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 weakness 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. 25 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, 2023 because of the material weakness 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 a material weakness in its internal controls relating to the inadequate review, assessment of and reporting of the Company’s temporary differences between book and taxable income. This material weakness led to the need to restate within Note 11 “Income Taxes” of this Annual Report on Form 10-K the Company’s December 31, 2022 deferred tax assets and deferred tax liabilities balances, which had no impact to the Company’s previously reported net deferred tax asset on its December 31, 2022 Balance Sheet and no impact to the Company’s previously reported Net Income, Earnings Per Share or Cash Flow for the twelve months ended December 31, 2022. The restatement of the aforementioned balances, as well as additional details regarding the restatement adjustments, appears in Note 11 “Income Taxes” of this Annual Report on Form 10-K. The Company is in the process of remediating the aforementioned material weakness. The Company’s remediation plans currently include conducting a comprehensive review of the scope and work of its outside tax advisor, providing additional education and training in tax accounting to the its finance personnel and requiring additional review of, approval over and documentation of the work product of its tax advisor and tax accounting preparors. 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, 2023. Notwithstanding the conclusion by our management that our controls and procedures as of December 31, 2023 were not effective, as described above with respect to income tax accounting, 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 2023. 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 2024 for 2023. Changes in Internal Control Over Financial Reporting Other than as disclosed above, there were no changes in our internal control over financial reporting during the quarter ended December 31, 2023 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. During the quarter ended December 31, 2023, we implemented additional internal controls related to the reconciliation of accounts receivable that include more timely account reconciliation and transactional reviews, and strengthening oversight controls over the accounts receivable and billing function. 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, 2023. 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, 2023. 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, 2023. 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, 2023. 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, 2023. 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, 2023 and 2022 Consolidated Statements of Operations for the Years Ended December 31, 2023 and 2022 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2023 and 2022 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 and 2022 Notes to Financial Statements 26 (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 99.1 to the Company’s Registration Statement on Form S-8 filed on June 28, 2023). 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). 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). 27 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). 10.4.14 Thirteenth 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 February 21, 2024. 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). 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. 97* The Company’s Clawback Policy Relating to the Recovery of excessive Incentive-Based Compensation from Executive Officers in the Event of an Accounting Restatement. 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 28 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID: 49 ) F-2 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2023 and 2022 F-5 Consolidated Statements of Operations for the Years Ended December 31, 2023 and 2022 F-6 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2023 and 2022 F-7 Consolidated Statements of Cash Flows for the Years Ended December 31, 2023 and 2022 F-8 Notes to Consolidated Financial Statements F-9 - F-29 F- 1 Report of Independent Registered Public Accounting Firm 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, 2023 and 2022, 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, 2023 and 2022, 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. Restatement As discussed in Note 11 to the financial statements, the 2022 financial statements have been restated to correct a misstatement. 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. F- 2 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. 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 $19.9 million is net of a valuation allowance of approximately $0.6 million as of December 31, 2023. 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 future reversals of existing taxable temporary differences, projected future taxable income, loss carrybacks and tax-planning strategies 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 related to the realization of the Company’s net 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 realize a benefit from its net deferred tax assets. Revenue Recognition As described in Note 2 of the financial statements, revenue for the year ended December 31, 2023 was $86.5 million, including $82.7 million of revenue recognized using an over time revenue recognition model. As described in Note 1 of the financial statements, 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. F- 3 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. · Performed procedures to evaluate the reasonableness of the significant assumptions used to estimate contract costs to complete on a sample of contracts. /s/ RSM US LLP We have served as the Company's auditor since 2021. New York, New York April 