CPI AEROSTRUCTURES INC 10-K

Item 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as of the end of the period covered by this Annual Report on Form 10-K. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of such date, our disclosure controls and procedures were not effective due to the material weaknesses described below. Management’s Annual Report on Internal Control over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting, as defined in Exchange Act Rules 13a-15(f) and 15d-15(f), is a process designed by, or under the supervision of, our principal executive and principal financial officers and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that: ● pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; ● provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and ● provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management conducted an evaluation of the effectiveness of internal control over financial reporting based on criteria established in Internal Control- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective at the reasonable assurance level as of December 31, 2022 because of the material weaknesses described below. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. In connection with management’s evaluation of the Company’s internal control over financial reporting described above, management identified material weaknesses in its internal controls over the processing and accrual of vendor invoices, the reconciliation of accounts receivable and contract assets, and the documentation with respect to its internal controls over inventory. Conclusion As described above, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2022. Notwithstanding the conclusion by our management that our controls and procedures as of December 31, 2022 were not effective, and notwithstanding the material weaknesses in our internal control over financial reporting described above, management believes that the consolidated financial statements and related financial information included in this Annual Report on Form 10-K fairly present in all material respects our financial position, results of operations and cash flows as of and for the dates presented, and for the periods ended on such dates, in conformity with U.S. GAAP. CPI is a non-accelerated filer for 2022. As such, CPI is not subject to the requirement to have an auditor attestation report on internal control over financial reporting in the 10-K filed in 2023 for 2022. 29 Changes in Internal Control Over Financial Reporting There were no changes in our internal control over financial reporting during the quarter ended December 31, 2022 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. During the nine months ended September 30, 2022, we implemented additional internal controls related to the monitoring and review of inventory costing, excess and obsolete materials and loss contracts. Limitations on Effectiveness of Controls and Procedures In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs. Item 9B. OTHER INFORMATION None. Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS None. PART III Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE I ncorporated herein by reference from the Company's definitive proxy statement, which will be filed no later than 120 days after December 31, 2022. Item 11. EXECUTIVE COMPENSATION I ncorporated herein by reference from the Company's definitive proxy statement, which will be filed no later than 120 days after December 31, 2022. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS I ncorporated herein by reference from the Company's definitive proxy statement, which will be filed no later than 120 days after December 31, 2022. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE I ncorporated herein by reference from the Company's definitive proxy statement, which will be filed no later than 120 days after December 31, 2022. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES I ncorporated herein by reference from the Company's definitive proxy statement, which will be filed no later than 120 days after December 31, 2022. 30 PART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) The following documents are filed as part of this report: (1) Financial Statements: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2022 and 2021 Consolidated Statements of Operations for the Years Ended December 31, 2022 and 2021 Consolidated Statements of Shareholders’ Equity (Deficit) for the Years Ended December 31, 2022 and 2021 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021 Notes to Financial Statements (2) Financial Statement Schedules: None. (3) The following Exhibits are filed as part of this report: Exhibit No. Description 3.1 Certificate of Incorporation of the Company, as amended, (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K, filed on August 25, 2020). 3.1.1 Certificate of Amendment of the Certificate of Incorporation of Composite of Precision Industries, Inc., dated May 9, 1989 (incorporated by reference to Exhibit 3.1.1 to the Company’s Annual Report on Form 10-K, filed on August 25, 2020). 3.1.2 Certificate of Amendment of the Certificate of Incorporation of Consortium Products International, Inc., dated June 30, 1992 (incorporated by reference to Exhibit 3.1.2 to the Company’s Annual Report on Form 10-K, filed on August 25, 2020). 3.1.3 Certificate of Amendment of the Certificate of Incorporation of CPI Aerostructures, Inc., dated August 7, 1992 (incorporated by reference to Exhibit 3.1.3 to the Company’s Annual Report on Form 10-K, filed on August 25, 2020). 3.1.4 Certificate of Amendment of the Certificate of Incorporation of CPI Aerostructures, Inc., dated June 3, 1997 (incorporated by reference to Exhibit 3.1.4 to the Company’s Annual Report on Form 10-K, filed on August 25, 2020). 3.1.5 Certificate of Amendment of the Certificate of Incorporation of CPI Aerostructures, Inc., dated June 16, 1998 (incorporated by reference to Exhibit 3.1.5 to the Company’s Annual Report on Form 10-K, filed on August 25, 2020). 3.2 Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K/A filed on November 24, 2021). 3.2.1 Amended Article V, Section 6 of Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on November 22, 2021). 4.1* Securities of the Registrant. 10.1 Performance Equity Plan 2009 (incorporated by reference to Appendix A to the Company’s Proxy Statement on Schedule 14A filed on April 30, 2009). 10.2 2016 Long-Term Incentive Plan, as amended (incorporated by reference from Exhibit 10.2 to the Company’s Annual Report on Form 10-K filed on April 15, 2021). 10.3.1 Agreement of Lease, dated June 30, 2011, between Heartland Boys II L.P. and CPI Aerostructures, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed on August 15, 2011). 31 10.3.2 Lease Amendment, dated November 11, 2020, between Heartland Boys II L.P. and CPI Aerostructures, Inc. (incorporated by reference to Exhibit 10.3.2 to the Company’s Annual Report on Form 10-K/A filed on November 24, 2021). 10.3.3 Second Lease Amendment, dated November 10, 2021, between Heartland Boys II L.P. and CPI Aerostructures, Inc. (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 12, 2021). 10.4.1 Amended and Restated Credit Agreement, dated as of March 24, 2016, among CPI Aerostructures, Inc., the several lenders from time to time party thereto, and BankUnited, N.A. (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 28, 2016). 