleventh Amendment to the Credit Agreement (the “Eleventh Amendment”). Under the Eleventh Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to November 30, 2023 or with respect to the Term Loan, if earlier, until the outstanding principal balance is paid in full (the “Term Loan Maturity Date”), (b) providing for regular monthly principal payments of $200,000 on the Term Loan from January 1, 2023 through the Term Loan Maturity Date (in addition to the Company’s existing obligation to make two principal payments on the term loan of $250,000 on each of December 31, 2022 and March 31, 2023) and (c) decreasing the interest rate on the Revolving Loan, the Term Loan and the Amendment Fee to the Prime Rate plus 3.5% effective as of November 1, 2022. As described above, on March 23. 2023, the Company entered into the Twelfth Amendment, under which 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 be 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, 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 capitalized fee incurred in connection with 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. 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 1.0 for the trailing four quarter periods thereafter; (c) minimum net income after taxes as of the end of each fiscal quarter being no less than $1.00 commencing June 30, 2022; and (d) a minimum adjusted EBITDA at the end of each quarter of no less than $1.0 million (waived for the quarter ended March 31, 2022). The additional principal payments, increase in interest and the Amendment Fee provided for in the Eight Amendment and Ninth Amendment are excluded for purposes of calculating compliance with each of the financial covenants. 27 PPP Loan On April 10, 2020, we entered into the PPP Loan, with BNB Bank (now part of Dime Community Bank (“Dime”)) as the lender, in an aggregate principal amount of $4,795,000, pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). On November 2, 2020, the Company applied to the lender for full forgiveness of the PPP Loan as calculated in accordance with the terms of the CARES Act, as modified by the Paycheck Protection Flexibility Act. On July 13, 2021, the Company received notification through Dime that the PPP Loan and accrued interest thereon were fully forgiven by the Small Business Association and that the forgiveness payment date was July 1, 2021. The forgiveness of the PPP Loan was recognized during the Company’s third fiscal quarter ending September 30, 2021. The PPP Loan was evidenced by a promissory note (the “Note”) and, subject to the terms of the Note, the PPP Loan had a fixed interest rate interest of one percent (1%) per annum, with the first six months of interest deferred and had an initial term of two years. The SBA reserves the right to audit any PPP Loan, for eligibility and other criteria, regardless of size. These audits may occur after forgiveness has been granted. In accordance with the CARES Act, all borrowers are required to maintain their PPP loan documentation for six years after the PPP Loan was forgiven and to provide that documentation to the SBA upon request. All amounts are classified as current or long term in accordance with the Note terms. Liquidity Our working capital requirements can vary significantly, depending in part on the timing of the conclusion of mature programs and new program awards and the payment terms with our customers and suppliers. There is currently no availability for borrowings under the BankUnited Facility and the Company finances its operations from internally generated cash flow. Note 8 to our consolidated financial statements included in Part II - Item 8 includes a discussion regarding the BankUnited Facility and recent amendments thereto which provide, among other things, for increases in principal payments and the interest rate on the loans provided for therein. Management has (i) negotiated and executed a further amendment to the Credit Agreement which extended the maturity date of the Credit Agreement to November 30, 2024, (ii) obtained and regularly seeks 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 customer base which has proven to be less susceptible to COVID-19 related impacts and (v) maintained its approximately $122 million backlog of funded orders, 98% of which are for military programs. Based upon the aforementioned factors, it is management’s estimation that there will likely not be any individual conditions or combination of events that will occur in the coming year which would cause the Company to be unable to meet its obligations or otherwise continue as a going concern. However, there can be no assurance that such plans will accomplish their intended goals. Cost Reduction Initiative During the first quarter of 2022, the Company implemented a cost reduction initiative designed to improve operational efficiency and reduce costs during fiscal year 2022. Management has reallocated resources and reduced operating and general administrative expenses to more properly align the Company’s costs to revenue given the timing differences between the conclusion of certain mature programs and the commencement of new programs in 2022. In connection with the cost reduction initiative, the Company executed a headcount reduction and furlough action in March 2022 and implemented cost controls and cuts during the balance of fiscal year 2022. The Company recorded severance costs related to the headcount reduction in its first fiscal quarter of 2022 and the cost reductions of these actions positively impacted the financial results of the Company beginning in the second fiscal quarter of 2022. Contractual Obligations The table below summarizes information about our contractual obligations as of December 31, 2022 and the effects these obligations are expected to have on our liquidity and cash flow in the future years. Payments Due By Period Contractual Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years Line of credit $ 21,000,000 $ 1,200,000 $ 19,800,000 $ — $ — Debt 1,583,333 1,583,333 — — — Finance Leases 207,414 136,433 70,981 — — Operating Leases 6,895,046 1,814,588 4,870,881 202,332 7,245 Total Contractual Cash Obligations $ 29,685,793 $ 4,734,354 $ 24,741,862 $ 202,332 $ 7,245 Inflation Inflation historically has not had a material effect on our operations, although the current inflationary environment in the U.S., and its impact on interest rates, the supply chain, the labor market and general economic conditions, are factors that the Company actively monitors in an attempt to mitigate and manage potential negative impacts on and risks faced by the Company. The majority of the Company’s long term contracts with its customers reflect fixed pricing and its long term contracts with its suppliers reflect fixed pricing. When bidding for work, the Company takes inflation risk and supply side pricing risk into account in its proposals. 28 Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Not applicable. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA This information appears following Item 15 of this Annual Report on Form 10-K and is incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.