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 November 10, 2022 which extended the maturity date of the credit facility to November 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 and (iv) remained focused on its military segment and maintained a strong (approximately $118 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.  

Our business and operations and the industries in which we operate have been impacted by public and private sector policies and initiatives in the 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 could adversely impact our results of operations and financial condition. In response to the COVID-19 impact on our business, we have 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 included in Part I, Item 1A of our Form 10-K.

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. This is known as the over time revenue recognition. Under the over time revenue recognition model, revenue and gross profit are recognized over the contract period as work is performed based on actual costs incurred and an estimateas a percentage of costs to complete and resulting total estimated costs at completion.completion of the contract.

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

Contracts with Customers and Performance Obligations

The majority of the Company’s revenues are from long-term contracts with the U.S. government as well military 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 and military contractors 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. 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; in most cases this will be based on shipping terms.customer.

Contract Estimates

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

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

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

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

Capitalized Contract Acquisition Costs and Fulfillment Costs

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

Disaggregation of Revenue

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

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 September 30, 2022,March 31, 2023, the aggregate amount of transaction price allocated to the remaining performance obligations was approximately $118113.3 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 September 30, 2022.March 31, 2023. The Company estimates that it will recognizemajority of the Company’s performance obligations have an average duration up to approximately 21four years% of this amount in fiscal year 2022 and the remainder by 2030. .

Contract assets represent revenue recognized on contracts in excess of amounts invoiced to the customers and the where 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 as well as military contractor 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 and military contractor contracts therefore typically result in revenue recognized in excess of billings, which we present as contract assets. Contract assets are classified as current.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.current liabilities.

Schedule of contract assets and liabilities

Revenue recognized for the periodsthree months ended September 30,March 31, 2023 and 2022 and 2021 that was included in the contract liabilities balance as of January 1, 20222023 and 2021,2022, respectively, was approximately $3.61.5 million and $1.62.5 million, respectively.

The components of inventory consisted of the following:

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 $84,978 and $154,649 of stock-basedStock-based compensation expense for restricted stock in the three months ended September 30, 2022 and 2021, respectively, and a net totalconsolidated statements of $operations is summarized as follows:

248,359 and $723,474 of stock- based compensation expense for the nine months ended September 30, 2022 and 2021, respectively.

During the three and nine months ended September 30, 2022, theThe Company granted 0 and 190,114grants restricted stock units (“RSUs”), respectively, to its board of directors as partial compensation for the 2022 year, and during the three and nine months ended September 30, 2021, the Company granted 0 and 135,512 RSUs, respectively, to its board of directors as partial compensation for the 2021 year.compensation. These RSUs vest quarterly on a straight-line basis over a one-year period. For the three and nine months ended September 30, 2022, $61,272 and $393,891, 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 nine months ended September 30, 2021, $79,638 and $511,983, respectively, of non-cash compensation expense related to the RSU grants to the board of directors are included in selling, general and administrative expenses.

During the three and nine months ended September 30, 2022, theThe Company granted 0 and 18,588grants shares of common stock (“Restricted Stock”Stock Awards”) to select employees. In the event that thisthe employee’s employment is voluntarily terminated prior to certain vesting dates, portions of the shares may be forfeited. For the three and nine months ended September 30, 2022, $In addition, if certain Company performance criteria are not achieved, portions of these shares may be forfeited. 17,23585,748 and $(172,009), respectively, of compensation expense are included in selling, general and administrative expenses, which includes forfeituresshares were forfeited during the three months ended March 31, 2022, of 171,495 shares totaling ($263,148) of credit. Forresulting in a reduction to stock-based compensation expense for the three and nine months ended September 30,March 31, 2022 $6,471 and $26,477, respectively, of compensation expense are included in cost of sales for shares of common stock granted to employees between 2018 and 2022. For the three and nine months ended September 30, 2021, $61,434 and $173,536, respectively, of compensation expense are included in selling, general and administrative expensesexpense of $263,148.

The following table summarizes activity related to outstanding RSUs and $13,577 and $37,955, respectively, of compensation expense are included in cost of salesRestricted Stock Awards for shares of common stock granted to employees between 2016 and 2020. During the three and nine months ended September 30, 2021, 41,199March 31, 2023: shares were forfeited.

As of March 31, 2023, unamortized stock-based compensation costs related to restricted share arrangements was $313,582.

