UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to __________

Commission File Number: 1-11398

CPI AEROSTRUCTURES, INC.

(Exact name of registrant as specified in its charter)

New York	11-2520310
(State or other jurisdiction	(IRS Employer Identification Number)
of incorporation or organization)

91 Heartland Blvd., Edgewood, NY	11717
(Address of principal executive offices)	(Zip code)

(631) 586-5200

(Registrant’s telephone number including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common stock, $0.001 par value per share	CVU	NYSE American

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer ☐	Accelerated Filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Yes ☐ No ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of April 14, 2022, the registrant had 12,441,276 shares of common stock, $.001 par value, outstanding.

INDEX

Part I - Financial Information

Item 1 – Consolidated Financial Statements (Unaudited)

Consolidated Balance Sheets as of June 30, 2021 (Unaudited) and December 31, 2020 (As Restated)		3

Consolidated Statements of Operations for the Three and Six Months ended June 30, 2021 (Unaudited) and 2020 (As Restated, Unaudited)		4

Consolidated Statements of Shareholders’ Deficit for the Six Months ended June 30, 2021 (Unaudited) and 2020 (As Restated, Unaudited)		5

Consolidated Statements of Cash Flows for the Six Months ended June 30, 2021 (Unaudited) and 2020 (As Restated, Unaudited)		6

Notes to Consolidated Financial Statements (Unaudited)		7

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

Item 3 – Quantitative and Qualitative Disclosures About Market Risk		33

Item 4 – Controls and Procedures		34

Part II - Other Information

Item 1 – Legal Proceedings		37

Item 1A – Risk Factors		38

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		39

Item 3 – Defaults Upon Senior Securities		39

Item 4 – Mine Safety Disclosures		39

Item 5 – Other Information		39

Item 6 – Exhibits		40

Signatures		41

Exhibits

Part I - Financial Information

Item 1 – Consolidated Financial Statements

CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2021 (Unaudited)			2020 (As Restated - see Note 14)

ASSETS
Current Assets:
Cash	$	2,599,993		$	6,033,537
Accounts receivable, net		7,071,228			4,962,906
Insurance recovery receivable		2,850,000			—
Contract assets		23,996,068			19,729,638
Inventory		5,281,161			6,386,288
Refundable income taxes		40,647			40,000
Prepaid expenses and other current assets		802,755			534,857
Total current assets		42,641,852			37,687,226

Operating lease right-of-use assets		3,223,540			4,075,048
Property and equipment, net		2,065,351			2,521,742
Intangibles, net		187,500			250,000
Goodwill		1,784,254			1,784,254
Other assets		166,331			191,179
Total assets	$	50,068,828		$	46,509,449

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities:
Accounts payable	$	13,548,612		$	12,092,684
Accrued expenses		4,551,239			5,937,921
Litigation settlement obligation		3,371,162			—
Contract liabilities		1,525,573			1,650,549
Loss reserve		1,664,804			2,009,247
Current portion of long-term debt		8,165,438			6,501,666
Operating lease liabilities		1,848,291			1,819,237
Income tax payable		—			948
Total current liabilities		34,675,119			30,012,252

Line of credit		21,000,000			20,738,685
Long-term operating lease liabilities		1,607,917			2,537,149
Long-term debt, net of current portion		3,345,047			6,205,095
Total liabilities		60,628,083			59,493,181

Shareholders’ Deficit:
Common stock - $.001 par value; authorized 50,000,000 shares, 12,267,930 and 11,951,271shares, respectively, issued and outstanding		12,268			11,951
Additional paid-in capital		72,574,307			72,005,841
Accumulated deficit		(83,145,830	)		(85,001,524	)
Total Shareholders’ Deficit		(10,559,255	)		(12,983,732	)
Total Liabilities and Shareholders’ Deficit	$	50,068,828		$	46,509,449

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2021		2020 (As Restated – See Note 14)			2021		2020 (As Restated – See Note 14)

Revenue	$	22,301,190	$	19,740,767		$	53,119,936	$	36,599,154
Cost of sales		18,704,588		17,924,428			44,603,246		34,629,831
Gross profit		3,596,602		1,816,339			8,516,690		1,969,323