5, 2024 F- 4 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2023 December 31, 2022 ASSETS Current Assets: Cash $ 5,094,794 $ 3,847,225 Accounts receivable, net 4,352,196 4,857,772 Insurance recovery receivable — 3,600,000 Contract assets, net 35,312,068 27,384,540 Inventory 1,436,647 2,493,069 Refundable income taxes 40,000 40,000 Prepaid expenses and other current assets 678,026 975,830 Total Current Assets 46,913,731 43,198,436 Operating lease right-of-use assets 4,740,193 6,526,627 Property and equipment, net 794,056 1,124,556 Deferred tax asset 19,938,124 6,574,463 Goodwill 1,784,254 1,784,254 Other assets 189,774 238,744 Total Assets $ 74,360,132 $ 59,447,080 LIABILITIES AND SHAREHOLDERS’ EQUITY Current Liabilities: Accounts payable $ 10,487,012 $ 8,029,996 Accrued expenses 10,275,695 7,344,590 Litigation settlement obligation — 3,600,000 Contract liabilities 5,937,629 6,001,726 Loss reserve 337,351 576,549 Current portion of line of credit 2,400,000 1,200,000 Current portion of long-term debt 44,498 1,719,766 Operating lease liabilities 1,999,058 1,817,811 Income taxes payable 30,107 11,396 Total Current Liabilities 31,511,350 30,301,834 Line of credit, net of current portion 17,640,000 19,800,000 Long-term operating lease liabilities 3,100,571 5,077,235 Long-term debt, net of current portion 26,483 70,981 Total Liabilities 52,278,404 55,250,050 Commitments and Contingencies (see note 16) Shareholders’ Equity: Common stock - $ .001 par value; authorized 50,000,000 shares, 12,771,434 and 12,506,795 shares, respectively, issued and outstanding 12,771 12,507 Additional paid-in capital 73,872,679 73,189,449 Accumulated deficit ( 51,803,722 ) ( 69,004,926 ) Total Shareholders’ Equity 22,081,728 4,197,030 Total Liabilities and Shareholders’ Equity $ 74,360,132 $ 59,447,080 see notes to CONSOLIDATED financial statements F- 5 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 2023 and 2022 2023 2022 Revenue $ 86,466,321 $ 83,335,764 Cost of sales 69,400,693 67,031,502 Gross profit 17,065,628 16,304,262 Selling, general and administrative expenses 10,758,624 11,410,067 Income from operations 6,307,004 4,894,195 Interest expense ( 2,455,214 ) ( 2,271,101 ) Income before benefit for income taxes 3,851,790 2,623,094 Benefit from income taxes ( 13,349,414 ) ( 6,553,131 ) Net income $ 17,201,204 $ 9,176,225 Income per common share-basic $ 1.40 $ 0.74 Income per common share-diluted $ 1.38 $ 0.74 Shares used in computing income per common share: Basic 12,311,219 12,389,890 Diluted 12,471,961 12,389,890 see notes to CONSOLIDATED financial statements F- 6 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Years ended December 31, 2023 and 2022 Common Stock Shares Common Stock Amount Additional Paid-in Capital Accumulated Deficit Total Shareholders’ Equity (Deficit) Balance at January 1, 2022 12,335,683 $ 12,336 $ 72,833,742 $ ( 78,181,151 ) $ ( 5,335,073 ) Net income — — — 9,176,225 9,176,225 Issuance of common stock upon settlement of restricted stock, net 171,112 171 — — 171 Stock-based compensation expense — — 355,707 — 355,707 Balance at December 31, 2022 12,506,795 12,507 73,189,449 ( 69,004,926 ) 4,197,030 Net income — — — 17,201,204 17,201,204 Issuance of common stock upon settlement of restricted stock, net 264,639 264 — — 264 Stock-based compensation expense — — 770,362 — 770,362 Shares withheld for tax withholdings — — ( 87,132 ) — ( 87,132 ) Balance at December 31, 2023 12,771,434 $ 12,771 $ 73,872,679 $ ( 51,803,722 ) $ 22,081,728 see notes to CONSOLIDATED financial statements F- 7 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2023 and 2022 2023 2022 Cash flows from operating activities: Net income $ 17,201,204 $ 9,176,225 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 470,950 688,096 Amortization of debt issuance costs 103,304 133,997 Stock-based compensation expense 770,626 355,878 Deferred income taxes ( 13,363,661 ) ( 6,574,463 ) Bad debt expense — 72,099 Changes in operating assets and liabilities: Decrease in accounts receivable 505,576 37,843 Decrease (increase) in insurance recovery receivable 3,600,000 ( 750,000 ) Increase in contract assets ( 7,927,528 ) ( 2,925,201 ) Decrease in inventory 1,056,422 1,535,856 Decrease (increase) in prepaid expenses and other current assets 297,804 ( 350,755 ) Decrease in operating right-of-use assets 1,786,434 1,270,141 Increase (decrease) in accounts payable and accrued expenses 5,107,211 ( 1,157,019 ) (Decrease) increase in litigation settlement obligation ( 3,600,000 ) 596,741 (Decrease) increase in contract liabilities ( 64,097 ) 878,960 Decrease in lease liabilities ( 1,795,417 ) ( 1,131,135 ) Decrease in loss reserve ( 239,198 ) ( 919,165 ) Increase in income taxes payable 18,711 6,231 Net cash provided by operating activities 3,928,341 944,329 Cash flows from investing activities: Purchase of property and equipment ( 140,450 ) ( 40,789 ) Net cash used in investing activities ( 140,450 ) ( 40,789 ) Cash flows from financing activities: Principal payments on line of credit ( 960,000 ) ( 250,000 ) Principal payments on long-term debt ( 1,719,766 ) ( 3,115,181 ) Proceeds from insurance financing obligation 330,482 — Repayments of insurance financing obligation ( 49,572 ) — Taxes paid related to net share settlement of equity awards ( 87,132 ) — Debt issuance costs ( 54,334 ) — Net cash used in financing activities ( 2,540,322 ) ( 3,365,181 ) Net increase (decrease) in cash 1,247,569 ( 2,461,641 ) Cash at beginning of year 3,847,225 6,308,866 Cash at end of year $ 5,094,794 $ 3,847,225 Supplemental disclosure of cash flow information: Cash paid during the year for interest $ 2,454,065 $ 1,792,858 Cash paid for income taxes $ 4,364 $ 25,291 See notes to CONSOLIDATED financial statements F- 8 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. 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”). 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. 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 model. 