Fair Value

At September 30, 2022March 31, 2023 and December 31, 2021,2022, the fair values of cash, accounts receivable and accounts payable approximated their carrying values because of the short-term nature of these instruments.

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

The Company complies with the accounting and disclosure requirements of FASB ASC Topic 260, “Earnings Per Share” and uses the two-class method in the calculation of earnings per share. Net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. During the three months ended March 31, 2023 and 2022, respectively, and as of March 31, 2023 and 2022, respectively, the Company had restricted shares of common stock that were considered participating securities and unrestricted shares of common stock outstanding. Earnings and losses are shared pro rata.

Basic and diluted income (loss) per common share for the three and six months ended September 30, 2022 and 2021 is computed using the weighted average number of common shares outstandingoutstanding. Diluted income (loss) per common share is adjusted for the incremental shares attributed to outstanding options to purchase common stock, as well as unvested RSUs. Incremental shares of 47,53187,890 were used in the calculation of diluted income per common share infor the three and nine months ended September 30, 2022.March 31, 2023. Incremental shares of 33,876142,587 were not used in the calculation of diluted income per common share infor the three and nine months ended September 30, 2021. March 31, 2022, as the Company was in a loss position for the three months ended March 31, 2022 and these shares would be considered anti-dilutive.

For the three months ended March 31, 2023 and 2022, respectively, our income (loss) per common share was calculated as follows:

Credit Facility

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

On May 11, 2021,March 23, 2023, the Company entered into the Seventha Twelfth Amendment to the Credit Agreement (the “Seventh“Twelfth Amendment”). Under the SeventhTwelfth Amendment, the parties amended the Credit Agreement by : (a) extending the maturity date of the Revolving LoanCompany’s existing revolving line of credit and the Term Loanits 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 31, 2022,1, 2024 through September 30, 2024, and (b) amending the leverage ratio covenant. Additionally, under the Seventh Amendment, BankUnited waived late delivery of certain financial information.

On$17,640,000 from October 28, 2021,1, 2024 and thereafter, and for payments to be made by the Company entered intoto comply therewith (if any such payments are necessary), on the first day of each such period; and (c) payment of a Waiver and$250,000 capitalized fee incurred in connection with the Eighth Amendment to the Credit Agreement, (the “Eighth Amendment”). 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, (e) amending the maximum leverage ratio covenant. Additionally, under the Eighth Amendment, BankUnited waived certain covenant non-compliance and waived temporarily, late delivery of certain financial information. In connection with the Eighth Amendment, a $250,000 amendment fee (the “Amendment Fee”) was earned by the lenders on December 31, 2021 which the Company elected to pay in kind and accrue and capitalize rather than pay in cash. As at December 31, 2021, the Amendment Fee payable was posted by BankUnited to the Revolving Loan and on February 11, 2022, in agreement with the Company, the Amendment Fee was reclassified by BankUnited to the Term Loan. The Company has recorded this payable to its financial statements accordingly.

On April 12, 2022 the Company entered into a Consent, Wavier and Ninth Amendmenton October 28, 2021 (the “Eighth Amendment”) in two installments, the first installment to be paid on June 1, 2023 in the Credit Agreement (the “Ninth Amendment”). Under the Ninth Amendment, the parties amended the Credit Agreement by (a) extending the maturity dateamount of the Revolving Loan$116,667 and the Term Loansecond installment to September 30,be paid July 1, 2023, (b) providing for in the repayment of an additional $750,000 of the principal balance of the Term Loan in three installmentsamount of $250,000133,333 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, together with all unpaid interest on the Revolving Loan, Term Loan, and the Amendment Fee as follows: through June 30, 2022, Prime Rate (as defined in the Credit Agreement) plus 2.5%; from July 1, 2022 through August 31, 2022, Prime Rate plus 5%; from September 1, 2022 through October 31, 2022, Prime Rate plus 6%; from November 1, 2022 through December 31, 2022, Prime Rate plus 7%; and from January 1, 2023 through September 30, 2023, Prime Rate plus 8%. Additionally, under the Ninth Amendment, the Credit Agreement financial covenants were amended. BankUnited also waived or consented to certain covenant non-compliance, waived temporarily or consented to, late delivery of certain financial information and waived permanently late delivery of certain pro-forma budget information.