Selling, general and administrative expenses		2,677,688		2,815,252			6,068,494		5,908,342
Income (loss) from operations		918,914		(998,913	)		2,448,196		(3,939,019	)

Interest expense		293,685		360,126			588,174		776,797
Income (loss) before provision for income taxes		625,229		(1,359,039	)		1,860,022		(4,715,816	)

Provision for income taxes		2,078		1,522			4,328		2,100
Net income (loss)	$	623,151	$	(1,360,561	)	$	1,855,694	$	(4,717,916	)

Income (loss) per common share – basic	$	0.05	$	(0.11	)	$	0.15	$	(0.40	)

Income (loss) per common share – diluted	$	0.05	$	(0.11	)	$	0.15	$	(0.40	)

Shares used in computing loss per common share:
Basic		12,188,197		11,855,404			12,086,299		11,846,260
Diluted		12,255,950		11,855,404			12,154,052		11,846,260

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT (UNAUDITED)


	Common Stock Shares			Common Stock Amount			Additional Paid-in Capital		Accumulated Deficit			Total Shareholders’ Deficit
Balance at January 1, 2020		11,818,830		$	11,819		$	71,294,629	$	(81,346,771	)	$	(10,040,323	)
Net Loss (As Restated - See Note 14)		—			—			—		(3,357,355	)		(3,357,355	)
Stock-based compensation expense		18,388			18			347,167		—			347,185
Balance at March 31, 2020 (As Restated - see Note 14)		11,837,218		$	11,837		$	71,641,796	$	(84,704,126	)	$	(13,050,493	)
Net Loss (As Restated - See Note 14)		—			—			—		(1,360,561	)		(1,360,561	)
Stock-based compensation expense		18,388			19			189,184		—			189,203
Balance at June 30, 2020 (As Restated - see Note 14)		11,855,606		$	11,856		$	71,830,980	$	(86,064,687	)	$	(14,221,851	)

Balance at January 1, 2021 (As Restated - see Note 14)		11,951,271		$	11,951		$	72,005,841	$	(85,001,524	)	$	(12,983,732	)
Net Income		—			—			—		1,232,543			1,232,543
Stock-based compensation expense		33,881			34			343,693		—			343,727
Balance at March 31, 2021		11,985,152			11,985			72,349,534		(83,768,981	)		(11,407,462	)
Net Income		—			—			—		623,151			623,151
Common stock forfeited		(41,199	)		(42	)		—		—			(42	)
Stock-based compensation expense		323,977			325			224,773		—			225,098
Balance at June 30, 2021		12,267,930		$	12,268		$	72,574,307	$	(83,145,830	)	$	(10,559,255	)

See Notes to Consolidated Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


	For the Six Months Ended June 30,
	2021			2020
				(As Restated - see Note 14)
Cash flows from operating activities:
Net income (loss)	$	1,855,694		$	(4,717,916	)
Adjustments to reconcile net income loss to net cash used in operating activities:
Depreciation and amortization		530,843			512,567
Amortization of debt issuance cost		28,107			56,055
Insurance receivable		(2,850,000	)		—
Settlement of litigation obligation		3,371,162			—
Cash expended in excess of rent expense		(48,670	)		(77,288	)
Stock-based compensation		568,783			536,388
Bad debt expense (recovery)		127,413			(73,352	)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable		(2,235,735	)		144,537
Increase in contract assets		(4,266,430	)		(285,875	)
Decrease (increase) in inventory		1,105,127			(799,600	)
Increase in prepaid expenses and other assets		(271,157	)		(142,816	)
Decrease in refundable income taxes		(647	)		437,931
Increase in accounts payable and accrued expenses		69,246			2,473,901
(Decrease) increase in contract liabilities		(124,976	)		1,433,720
Increase in income taxes payable		(948	)		—
Decrease in loss reserve		(344,443	)		(350,434	)
Net cash used in operating activities		(2,486,631	)		(852,182	)