10.4.2 First Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 10, 2016). 10.4.3 Second Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.4.3 to the Company’s Annual Report on Form 10-K filed on August 25, 2020). 10.4.4 Third Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 16, 2018). 10.4.5 Fourth Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 27, 2018). 10.4.6 Fifth Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 26, 2019). 10.4.7 Waiver and Sixth Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 24, 2020). 10.4.8 Waiver and Seventh Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 17, 2021). 10.4.9 Waiver and Eighth Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 28, 2021). 10.4.10 Consent, Waiver and Ninth Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 12, 2022). 10.4.11 Consent, Waiver and Tenth Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 19, 2022). 10.4.12 Eleventh Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 11, 2022). 10.4.13 Twelfth Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 23, 2023). 10.5 Amended and Restated Continuing General Security Agreement among CPI Aerostructures, Inc. and BankUnited N.A. (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 28, 2016). 10.6** Severance and Change in Control Agreement, dated March 9, 2022, between the Company and Dorith Hakim (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 9, 2022). 21* Subsidiaries of the Registrant. 23.1* Consent of RSM US LLP. 31.1* Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1*** Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 905 of the Sarbanes-Oxley Act of 2002. 101.INS* XBRL Instanse Document. 101.SCH* XBRL Taxonomy Extension Scheme Document. 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB* XBRL Taxonomy Extension Label Linkbase Document. 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document. 104* Cover page formatted as Inline XBRL and contained in Exhibit 101. * Filed herewith. ** Management contract compensatory plan or arrangement. *** Furnished herewith. Item 16. FORM 10-K SUMMARY None 32 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm F-1 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2022 and 2021 F-3 Consolidated Statements of Operations for the Years Ended December 31, 2022 and 2021 F-4 Consolidated Statements of Shareholders’ Equity (Deficit) for the Years Ended December 31, 2022 and 2021 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021 F-6 Notes to Consolidated Financial Statements F-7 - F-26 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of CPI Aerostructures, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of CPI Aerostructures, Inc. and Subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of operations, shareholders’ equity (deficit) and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. F- 1 Deferred Tax Asset Valuation Allowance As described in Note 1 and Note 11 of the financial statements, the Company’s net deferred tax asset of approximately $6.6 million is net of a valuation allowance of approximately $14.9 million as of December 31, 2022. The Company recognizes deferred tax assets and liabilities for the expected future income tax consequences of events that have been recognized in the Company’s financial statements. Valuation allowances are provided for deferred tax assets where it is considered more likely than not that the Company will not realize the benefit of such assets. In evaluating the realizability of deferred tax assets in future periods, the available positive and negative evidence, including projected future taxable income exclusive of reversing temporary differences, history of book losses, tax planning strategies, and results of recent operations, are considered. We identified management’s determination of the value of deferred tax assets as a critical audit matter as there is significant judgment required by management to conclude that it is more likely than not that these deferred tax assets will be realized in future periods. In addition, the auditing of these elements involved complex and subjective auditor judgment, including the need to involve personnel with specialized skill and knowledge. Our audit procedures to evaluate management’s determination that sufficient taxable income will not be generated to realize deferred tax assets included the following, among others: · Evaluated the reasonableness of management’s estimate in regard to the ability to generate future taxable income and utilize the deferred tax assets by evaluating the forecast of future taxable income, including testing of management’s assumptions used in their projections. · Utilized personnel with specialized knowledge and skill in accounting for income taxes to assist in the evaluation of management’s assessment of positive and negative evidence and their conclusion that it is more likely than not that the Company will not realize a benefit from a portion of its deferred tax assets. Revenue Recognition As described in Note 2 of the financial statements, revenue for the year ended December 31, 2022 was $83 million. The majority of the Company's revenues are from long-term contracts with performance obligations 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 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. Given the complexity and significant estimates and assumptions management makes regarding revenue and costs associated with long-term contracts with performance obligations satisfied over time, we identified revenue recognition over these contracts as a critical audit matter. Auditing these estimates required a high degree of auditor judgement and increased audit effort. Our audit procedures related to the Company's revenue, costs and profit for these contracts included the following, among others: · Obtained an understanding of management’s process related to the accounting for contract revenue including cost to complete estimates for long-term contracts with performance obligations satisfied over time. · Performed substantive test of details on a sample of contracts with customers to ensure modifications were agreed to by the customer. · Performed journal entry testing related to revenue. · Tested the accuracy and completeness of the costs incurred to date on a sample of contracts. · Performed procedures, including a retrospective and prospective review, over estimated costs to complete on a sample of contracts. · On a sample of contracts, we evaluated whether the revenue recognition over time on contracts was appropriate based on the terms and conditions. · Tested the mathematical accuracy of management’s calculation of revenue recognized on a sample basis. /s/ RSM US LLP We have served as the Company's auditor since 2021. New York, New York April 14, 2023 49 F- 2 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2022 December 31, 2021 ASSETS Current Assets: Cash $ 3,847,225 $ 6,308,866 Accounts receivable, net 4,857,772 4,967,714 Insurance recovery receivable 3,600,000 2,850,000 Contract assets 27,384,540 24,459,339 Inventory 2,493,069 4,028,925 Refundable income taxes 40,000 40,000 Prepaid expenses and other current assets 975,830 625,075 Total