On August 19, 2022, the Company entered into a Consent, Waiver and Tenth Amendment to the Credit Agreement (the “Tenth Amendment”). 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, (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) $566,024.81 of losses incurred and reserves taken under the Borrower’s welded product contracts, and (ii) $367,044.51 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 $795,997.06 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 onat the term loan of $250,000 on each of December 31, 2022 and March 31, 2023) and (c) decreasing the interest rate on the Revolving Loan, the Term Loan and the Amendment Fee to the Prime Rate plus 3.5capitalized fee through each such date.% effective as of November 1, 2022.

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, and 5.0 to 1.0 for the trailing four quarter period ended September 30, 2022 and 4.0 to 1.0 for the trailing four quarter periods thereafter; (c) minimum net income after taxes as of the end of each fiscal quarter being no less than $1.00 commencing June 30, 2022; and (d) a minimum adjusted EBITDA at the end of each quarter of no less than $1.0 million (waived for the quarter ended March 31, 2022). The additional principal payments, increase in interest and the Amendment Fee provided for in the Eight Amendment and Ninth Amendment to the Credit Agreement, which the Company entered into on April 12, 2022 (the “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 borebear interest at the rate of 12.25% (the Prime Rate of 6.25% + 6.003.50%). The Prime Rate was 8.00% as of September 30, 2022.March 31, 2023 and as such, the Company’s interest rate on the Revolving Loan and Term Loan was 11.50% as of March 31, 2023.

As of September 30,March 31, 2023 and December 31, 2022, the Company had $21,000,000 million outstanding under the Revolving Loan. $1,920,000 of the Revolving Loan as compared tois payable by March 31, 2024 and the remaining balance of $21,250,00019,080,000 as of December 31, 2021.the revolving line of credit matures and is payable by November 30, 2024.

The Term Loan as amended by the Eleventh Amendment, had an aggregate principal amount of $2,433,333983,333, payable in monthly installments, as defined in the agreement, as of September 30, 2022March 31, 2023 as compared to an aggregate principal amount outstanding as of December 31, 20212022 of $4,483,3331,583,333.

There is currently no availability for borrowings under the Revolving Loan and the Company finances its operations from internally generated cash flow.

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 Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). The PPP Loan was evidenced by a promissory note (the “Note”). Subject to the terms of the Note, the PPP Loan bore interest at a fixed rate of one percent (1%) per annum, with the first six months of interest deferred, had an initial term of two years, and was unsecured and guaranteed by the Small Business Administration (“SBA”). The Note provided for customary events of default including, among other things, cross-defaults on any other loan with the lender. The PPP Loan could have been accelerated upon the occurrence of an event of default. 

On November 2, 2020, the Company applied to the lender for full forgiveness of the PPP Loan as calculated in accordance with the terms of the CARES Act, as modified by the Paycheck Protection Flexibility Act. All amounts have been classified as current or long term in accordance with the Note terms.

On July 13, 2021, the Company received notification through Dime that the PPP Loan and accrued interest thereon had been fully forgiven by the SBA and that the forgiveness payment date was July 1, 2021. The forgiveness of the PPP Loan was recognized as other income during the Company’s third fiscal quarter ending September 30, 2021. The SBA reserves the right to audit any PPP Loan, for eligibility and other criteria, regardless of size. These audits may occur after forgiveness has been granted. In accordance with the CARES Act, all borrowers are required to maintain their PPP loan documentation for six years after the PPP Loan was forgiven and to provide that documentation to the SBA upon request.

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

Included in the long-term debt are financing leases and other notes payable of $258,970163,254 and $422,595207,414 at September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively, including a current portion of $158,594114,508 and $215,181136,433, respectively.

The Company has cumulatively paid approximately $908,000962,000 of total debt issuance costs in connection with the BankUnited Facility, of which approximately $174,219119,000 is included in other assets at September 30, 2022.March 31, 2023.

During the ninethree months ended September 30,March 31, 2023, our two largest customers accounted for 36% and 28% of revenue. During the three months ended March 31, 2022, the Company’sour three largest customers accounted for 3839%, 1417% and 12% of revenue. During the nine months ended September 30, 2021, the Company’s four largest customers accounted for

34

At March 31, 2023, 25%, 21%,11% and 10% of revenue.

At September 30, 2022, 3417%, 2217%, 10% and 1015% of our contract assets were from four of our largest customers. At December 31, 2021,2022, 3427%, 20%, 16%, and 1216% of our contract assets were from three ofrelated to our four largest customers.