Cash flows from investing activities:
Purchase of property and equipment		(11,952	)		(8,000	)
Net cash used in investing activities		(11,952	)		(8,000	)

Cash flows from financing activities:
Payments on long-term debt		(1,196,276	)		(1,237,726	)
Proceeds of line of credit		261,315			—
Proceeds from PPP loan					4,795,000
Net cash (used) provided by financing activities		(934,961	)		3,557,274

Net decrease (increase) in cash and restricted cash		(3,433,544	)		2,697,092
Cash at beginning of period		6,033,537			5,432,793
Cash at end of period	$	2,599,993		$	8,129,885

Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest	$	588,174		$	845,962
Income taxes	$	5,923		$	(449,749	)

See Notes to Consolidated Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. INTERIM FINANCIAL STATEMENTS

The Company consists of CPI Aerostructures, Inc. (“CPI Aero”), Welding Metallurgy, Inc. (“WMI”), a wholly owned subsidiary of CPI Aero, and Compac Development Corporation, a wholly owned subsidiary of WMI (collectively, the “Company”).

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, accompanied by disaggregated information about revenues for purposes of making operating decisions and assessing financial performance. The Company has determined that it has a single operating and reportable segment.

The consolidated financial statements of the Company as of June 30, 2021 and for the three and six months ended June 30, 2021 and 2020 (as restated) have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and notes normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to those rules and regulations. The consolidated balance sheet at December 31, 2020 (as restated) has been derived from audited consolidated financial statements, as restated (see Note 14 for more information on the effect of the restatement), but does not include all of the information and notes required by U.S. GAAP. The Company believes that the disclosures are adequate to make the information presented not misleading.

All adjustments that, in the opinion of the management, are necessary for a fair presentation for the periods presented have been reflected. Such adjustments are of a normal, recurring nature. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s comprehensive Annual Report on Form 10-K/A for the year ended December 31, 2020 (the “Comprehensive Form 10-K/A”), as restated. The results of operations for interim periods are not necessarily indicative of the operating results to be expected for the full year or any other interim period.

The Company maintains its cash in six financial institutions. The balances are insured by the Federal Deposit Insurance Corporation. From time to time, the Company’s balances may exceed insurance limits. As of June 30, 2021, the Company had $2,376,460 of uninsured balances. The Company limits its credit risk by selecting financial institutions considered to be highly creditworthy.

The Company currently has a shareholders' deficit and has experienced losses from operations and negative cash flows from operations in prior periods that collectively represent significant risk to the Company to continue to operate as a going concern. To address this risk, the Company has (i) negotiated and executed a further amendment to its Amended and Restated Credit Agreement with the lenders named therein and BankUnited N.A. as Sole Arranger, Agent and Collateral Agent (as amended from time to time, the “Credit Agreement” or the “BankUnited Facility”), effective April 12, 2022 which extended the maturity date of the credit facility to September 30, 2023, (ii) obtained and is seeking additional progress payment and advance payment customer contract funding provisions, (iii) maintained procedures to reduce investments in inventory and contract assets, (iv) remained focused on its military segment which has proven to be less susceptible to COVID-19 related impacts and (v) maintained a strong (approximately $157 million) backlog of funded orders, 98% of which are for military programs. Based upon management's assessment of the identified significant risks and the execution of the plans described above, management believes that substantial risk does not exist as to whether the Company's liquidity and debt resources will be sufficient to meet its obligations as a going concern through a year and a day from the date of this filing.

The outbreak of the COVID-19 coronavirus was declared a pandemic by the World Health Organization during our first quarter of 2020. During the latter part of our first quarter and subsequent to our quarter end, the COVID-19 pandemic grew, causing non-essential businesses to shut down and many people to observe the shelter-in-place directive from our state government. Our business and operations and the industries in which we operate have been impacted by public and private sector policies and initiatives in the United States (“U.S.”) to address the transmission of COVID-19, such as the imposition of travel restrictions and the adoption of remote work. The COVID-19 pandemic has contributed to a general slowdown in the global economy, has adversely impacted the businesses of certain of our customers and suppliers, and, if it continues for an extended period of time, it could adversely impact our results of operations and financial condition. In response to the COVID-19 impact on our business, we have been and continue to actively mitigate costs. We have also been taking actions to preserve capital and protect the long-term needs of our businesses, including negotiating progress payments with our customers and reducing discretionary spending. For more information on the current and potential impact of the COVID-19 pandemic on our business, see Risk Factors “The impact of the coronavirus (COVID-19) pandemic on our operations, supply chain, and customers has impacted and could continue to have a material adverse effect on our business, financial position, results of operations and/or cash flows” included in Part I, Item 1A of our Comprehensive Form 10-K/A.