Current Assets 43,198,436 43,279,919 Operating lease right-of-use assets 6,526,627 7,796,768 Property and equipment, net 1,124,556 1,646,863 Deferred tax asset 6,574,463 — Intangibles, net — 125,000 Goodwill 1,784,254 1,784,254 Other assets 238,744 372,741 Total Assets $ 59,447,080 $ 55,005,545 LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT) Current Liabilities: Accounts payable $ 8,029,996 $ 10,429,018 Accrued expenses 7,344,590 6,102,587 Litigation settlement obligation 3,600,000 3,003,259 Contract liabilities 6,001,726 5,122,766 Loss reserve 576,549 1,495,714 Current portion of line of credit 1,200,000 — Current portion of long-term debt 1,719,766 3,365,181 Operating lease liabilities 1,817,811 1,580,453 Income taxes payable 11,396 5,165 Total Current Liabilities 30,301,834 31,104,143 Line of credit, net of current portion 19,800,000 21,250,000 Long-term operating lease liabilities 5,077,235 6,445,728 Long-term debt, net of current portion 70,981 1,540,747 Total Liabilities 55,250,050 60,340,618 Shareholders’ Equity (Deficit): Common stock - $ .001 par value; authorized 50,000,000 shares, 12,506,795 and 12,335,683 shares, respectively, issued and outstanding 12,507 12,336 Additional paid-in capital 73,189,449 72,833,742 Accumulated deficit ( 69,004,926 ) ( 78,181,151 ) Total Shareholders’ Equity (Deficit) 4,197,030 ( 5,335,073 ) Total Liabilities and Shareholders’ Equity (Deficit) $ 59,447,080 $ 55,005,545 see notes to CONSOLIDATED financial statements F- 3 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 2022 and 2021 2022 2021 Revenue $ 83,335,764 $ 103,369,544 Cost of sales 67,031,502 88,364,452 Gross profit 16,304,262 15,005,092 Selling, general and administrative expenses 11,410,067 11,823,921 Income from operations 4,894,195 3,181,171 Other income (expense): Other income — 4,795,000 Interest expense ( 2,271,101 ) ( 1,141,189 ) Total other income (expense), net ( 2,271,101 ) 3,653,811 Income before provision for income taxes 2,623,094 6,834,982 Provision for (benefit from) income taxes ( 6,553,131 ) 14,609 Net income $ 9,176,225 $ 6,820,373 Income per common share: Income per common share-unrestricted shares $ 0.74 $ 0.56 Income per common share-restricted shares $ 0.74 $ 0.56 Shares used in computing income per common share: Unrestricted shares 12,286,781 11,960,134 Restricted shares 103,109 233,692 Total shares 12,389,890 12,193,826 see notes to CONSOLIDATED financial statements F- 4 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT) Years ended December 31, 2022 and 2021 Common Stock Shares Common Stock Amount Additional Paid-in Capital Accumulated Deficit Total Shareholders’ Equity (Deficit) Balance at January 1, 2021 11,951,271 $ 11,951 $ 72,005,841 $ ( 85,001,524 ) $ ( 12,983,732 ) Net income 6,820,373 6,820,373 Common stock forfeited ( 41,199 ) ( 42 ) — — ( 42 ) Stock-based compensation expense 425,611 427 827,901 — 828,328 Balance at December 31, 2021 12,335,683 12,336 72,833,742 ( 78,181,151 ) ( 5,335,073 ) Net income 9,176,225 9,176,225 Common stock forfeited ( 220,721 ) ( 221 ) — — ( 221 ) Stock-based compensation expense 391,833 392 355,707 — 356,099 Balance at December 31, 2022 12,506,795 $ 12,507 $ 73,189,449 $ ( 69,004,926 ) $ 4,197,030 see notes to CONSOLIDATED financial statements F- 5 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2022 and 2021 2022 2021 Cash flows from operating activities: Net income $ 9,176,225 $ 6,820,373 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 688,096 1,029,067 Amortization of debt issuance costs 133,997 49,642 Cash expended below (in excess of) rent expense 139,006 ( 51,925 ) Stock-based compensation expense 355,878 828,286 Deferred income taxes ( 6,574,463 ) — Bad debt expense 72,099 127,413 Forgiveness of PPP loan — ( 4,795,000 ) Changes in operating assets and liabilities: Decrease (increase) in accounts receivable 37,843 ( 132,221 ) Increase in insurance recovery receivable ( 750,000 ) ( 2,850,000 ) Increase in contract assets ( 2,925,201 ) ( 4,729,701 ) Decrease in inventory 1,535,856 2,357,363 Increase in prepaid expenses and other current assets ( 350,755 ) ( 321,422 ) Decrease in accounts payable and accrued expenses ( 1,157,019 ) ( 1,499,000 ) Increase in litigation settlement obligation 596,741 3,003,259 Increase in contract liabilities 878,960 3,472,217 Decrease in loss reserve ( 919,165 ) ( 513,533 ) Increase in income taxes payable 6,231 4,217 Net cash provided by operating activities 944,329 2,799,035 Cash flows from investing activities: Purchase of property and equipment ( 40,789 ) ( 29,188 ) Net cash used in investing activities ( 40,789 ) ( 29,188 ) Cash flows from financing activities: Proceeds from line of credit — 511,315 Principal payments on long-term debt ( 3,365,181 ) ( 3,005,833 ) Net cash used in financing activities ( 3,365,181 ) ( 2,494,518 ) Net increase (decrease) in cash ( 2,461,641 ) 275,329 Cash at beginning of year 6,308,866 6,033,537 Cash at end of year $ 3,847,225 $ 6,308,866 Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 1,792,858 $ 1,139,532 Cash paid for (received from) income taxes $ 25,291 $ 10,392 See notes to CONSOLIDATED financial statements F- 6 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. PRINCIPAL BUSINESS ACTIVITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company consists of CPI Aerostructures, Inc. (“CPI”), Welding Metallurgy, Inc. (“WMI”) and Compac Development Corporation, a wholly owned subsidiary of WMI (collectively the “Company”). CPI is a U.S. supplier of aircraft parts for fixed wing aircraft and helicopters in both the commercial and defense markets. CPI manufactures complex aerostructure assemblies, as well as aerosystems. Additionally, CPI supplies parts for maintenance, repair and overhaul (“MRO”) and kitting contracts. 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. Certain balances have been reclassified to conform to presentation requirements, including consistent presentation of the components of inventory (Note 5). Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the United States Securities and Exchange Commission (“SEC”). The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires the use of estimates by management. Actual results could differ from these estimates. Revenue Recognition The Company follows Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“ASC 606”), using the modified retrospective method. 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 over-time revenue recognition model, revenue and gross profit are recognized over the contract period as work is performed based on actual costs incurred and an estimate of costs to complete and resulting total estimated costs at completion. See Note 2, “Revenue Recognition”, for additional information regarding the Company’s revenue recognition policy. F- 7 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Government Contracts The Company’s government contracts are subject to the procurement rules and regulations of the U.S. government. Many of the contract terms are dictated by these rules and regulations. Specifically, cost-based pricing is determined under the Federal Acquisition Regulation (“FAR”), which provides guidance on the types of costs that are allowable in establishing prices for goods and services under U.S. government contracts. For example, costs such as those related to charitable contributions, advertising, interest expense, and public relations are unallowable, and therefore not recoverable through sales. During and after the fulfillment of a government contract, the Company may be audited in respect to the direct and allocated indirect costs attributable thereto. These audits may result in adjustments to the Company’s contract cost, and/or revenue. When contractual terms allow, the Company invoices its customers on a progress basis. Cash 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 these limits. As of December 31, 2022 and 2021, the Company had $ 3,763,608 and $ 6,195,672 , respectively, of uninsured balances. The Company limits its credit risk by selecting financial institutions considered to be highly credit worthy. Accounts Receivable Accounts receivable are reported at their outstanding unpaid principal balances, net of reserves. The Company calculates and maintains its accounts receivable reserves based on customer account agings as well as identification of any anticipated collectability issues by account, if applicable. The Company writes off accounts when they are deemed to be uncollectible. Inventory Inventories, which consist of raw materials, work in progress and finished goods, are reported at lower of cost or net realizable value using weighted average actual cost. Property and Equipment Property and equipment are carried at cost, net of accumulated depreciation. Depreciation is computed utilizing the straight-line method over the estimated useful life of the asset. Leasehold improvements depreciation is computed over the shorter of the lease term or estimated useful life of the asset. Additions and improvements are capitalized, while repairs and maintenance are expensed as incurred. Leases The Company leases a building and various equipment. Under ASC 842, Leases (“ASC 842”), at contract inception we determine whether the contract is or contains a lease and whether the lease should be classified as an operating or a finance lease. Operating leases are included in ROU assets and operating lease liabilities in our consolidated balance sheets. ROU assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The determination of the length of lease terms is affected by options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. The existence of significant economic incentive is the primary consideration when assessing whether the Company is reasonably certain of exercising an option in a lease. ROU assets and liabilities are recognized at commencement date and measured as the present value of lease payments to be made over the lease term. As the interest rate implicit in the lease is not readily available for most of the Company’s leases, the Company uses its estimated incremental borrowing rate in determining the present value of lease payments. The estimated incremental borrowing rate is derived from information available at the lease commencement date. The lease ROU asset recognized at commencement is adjusted for any lease payments related to initial direct costs, prepayments, and lease incentives. The ROU asset is amortized on a straight-line basis generally over the shorter of the lease term or the estimated useful life of the underlying asset and interest on the lease liability. Finance leases are treated as the purchase of an asset on a financing basis. F- 8 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS At December 31, 2022, the Company has right of use assets and lease liabilities of $ 6,526,627 and $ 6,895,046 , respectively. At December 31, 2021, the Company had right of use assets and lease liabilities of $ 7,796,768 and $ 8,026,181 , respectively. Goodwill Goodwill represents the excess of purchase price of an acquisition over the fair value of net assets acquired. Goodwill is not amortized but instead is assessed for impairment annually and when events and circumstances warrant an evaluation. The Company evaluates its goodwill on an annual basis during its fourth fiscal quarter. The Company has determined that it has a single operating and reportable segment, and assesses during its evaluation whether it believes it is more likely than not that the fair value of this reporting unit is greater than or less than its carrying amount by comparing the fair value of this reporting unit with its carrying value. If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the amount by which the carrying value exceeds the fair value is recognized as an impairment loss. The Company performed its annual impairment assessment of goodwill as of December 31, 2022 and concluded that goodwill was not impaired. Long-Lived Assets The Company reviews its long-lived assets and certain related intangibles for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable by comparing the estimated undiscounted cash flows expected to result from the use of the asset and the estimated amounts expected to be realized upon the asset’s eventual disposition with the carrying value of the asset. If the carrying amount of the asset exceeds the aforementioned estimated expected undiscounted cash flows and estimated expected disposition proceeds, the Company measures the amount of the impairment to record by comparing the carrying amount of the asset with its estimated fair value. As of December 31, 2022, the Company determined that long-lived assets were not impaired. Short-Term Debt The fair value of the Company’s short-term debt is estimated based on the current rates offered to the Company for debt of similar terms and maturities. Using this method, the fair value of the Company’s short-term debt was equal to the stated value at December 31, 2022 and 2021. Fair Value At December 31, 2022 and 2021, the fair values of the Company’s current assets and current liabilities approximated their carrying values because of the short-term nature of these instruments. 2022 2021 Carrying Amount Fair Value Carrying Amount Fair Value Debt Line of credit and long-term debt $ 22,790,747 $ 22,790,747 $ 26,155,928 $ 26,155,928 We estimated the fair value of debt using market quotes and calculations based on market rates. Income per share The Company complies with the accounting and disclosure requirements of FASB ASC Topic 260, “Earnings Per Share” and uses the two-class method in the calculation of earnings per share. Net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. During the twelve months ended December 31, 2022 and 2021, respectively, and as of December 31, 2022 and December 31, 2021, 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. F- 9 For the years ended December 31, 2022 and 2021, respectively, our income per common share was calculated as follows: Year ended December 31, 2022 Year ended December 31, 2021 Net income $ 9,176,225 $ 6,820,373 Income per common share-unrestricted shares $ 0.74 $ 0.56 Income per common share-restricted shares $ 0.74 $ 0.56 Shares used in computing income per common share: Unrestricted shares 12,286,781 11,960,134 Restricted shares 103,109 233,692 Total shares 12,389,890 12,193,826 Income taxes 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 recognizes the effect of an income tax position only if, based on its merits, the position is more likely than not to be sustained on audit by the taxing authorities. The Company’s policy is to record estimated interest and penalties related to uncertain tax positions in income tax expense. F- 10 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock-Based Compensation The Company accounts for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”). ASC 718 establishes accounting for stock-based awards exchanged for employee and nonemployees. Under the provisions of ASC 718, stock-based compensation cost is measured at the grant date, based on the fair value of the award on the grant date, and is recognized as expense over the employee’s requisite service period (generally the vesting period of the equity grant). Restricted stock awards are granted at the discretion of the Company’s board of directors. These awards are restricted as to the transfer of ownership and generally vest over the requisite service period. The Company recognizes forfeitures at the time the forfeiture occurs. Recently Issued Accounting Standards In June 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326), which require that financial assets measured at amortized cost be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the increase or decreases of expected credit losses that have taken place during the period. The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. On November 15, 2019, the FASB delayed the effective date for smaller reporting companies. The amendments in this update are now effective for fiscal years beginning after December 15, 2022 and interim periods within those annual periods. Early adoption for fiscal years beginning after December 15, 2018 is permitted. Management has evaluated the effect of this update on the Company’s consolidated financial statements and currently believes it will not have a material impact. Liquidity 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 . Our accounts receivable, net balance at December 31, 2022 decreased to $ 4,857,772 from $ 4,967,714 at December 31, 2021. At December 31, 2022, we had working capital of $ 12,896,602 compared to working capital of $ 12,175,776 at December 31, 2021. 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. F- 11 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. REVENUE RECOGNITION 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. This is known as the over time revenue recognition. Under the over 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 percentage of total estimated costs at completion of the contract. 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 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 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 typically are subject to the FAR, 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 contractors are 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. F- 12 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 table presents the Company’s revenue disaggregated by contract type and revenue recognition method: Year Ended December 31, 2022 Year Ended December 31, 2021 Aerostructure $ 36,972,117 $ 35,312,287 Aerosystems 30,795,874 31,259,852 Kitting and Supply Chain Management 15,567,773 36,797,405 Total $ 83,335,764 $ 103,369,544 Year Ended December 31, 2022 Year Ended December 31, 2021 Revenue recognized using over time revenue recognition model $ 75,911,241 $ 93,833,181 Revenue recognized using point in time revenue recognition model 7,424,523 9,536,363 Total $ 83,335,764 $ 103,369,544 F- 13 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Transaction Price Allocated to Remaining Performance Obligations As of December 31, 2022, the aggregate amount of transaction price allocated to the remaining performance obligations was approximately $ 122.1 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 December 31, 2022. 3. CONTRACT ASSETS AND LIABILITIES Contract assets represent revenue recognized on contracts in excess of amounts invoiced to the customer 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 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 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 December 31, 2022 December 31, 2021 December 31, 2020 Contract assets $ 27,384,540 $ 24,459,339 $ 19,729,638 Contract liabilities 6,001,726 5,122,766 1,650,549 Net Contract assets $ 21,382,814 $ 19,336,573 $ 18,079,089 Revenue recognized for the year ended December 31, 2022, that was included in the contract liabilities balances as of January 1, 2022 was $ 3.6 million. Revenue recognized for the year ended December 31, 2021, that was included in the contract liabilities balances as of January 1, 2021 was $ 1.6 million. 4. ACCOUNTS RECEIVABLE Accounts receivable consists of trade receivables as follows: December 31, 2022 December 31, 2021 December 31 2020 Billed receivables $ 5,139,757 $ 5,177,601 $ 5,226,468 Less: allowance for doubtful accounts ( 281,985 ) ( 209,887 ) ( 263,562 ) Total accounts receivable, net $ 4,857,772 $ 4,967,714 $ 4,962,906 F- 14 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. INVENTORY The components of inventory consist of the following: December 31, 2022 2021 Raw materials $ 1,892,157 $ 2,033,216 Work in progress 685,438 1,413,672 Finished goods (Includes completed components) 3,038,859 3,568,192 Gross inventory $ 5,616,454 $ 7,015,080 Inventory reserves ( 3,123,386 ) ( 2,986,155 ) Inventory, net $ 2,493,069 $ 4,028,925 6. PROPERTY AND EQUIPMENT The components of property and equipment consist of the following: December 31, Estimated 2022 2021 Useful Life (years) Machinery and equipment $ 3,978,662 $ 3,978,662 5 to 7 Computer equipment 4,191,040 4,191,040 5 Furniture and fixtures 709,350 709,350 7 Automobiles and trucks 13,162 13,162 5 Leasehold improvements 2,629,615 2,588,826 Lesser of lease term or 10 years Total gross property and equipment 11,521,829 11,481,040 Less accumulated depreciation and amortization ( 10,397,273 ) ( 9,834,177 ) Total property and equipment, net $ 1,124,556 $ 1,646,863 Depreciation expense for the years ended December 31, 2022 and 2021 was $ 563,096 and $ 904,067 , respectively. During the years ended December 31, 2022 and 2021, the Company did not acquire any property and equipment under finance leases. The assets acquired under finance leases as of December 31, 2022 and 2021, are as follows: December 31, 2022 2021 Machinery and equipment $ 1,114,044 $ 1,114,044 Computer equipment 527,188 527,188 Leasehold improvements 399,800 399,800 Total assets acquired under finance leases 2,041,032 2,041,032 Less accumulated depreciation and amortization ( 1,698,476 ) ( 1,439,073 ) Total assets acquired under finance leases, net $ 342,556 $ 601,959 7. INTANGIBLES AND GOODWILL The components of intangibles and goodwill consist of the following: December 31, 2022 2021 Gross Intangibles $ 500,000 $ 500,000 Less: amortization of intangibles ( 500,000 ) ( 375,000 ) Intangibles, net $ — $ 125,000 Goodwill $ 1,784,254 $ 1,784,254 F- 15 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company acquired WMI on December 20, 2018. The acquisition was accounted for as a business combination in accordance with ASC Topic 805. Accordingly, the Company recorded the fair value of the assets and liabilities assumed at the date of acquisition. As a result of the acquisition of WMI on December 30, 2018, the Company recorded Goodwill of $ 1,784,254 . Also, as a result of the acquisition, the Company recorded an intangible asset of $ 500,000 comprised of the value of the customer relationships acquired. The useful life of the intangible asset was four years representing the remaining economic life at the time of acquisition, and is fully amortized as of December 31, 2022. Amortization expense was $ 125,000 during each of the years ended December 31, 2022 and December 31, 2021. 8. LINE OF CREDIT On March 24, 2016, the Company entered into an Amended and Restated Credit Agreement with the lenders named therein and BankUnited, N.A. (“BankUnited”) as Sole Arranger, Agent and a Lender, dated as of March 24, 2016 (as amended, the “Credit Agreement” or the “BankUnited Facility”). The BankUnited Facility originally provided for a revolving credit loan commitment of $ 30 million (the “Revolving Loan”) and a $ 10 million term loan (“Term Loan”). The Revolving Loan bears interest at a rate based upon a pricing grid, as defined in the Credit Agreement. On May 11, 2021, 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. 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 ratio covenant. Additionally, under the Eighth Amendment, BankUnited waived certain covenant non-compliance and waived temporarily, late delivery of certain financial information. In connection with the Eighth Amendment, a $ 250,000 amendment fee (the “Amendment Fee”) was earned by the lenders on December 31, 2021, which the Company elected to pay in kind and accrue and capitalize rather than pay in cash. As at December 31, 2021, the Amendment Fee payable was posted by BankUnited to the Revolving Loan and on February 11, 2022, in agreement with the Company, the Amendment Fee was reclassified by BankUnited to the Term Loan. The Company has recorded this payable to its financial statements accordingly. On April 12, 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. F- 16 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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 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 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. 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. F- 17 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2022 and December 31, 2021, the Company had $ 21,000,000 and $ 21,250,000 , respectively, outstanding under the BankUnited Revolving Loan Facility. 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. $ 1,200,000 of the revolving line of credit matures and is payable by December 31, 2023 and the remaining balance of $ 19,800,000 of the revolving line of credit matures and is payable by November 30, 2024. The BankUnited Facility is secured by all of the Company’s assets. 9. DEBT As described above, in connection with the Twelfth Amendment, the Company and BankUnited agreed to amend 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 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. As described above, in connection with the Eleventh Amendment, the Company and BankUnited agreed to amend 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, in connection with the Tenth Amendment, the Company and BankUnited agreed to amend the Credit Agreement by (a) amending the maximum leverage ratio applicable for the fiscal quarter ending on September 30, 2022, and (b) consenting to and waiving certain covenant non-compliance under the Credit Agreement. Under the Tenth Amendment, there are no changes to interest rates or repayment schedule and the terms pertaining to interest rates and repayment schedule remain the same as described below as per the Ninth Amendment. The Tenth Amendment had no effect on the interest rates on the Revolving Term Loan or Term Loan. As described above, in connection with the Ninth Amendment, the Company and BankUnited agreed to extend the maturity dates of the Revolving Loan and Term Loan to September 30, 2023 , provide 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 the $ 750,000 in additional principal payments as required by the Eighth Amendment due on November 30, 2021, December 31, 2021 and March 31, 2022), as well as the $ 200,000 regular monthly principal payments paid monthly through maturity, increase 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 %, waive or consent to certain covenant non-compliance, and waive temporarily or consented to, late delivery of certain financial information and waived permanently late delivery of certain pro-forma budget information. The BankUnited Facility, as amended, requires us to maintain the financial covenants described in the preceding note. In 2022, as consideration for the lenders entering into the Ninth Amendment, the Company paid a $ 62,833 fee to the lenders. In 2021, the Company paid to BankUnited, commitment and agent fees in the amount of $ 250,000 , together with out of pocket costs, expenses, and reasonable attorney’s fees incurred by BankUnited in connection with the Eighth Amendment. The Company has cumulatively paid approximately $ 908,000 of total debt issuance costs in connection with the BankUnited Facility of which approximately $ 131,000 is included in other assets at December 31, 2022. On April 10, 2020, we entered into the Paycheck Protection Program (PPP) Loan, with BNB Bank (now part of Dime Community Bank) 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”). The PPP Loan was evidenced by the Note. Subject to the terms of the Note, the PPP Loan bore interest at a fixed rate of one percent ( 1 %) per annum, with the first six months of interest deferred, had an initial term of two years , and was unsecured and guaranteed by the Small Business Administration (“SBA”). The Note provided for customary events of default including, among other things, cross-defaults on any other loan with the Lender. The PPP Loan could have been accelerated upon the occurrence of an event of default. On November 2, 2020, the Company applied to the Lender for full forgiveness of the PPP Loan as calculated in accordance with the terms of the CARES Act, as modified by the Paycheck Protection Flexibility Act. We were notified by our lender that our application was accepted and forwarded to the SBA. All amounts have been classified as current or long term in accordance with the Note terms. F- 18 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On July 13, 2021, the Company received notification through Dime that the PPP Loan and accrued interest thereon were fully forgiven by the SBA and that the forgiveness payment date was July 1, 2021. The forgiveness of the PPP Loan was recognized as other income during the year ended December 31, 2021. 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. The maturities of the long-term debt (excluding unamortized debt issuance costs) as of December 31, 2022, are as follows: Year ending December 31, 2023 $ 1,719,766 2024 44,498 2025 26,483 Total $ 1,790,747 Included in the long-term debt are financing leases and notes payable totaling $ 207,414 and $ 422,595 at December 31, 2022 and 2021, respectively, including a current portion of $ 136,433 and $ 215,181 , respectively. 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 7.50 % as of December 31, 2022 and as such, the Company’s interest rate on the Revolving Loan and Term Loan was 11.00 % as of December 31, 2022. At December 31, 2022 and 2021, the Term Loan had an aggregate principal balance due of $ 1,583,333 and $ 4,483,333 , respectively, payable in monthly installments, as defined in the Credit Agreement. F- 19 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. LEASES 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. 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 years ended December 31, 2022 and 2021, the Company’s operating lease expense was $ 2,101,596 and $ 1,873,455 , respectively. Future minimum lease payments under non-cancellable operating leases as of December 31, 2022 were as follows: Year ending December 31, 2023 $ 2,140,254 2024 2,222,280 2025 2,276,850 2026 843,772 2027 116,724 Total undiscounted operating lease payments 7,599,880 Less imputed interest ( 704,834 ) Present value of operating lease payments $ 6,895,046 The following table sets forth the ROU assets and operating lease liabilities as of December 31, 2022 and 2021: 2022 2021 Assets ROU assets, net $ 6,526,627 $ 7,796,768 Liabilities Current operating lease liabilities $ 1,817,811 $ 1,580,453 Long-term operating lease liabilities 5,077,235 6,445,728 Total lease liabilities $ 6,895,046 $ 8,026,181 The amortization expense of these assets under operating leases was $ 1,738,989 and $ 1,717,365 for the years ended December 31, 2022 and 2021, respectively. The Company’s weighted average remaining lease term for its operating leases is 3.4 years as of December 31, 2022. The Company’s weighted average discount rate for its operating leases is 5.3 % as of December 31, 2022. F- 20 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. INCOME TAXES We account for income taxes in accordance with ASC 740 Income Taxes. ASC 740 is an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected tax consequences or events that have been recognized in our consolidated financial statements or tax returns. ASC 740 also clarifies the accounting for uncertainty in income taxes recognized in the consolidated financial statements. The interpretation prescribes a recognition threshold and measurement attribute for the consolidated financial statements recognition and measurement of a tax position taken, or expected to be taken, in a tax return. The Company files income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. The 2014 tax return was under audit by the IRS and the Company has received notification that the returns will be accepted as filed. The Company generally is no longer subject to U.S. or state examinations by tax authorities for taxable years prior to 2018. However, net operating losses utilized from prior years in subsequent years’ tax returns are subject to examination until three years after the filing of subsequent years’ tax returns. The statute of limitations expiration in foreign jurisdictions for corporate tax returns generally ranges between two and five years depending on the jurisdiction. The provision (benefit) for income taxes consists of the following: Year ended December 31, 2022 2021 Current: Federal $ — $ 1,210 State 21,332 13,399 Deferred: Federal ( 6,428,448 ) — State ( 146,015 ) — Total $ ( 6,553,131 ) $ 14,609 The difference between the income tax provision computed at the federal statutory rate and the actual tax provision (benefit) is accounted for as follows: December 31, 2022 2021 Taxes computed at the federal statutory rate $ 550,850 $ 1,435,346 State income tax, net ( 98,499 ) 10,585 Research and development tax credit ( 190,656 ) ( 198,507 ) Change in valuation allowance ( 6,616,952 ) ( 247,094 ) PPP loan forgiveness — ( 1,006,950 ) Other 51,696 ( 22,879 ) Accrued loss reserve adjustment ( 253,738 ) — Permanent differences 4,168 44,108 Provision(benefit) for income taxes $ ( 6,553,131 ) $ 14,609 The components of deferred income tax assets and liabilities are as follows: Deferred Tax Assets: 2022 2021 Allowance for doubtful accounts $ 60,100 $ 45,794 Capitalized R&D 864,969 — Credit carryforwards 2,193,146 2,005,909 Inventory reserve 1,130,788 1,137,436 Accrued payroll 267,819 88,118 Loss contracts reserve 46,205 185,329 Restricted stock 160,989 191,076 Other 20,659 20,244 Acquisition costs 77,762 86,841 Lease liability 1,469,551 1,751,168 Accrued legal 159,849 33,438 Disallowed interest expense 1,268,226 801,385 Net operating loss carryforward 19,493,530 20,140,818 Deferred tax assets 27,213,593 26,487,556 Valuation allowance ( 14,916,923 ) ( 22,235,611 ) Deferred Tax Liabilities: Prepaid expenses 207,980 136,381 Revenue recognition 3,966,404 2,144,797 Property and equipment 156,794 269,653 ROU asset 1,391,029 1,701,114 Deferred tax liabilities $ 5,722,207 $ 4,251,945 Net deferred tax assets $ 6,574,463 $ — F- 21 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES As of December 31, 2022, the Company had approximately $ 88.3 million of gross net operating loss carryforwards ("NOLs") for federal tax purposes and approximately $ 25 .0 million of post apportionment NOLs for state tax purposes. The Federal NOLs begin to expire in 2034. Losses generated in 2018 and forward of $ 15.9 million have an indefinite life and can offset up to 80 % of taxable income in the future. Federal NOLs generated prior to 2018 can offset 100 % of future taxable income. The state NOLs begin to expire in 2034. As a result of the Tax Cuts and Jobs Act of 2017 and the Coronavirus Aid, Relief, and Economic Security Act of 2020, federal NOLs arising before January 1, 2018, and NOLs arising after January 1, 2018, are subject to different rules. Our pre-2018 NOLs totaled approximately $ 78.9 million; these NOLs will expire in varying amounts from 2034 through 2039, if not utilized, and can offset 100% of future taxable income for regular tax purposes. Our NOLs arising in 2018, 2019 and 2020 can generally be carried back five years, carried forward indefinitely and can offset 100% of taxable income for tax years before January 1, 2021 and up to 80% of taxable income for tax years after December 31, 2020. Any NOLs arising on or after January 1, 2021, cannot be carried back, can generally be carried forward indefinitely and can offset up to 80% of future taxable income. The state NOLs begin to expire in 2034. Our ability to fully recognize the benefits from our NOLs is dependent upon our ability to generate sufficient income prior to their expiration. In addition, our NOL carryforwards may be limited if we experience an ownership change as defined by Section 382 of the Internal Revenue Code (“Section 382”). In general, an ownership change under Section 382 occurs if 5% shareholders increase their collective ownership of the aggregate amount of our outstanding shares by more than 50 percentage points over a relevant lookback period. The Company has completed a Section 382 analysis for the year ended December 31, 2022, and believes that no ownership change occurred during the relevant lookback period that would limit our ability to use our NOLs. The sale of additional equity securities in the future may trigger an ownership change under IRC Section 382, which could significantly limit our ability to utilize our tax benefits. The Company will recognize a tax benefit in the consolidated financial statements for an uncertain tax position only if management’s assessment is that the position is “more likely than not” (i.e., a likelihood greater than 50%) to be allowed by the tax jurisdiction based solely on the technical merits of the position. The term “tax position” refers to a position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for financial reporting purposes. Assessing the realizability of deferred tax assets requires the determination of whether it is more likely than not that some portion or all the deferred tax assets will not be realized. In assessing the need for a valuation allowance, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, loss carryback and tax-planning strategies. Generally, more weight is given to objectively verifiable evidence, such as the cumulative loss in recent years, as a significant piece of negative evidence to overcome. As of December 31, 2022, the Company achieved three years of cumulative book income, along with projections of profitability, for which management determined that there is sufficient positive evidence to conclude that it is more likely than not that a portion of the deferred tax assets will be realized. As such, $ 6.5 million of the valuation allowance has been released as of December 31, 2022, leaving a balance in the valuation allowance of $ 14.9 million as of December 31, 2022. The income tax (benefit) for the year ended December 31, 2022 was $ ( 6,553,131 ) , an effective tax (benefit) rate of ( 249.8 %) . The tax (benefit) was mostly the result of a reduction in the valuation allowance on deferred tax assets recorded by the Company during the fourth quarter of fiscal year 2022 based on management’s estimates of the likelihood and level of the future taxable income of the Company. Management makes these estimates quarterly in order to determine the appropriate level of valuation allowance to include in the Company’s financial statements at the balance sheet date. F- 22 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. STOCK-BASED COMPENSATION Stock-based compensation expense for restricted stock in the consolidated statements of operations is summarized as follows: 2022 2021 Cost of sales $ 36,794 $ 51,447 Selling, general and administrative 319,084 776,839 Total stock-based compensation expense $ 355,878 $ 828,286 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. The following table summarizes activity related to outstanding RSUs and Restricted Stock Awards for the year ended December 31, 2022: Restricted Stock Awards Weighted Average Grant Date Fair Value of Restricted Stock Awards RSUs Weighted Average Grant Date Fair Value of RSUs Non-vested – January 1, 2022 285,968 $ 4.57 — $ — Granted 202,719 $ 1.78 190,114 $ 2.21 Vested ( 37,268 ) $ 3.95 ( 190,114 ) $ 2.21 Forfeited ( 212,235 ) $ 4.55 — $ — Non-vested – December 31, 2022 239,184 $ 2.32 — $ — As of December 31, 2022, unamortized stock-based compensation costs related to restricted share arrangements was $ 213,244 . F- 23 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. EMPLOYEE BENEFIT PLAN On September 11, 1996, the Company’s board of directors instituted a defined contribution plan under Section 401(k) of the Internal Revenue Code (the “Code”). On October 1, 1998, the Company amended and standardized its plan as required by the Code. Pursuant to the amended plan, qualified employees may contribute a percentage of their pretax eligible compensation to the Plan and the Company will match a percentage of each employee’s contribution. Additionally, the Company has a profit-sharing plan covering all eligible employees. Contributions by the Company are at the discretion of management. The amount of contributions recorded by the Company during the years ended December 31, 2022 and 2021 amounted to $ 343,077 and $ 381,066 , respectively. 14. MAJOR CUSTOMERS For the year ended December 31, 2022, 35 %, 17 %, 12 % and 10 % of our revenue was generated from our four largest customers. For the year ended December 31, 2021, 32 %, 19 %, 12 % and 10 % of our revenue was generated from our four largest customers. At December 31, 2022, 38 %, 21 %, 17 %, and 13 % of accounts receivable were due from our four largest customers. At December 31, 2021, 30 %, 23 % and 18 % of accounts receivable were due from our three largest customers. At December 31, 2022, 27 %, 20 %, 16 %, and 16 % of our contract assets were related to our four largest customers. At December 31, 2021, 34 %, 16 % and 12 % of our contract assets were related to our three largest customers. 15. LEGAL PROCEEDINGS 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 registration statement and prospectus supplements issued in connection with its 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 , subject to court approval. On July 9, 2021, Plaintiff filed an unopposed motion for preliminary approval of the settlement. On November 10, 2021, a magistrate judge recommended that the court grant the motion for preliminary approval in its entirety. The Court adopted the recommendation on May 27, 2022, and entered an order granting preliminary approval of the settlement on June 7, 2022. On August 5, 2022, the Plaintiff filed an unopposed motion for final approval. The magistrate judge held a hearing on 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. 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. F- 24 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 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. The proposed settlement is subject to final approval by the court. In addition to requiring 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. The terms of the proposed settlement are set forth in the Stipulation of Settlement. 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 Lawsuit and the Shareholder Derivative Action will be covered and paid by our directors’ and officers’ insurance carrier, after satisfaction of our $ 750,000 retention. As of December 31, 2022, we have previously paid and accrued to our financial statements covered expenses totaling $ 750,000 , and have therefore met our insurance carrier’s directors’ and officers’ retention requirement, which caps the Company’s expenses pertaining to the class action suit at $ 750,000 . As of December 31, 2022, in order to reflect the amounts owed from our directors’ and officers’ insurance carrier and to the Plaintiffs, we have recorded to our balance sheet a litigation settlement obligation of $ 3,600,000 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 upon the payment of the settlement amount to the Plaintiff by our directors’ and officers’ insurance carrier. F- 25 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: April 14, 2023 CPI AEROSTRUCTURES, INC. (Registrant) By: /s/ Andrew L. Davis Andrew L. Davis Chief Financial Officer and Secretary (Principal financial and accounting officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date /s/ Terry Stinson Chairman of the Board of Directors April 14, 2023 Terry Stinson /s/Carey Bond Carey Bond Vice Chairman of the Board of Directors April 14, 2023 /s/Dorith Hakim Chief Executive Officer and April 14, 2023 Dorith Hakim President (Principal Executive Officer) /s/ Andrew L. Davis Chief Financial Officer and Secretary April 14, 2023 Andrew L. Davis (Principal Financial and Accounting Officer) /s/ Michael Faber Director April 14, 2023 Michael Faber /s/ Richard Caswell Director April 14, 2023 Richard Caswell F- 26