At September 30, 2022,March 31, 2023, 27%, 1729%, 16%, 14%, 12% and 1211% of our accounts receivable were from our five largest customers. At December 31, 2021,2022, 3038%, 2321%, 17%, and 1813% of accounts receivable were due from our threefour largest customers.

The Company leases a building and equipment. Under 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 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.

On November 10, 2021, the Company executed the second amendment to the lease agreement for its manufacturing and office space, which extends the lease agreement’s expiration date to April 30, 2026. The lease agreement 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 nine months ended September 30,March 31, 2023 and 2022, the Company’s operating lease expense was $529,004546,082 and $1,579,879534,991, respectively.

Future minimum lease payments under non-cancellable operating leases as of September 30, 2022March 31, 2023 were as follows:

The following table sets forth the ROU assets and operating lease liabilities as of September 30, 2022:of:

The amortization expense of these assets under operating leases was $455,392 and $435,968 for the three months ended March 31, 2023 and 2022, respectively.

The Company’s weighted average remaining lease term for its operating leases is 3.63.2 years. years as of March 31, 2023. The Company’s weighted average discount rate for its operating leases is 5.4% as of March 31, 2023.

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 three months ended September 30,March 31, 2023 and 2022 and 2021 was $3,750199,257 and $3,3741,275, respectively. The increase in the provision for income tax is the result of the Company’s valuation allowance on its deferred tax asset being partially released at December 31, 2022, resulting in the change in the deferred asset for the ninethree months ended September 30,ending March 31, 2023 being recorded through the Company’s statement of operations for the three months ending March 31, 2023. For the three months ending March 31, 2022 and 2021the company’s deferred tax assets were fully offset by the valuation allowance, therefore there was $11,250only minimum state tax income expense recorded to the Company’s statement of operations during the three months ending March 31, 2022. and $7,702, respectively.

The effective income tax rate for the three months ended March 31, 2023 is 16.8%. The difference between the effective income tax rate for the three months ended March 31, 2023 and the statutory income tax rate of 21% for the three months ended March 31, 2023 is due to the estimated R&D credit, state income taxes and permanent tax differences.

The difference between the Company’s statutory tax rate and its effective rate is due to the valuation allowance taken on the Company’s net operating loss carryforwards.R&D credit and permanent tax differences.

Class Action Lawsuit

As previously disclosed, aA consolidated class action lawsuit (captioned Rodriguez v. CPI Aerostructures, Inc., et al., No. 20-cv-00982) has been20-cv-01026) was filed in the U.S. District Court for the Eastern District of New York against the Company, Douglas McCrosson;McCrosson, the Company’s former Chief Executive Officer;Officer, Vincent Palazzolo, the Company’s former Chief Financial Officer;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 assertsasserted 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 allegesalleged that the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended (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 allegesalleged 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 seekssought 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 (the “Settlement Amount”), 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 Courtcourt grant the motion for preliminary approval in its entirety. The Courtcourt 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, and is now deciding whether to recommend2022. On February 16, 2023, the magistrate judge recommended that the Court grant the final approval ofmotion in its entirety. The Court adopted that recommendation in its entirety on March 10, 2023, and terminated the settlement. As of September 30, 2022, we have previously paid and accrued to our financial statements covered expenses totaling $750,000, and have therefore met our insurance carrier’s directors’ and officers’ retention requirement, which capscase on March 13, 2023. On May 5, 2023, the Company’s expenses pertainingSettlement Amount was transferred to the class action suit.

At September 30, 2022, in order to reflect the amounts owed from our directors’ and officers’ insurance carrier and to the Plaintiffs, we have recorded to our balance sheet a litigation settlement obligation of $3,600,000 and an insurance recovery receivable of $3,600,000 to reflect the liability owed by the Company to the Plaintiffs as well as the amount receivable owingPlaintiff from the Company’s insurance carrier to the Company with respect to the settlement obligation.escrow account established for this purpose.

Shareholder Derivative Action

Four shareholder derivative actions, each based on substantially the same facts as those alleged in the class action discussed above, have been filed against current members of our board of directors and certain of our current and former directors and officers.

The first action (captioned Moulton v. McCrosson, et.al., No. 20-cv-02092) was filed in the United StatesU.S. District Court for the Eastern District of New York. It purports to assert derivative claims against the individual defendants for violations of Section 10(b) and 21D of the Exchange Act, breach of fiduciary duty, and unjust enrichment and seeks to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct. The complaint also seeks declaratory, equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs. On October 26, 2020, the plaintiff filed an amended complaint. On January 27, 2021, the Courtcourt stayed the action pursuant to a joint stipulation filed by the parties.