2. REVENUE RECOGNITION

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 Company also has contracts that are considered point in time. Under the point in time revenue recognition model, revenue is recognized when control of the components has transferred to the customer; in most cases this will be based on shipping terms.

Contracts with Customers and Performance Obligations

The majority of the Company’s revenues are from long-term contracts with the U.S. government and commercial contractors. The Company accounts for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. For the Company, the contract under Accounting Standards Codification Topic 606 (“ASC 606”) is typically established upon execution of a purchase order either in accordance with a long-term customer contract or on a standalone basis.

To determine the proper revenue recognition for our contracts, we must evaluate whether two or more contracts should be combined and accounted for as a single contract, and whether the combined or single contract should be accounted for as one performance obligation or more than one performance obligation. This evaluation requires significant judgment, and the decision to combine a group of contracts or to separate a contract into multiple performance obligations could change the amount of revenue and profit recorded in a period. A performance obligation is a promise within a contract to transfer a distinct good or service to the customer in exchange for payment and is the unit of account for recognizing revenue. The Company’s performance obligations in its contracts with customers are typically the sale of each individual product contemplated in the contract or a single performance obligation representing a series of products when the contract contains multiple products that are substantially the same. The Company has elected to account for shipping performed after control over a product has transferred to a customer as fulfillment activities. When revenue is recognized in advance of incurring shipping costs, the costs related to the shipping are accrued. Shipping costs are included in costs of sales. The Company provides warranties on many of its products; however, since customers cannot purchase such warranties separately and they do not provide services beyond standard assurances, warranties are not separate performance obligations.

A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when or as the performance obligation is satisfied. For contracts with more than one performance obligation, the Company allocates the transaction price to each performance obligation based on its estimated standalone selling price. When standalone selling prices are not available, the transaction price is allocated using an expected cost plus margin approach as pricing for such contracts is typically negotiated on the basis of cost.

The contracts with the U.S. government typically are subject to the Federal Acquisition Regulation, 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 contracts is 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. 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.

Contract Estimates

Certain contracts contain forms of variable consideration, such as price discounts and performance penalties. The Company generally estimates variable consideration using the most likely amount based on an assessment of all available information (i.e., historical experience, current and forecasted performance) and only to the extent it is probable that a significant reversal of revenue recognized will not occur when the uncertainty is resolved.

In applying the cost-to-cost input method, the Company compares the actual costs incurred relative to the total estimated costs expected at completion to determine its progress towards satisfying its performance obligation and to calculate the corresponding amount of revenue to recognize. For any costs incurred that do not depict the Company’s performance in transferring control of goods or services to the customer, the Company excludes such costs from its input method measure of progress as the amounts are not reflected in the price of the contract. Costs that are inputs to the satisfaction of a performance obligation include labor, materials and subcontractors’ costs, other direct costs and an allocation of indirect costs.

Changes to the original estimates may be required during the life of the contract. Estimates are reviewed quarterly and the effect of any change in the estimated gross margin percentage for a contract is reflected in revenue in the period the change becomes known. ASC 606 involves considerable use of estimates and judgment in determining revenues, costs and profits and in assigning the amounts to accounting periods. For instance, management must make assumptions and estimates regarding labor productivity and availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation, execution by our subcontractors, the availability and timing of funding from the customer, and overhead cost rates, among other variables. The Company continually evaluates all of the factors related to the assumptions, risks and uncertainties inherent with the application of the cost-to-cost input method; however, it cannot be assured that estimates will be accurate. If estimates are not accurate, or a contract is terminated which will affect estimates at completion, the Company is required to adjust revenue in the period the change is determined.

When changes are required for the estimated total revenue on a contract, these changes are recognized on a cumulative catch-up basis in the current period. A significant change in one or more estimates could affect the profitability of one or more of our performance obligations. If estimates of total costs to be incurred exceed estimates of total consideration the Company expects to receive, a provision for the remaining loss on the contract is recorded in the period in which the loss becomes evident.

Capitalized Contract Acquisition Costs and Fulfillment Costs

Contract acquisition costs are those incremental costs that the Company incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained. The Company does not typically incur contract acquisition costs or contract fulfillment costs that are subject to capitalization in accordance with the guidance in Accounting Standards Codification Subtopic 340-40, "Other Assets and Deferred Costs—Contracts with Customers."

Disaggregation of Revenue

The following tables present the Company’s revenue disaggregated by contract type:

	Three months ended June 30,				Six months ended June 30,
	2021		2020 (As Restated – see Note 14)		2021		2020 (As Restated – see Note 14)
Aerostructures	$	8,255,406	$	7,369,845	$	16,882,354	$	16,497,321
Aerosystems		6,167,283		2,285,716		16,171,720		3,510,983
Kitting and Supply Chain Management		7,878,501		10,085,206		20,065,862		16,590,850
	$	22,301,190	$	19,740,767	$	53,119,936	$	36,599,154

Transaction Price Allocated to Remaining Performance Obligations

Our backlog represents the estimated transaction prices on performance obligations to our customers for which work remains to be performed. Backlog is converted into revenue in future periods as work is performed. As of June 30, 2021, the aggregate amount of transaction price allocated to the remaining performance obligations was approximately $157 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 June 30, 2021. The Company estimates that it will recognize approximately 32% of this amount in fiscal year 2021 and the remainder by 2025.

3. CONTRACT ASSETS AND CONTRACT LIABILITIES

Contract assets represent revenue recognized on contracts in excess of amounts invoiced to the customers 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. 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.

Revenue recognized for the periods ended June 30, 2021 and 2020 that was included in the contract liabilities balance as of January 1, 2021 and 2020, respectively, was approximately $1.5 million and $2.6 million, respectively.

4. INVENTORY

The components of inventory consisted of the following:

	June 30, 2021			December 31, 2020 (As Restated)
Raw materials	$	2,067,297		$	2,218,981
Work in progress		1,786,942			2,645,548
Finished goods (includes completed components)		4,082,575			4,251,982
Gross inventory		7,936,814			9,116,511
Inventory reserves		(2,655,653	)		(2,730,223	)
Inventory, net	$	5,281,161		$	6,386,288

5. STOCK-BASED COMPENSATION

The Company accounts for stock-based compensation based on the fair value of the stock or stock-based instrument on the date of grant. The Company recognized a net total of $225,098 and $189,203 of stock-based compensation expense for the three months ended June 30, 2021 and 2020, respectively, and a net total of $568,825 and $536,388 of stock-based compensation expense for the six months ended June 30, 2021 and 2020, respectively.

During the three and six months ended June 30, 2021, the Company granted 0 and 135,512 restricted stock units (“RSUs”), respectively, to its board of directors as partial compensation for the 2021 year, and during the three and six months ended June 30, 2020, the Company granted 0 and 73,550 RSUs, respectively, to its board of directors as partial compensation for the 2020 year. RSUs vest quarterly on a straight-line basis over a one-year period. For the three and six months ended June 30, 2021, approximately $147,902 and $432,345, respectively, of non-cash compensation expense related to the RSU grants to the board of directors are included selling, general and administrative expenses, and for the three and six months ended June 30, 2020, approximately $134,060 and $391,871, respectively, of non-cash compensation expense related to the RSU grants to the board of directors are included selling, general and administrative expenses.

During the three and six months ended June 30, 2021, the Company granted 166,428 shares of common stock to employees. In the event that any of these employees voluntarily terminates their employment prior to certain dates, portions of the shares may be forfeited. In addition, if certain Company performance criteria are not achieved, portions of these shares may be forfeited. For the three and six months ended June 30, 2021, approximately $63,653 and $112,102, respectively, of compensation expense are included in selling, general and administrative expenses and approximately $13,543 and $24,378, respectively, of compensation expense are included in cost of sales for shares of common stock granted to employees between 2016 and 2020. For the three and six months ended June 30, 2020, approximately $44,164 and $115,906, respectively, of compensation expense are included in selling, general and administrative expenses and approximately $10,979 and $28,611, respectively, of compensation expense are included in cost of sales for shares of common stock granted to employees between 2015 and 2019. During the three and six months ended June 30, 2021, 41,199 shares were forfeited.

6. FAIR VALUE

Fair Value

At June 30, 2021 and December 31, 2020, the fair values of cash, accounts receivable, accounts payable and accrued expenses approximated their carrying values because of the short-term nature of these instruments.

	June 30, 2021
	Carrying Amount		Fair Value
Debt
Short-term borrowings, PPP loan, long-term debt	$	32,510,485	$	32,510,485

	December 31, 2020
	Carrying Amount		Fair Value
Debt
Short-term borrowings and long-term debt	$	33,445,446	$	33,445,446

We estimated the fair value of debt using market quotes and calculations based on market rates.

INCOME (LOSS) PER COMMON SHARE

Basic and diluted income (loss) per common share for the three and six months ended June 30, 2021 and June 30, 2020 is computed using the weighted average number of common shares outstanding adjusted for the incremental shares attributed to outstanding options to purchase common stock, as well as unvested RSUs. Incremental shares of 67,753 were used in the calculation of diluted income per common share in the three and six months ended June 30, 2021. Incremental shares of 36,774 were not used in the calculation of diluted income per common share in the three and six months ended June 30, 2020, respectively, as the Company is in a loss position for those periods and these shares would be considered anti-dilutive.

Debt

Credit Facility

On March 24, 2016, the Company entered into the Credit Agreement. The BankUnited Facility originally provided for a revolving credit loan commitment of $30 million (the “Revolving Loan”) and a $10 million term loan (“Term Loan”). The Revolving Loan bears interest at a rate based upon a pricing grid, as defined in the Credit Agreement.

On August 24, 2020, the Company entered into a Sixth Amendment and Waiver to the Credit Agreement (the “Sixth Amendment”). Under the Sixth Amendment, the parties amended the Credit Agreement by extending the maturity date of the Revolving Loan and Term Loan to May 2, 2022 and making conforming changes to the repayment schedule of the Term Loan. The availability under the Revolving Loan was reduced by $6 million, to $24 million, and the outstanding principal amount on the Term Note was increased to approximately $7,933,000.

On May 11, 2021, the Company entered into a Waiver and Seventh Amendment (“Seventh Amendment”) to the Credit Agreement. Under the Seventh Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to July 31, 2022, and (b) amending the leverage ratio covenant for the fiscal quarters ending on and after March 31, 2021, to 4.0 to 1.0, determined at the end of each fiscal quarter for the trailing four-quarter period then ended (or, in the case of the fiscal quarter ended March 31, 2021, determined on an annualized basis for the three-quarter period then ended). Additionally, under the Seventh Amendment, BankUnited waived late delivery of certain financial information.

On October 28, 2021, the Company entered into a Waiver and Eighth Amendment (the “Eighth Amendment”) to the Credit Agreement. Under the Eighth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to December 31, 2022, (b) reducing the availability under the Revolving Loan from $24 million to $21 million while eliminating the requirement to maintain a minimum $3.0 million in a combination of Revolving Loan availability and unrestricted cash, (c) providing for the repayment of an additional $750,000 of the principal balance of the Term Loan in three installments of $250,000 on November 30, 2021, December 31, 2021 and March 31, 2022 in addition to $200,000 regular monthly principal payments through December 31, 2022, (d) amending the minimum debt service coverage ratio covenant for the fiscal quarters ending on and after June 30, 2021 to provide for a ratio of 1.5 to 1.0, and (e) amending the maximum leverage ratio covenant as follows: for the fiscal quarter ending on March 31, 2021 - 5.0 to 1.0; for the fiscal quarter ending June 30, 2021 - 4.75 to 1.0; for the fiscal quarter ended September 30, 2021 - 4.25 to 1.0 and for the fiscal quarter ended December 31, 2021 and thereafter - 4.0 to 1.0, determined at the end of each fiscal quarter for the trailing four-quarter period then ended (or, in the case of the fiscal quarter ended March 31, 2021, determined on an annualized basis for the three-quarter period then ended). Additionally, under the Eighth Amendment, BankUnited waived certain covenant non-compliance and waived temporarily, late delivery of certain financial information. In connection with the Eighth Amendment, a $250,000 amendment fee (the “Amendment Fee”) was earned by the lenders on December 31, 2021 which the Company elected to pay in kind and accrue and capitalize rather than pay in cash.

On April 12, 2022 the Company entered into a Consent, Waiver and Ninth Amendment (the “Ninth Amendment”) to the Credit Agreement. Under the Ninth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to September 30, 2023, (b) providing for the repayment of an additional $750,000 of the principal balance of the Term Loan in three installments of $250,000 on September 30, 2022, December 31, 2022 and March 31, 2023 in addition to $200,000 regular monthly principal payments through December 31, 2022 and (c) increasing the interest on the Revolving Loan, Term Loan, and the Amendment Fee as follows: through June 30, 2022, Prime Rate (as defined in the Credit Agreement) plus 2.5%; from July 1, 2022 through August 31, 2022, Prime Rate plus 5%; from September 1, 2022 through October 31, 2022, Prime Rate plus 6%; from November 1, 2022 through December 31, 2022, Prime Rate plus 7%; and from January 1, 2023 through September 30, 2023, Prime Rate plus 8%. Additionally, under the Ninth Amendment, the Credit Agreement financial covenants were amended as set forth in the following paragraph. 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.

The Credit Agreement, as amended, requires us to maintain the following financial covenants: (a) minimum debt service coverage ratio of no less than 1.5 to 1.0 for the trailing four quarter period ended June 30, 2021 and December 31, 2021, 0.90 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 4.75 to 1.0 for the trailing four quarter period ended June 30, 2021, 5.35 to 1.0 for the trailing four quarter period ended September 30, 2021, 4.65 to 1.0 for the trailing four quarter period ended December 31, 2021, 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, and 4.0 to 1.0 for the trailing four quarter period ended September 30, 2022 and for the trailing four quarter periods thereafter; (c) minimum net income after taxes as of the end of each fiscal quarter being no less than $1.00 commencing June 30, 2022; and (d) a minimum adjusted EBITDA at the end of each quarter of no less than $1.0 million (waived for the quarter ended March 31, 2022). The additional principal payments, increase in interest and the Amendment Fee provided for in the Eight Amendment and Ninth Amendment are excluded for purposes of calculating compliance with each of the financial covenants.

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 + 0.75% as of June 30, 2021.

As of June 30, 2021 the Company had $21,000,000 million outstanding under the Revolving Loan.

The Term Loan, as amended by the Ninth Amendment, had an aggregate principal amount of $6,183,333, payable in monthly installments, as defined in the Credit Agreement, as of June 30, 2021.

PPP Loan

On April 10, 2020, we entered into the Paycheck Protection Program loan (“PPP Loan”), with BNB Bank (now part of Dime Community Bank (“Dime”)) as the lender, in an aggregate principal amount of $4,795,000, pursuant to the Paycheck Protection Program under the CARES Act. On November 2, 2020, the Company applied to the lender for full forgiveness of the PPP Loan as calculated in accordance with the terms of the CARES Act, as modified by the Paycheck Protection Flexibility Act. On July 13, 2021, the Company received notification through Dime that the PPP Loan and accrued interest thereon have been fully forgiven by the Small Business Association and that the forgiveness payment date was July 1, 2021. The forgiveness of the PPP Loan will be recognized during the Company’s third fiscal quarter ending September 30, 2021. The PPP Loan was evidenced by a promissory note (the “Note”) and, subject to the terms of the Note, the PPP Loan had a fixed interest rate interest of one percent (1%) per annum, with the first six months of interest deferred and had an initial term of two years. The SBA reserves the right to audit any PPP Loan, for eligibility and other criteria, regardless of size. These audits may occur after forgiveness has been granted. In accordance with the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), all borrowers are required to maintain their PPP loan documentation for six years after the PPP Loan was forgiven and to provide that documentation to the SBA upon request. All amounts are classified as current or long term in accordance with the Note terms.

Long Term Debt Maturities

The maturities of long-term debt (excluding unamortized debt issuance costs) are as follows:

Twelve months ending June 30,
2022	$	8,165,438
2023		3,215,725
2024		87,838
2025		30,663
2026		10,821
Total	$	11,510,485

Included in the long-term debt are financing leases and other notes payable of $532,152 and $678,428 at June 30, 2021 and December 31, 2020, respectively, including a current portion of $220,440 and $255,833, respectively.

The Company has cumulatively paid approximately $595,540 of total debt issuance costs in connection with the BankUnited Facility, of which approximately $58,251 is included in other assets at June 30, 2021.

9. MAJOR CUSTOMERS

During the six months ended June 30, 2021, the Company’s two largest customers accounted for 35%, and 23% of revenue. During the six months ended June 30, 2020, the Company’s two largest customers accounted for 39% and 10% of revenue.

At June 30, 2021, 52%, 12%, and 15% of contract assets were from the Company’s three largest customers. At December 31, 2020, 39%, 20%, 12%, and 9% of contract assets were from the Company’s four largest customers.

At June 30, 2021, 33% of our accounts receivable was from the Company’s largest customer. At December 31, 2020, 29%, 24%, 15%, and 13% of accounts receivable were from the Company’s four largest customers.

10. LEASES

The Company leases a building and equipment. Under Accounting Standards Codification Topic 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 financing lease. Operating leases are included in ROU (right-of-use) assets and operating lease liabilities in our consolidated balance sheets.

The Company leases manufacturing and office space under an agreement classified as an operating lease.

The lease agreement, as amended, expires on April 30, 2026 and 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 three and six months ended June 30, 2021, the Company’s operating lease expense was $466,869 and $933,738, respectively.

Future minimum lease payments under non-cancellable operating leases as of June 30, 2021 were as follows:

Twelve months ending June 30,
2022	$	1,955,780
2023		1,624,477
2024		13,128
2025		1,784
Total undiscounted operating lease payments		3,595,169
Less imputed interest (between 4.0% - 6.0%)		(138,961	)
Present value of operating lease payments	$	3,456,208

The following table sets forth the ROU assets and operating lease liabilities as of June 30, 2021:

Assets
ROU assets-net	$	3,223,540

Liabilities
Current operating lease liabilities	$	1,848,291
Long-term operating lease liabilities		1,607,917
Total ROU liabilities	$	3,456,208

The Company’s weighted average remaining lease term for its operating leases is 1.8 years.

11. 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’s policy is to record estimated interest and penalties related to uncertain tax positions in income tax expense.

The provision for income tax for the six months ended June 30, 2021 and 2020 was 4,328 and 2,100 respectively. The provision for income tax for the three months ended June 30, 2021 and 2020 was 2,078 and 1,522 respectively.

12. COMMITMENTS AND CONTINGENCIES

Class Action Lawsuit

As previously disclosed, a consolidated class action lawsuit (captioned Rodriguez v. CPI Aerostructures, Inc., et al., No. 20-cv-01026) has been filed against the Company, Douglas McCrosson, the Company’s former Chief Executive Officer, Vincent Palazzolo, the Company’s former Chief Financial Officer, and the two underwriters of the Company’s October 16, 2018 offering of common stock, Canaccord Genuity LLC and B. Riley FBR. The Amended Complaint in the action asserts claims on behalf of two plaintiff classes: (i) purchasers of the Company’s common stock issued pursuant to and/or traceable to the

SEC Form 10-Q filed by CPI Aerostructures Inc.