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. 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. F- 9 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Federal Acquisition Regulation (“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. 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. F- 10 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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.” 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 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. F- 11 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Cash The Company maintains its cash in multiple financial institutions. The balances are insured by the Federal Deposit Insurance Corporation up to the limit of $ 250,000 . From time to time, the Company’s balances may exceed these limits. As of December 31, 2023 and 2022, the Company had $ 4,943,628 and $ 3,763,608 , respectively, of uninsured balances. The Company limits its credit risk by selecting financial institutions considered to be highly credit worthy. Allowance for Credit Losses The Company maintains an allowance for credit losses on accounts receivable and contract assets. The adequacy of the allowance is assessed quarterly through consideration of factors such as age of the receivable and 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 the weighted average cost method. The Company capitalizes labor, material, subcontractor and overhead costs as work-in-process for contracts where control has not yet passed to the customer. The Company regularly reviews inventory quantities on hand, future purchase commitments with its suppliers, and the estimated usability for its inventory. If the Company’s review indicates a reduction in usability below carrying value, it reduces its net inventory to its net realizable value. 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 that extend the useful lives 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 right-of-use (“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. At December 31, 2023, the Company has right of use assets and lease liabilities of $ 4,740,193 and $ 5,099,629 , respectively. At December 31, 2022, the Company had right of use assets and lease liabilities of $ 6,526,627 and $ 6,895,046 , respectively. Finance leases are treated as the purchase of an asset on a financing basis. Assets under finance leases, which primarily represent machinery and equipment, computer equipment, and leasehold improvements, are included in property and equipment, net, with the related liabilities included in current portion of long-term debt and long-term debt on the consolidated balance sheets. 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 as of December 31 st and when events and circumstances warrant an evaluation. The Company has determined that it has a single operating and reporting unit, 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, 2023 and concluded that goodwill was not impaired. The Company assessed goodwill using qualitative factors to determine whether it was more likely than not that the fair value is less than its carrying value (step 0) and determined that no further testing was required. F- 12 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Long-Lived Assets The Company reviews its long-lived assets 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, 2023, the Company determined that long-lived assets were not impaired. Fair Value The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs. At December 31, 2023 and 2022, 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. The carrying value of the line of credit and long-term debt approximates fair value (level 2) as the interest rate is based on market quotes. Earnings per Share The Company complies with the accounting and disclosure requirements of FASB ASC Topic 260, “Earnings Per Share” and uses the treasury stock 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. Basic and diluted income per common share is computed using the weighted average number of common shares outstanding. Diluted income per common share is adjusted for the incremental shares attributed to unvested RSUs. There were 160,742 and 0 incremental shares used in the calculation of diluted income per common share for the years ended December 31, 2023 and 2022, respectively. F- 13 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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. 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. Research and Development Customer-funded research and development (“R&D”) costs are incurred pursuant to contractual arrangements requiring us to provide a product meeting certain defined performance or other specifications, such as designs, and such contractual arrangements are accounted for principally by the over time revenue recognition method. Customer-funded R&D is included in the “Revenue” and “Cost of sales” line items in our Consolidated Statements of Operations. Prior Period Reclassification Certain amounts in prior periods have been reclassified to conform with current period presentation within the Consolidated Statement of Shareholder’s Equity and the Consolidated Statements of Cash Flows. Recently Issued Accounting Standards – Adopted In 2023, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), using a modified retrospective method, which did not result in a material impact on the Company’s consolidated financial statements. Recently Issued Accounting Standards – Not Adopted In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which focuses on the rate reconciliation and income taxes paid. ASU No. 2023-09 requires a public business entity (“PBE”) to disclose, on an annual basis, a tabular rate reconciliation using both percentages and currency amounts, broken out into specified categories with certain reconciling items further broken out by nature and jurisdiction to the extent those items exceed a specified threshold. In addition, all entities are required to disclose income taxes paid, net of refunds received disaggregated by federal, state/local, and foreign and by jurisdiction if the amount is at least 5% of total income tax payments, net of refunds received. For PBEs, the new standard is effective for annual periods beginning after December 15, 2024, with early adoption permitted. An entity may apply the amendments in this ASU prospectively by providing the revised disclosures for the period ending December 31, 2025 and continuing to provide the pre-ASU disclosures for the prior periods, or may apply the amendments retrospectively by providing the revised disclosures for all period presented. We expect this ASU to only impact our disclosures with no impacts to our results of operations, cash flows, and financial condition. F- 14 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. REVENUE Disaggregation of Revenue The following table presents the Company’s revenue disaggregated by contract type and revenue recognition method: Year Ended December 31, 2023 December 31, 2022 Government subcontracts $ 69,672,602 $ 69,023,729 Prime government contracts 11,842,145 8,663,308 Commercial contracts 4,951,574 5,648,727 Total $ 86,466,321 $ 83,335,764 Year Ended December 31, 2023 December 31, 2022 Revenue recognized using over time revenue recognition model $ 82,713,436 $ 75,911,241 Revenue recognized using point in time revenue recognition model 3,752,885 7,424,523 Total $ 86,466,321 $ 83,335,764 Favorable/(Unfavorable) Adjustments to Gross Profit We review our Estimates at Completion (“EAC”) at least quarterly. Due to the nature of the work required to be performed on many of the Company’s performance obligations, the estimation of total revenue and cost at completion is complex, subject to many inputs, and requires significant judgment by management on a contract-by-contract basis. As part of this process, management reviews information including, but not limited to, any outstanding key contract matters, progress towards completion and the related program schedule, identified risks and opportunities, and the related changes in estimates of revenues and costs. The risks and opportunities relate to management’s judgment about the ability and cost to achieve the schedule, consideration of customer-directed delays or reductions in scheduled deliveries, technical requirements, customer activity levels, and related variable consideration. Management must make assumptions and estimates regarding contract revenue and costs, including estimates of labor productivity and availability, the complexity and scope of the work to be performed, the availability and cost of materials including any impact from changing costs or inflation, the length of time to complete the performance obligation, the availability and timing of funding from our customer, and overhead cost rates, among others. Changes in estimates of net sales, cost of sales, and the related impact to operating profit on contracts recognized over time are recognized on a cumulative catch-up basis, which recognizes the cumulative effect of the profit changes on current and prior periods based on a performance obligation’s percentage-of-completion in the current period. A significant change in one or more of these estimates could affect the profitability of one or more of our performance obligations. Our EAC adjustments also include the establishment of, and changes to, loss provisions for our contracts accounted for on a percentage-of-completion basis. Net EAC adjustments had the following impact on our gross profit during the years ended December 31, 2023 and 2022: Years Ended December 31, 2023 December 31, 2022 Favorable adjustments $ 2,601,615 $ 4,962,675 (Unfavorable) adjustments ( 4,052,117 ) ( 3,207,099 ) Net adjustments $ ( 1,450,502 ) $ 1,755,576 F- 15 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Favorable adjustments during the year ended December 31, 2023 included the NGC E-2D MY2 Outer Wing Panel (“OWP”) and NGC E-2D Wet Outer Wing Panel programs. Unfavorable adjustments during the year ended December 31, 2023 included the Boeing A-10 and Embraer Phenom 300 programs. Favorable adjustments during the year ended December 31, 2022 included the Raytheon NGJ Pods/AMS and Lockheed Margin F-16 Rudder Island programs. Unfavorable adjustments during the year ended December 31, 2022 included the NGC E-2D MY2 OWP and Embraer Phenom 300 programs. Transaction Price Allocated to Remaining Performance Obligations As of December 31, 2023, the aggregate amount of transaction price allocated to the remaining performance obligations was approximately $ 118.2 million. This represents the amount of revenue the Company expects to recognize in the future on contracts with unsatisfied or partially satisfied performance obligations as of December 31, 2023. 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, 2023 December 31, 2022 December 31, 2021 Contract assets $ 35,312,068 $ 27,384,540 24,459,339 Contract liabilities 5,937,629 6,001,726 5,122,766 Contract assets at December 31, 2023 increased $ 7,927,528 from December 31, 2022 due to the recognition of revenue during 2023 upon the satisfaction or partial satisfaction of performance obligations for which we had not yet billed our customers as of December 31, 2023, primarily on our T-38 Pacer Classic program, our Lockheed Martin F-16 Rudder Island program and our NGC E-2D Advanced Hawkeye OWP program. Contract liabilities decreased $ 64,097 during 2023, primarily due to revenue recognized on these performance obligations in excess of payments received. Revenue recognized for the year ended December 31, 2023, that was included in the contract liabilities balances as of January 1, 2023 was $ 3,816,336 . Revenue recognized for the year ended December 31, 2022, that was included in the contract liabilities balances as of January 1, 2022 was $ 3,598,601 . F- 16 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. ACCOUNTS RECEIVABLE Accounts receivable consists of trade receivables as follows: December 31, 2023 December 31, 2022 Billed receivables $ 4,444,504 $ 5,139,757 Less: allowance for expected credit losses ( 92,308 ) ( 281,985 ) Total accounts receivable, net $ 4,352,196 $ 4,857,772 5. INVENTORY The components of inventory consist of the following: December 31, 2023 2022 Raw materials $ 1,187,008 $ 1,892,157 Work in progress 75,795 685,438 Finished goods (Includes completed components) 1,617,077 3,038,859 Gross inventory $ 2,879,879 $ 5,616,454 Inventory reserves ( 1,443,233 ) ( 3,123,386 ) Inventory, net $ 1,436,647 $ 2,493,069 6. PROPERTY AND EQUIPMENT The components of property and equipment consist of the following: December 31, Estimated 2023 2022 Useful Life (years) Machinery and equipment $ 4,004,779 $ 3,978,662 5 to 7 Computer equipment 4,242,437 4,191,040 5 Furniture and fixtures 709,350 709,350 7 Automobiles and trucks 13,162 13,162 5 Leasehold improvements 2,692,552 2,629,615 Lesser of lease term or 10 years Total gross property and equipment 11,662,280 11,521,829 Less accumulated depreciation and amortization ( 10,868,224 ) ( 10,397,273 ) Total property and equipment, net $ 794,056 $ 1,124,556 Depreciation expense for the years ended December 31, 2023 and 2022 was $ 470,950 and $ 563,096 , respectively. F- 17 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. GOODWILL 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 . 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 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 and the Term Loan 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- 18 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On August 19, 2022, the Company 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 and on the Term Loan 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 an amendment fee provided for in the Eighth and Ninth Amendments are excluded for purposes of calculating compliance with each of the financial covenants. On February 20, 2024, the Company entered into a Thirteenth Amendment to the Credit Agreement (the “Thirteenth Amendment”). Under the Thirteenth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Company’s existing revolving line of credit to August 31, 2025 ; and (b) setting the aggregate maximum principal amount of all revolving line of credit loans to $ 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, $ 17,640,000 from October 1, 2024 through December 31, 2024, $ 16,920,000 from January 1, 2025 through March 31, 2025, $ 16,200,000 from April 1, 2025 through June 30, 2025 and $ 15,480,000 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. As of December 31, 2023 and December 31, 2022, the Company had $ 20,040,000 and $ 21,000,000 , respectively, outstanding under the BankUnited Revolving Loan Facility. $ 2,400,000 of the revolving line of credit matures and is payable by December 31, 2024 and the remaining balance of $ 17,640,000 of the revolving line of credit matures and is payable by August 31, 2025. The BankUnited Facility is secured by all of the Company’s assets. F- 19 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 and on the Term Loan 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 and on the Term Loan 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. The Company has cumulatively paid approximately $ 962,000 of total debt issuance costs in connection with the BankUnited Facility of which approximately $ 82,000 and $ 131,000 is unamortized and included in other assets at December 31, 2023 and 2022, respectively. F- 20 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The maturities of the long-term debt (excluding unamortized debt issuance costs) as of December 31, 2023, are as follows: Year ending December 31, 2024 $ 44,498 2025 26,483 Total $ 70,981 Included in the long-term debt are financing leases and notes payable totaling $ 70,981 and $ 207,414 at December 31, 2023 and 2022, respectively, including a current portion of $ 44,498 and $ 136,433 , 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 8.50 % as of December 31, 2023 and as such, the Company’s interest rate on the Revolving Loan and Term Loan was 12.00 % as of December 31, 2023. During the year ended December 31, 2023, the Term Loan was fully repaid. At December 31, 2022, the Term Loan had an aggregate principal balance due of $ 1,583,333 , payable in monthly installments, as defined in the Credit Agreement. 10. LEASES The Company leases manufacturing and office space under an agreement classified as an operating lease. On November 10, 2022, 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, 2023 and 2022, the Company’s operating lease expense was $ 2,142,338 and $ 2,101,596 , respectively. Future minimum lease payments under non-cancellable operating leases as of December 31, 2023 were as follows: Year ending December 31, 2024 $ 2,228,784 2025 2,283,354 2026 850,276 2027 111,065 2028 9,226 Total undiscounted operating lease payments 5,482,705 Less imputed interest ( 383,076 ) Present value of operating lease payments $ 5,099,629 F- 21 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table sets forth the ROU assets and operating lease liabilities as of December 31, 2023 and 2022: 2023 2022 Assets ROU assets, net $ 4,740,193 $ 6,526,627 Liabilities Current operating lease liabilities $ 1,999,058 $ 1,817,811 Long-term operating lease liabilities 3,100,571 5,077,235 Total lease liabilities $ 5,099,629 $ 6,895,046 The Company’s weighted average remaining lease term for its operating leases is 2.5 years as of December 31, 2023. The Company’s weighted average discount rate for its operating leases is 5.43 % as of December 31, 2023. 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 Company generally is no longer subject to U.S. or state examinations by tax authorities for taxable years prior to 2019. 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 (benefit) for income taxes consists of the following: Year ended December 31, 2023 2022 Current: State $ 14,248 $ 21,332 Deferred: Federal ( 12,608,425 ) ( 6,428,448 ) State ( 755,237 ) ( 146,015 ) Total $ ( 13,349,414 ) $ ( 6,553,131 ) F- 22 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The difference between the income tax provision computed at the federal statutory rate and the actual tax benefit is accounted for as follows: December 31, 2023 2022 Taxes computed at the federal statutory rate $ 808,876 $ 550,850 State income tax, net ( 585,381 ) ( 98,499 ) Research and development tax credit ( 133,089 ) ( 190,656 ) Change in valuation allowance ( 13,531,626 ) ( 6,616,952 ) Other 88,308 51,696 Accrued loss reserve adjustment — ( 253,738 ) Permanent differences 3,498 4,168 Benefit for income taxes $ ( 13,349,414 ) $ ( 6,553,131 ) The components of deferred income tax assets and liabilities are as follows at December 31: Deferred Tax Assets: 2023 2022 (As Restated) Allowance for credit losses $ 20,632 $ 60,100 Capitalized R&D 1,420,263 864,969 Credit carryforwards 2,278,642 2,193,146 Inventory reserve 350,073 722,991 Accrued payroll 151,986 267,819 Loss contracts reserve 75,402 46,205 Restricted stock 94,809 92,677 Acquisition costs 74,136 77,762 Lease liability 1,139,836 1,469,551 Accrued legal — 159,849 Disallowed interest expense 1,067,063 943,089 Net operating loss carryforward 16,356,545 17,513,901 Other 45,057 20,659 Deferred tax assets 23,074,444 24,432,718 Valuation allowance ( 569,143 ) ( 14,740,034 ) Deferred Tax Liabilities: Prepaid expenses 143,126 207,980 Revenue recognition 1,224,106 1,341,105 Property and equipment 140,449 178,107 ROU asset 1,059,496 1,391,029 Deferred tax liabilities $ 2,567,177 $ 3,118,221 Net deferred tax assets $ 19,938,124 $ 6,574,463 F- 23 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During our review of the Company’s deferred income tax positions as of December 31, 2023, we determined that the following adjustments are needed to our previously reported December 31, 2022 deferred tax assets and liabilities balances, with no impact to our net deferred tax assets, due to the inadequate review, assessment of and reporting of the Company’s temporary differences between book and taxable income. More specifically, the adjustments are required due to computational errors and incomplete analyses. Accordingly, we have restated the balances as previously reported, where needed, as follows: Deferred Tax Assets: 2022 (as Previously Reported) Restatement Adjustments 2022 (As Restated) Allowance for credit losses $ 60,100 $ — $ 60,100 Capitalized R&D 864,969 — 864,969 Credit carryforwards 2,193,146 — 2,193,146 Inventory reserve 1,130,788 ( 407,797 ) 722,991 Accrued payroll 267,819 — 267,819 Loss contracts reserve 46,205 — 46,205 Restricted stock 160,989 ( 68,312 ) 92,677 Acquisition costs 77,762 — 77,762 Lease liability 1,469,551 — 1,469,551 Accrued legal 159,849 — 159,849 Disallowed interest expense 1,268,226 ( 325,137 ) 943,089 Net operating loss carryforward 19,493,530 ( 1,979,629 ) 17,513,901 Other 20,659 — 20,659 Deferred tax assets 27,213,593 ( 2,780,875 ) 24,432,718 Valuation allowance ( 14,916,923 ) 176,889 ( 14,740,034 ) Deferred Tax Liabilities: Prepaid expenses 207,980 — 207,980 Revenue recognition 3,966,404 ( 2,625,299 ) 1,341,105 Property and equipment 156,794 21,313 178,107 ROU asset 1,391,029 — 1,391,029 Deferred tax liabilities $ 5,722,207 $ ( 2,603,986 ) $ 3,118,221 Net deferred tax assets $ 6,574,463 $ — $ 6,574,463 As of December 31, 2023, the Company had approximately $ 74.7 million of gross net operating loss carryforwards (“NOLs”) for federal tax purposes and approximately $ 17.3 million of post apportionment NOLs for state tax purposes. The Federal NOLs begin to expire in 2034. Losses generated in 2018 and forward of $ 14.4 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 $ 60.3 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 a cumulative loss in recent years, as a significant piece of negative evidence to overcome. As of December 31, 2023, the Company achieved three years of consecutive book and taxable 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, $ 14,170,891 of the valuation allowance was released during the fourth quarter of fiscal 2023, leaving a balance in the valuation allowance of $ 569,143 as of December 31, 2023. The income tax (benefit) for the year ended December 31, 2023 was $ ( 13,349,414 ) , an effective tax (benefit) rate of ( 346.6 %) . The tax (benefit) was mostly the result of the aforementioned reduction in the valuation allowance on deferred tax assets. 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- 24 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. ACCRUED EXPENSES Accrued expenses consists of the following: December 31, 2023 December 31, 2022 Accrued purchases $ 7,132,847 $ 4,153,237 Accrued payroll 1,143,913 1,285,122 Accrued insurance 855,190 837,371 Accrued interest 601,200 703,354 Accrued professional fees and other accrued expenses 542,545 365,506 Total $ 10,275,695 $ 7,344,590 13. STOCK-BASED COMPENSATION Stock-based compensation expense for restricted stock in the consolidated statements of operations is summarized as follows: 2023 2022 Cost of sales $ 65,470 $ 36,794 Selling, general and administrative 705,156 319,084 Total stock-based compensation expense $ 770,626 $ 355,878 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 following table summarizes activity related to outstanding RSUs for the year ended December 31, 2023: RSUs Weighted Average Grant Date Fair Value of RSUs Non-vested – January 1, 2023 — $ — Granted 173,718 $ 3.43 Vested ( 139,969 ) $ 3.43 Forfeited ( 33,749 ) $ 3.42 Non-vested – December 31, 2023 — $ — The Company grants shares of common stock (“Restricted Stock Awards”) to select employees. These shares have various vesting dates, ranging from vesting on the grant date to as late as four years from the date of grant. In the event that the employee’s employment is voluntarily terminated prior to certain vesting dates, portions of the shares may be forfeited. At December 31, 2023, the weighted average remaining amortization period was 2.7 years. The following table summarizes activity related to outstanding Restricted Stock Awards for the year ended December 31, 2023: Restricted Stock Awards Weighted Average Grant Date Fair Value of Restricted Stock Awards Non-vested – January 1, 2023 130,583 $ 2.37 Granted 111,447 $ 3.82 Vested ( 39,331 ) $ 3.07 Forfeited ( 35,628 ) $ 2.04 Non-vested – December 31, 2023 167,071 $ 3.25 F- 25 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company grants shares of common stock (“Performance Restricted Stock Awards” or “PRSAs”) to select officers as part of our long-term incentive program that will result in that number of PRSAs being paid out if the target performance metric is achieved. The award vesting is based on specific performance metrics related to accounts payable delinquency, debt, and net income during the performance period. The PRSAs vest at 0 % or 100 % and all three metrics must be met to vest at 100 % . The PRSAs granted under this program will vest on the fourth anniversary of the grant date, subject to the aforementioned performance criteria. At December 31, 2023, the weighted average remaining amortization period was 2.9 years. The following table summarizes activity related to outstanding PRSAs for the year ended December 31, 2023: PRSAs Weighted Average Grant Date Fair Value of PRSAs Non-vested – January 1, 2023 31,737 $ 2.65 Granted 48,050 $ 3.27 Vested ( 20,971 ) $ 2.65 Forfeited ( 10,766 ) $ 2.65 Non-vested – December 31, 2023 48,050 $ 3.27 The fair value of all RSUs, PRSAs and Restricted Stock Awards is based on the closing price of our common stock on the grant date. All RSUs, PRSAs, and Restricted Stock Awards vest and settle in common stock (on a one-for-one basis). As of December 31, 2023, unamortized stock-based compensation costs related to restricted share arrangements was $ 274,415 . In addition, our income tax liabilities for 2023 and 2022 were reduced by $ 174,617 and $ 101,497 , respectively, due to recognized tax benefits on stock-based compensation arrangements. In 2009, the Company adopted the Performance Equity Plan 2009 (the “2009 Plan”). The 2009 Plan reserved 500,000 common shares for issuance. The 2009 Plan provides for the issuance of either incentive stock options or nonqualified stock options to employees, consultants or others who provide services to the Company. The Company has 2,364 shares available for grant under the 2009 Plan as of December 31, 2023. In 2016, the Company adopted the 2016 Long Term Incentive Plan (the “2016 Plan”). The 2016 Plan reserved 600,000 common shares for issuance, provided that, no more than 200,000 common shares be granted as incentive stock options. Awards may be made or granted to employees, officers, directors and consultants in the form of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units and other stock-based awards. Any shares of common stock granted in connection with awards other than stock options and stock appreciation rights are counted against the number of shares reserved for issuance under the 2016 Plan as one and one-half shares of common stock for every one share of common stock granted in connection with such award. Any shares of common stock granted in connection with stock options and stock appreciation rights are counted against the number of shares reserved for issuance under the 2016 Plan as one share for every one share of common stock issuable upon the exercise of such stock option or stock appreciation right awarded. In the fourth quarter of 2020, the Company added 800,000 shares to the 2016 Plan, which increased the number of shares reserved for issuance under the 2016 Plan to 1,400,000 shares. In the second quarter of 2023, the Company added an additional 800,000 shares to the 2016 Plan, which increased the number of shares for reserved for issuance under the 2016 Plan to 2,200,000 shares. The Company has 619,055 shares available for grant under the 2016 Plan as of December 31, 2023. F- 26 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. 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, 2023 and 2022 amounted to $ 300,600 and $ 343,077 , respectively. 15. MAJOR CUSTOMERS For the year ended December 31, 2023, 30 %, 26 %, 13 %, and 12 % of our revenue was generated from our four largest customers. For the year ended December 31, 2022, 35 %, 17 %, 12 % and 10 % of our revenue was generated from our four largest customers. At December 31, 2023, 30 %, 17 %, 12 %, and 11 % of accounts receivable were due 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, 2023, 26 %, 23 %, 18 %, and 15 % of our contract assets were related to our four largest customers. At December 31, 2022, 27 %, 20 %, 16 %, and 16 % of our contract assets were related to our four largest customers. 16. COMMITMENTS AND CONTINGENCIES The Company may be involved in various claims, suits, assessments, investigations, and legal proceedings that arise from time to time in the ordinary course of its business. The Company accrues a liability when it is both probable a liability has been incurred and the amount of the loss can be reasonably estimated. The Company reviews these accruals at least quarterly and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant information. To the extent new information is obtained and the Company’s views on the probable outcomes of claims, suits, assessments, investigations, or legal proceedings change, changes in the Company’s accrued liabilities would be recorded in the period such determination is made. For some matters, the amount of liability is not probable or the amount cannot be reasonably estimated and, therefore, accruals have not been made. Termination of Shareholder Derivative Actions and Class Action Lawsuit Termination of Shareholder Derivative Actions In 2020 and 2021, four shareholder derivative actions were filed against certain current and former members of our board of directors and certain of our current and former officers. All four of the actions—each described in further detail below—were based on substantially the same allegations and claims – specifically, that the defendants allegedly breached their fiduciary duties and/or violated securities laws by permitting false and misleading statements to be included in the Company’s registration statement and prospectus supplements issued in connection with the Company’s October 16, 2018 securities offering and/or by permitting false and misleading statements to be made in the Company’s periodic reports filed between March 22, 2018 and February 14, 2020. The first action (captioned Moulton v. McCrosson, et.al. , No. 20-cv-02092) was filed on May 7, 2020, in the U.S. District Court for the Eastern District of New York. It purported 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 sought 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 sought declaratory, equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs. 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 purported to assert derivative claims against the individual defendants for breach of fiduciary duty and unjust enrichment and sought 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. 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 was based on the shareholder’s inspection of certain corporate books and records, purported to assert derivative claims against the individual defendants for breach of fiduciary duty and unjust enrichment, and sought 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 sought equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs. F- 27 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. The fourth action (captioned Wurst, et al. v. Bazaar, et al. , Index No. 605244/2021) was filed on March 24, 2021, in the Supreme Court of the State of New York (Suffolk County). The complaint purported to assert derivative claims against the individual defendants for breach of fiduciary duty, unjust enrichment, and waste of corporate assets, and sought 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 sought declaratory, equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs. On June 13, 2022, 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, plaintiffs in the consolidated federal action filed an unopposed motion for preliminary approval of the settlement. On February 14, 2023, the magistrate judge recommended that the court grant the motion in its entirety. On March 6, 2023, the Court granted preliminary approval of the proposed settlement. On May 17, 2023, plaintiffs in the consolidated federal action filed an unopposed motion for final approval of the settlement. The magistrate judge held a final approval hearing on June 7, 2023. On October 27, 2023, the magistrate judge recommended that the Court grant the final approval motion in its entirety. On December 11, 2023, the Court adopted that recommendation and entered orders granting final approval to the settlement and closing the case. Pursuant to the settlement agreement, after the federal court’s final approval of the settlement, the plaintiffs in the Woodyard and Wurst state-court actions voluntarily requested that those actions be dismissed. The parties to the Woodyard action filed a stipulation of dismissal on December 15, 2023, and the Court entered an order dismissing the action on December 19, 2023. The parties to the Wurst action filed a stipulation of dismissal on December 14, 2023, and the Court entered an order dismissing the action on December 18, 2023. As part of the settlement, the Company 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. The Company’s insurer paid the full amount due of $ 585,000 . Because the settlement amount was transferred to counsel for plaintiffs on May 5, 2023 from the escrow account established for this purpose, we relieved from our balance sheet, as of that date, the amounts previously owed from our directors’ and officers’ insurance carrier and to that plaintiff. Termination of 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. On May 5, 2023, the Settlement Amount was transferred to plaintiff’s counsel from the escrow account established for this purpose. F- 28 CPI AEROSTRUCTURES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 actions were covered and paid by our directors’ and officers’ insurance carrier, after satisfaction of our $ 750,000 retention. As of December 31, 2023, we had previously paid and accrued to our financial statements covered expenses totaling $ 750,000 , and had therefore met our insurance carrier’s directors’ and officers’ retention requirement, which capped the Company’s expenses pertaining to the class action suit at $ 750,000 . Because the Settlement Amount was transferred to counsel for plaintiff in the class action lawsuit on May 5, 2023, from the escrow account established for this purpose, we have relieved from our balance sheet, as of that date, the amounts previously owed from our directors’ and officers’ insurance carrier and to that plaintiff. F- 29 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 5 , 2024 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/Carey Bond Vice Chairman of the Board of Directors April 5 , 2024 Carey Bond /s/ Richard Caswell Director April 5 , 2024 Richard Caswell /s/ Andrew L. Davis Chief Financial Officer and Secretary April 5 , 2024 Andrew L. Davis (Principal Financial and Accounting Officer) /s/ Michael Faber Director April 5 , 2024 Michael Faber /s/Dorith Hakim Chief Executive Officer and President April 5 , 2024 Dorith Hakim (Principal Executive Officer) /s/ Pamela Levesque Director April 5 , 2024 Pamela Levesque /s/ Rick Rosenjack Director April 5, 2024 Rick Rosenjack /s/ Terry Stinson Chairman of the Board of Directors April 5, 2024 Terry Stinson