The second action (captioned Woodyard v. McCrosson, et al., Index No. 613169/2020) was filed on September 17, 2020, in the Supreme Court of the State of New York (Suffolk County). It purports to assert derivative claims against the individual defendants for breach of fiduciary duty and unjust enrichment, and seeks to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct, along with declaratory, equitable, injunctive and monetary relief, as well as attorneys’ fees and other costs. On December 22, 2020, the parties filed a joint stipulation staying the action pending further developments in the class action.

The third action (captioned Berger v. McCrosson, et al., No. 1:20-cv-05454) was filed on November 10, 2020, in the United StatesU.S. District Court for the Eastern District of New York. The complaint, which is based in part on the shareholder’s inspection of certain corporate books and records, purports to assert derivative claims against the individual defendants for breach of fiduciary duty and unjust enrichment, and seeks to implement reforms to the Company’s corporate governance and internal procedures and to recover on behalf of the Company an unspecified amount of monetary damages. The complaint also seeks equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs.

On March 19, 2021, the parties to the Moulton and Berger actions filed a joint stipulation consolidating the actions (under the caption In re CPI Aerostructures Stockholder Derivative Litigation, No. 20-cv-02092) and staying the consolidated action pending further developments in the class action.

The fourth action (captioned Wurst v. Bazaar, et al., Index No. 605244/2021) was filed on March 24, 2021, in the Supreme Court of the State of New York (Suffolk County). The complaint purports to assert derivative claims against the individual defendants for breach of fiduciary duty, unjust enrichment, and waste of corporate assets, and seeks to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct. The complaint also seeks declaratory, equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs. On April 12, 2021, the parties filed a joint stipulation staying the action pending further developments in the class action.

On June 13, 2022, the plaintiffs in the consolidated federal action informed the Courtcourt that the Company (as nominal defendant) and all individual defendants had reached an agreement in principle with all plaintiffs to settle the four shareholder derivative lawsuits described above. On June 16, 2022, the plaintiffs in the consolidated federal action filed an unopposed motion for preliminary approval of the settlement. On July 22, 2022, the Courtcourt referred the motion to the magistrate judge; the motion remains pending.judge. The magistrate judge held a conference on September 9, 2022 in the consolidated federal action. On February 14, 2023, the magistrate judge recommended that the court grant the motion in its entirety.

On March 6, 2023, the court granted preliminary approval of the proposed settlement. The proposed settlement is subject to final approval by the court. In addition to requiring final approval by the court, the proposed settlement is subject to certain conditions, including the filing with the SEC of the stipulation of settlement agreed to by the Company and plaintiff (the “Stipulation of Settlement”), and sending notice to potential class members. The terms of the proposed settlement are set forth in the Stipulation of Settlement. Should the proposed settlement receive final approval from the Court, approval and, if approved,it will result in the dismissal of the shareholder derivative lawsuits. As part of the proposed settlement, the Company has agreed to undertake (or confirm that it has undertaken already) certain corporate governance reforms andreforms. In addition, the Company and/or its insurer have agreed to pay a total of $585,000 in attorneys’ fees to plaintiffs’ counsel.

Litigation Settlement Obligation and Insurance Recovery Receivable Pertaining to the Class Action Lawsuit and Shareholder Derivative Action

The attorneys’ fees for both the Class Action Lawsuit and the Shareholder Derivative Action will be covered and paid by our directors’ and officers’ insurance carrier, after satisfaction of our $750,000 retention. As of March 31, 2023, we have previously paid and accrued to our financial statements covered expenses totaling $750,000, and have therefore met our insurance carrier’s directors’ and officers’ retention requirement, which caps the Company’s expenses pertaining to the class action suit at $750,000. As of March 31, 2023, in order to reflect the amounts owed from our directors’ and officers’ insurance carrier and to the Plaintiffs, we have recorded to our balance sheet a litigation settlement obligation of $3,600,000 and an insurance recovery receivable of $3,600,000 owing from the Company’s insurance carrier to the Company with respect to the settlement obligation; this obligation and receivable will be relieved from our balance sheet following the transfer of the Settlement Amount to the Plaintiff from the escrow account established for this purpose.

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

The following discussion should be read in conjunction with the Company’s consolidated financial statements and notes thereto contained in this report.

Forward Looking Statements

When used in this Form 10-Q and in future filings by us with the Securities and Exchange Commission (the “SEC”), the words or phrases “will likely result,” “management expects” or “we expect,” “will continue,” “is anticipated,” “estimated” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. The risks are included in Part I, Item 1A – Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 20212022 (the “Form 10-K”). We undertakehave no obligation to publicly updaterelease the result of any revisions which may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements.

Business Operations

We are engaged in the contract production of structural aircraft parts for fixed wing aircraft and helicopters in both the defensecommercial and commercialdefense markets. We also have a strong and growing presence in the aerosystems segmentsector of the market, with our production of various reconnaissance pod structures and fuel panel systems. Within the global aerostructure and aerosystem supply chain, we are either a Tier 1 supplier to aircraft Original Equipment Manufacturersoriginal equipment manufacturers (“OEMs”) or a Tier 2 subcontractor to major Tier 1 manufacturers. We also are a prime contractor to the U.S.United States Department of Defense (“DOD”), primarily the U.S.United States Air Force.Force (“USAF”). In conjunction with our assembly operations, we provide engineering, program management, supply chain management and kitting, and maintenance, repair and overhaul (“MRO”) services.

Impact of COVID-19

Our business and operations and the industries in which we operate have been impacted by public and private sector policies and initiatives in the 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 could adversely impact our results of operations and financial condition. In response to the COVID-19 impact on our business, we have 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 included in Part I, Item 1A of our Form 10-K.

Recent Developments

NYSE American Trading Resumption and Delinquency Notice

On May 19, 2022, the NYSE American exchange (the “Exchange”) announced the suspension of trading of our common stock due to non-compliance with the SEC annual and quarterly report timely filing criteria provided for in Section 1007 of the Exchange’s Company Guide (the “Company Guide”) and announced that it was initiating proceedings to delist our common stock. On September 29, 2022, we became current with our SEC reports upon the filing of our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2022. On September 30, 2022, we were informed by the Exchange that the Exchange terminated its proceeding to delist our common stock. Trading of our common stock recommenced on the Exchange on October 5, 2022, under the symbol “CVU.”

On SeptemberMarch 17, 2021,2023, we received notice from the Exchange indicatingNYSE American (the “Exchange”) that the Company does not meetis in compliance with all of the NYSE American LLC continued listing standards set forth in Part 10 of the NYSE American Company Guide. The Guide (“Company is not in complianceGuide”), and that, specifically, the Company has resolved the continued listing deficiency with Sectionrespect to Sections 1003(a)(i) of the Company Guide since it has stockholders’ equity of less than $2.0 million and losses from continuing operations and/or net losses in two of its three most recent fiscal years and Section 1003(a)(ii) of the Company Guide since it has stockholders’ equity of less than $4.0 million and losses from continuing operations and/or net lossesreferenced in three of its four most recent fiscal years. The Company is therefore subjectthe Exchange’s letter to the procedures and requirements of Section 1009 ofCompany dated September 17, 2021, which was previously disclosed by the Company Guide and was required to, and timely did, submit a plan to the Exchange addressing how the Company intends to regain compliance with the continued listing standards by March 17, 2023 (the “Plan”). On November 19, 2021, we received notice from the Exchange that it accepted the Plan, subject to periodic review, including quarterly monitoring, for compliance with the Plan. If the Company (i) does not make progress consistent with the Plan during the plan period or (ii) is not in compliance with the continued listing standards by March 17, 2023, the Exchange staff may initiate delisting proceedings as appropriate.Company.

AmendmentBacklog

We produce custom assemblies pursuant to long-term contracts and Waivercustomer purchase orders. Funded backlog consists of aggregate funded values under such contracts and purchase orders, excluding the portion previously included in operating revenues pursuant to Accounting Standards Codification Topic 606 (“ASC 606”). Unfunded backlog is the estimated amount of future orders under the expected duration of the programs. Substantially all of our BankUnitedbacklog is subject to termination at will and rescheduling, without significant penalty. Funds are often appropriated for programs or contracts on a yearly or quarterly basis, even though the contract may call for performance that is expected to take a number of years. Therefore, our funded backlog does not include the full value of our contracts.

Our total backlog as of March 31, 2023 and December 31, 2022 was as follows: