United States SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2020 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 of (I.R.S. Employer incorporation or organization) Identification No.) 91 Heartland Blvd., Edgewood, New York 11717 (Address of principal exe ...

Information contained herein is proprietary to CPI Aero and may be subject to ITAR regulations 1 Expertise in Aerospace Technologies 2020 Q3 Results Presentation Speakers: Douglas McCrosson, President & Chief Executive Officer Tom Powers, Acting Chief Financial Officer Monday, January 4, 2021 LISTED NYSE AMERICAN Disclosure Statements This presentation contains forward-looking statements that are based on current expectations of management and certain assumptions that are subject to risks and uncertainties. ...

Financial Data and Key Metrics Changes - Revenue for Q3 2020 increased by 12.7% to $25.6 million compared to $22.7 million in Q3 2019 [19] - Revenue from defense programs surged by 38%, while revenue from commercial aviation contracts decreased by $3.9 million [19] - Gross profit more than doubled to $4.2 million, reflecting higher revenue and a favorable program mix [21] - Net income improved to $800,000 or $0.07 per share, compared to a net loss of $1.3 million or $0.11 per share in Q3 2019 [22] Business Line Data and Key Metrics Changes - Revenue from military contracts increased by $6.8 million or 38%, primarily due to the Northrop Grumman E-2D program [20] - Revenue from commercial programs declined, particularly from the G-650 and Embraer business jet programs [20] Market Data and Key Metrics Changes - The total backlog at the end of Q3 2020 was $536.9 million, with a funded defense backlog of $183.6 million [18] - The book-to-bill ratio for the 12 months ended September 30 was a strong 1.4 [18] Company Strategy and Development Direction - The company is focused on liquidity, balance sheet improvement, and margin expansion for 2020 and 2021 [27] - Strategic moves were made to eliminate unprofitable business and settle disputes, which had previously diverted resources [33] - The company expects to ramp up production on newer defense programs and improve fixed cost absorption and profitability [31] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism for a strong finish to 2020 and positive momentum heading into 2021, citing a solid defense backlog [17][34] - The company anticipates higher revenue, operating income, and operating cash flow for 2021 compared to 2020 [34] Other Important Information - The company resumed work on the Gulfstream G650 program, receiving new purchase orders totaling approximately $3.6 million [12] - The company exited the program with Honda Aircraft Company, which is expected to have a positive effect on Q4 2020 results [16] - A settlement of a working capital dispute with Air Industries added $1.4 million to liquidity [17] Q&A Session Summary Question: Was there anything unusual in the strong revenue growth in Q3? - Management confirmed that there was nothing pulled forward from Q4 and attributed the growth to the Northrop Grumman E-2D program and improved working capital management [38][39] Question: What is the expected revenue cadence into 2021? - Management indicated that activity levels are expected to increase in Q4 2020 and into Q1 2021, with strong business momentum [42] Question: Can you clarify the cash flow situation? - Management confirmed that excluding one-time charges, the company would have been positive in cash flow for the first nine months of 2020, and expects improved cash flow in 2021 [43][46] Question: What can be expected from the A-10 program in 2021? - The A-10 program has a significant backlog and is expected to be profitable in 2021, with anticipated revenue growth of around $4 million to $5 million [48]

[Part I - Financial Information](index=4&type=section&id=Part%20I%20-%20Financial%20Information) This part provides the unaudited consolidated financial statements and related notes, detailing the company's financial performance and position [Item 1 – Consolidated Financial Statements (Unaudited)](index=4&type=section&id=Item%201%20%E2%80%93%20Consolidated%20Financial%20Statements%20(Unaudited)) This section presents the company's unaudited consolidated financial statements, including balance sheets, operations, shareholders' deficit, and cash flows, with detailed notes [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) This section provides a snapshot of the company's financial position, detailing assets, liabilities, and shareholders' deficit at specific reporting dates Consolidated Balance Sheet Highlights | Metric | Sep 30, 2020 (Unaudited) ($) | Dec 31, 2019 (Note 1) ($) | | :------------------------------------ | :----------------------- | :-------------------- | | Total Assets | $47,687,612 | $44,339,580 | | Total Liabilities | $57,344,504 | $52,079,820 | | Total Shareholders' Deficit | $(9,656,892) | $(7,740,240) | - Total assets increased by **$3.35 million**, driven by increases in current assets such as contract assets and inventory[9](index=9&type=chunk) - Total liabilities increased by **$5.26 million**, primarily due to higher accounts payable and the current portion of long-term debt[9](index=9&type=chunk) [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations) This section presents the company's revenues, costs, and net income or loss over specific periods, reflecting operational performance Consolidated Statements of Operations Highlights | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | 9 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2019 ($) | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue | $25,576,718 | $22,689,762 | $62,175,872 | $64,779,858 | | Gross profit | $4,182,475 | $1,932,113 | $7,460,364 | $6,659,171 | | Income (loss) from operations | $1,131,831 | $(874,385) | $(1,498,622) | $(1,600,774) | | Net income (loss) | $815,209 | $(1,255,051) | $(2,594,141) | $(3,070,934) | | Income (loss) per common share – basic | $0.07 | $(0.11) | $(0.22) | $(0.26) | - Net income for the three months ended September 30, 2020, was **$815,209**, a significant improvement from a net loss of **$(1,255,051)** in the prior year period[10](index=10&type=chunk) - For the nine months ended September 30, 2020, the net loss decreased to **$(2,594,141)** from **$(3,070,934)** year-over-year[10](index=10&type=chunk) [Consolidated Statements of Shareholders' Deficit](index=6&type=section&id=Consolidated%20Statements%20of%20Shareholders'%20Deficit) This section details changes in the company's shareholders' deficit, reflecting impacts from net losses and equity transactions Shareholders' Deficit Evolution | Metric | January 1, 2020 ($) | September 30, 2020 ($) | | :-------------------------- | :-------------- | :----------------- | | Total Shareholders' Deficit | $(7,740,240) | $(9,656,892) | - The total shareholders' deficit increased from **$(7,740,240)** at January 1, 2020, to **$(9,656,892)** at September 30, 2020[13](index=13&type=chunk) - This change was primarily influenced by net losses incurred during the period, partially offset by net income in the third quarter and stock-based compensation expenses[13](index=13&type=chunk) [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section outlines the company's cash inflows and outflows from operating, investing, and financing activities over specific periods Consolidated Statements of Cash Flows Highlights (9 Months Ended Sep 30) | Cash Flow Activity | 2020 ($) | 2019 ($) | | :------------------------------------ | :----------- | :----------- | | Net cash used in operating activities | $(3,283,377) | $(4,039,916) | | Net cash used in investing activities | $(11,888) | $(334,909) | | Net cash provided by financing activities | $2,832,251 | $715,219 | | Net decrease in cash and restricted cash | $(463,014) | $(3,659,606) | | Cash and restricted cash at end of period | $4,969,779 | $2,468,536 | - Net cash used in operating activities decreased by **$756,539** for the nine months ended September 30, 2020, compared to the prior year[16](index=16&type=chunk) - Net cash provided by financing activities significantly increased, primarily due to **$4.8 million** in proceeds from the PPP loan[16](index=16&type=chunk) [Notes to Consolidated Financial Statements (Unaudited)](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements%20(Unaudited)) This section provides detailed explanations and disclosures supporting the unaudited consolidated financial statements [Note 1. Interim Financial Statements](index=8&type=section&id=1.%20INTERIM%20FINANCIAL%20STATEMENTS) This note describes the company's operating segments, going concern risks, the WMI acquisition settlement, and the impact of the COVID-19 pandemic - The Company operates as a single operating and reportable segment, comprising CPI Aerostructures, Inc., Welding Metallurgy, Inc. (WMI), and Compac Development Corporation[18](index=18&type=chunk)[19](index=19&type=chunk) - Management identified significant going concern risks due to continuing losses and negative cash flows but believes mitigation plans (revised credit facility, exiting unprofitable programs, customer funding, inventory reduction, military segment focus, strong backlog) are sufficient[23](index=23&type=chunk) - The WMI acquisition dispute was settled on December 23, 2020, resulting in the release of **$1.38 million** from escrow to the Company[27](index=27&type=chunk) - The COVID-19 pandemic has led to anticipated supply chain disruptions, employee absenteeism, and reduced commercial aircraft orders, though the Company is classified as an essential business[29](index=29&type=chunk)[30](index=30&type=chunk) [Note 2. Revenue Recognition](index=9&type=section&id=2.%20REVENUE%20RECOGNITION) This note details the company's revenue recognition policies, primarily for long-term contracts, and disaggregates revenue by contract type - The majority of revenue is recognized over time for long-term contracts, primarily with the U.S. government, using the cost-to-cost input method[31](index=31&type=chunk)[39](index=39&type=chunk) Revenue Disaggregation by Contract Type (3 Months Ended Sep 30) | Contract Type | 2020 ($) | 2019 ($) | | :------------------------------------ | :------- | :------- | | Aerostructures | 8,855,694 | 9,351,578 | | Aerosystems | 4,303,930 | 7,721,955 | | Kitting and Supply Chain Management | 12,417,094 | 5,616,229 | | **Total** | **25,576,718** | **22,689,762** | Revenue Disaggregation by Contract Type (9 Months Ended Sep 30) | Contract Type | 2020 ($) | 2019 ($) | | :------------------------------------ | :------- | :------- | | Aerostructures | 25,353,015 | 30,121,858 | | Aerosystems | 7,814,912 | 22,267,233 | | Kitting and Supply Chain Management | 29,007,945 | 12,390,767 | | **Total** | **62,175,872** | **64,779,858** | - The aggregate transaction price allocated to remaining performance obligations was approximately **$190 million** as of September 30, 2020, with **15%** expected to be recognized in fiscal year 2020 and the remainder by fiscal year 2022[51](index=51&type=chunk) [Note 3. Leases](index=12&type=section&id=3.%20LEASES) This note describes the company's operating leases for manufacturing, office space, and equipment, including associated expenses and liabilities - The Company leases manufacturing and office space, and office equipment, classified as operating leases[53](index=53&type=chunk)[54](index=54&type=chunk) Operating Lease Expenses and Liabilities | Metric | Amount ($) | | :------------------------------------ | :----------- | | Operating lease expense (9 months ended Sep 30, 2020) | $1,324,831 | | Operating lease expense (3 months ended Sep 30, 2020) | $441,610 | | ROU assets (Sep 30, 2020) | $2,730,567 | | Total ROU liabilities (Sep 30, 2020) | $3,033,709 | - The weighted average remaining lease term for operating leases is **1.6 years**[58](index=58&type=chunk) [Note 4. Reconciliation of Cash and Restricted Cash](index=13&type=section&id=4.%20RECONCILIATION%20OF%20CASH%20AND%20RESTRICTED%20CASH) This note reconciles cash and restricted cash balances, detailing changes and the nature of restricted funds Cash and Restricted Cash Reconciliation | Metric | Sep 30, 2020 ($) | Dec 31, 2019 ($) | | :------------------------------------ | :----------- | :----------- | | Cash | $3,589,095 | $4,052,109 | | Restricted cash | $1,380,684 | $1,380,684 | | Total cash and restricted cash | $4,969,779 | $5,432,793 | - Total cash and restricted cash decreased by **$463,014** from December 31, 2019, to September 30, 2020[59](index=59&type=chunk) - Restricted cash remained constant at **$1,380,684**, related to the WMI acquisition escrow[59](index=59&type=chunk) [Note 5. Inventory](index=13&type=section&id=5.%20INVENTORY) This note provides a breakdown of inventory components and analyzes changes in inventory levels Inventory Components | Component | Sep 30, 2020 ($) | Dec 31, 2019 ($) | | :------------------------------------ | :----------- | :----------- | | Raw materials | $1,948,486 | $881,761 | | Work in progress | $2,973,107 | $1,916,209 | | Finished goods | $3,820,500 | $3,093,416 | | **Total** | **$8,742,093** | **$5,891,386** | - Total inventory increased by **$2,850,707 (48.4%)** from December 31, 2019, to September 30, 2020, with significant increases across all categories[60](index=60&type=chunk) [Note 6. Stock-Based Compensation](index=14&type=section&id=6.%20STOCK-BASED%20COMPENSATION) This note details stock-based compensation expenses, including RSU grants, common stock grants, and forfeitures - In August 2020, the Company granted **2,617 RSUs** to a board member, resulting in approximately **$17,600** of non-cash compensation expense for the nine months ended September 30, 2020[64](index=64&type=chunk) - Also in August 2020, **84,383 shares** of common stock were granted to employees, leading to approximately **$46,300** in SG&A and **$14,800** in cost of sales compensation expense for the nine months ended September 30, 2020[65](index=65&type=chunk) - Shares granted in prior years (2016-2019) totaling **31,757** were forfeited in August 2020 due to the Company's failure to achieve certain performance criteria for the year ended December 31, 2019[67](index=67&type=chunk) [Note 7. Fair Value](index=14&type=section&id=7.%20FAIR%20VALUE) This note discusses the fair value of financial instruments, including cash, receivables, payables, and debt - The fair values of cash, accounts receivable, and accounts payable approximated their carrying values due to their short-term nature[68](index=68&type=chunk) Fair Value of Debt | Debt Type | Sep 30, 2020 Carrying Amount ($) | Sep 30, 2020 Fair Value ($) | Dec 31, 2019 Carrying Amount ($) | Dec 31, 2019 Fair Value ($) | | :------------------------------------ | :--------------------------- | :---------------------- | :--------------------------- | :---------------------- | | Short-term borrowings, PPP loan, long-term debt | $33,927,711 | $33,927,711 | $30,987,918 | $30,987,918 | - The fair value of debt was estimated using market quotes and calculations based on market rates, matching its carrying amount for both periods[69](index=69&type=chunk) [Note 8. Contract Assets and Contract Liabilities](index=15&type=section&id=8.%20CONTRACT%20ASSETS%20AND%20CONTRACT%20LIABILITIES) This note defines and explains contract assets and liabilities, including revenue recognized from contract liabilities - Contract assets represent revenue recognized in excess of amounts invoiced, where the right to consideration is conditional on factors other than the passage of time[72](index=72&type=chunk) - Contract liabilities represent customer payments received or due in excess of revenue recognized[72](index=72&type=chunk) - Revenue recognized from contract liabilities was approximately **$3.6 million** for the nine months ended September 30, 2020, compared to **$5.2 million** for the same period in 2019[73](index=73&type=chunk) [Note 9. Income (Loss) Per Common Share](index=15&type=section&id=9.%20INCOME%20(LOSS)%20PER%20COMMON%20SHARE) This note describes the computation of basic and diluted income (loss) per common share - Basic and diluted income (loss) per common share are computed using the weighted average number of common shares outstanding, adjusted for incremental shares from options and unvested RSUs[74](index=74&type=chunk) - No incremental shares were used in the calculation of diluted income (loss) per common share for the three and nine months ended September 30, 2020, as the Company was in a loss position[74](index=74&type=chunk) [Note 10. Debt](index=15&type=section&id=10.%20DEBT) This note details changes to the company's credit agreement, including loan conversions, maturity extensions, amended covenants, and the PPP loan - On August 24, 2020, the Company entered into a Sixth Amendment to its Credit Agreement with BankUnited, converting **$6 million** of the Revolving Loan into the Term Loan[76](index=76&type=chunk)[77](index=77&type=chunk) - The Revolving Loan commitment was permanently reduced to **$24 million**, and the maturity date for both the Revolving Note and Term Note was extended to May 2, 2022[77](index=77&type=chunk)[78](index=78&type=chunk) - Financial covenants were amended, including changes to the fixed charge coverage ratio, leverage covenant waiver, and reduced minimum quarterly EBITDA to **$1 million**. The Company was in compliance with all covenants as of September 30, 2020[78](index=78&type=chunk) - The Company obtained a **$4.8 million** PPP Loan on April 10, 2020, bearing **1%** interest, and applied for full forgiveness on October 16, 2020[84](index=84&type=chunk) Long-Term Debt Maturities (Excluding Debt Issuance Costs) | Period (Twelve months ending Sep 30) | Amount ($) | | :------------------------------------ | :----------- | | 2021 | $5,377,559 | | 2022 | $7,641,681 | | 2023 | $132,220 | | 2024 | $37,566 | | **Total** | **$13,189,026** | [Note 11. Major Customers](index=16&type=section&id=11.%20MAJOR%20CUSTOMERS) This note identifies the company's major customers and their respective contributions to revenue, contract assets, and accounts receivable - For the nine months ended September 30, 2020, the Company's three largest customers accounted for **39%**, **12%**, and **10%** of revenue, respectively[86](index=86&type=chunk) - As of September 30, 2020, **32%**, **23%**, and **15%** of contract assets were from the Company's three largest customers[86](index=86&type=chunk) - At September 30, 2020, **47%** and **21%** of accounts receivable were from the Company's two largest customers[87](index=87&type=chunk) [Note 12. Income Taxes](index=17&type=section&id=12.%20INCOME%20TAXES) This note outlines the company's accounting policies for income taxes, including deferred taxes, valuation allowances, and uncertain tax positions - Income taxes are accounted for under the asset and liability method, recognizing deferred tax assets and liabilities for temporary differences and operating loss/tax credit carryforwards[90](index=90&type=chunk) - A valuation allowance is applied when it is not more likely than not that some portion or all of the deferred tax assets will be realized[90](index=90&type=chunk) - Estimated interest and penalties related to uncertain tax positions are recorded in income tax expense[90](index=90&type=chunk) [Note 13. Subsequent Events](index=17&type=section&id=13.%20SUBSEQUENT%20EVENTS) This note discloses significant events occurring after the reporting period, including NYSE compliance and a stock plan amendment - The Company expects to regain compliance with NYSE American's timely filing criteria upon filing this Quarterly Report, after receiving an extension until January 15, 2021, for previous delinquencies[91](index=91&type=chunk) - On October 6, 2020, stockholders approved an amendment to the 2016 Long-Term Incentive Plan, increasing the total shares available for issuance by **800,000** to **1,400,000 shares**[92](index=92&type=chunk) [Note 14. Commitments and Contingencies](index=17&type=section&id=14.%20COMMITMENTS%20AND%20CONTINGENCIES) This note details the company's legal proceedings, including class action lawsuits, shareholder derivative actions, an SEC investigation, and a settlement agreement - The Company is a defendant in a consolidated class action lawsuit alleging securities law violations related to false/misleading statements in financial reports and offering documents[93](index=93&type=chunk) - Multiple shareholder derivative actions have been filed against current and former directors/officers for breach of fiduciary duty and other claims, seeking recovery on behalf of the Company[96](index=96&type=chunk)[97](index=97&type=chunk) - The SEC Division of Enforcement issued a subpoena on May 22, 2020, seeking documents related to financial statement errors, restatement, the 2018 equity offering, and former CFO separations[99](index=99&type=chunk) - A Settlement and Release Agreement was entered into with Honda Aircraft Company, Inc. on December 23, 2020, terminating an unprofitable program and requiring HACI to purchase approximately **$0.6 million** of inventory[100](index=100&type=chunk) [Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations](index=19&type=section&id=Item%202%20%E2%80%93%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's perspective on the company's financial condition and operational results, discussing business activities, COVID-19 impact, backlog, and liquidity [Business Operations and COVID-19 Impact](index=19&type=section&id=Business%20Operations%20and%20Impact%20of%20the%20COVID-19%20Pandemic%20on%20Third%20Quarter%20Results%20and%20Forward-Looking%20Impacts) This section describes the company's core business in aerospace manufacturing and the operational impacts and mitigation strategies related to the COVID-19 pandemic - The Company is engaged in contract production of structural aircraft parts and aerosystems for both commercial and defense markets, serving as a Tier 1/Tier 2 supplier and prime contractor to the U.S. Department of Defense[104](index=104&type=chunk) - Despite being classified as an 'essential business,' the COVID-19 pandemic has caused supply chain disruptions, employee absenteeism, and reductions in commercial aircraft orders, primarily affecting approximately **10%** of total business[105](index=105&type=chunk)[106](index=106&type=chunk) - Mitigating steps include curtailing discretionary spending, deferring business travel, implementing a hiring freeze, and managing material flow to preserve cash[106](index=106&type=chunk) [Recent Developments](index=20&type=section&id=Recent%20Developments) This section highlights key recent events, including a PPP loan, credit facility amendment, backlog reduction, and a working capital dispute settlement - The Company received a **$4.8 million** PPP Loan on April 10, 2020, and applied for full forgiveness on October 16, 2020[108](index=108&type=chunk) - A Sixth Amendment to the BankUnited Credit Facility on August 24, 2020, converted **$6 million** of revolving loan balance to term loan, reduced revolving availability to **$24 million**, and extended maturity to May 2, 2022[109](index=109&type=chunk)[110](index=110&type=chunk) - The Gulfstream G650 program experienced **$3.6 million** in backlog reduction due to COVID-19 related cancellations by Triumph Group, but Gulfstream Aerospace intends to continue purchasing components[111](index=111&type=chunk) - The working capital dispute with Air Industries Group was settled on December 23, 2020, resulting in the release of **$1.38 million** cash from escrow to the Company[112](index=112&type=chunk) [Backlog](index=21&type=section&id=Backlog) This section presents the company's total and funded backlog, highlighting changes and the proportion attributable to government contracts Total Backlog | Backlog Type | Sep 30, 2020 ($) | Dec 31, 2019 ($) | | :------------------------------------ | :----------- | :----------- | | Funded | $189,600,000 | $147,647,000 | | Unfunded | $347,300,000 | $414,231,000 | | **Total** | **$536,900,000** | **$561,878,000** | - Total backlog decreased by **$24.98 million**, while funded backlog increased by **$41.95 million**, primarily driven by government contracts[114](index=114&type=chunk)[115](index=115&type=chunk) - Approximately **89%** of the total backlog at September 30, 2020, was attributable to government contracts[115](index=115&type=chunk) [Critical Accounting Policies](index=22&type=section&id=Critical%20Accounting%20Policies) This section confirms that there have been no significant changes to the company's critical accounting policies during the reporting quarter - There have been no significant changes to the application of the Company's critical accounting policies during the quarter ended September 30, 2020[117](index=117&type=chunk) [Results of Operations](index=22&type=section&id=Results%20of%20Operations) This section analyzes the company's financial performance, including detailed discussions of revenue, cost of sales, gross profit, SG&A, income before taxes, and net income [Revenue Analysis](index=22&type=section&id=Revenue) This section analyzes revenue performance, highlighting increases in government contracts and decreases in commercial subcontracts Revenue Performance | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | Change (%) | | :------------------------------------ | :-------------------------- | :-------------------------- | :--------- | | Total Revenue | $25,576,718 | $22,689,762 | 12.7% | | Government subcontracts | $20,887,968 | $16,179,389 | 29.0% | | Direct military contracts | $3,778,686 | $1,702,951 | 121.9% | | Commercial subcontracts | $910,064 | $4,807,422 | -81.1% | - Total revenue for the three months ended September 30, 2020, increased by **12.7%** primarily due to new multi-year awards for the Northrop Grumman E2D program and increases in T-38 Pacer, Northrop Grumman WOWP, and F16 Rudder Island programs[118](index=118&type=chunk)[120](index=120&type=chunk) - Year-to-date revenue decreased by **4%** to **$62,175,872**, mainly driven by declines in the Raytheon NGJ Pod and G650 programs[119](index=119&type=chunk) - Commercial subcontract revenue saw a significant decrease of **81.1%** for the quarter and **55.9%** year-to-date, primarily from lower G650 and Embraer program revenue[124](index=124&type=chunk)[125](index=125&type=chunk) [Cost of Sales Analysis](index=23&type=section&id=Cost%20of%20Sales) This section analyzes changes in cost of sales components, including procurement, labor, and factory overhead, and their impact on margins Cost of Sales Components (3 Months Ended Sep 30) | Component | 2020 ($) | 2019 ($) | Change (%) | | :------------------------------------ | :----------- | :----------- | :--------- | | Procurement | $17,478,009 | $11,941,699 | 46.3% | | Labor | $1,670,761 | $1,967,144 | -15.2% | | Factory OH | $4,596,516 | $5,164,788 | -11.0% | | Inventory Change | $(1,083,585) | $1,647,414 | -165.8% | | Other | $(1,267,458) | $36,604 | -3561.9% | | **Total Cost of Sales** | **$21,394,243** | **$20,757,649** | **3.1%** | - Cost of sales for the three months ended September 30, 2020, increased by **3.1%**, which was substantially less than the revenue increase, indicating improved margin contribution from higher-margin defense programs[127](index=127&type=chunk) - Procurement costs increased significantly by **46.3%** for the quarter, primarily due to the E2D and WOWP programs, while labor costs decreased by **15%** due to lower requirements on certain programs[129](index=129&type=chunk)[131](index=131&type=chunk) - Year-to-date cost of sales decreased by **5.8%** to **$54,715,508**, also attributed to more margin contribution from higher margin defense programs[128](index=128&type=chunk) [Gross Profit Analysis](index=25&type=section&id=Gross%20Profit) This section analyzes gross profit performance, highlighting significant increases driven by a favorable mix of higher-margin defense programs Gross Profit Performance | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | Change (%) | | :------------------------------------ | :-------------------------- | :-------------------------- | :--------- | | Gross Profit | $4,182,475 | $1,932,113 | 116.5% | | Metric | 9 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2019 ($) | Change (%) | | :------------------------------------ | :-------------------------- | :-------------------------- | :--------- | | Gross Profit | $7,460,363 | $6,659,171 | 12.0% | - Gross profit for the three months ended September 30, 2020, increased by **116.5%**, primarily due to increased revenue from higher margin defense programs[139](index=139&type=chunk) - Year-to-date gross profit increased by **12%**, driven by a favorable mix of higher margin defense programs, despite lower overall revenue[140](index=140&type=chunk) - Net adjustments to gross profit from changes in estimates for the nine months ended September 30, 2020, resulted in an unfavorable impact of **$(736,267)**, compared to a favorable impact of **$190,233** in the prior year[141](index=141&type=chunk) [Selling, General and Administrative Expenses](index=25&type=section&id=Selling,%20General%20and%20Administrative%20Expenses) This section analyzes the increase in SG&A expenses, primarily attributed to higher professional fees related to financial restatements SG&A Expenses | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | Change (%) | | :------------------------------------ | :-------------------------- | :-------------------------- | :--------- | | SG&A Expenses | $3,050,644 | $2,806,498 | 8.7% | | Metric | 9 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2019 ($) | Change (%) | | :------------------------------------ | :-------------------------- | :-------------------------- | :--------- | | SG&A Expenses | $8,958,986 | $8,259,945 | 8.5% | - SG&A expenses increased by **8.7%** for the three months and **8.5%** for the nine months ended September 30, 2020, primarily due to higher professional fees related to the restatement of prior period financial statements[143](index=143&type=chunk)[144](index=144&type=chunk) [Income (Loss) Before Provision for Income Taxes](index=25&type=section&id=Income%20(Loss)%20Before%20Provision%20for%20Income%20Taxes) This section analyzes the company's income or loss before taxes, highlighting improvements driven by gross profit and lower interest expense Income (Loss) Before Provision for Income Taxes | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | Change ($) | | :------------------------------------ | :-------------------------- | :-------------------------- | :--------- | | Income (Loss) Before Taxes | $822,823 | $(1,252,580) | $2,075,403 | | Metric | 9 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2019 ($) | Change ($) | | :------------------------------------ | :-------------------------- | :-------------------------- | :--------- | | Income (Loss) Before Taxes | $(2,584,427) | $(3,065,150) | $480,723 | - Income before taxes for the three months ended September 30, 2020, significantly improved by **$2,075,403**, driven by increased gross profit and lower interest expense, despite higher SG&A[145](index=145&type=chunk) - The year-to-date loss before taxes decreased by **$480,723**, attributed to a favorable program mix and lower interest expense, offset by increased SG&A[146](index=146&type=chunk) [Provision for Income Taxes](index=26&type=section&id=Provision%20for%20Income%20Taxes) This section details the provision for income taxes, primarily related to state minimum and franchise taxes Provision for Income Taxes (9 Months Ended Sep 30) | Metric | 2020 ($) | 2019 ($) | | :------------------------------------ | :----------- | :----------- | | Provision for Income Taxes | $9,714 | $5,784 | - The provision for income taxes for the nine months ended September 30, 2020, was **$9,714**, primarily related to state minimum and franchise taxes[148](index=148&type=chunk) [Net Income (Loss)](index=26&type=section&id=Net%20Income%20(Loss)) This section presents the company's net income or loss and earnings per share, highlighting improvements over prior periods Net Income (Loss) and EPS | Metric | 3 Months Ended Sep 30, 2020 ($) | 3 Months Ended Sep 30, 2019 ($) | 9 Months Ended Sep 30, 2020 ($) | 9 Months Ended Sep 30, 2019 ($) | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Income (Loss) | $815,209 | $(1,255,051) | $(2,594,141) | $(3,070,934) | | Basic EPS | $0.07 | $(0.11) | $(0.22) | $(0.26) | - The Company reported net income of **$815,209 ($0.07 per basic share)** for the three months ended September 30, 2020, a significant improvement from a net loss in the prior year[149](index=149&type=chunk) - The year-to-date net loss decreased to **$(2,594,141) ($(0.22) per basic share)** from **$(3,070,934) ($(0.26) per basic share)** in the prior year[150](index=150&type=chunk) [Liquidity and Capital Resources](index=26&type=section&id=Liquidity%20and%20Capital%20Resources) This section assesses the company's liquidity position, including working capital, cash flow, credit facilities, and contractual obligations [General Liquidity](index=26&type=section&id=General) This section discusses working capital changes and potential cash flow shortfalls due to revenue recognition disparities and program delays Working Capital | Metric | Sep 30, 2020 ($) | Dec 31, 2019 ($) | Change (%) | | :------------------------------------ | :----------- | :----------- | :--------- | | Working Capital | $12,485,031 | $13,851,719 | -9.9% | - Working capital decreased by **9.9%** to **$12,485,031** at September 30, 2020[151](index=151&type=chunk) - The Company notes potential cash flow shortfalls due to disparities between reported earnings (ASC 606 estimates) and actual cash receipts, and risks impairment charges for unrecoverable up-front costs on delayed/cancelled programs[153](index=153&type=chunk)[154](index=154&type=chunk) [Cash Flow Analysis](index=26&type=section&id=Cash%20Flow) This section analyzes cash and restricted cash balances, including the impact of a government receipt and the release of restricted funds Cash and Restricted Cash Balances | Metric | Sep 30, 2020 ($) | Dec 31, 2019 ($) | | :------------------------------------ | :----------- | :----------- | | Cash balance | $3,589,095 | $4,052,109 | | Restricted cash | $1,380,684 | $1,380,684 | - The cash balance decreased to **$3,589,095** at September 30, 2020, excluding a **$2.6 million** U.S. Government receipt received on October 5, 2020[157](index=157&type=chunk) - Restricted cash of **$1,380,684** was released to the Company on December 28, 2020, following a settlement[157](index=157&type=chunk) - Management believes existing resources, including **$3.3 million** of availability under the BankUnited Facility, will be sufficient to meet working capital needs for at least the next **12 months**[158](index=158&type=chunk) [Bank Credit Facilities](index=27&type=section&id=Bank%20Credit%20Facilities) This section details the BankUnited Credit Agreement amendments, covenant compliance, and outstanding loan balances - The Sixth Amendment to the BankUnited Credit Agreement waived covenant violations for late financial statement delivery and past financial covenants, with testing resuming for the quarter ending September 30, 2020[160](index=160&type=chunk) - As of September 30, 2020, the Company was in compliance with all tested covenants[160](index=160&type=chunk) - The Company had **$20.7 million** outstanding under the Revolving Loan (**4%** interest) and a Term Loan with an aggregate principal of **$7.93 million**, both maturing on May 2, 2022[161](index=161&type=chunk) [Contractual Obligations](index=27&type=section&id=Contractual%20Obligations) This section refers to the Annual Report on Form 10-K for detailed information concerning contractual obligations - For detailed information concerning contractual obligations, the Company refers to its Annual Report on Form 10-K for the year ended December 31, 2019[162](index=162&type=chunk) [Item 3 – Quantitative and Qualitative Disclosures About Market Risk](index=27&type=section&id=Item%203%20%E2%80%93%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section states that there are no quantitative or qualitative disclosures about market risk applicable to the company for the reporting period - This item is not applicable to the Company[163](index=163&type=chunk) [Item 4 – Controls and Procedures](index=27&type=section&id=Item%204%20%E2%80%93%20Controls%20and%20Procedures) This section details management's evaluation of disclosure controls and procedures, identifying material weaknesses and outlining remediation efforts [Evaluation of Disclosure Controls and Procedures](index=27&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section presents management's conclusion on the ineffectiveness of internal control over financial reporting and disclosure controls due to material weaknesses - Management concluded that the Company's internal control over financial reporting was not effective as of December 31, 2019, December 31, 2018, and September 30, 2020, due to material weaknesses[168](index=168&type=chunk)[187](index=187&type=chunk) - Disclosure controls and procedures were also concluded to be not effective as of September 30, 2020, due to these material weaknesses[179](index=179&type=chunk)[187](index=187&type=chunk) - The evaluation excluded the WMI acquisition for the first year subsequent to acquisition, in accordance with SEC guidance[168](index=168&type=chunk) [Material Weaknesses](index=29&type=section&id=Material%20Weaknesses) This section identifies material weaknesses in the control environment, risk assessment, control activities, monitoring, revenue recognition, and IT general controls - Material weaknesses were identified in the control environment, risk assessment, control activities, and monitoring, stemming from insufficient personnel knowledge, lack of technical proficiency, and inadequately documented policies/procedures[171](index=171&type=chunk) - Deficiencies in revenue recognition accounting controls led to material errors and the restatement of prior financial statements, specifically regarding proper determination of contract performance period/value and constraining revenue to funded contract values[170](index=170&type=chunk)[172](index=172&type=chunk) - A material weakness existed in accounting for significant, non-routine, complex transactions due to a lack of controls and qualified external resources[173](index=173&type=chunk) - Ineffective Information Technology General Controls (ITGCs) were identified in areas such as access to programs/data, program change-management, and computer operations[175](index=175&type=chunk) [Remediation Efforts](index=30&type=section&id=Remediation%20Efforts%20to%20Address%20Material%20Weaknesses) This section outlines the company's remediation efforts, including hiring finance professionals, updating revenue recognition policies, and redesigning internal controls - The Company hired experienced professionals for key finance leadership positions (CFO, Controller, Director of Financial Planning & Analysis) to enhance technical proficiency and oversight[178](index=178&type=chunk) - Revenue recognition policies and procedures were reviewed and updated in Q2 2020, now constraining revenue recognition to funded contract values[178](index=178&type=chunk) - Ongoing efforts include redesigning and implementing internal controls, evaluating and revising the SOX Program, and establishing a policy to engage experienced professionals for future complex transactions[178](index=178&type=chunk) - An improved 404 compliant ITGC testing program will be implemented for years subsequent to 2019 with assistance from experienced professionals[178](index=178&type=chunk) [Changes in Internal Control Over Financial Reporting](index=31&type=section&id=Changes%20in%20Internal%20Control%20Over%20Financial%20Reporting) This section confirms that no material changes occurred in internal control over financial reporting during the quarter, apart from ongoing remediation - Other than the ongoing remediation efforts, there were no changes in internal control over financial reporting during the quarter ended September 30, 2020, that materially affected or are reasonably likely to materially affect the controls[181](index=181&type=chunk) [Part II - Other Information](index=31&type=section&id=Part%20II%20-%20Other%20Information) This part includes disclosures on legal proceedings, risk factors, equity sales, defaults, mine safety, and other relevant information [Item 1 – Legal Proceedings](index=31&type=section&id=Item%201%20%E2%80%93%20Legal%20Proceedings) This section refers to Footnote 14 – Commitments and Contingencies in the financial statements for details regarding legal proceedings - For information regarding legal proceedings, refer to Footnote 14 – Commitments and Contingencies[182](index=182&type=chunk) [Item 1A – Risk Factors](index=31&type=section&id=Item%201A%20%E2%80%93%20Risk%20Factors) This section outlines various material risks that could significantly impact the company's business, operating results, liquidity, and financial condition [Risks Related to Financial Restatement and Internal Controls](index=31&type=section&id=Risks%20Related%20to%20the%20Restatement%20of%20our%20Prior%20Period%20Consolidated%20Financial%20Statements%20and%20Material%20Weaknesses%20in%20our%20Internal%20Controls) This section details risks associated with financial restatements and internal control weaknesses, including impacts on investor confidence, litigation, and regulatory scrutiny - The restatement of prior financial statements and identified material weaknesses have eroded investor confidence, negatively impacted stock price, hindered capital raising, and led to stockholder litigation and regulatory investigations[185](index=185&type=chunk) - Ongoing remediation efforts for internal control weaknesses are costly, divert management attention, and do not guarantee future effectiveness, potentially impacting financial reporting accuracy and timeliness[189](index=189&type=chunk)[192](index=192&type=chunk)[194](index=194&type=chunk) - Past covenant violations under the BankUnited credit facility due to financial errors were waived, but future non-compliance could lead to default and adverse financial consequences[196](index=196&type=chunk)[197](index=197&type=chunk) - The Company is ineligible to use Form S-3 for **12 months** after regaining current filer status, increasing future capital raising costs and time[199](index=199&type=chunk) - Risk of delisting from the NYSE American exchange if compliance with listing standards is not maintained, which would adversely affect stock liquidity and capital access[201](index=201&type=chunk)[203](index=203&type=chunk) [Risks Related to COVID-19](index=34&type=section&id=Risks%20Related%20to%20COVID-19) This section outlines risks from the COVID-19 pandemic, including supply chain disruptions, reduced commercial demand, liquidity challenges, and PPP loan forgiveness uncertainty - The COVID-19 pandemic has caused and could continue to cause disruptions in the supply chain, increased costs, delays, and limitations on customer performance, including timely payments[205](index=205&type=chunk) - Reduced demand in the commercial air industry due to lower aircraft deliveries is impacting the Company's commercial business[205](index=205&type=chunk) - Liquidity could be adversely affected by slower production schedules and potential customer payment delays, possibly necessitating additional funding which may be difficult to obtain[206](index=206&type=chunk) - There is no assurance that the **$4.8 million** PPP Loan will be fully forgiven; if not, it must be repaid over **two years**[210](index=210&type=chunk) [Risks Related to Legal Proceedings](index=35&type=section&id=Risks%20Related%20to%20Legal%20Proceedings) This section details risks from ongoing class action and shareholder derivative lawsuits, as well as an SEC investigation, potentially leading to significant expenses and penalties - The Company faces ongoing class action and shareholder derivative lawsuits related to financial restatements and internal control issues, which could result in significant expenses and diversion of management attention[211](index=211&type=chunk) - An SEC investigation is underway, seeking documents related to financial errors, restatement, and executive changes, with unpredictable length, scope, and potential impact, including regulatory penalties[212](index=212&type=chunk) [General Business Risks](index=36&type=section&id=General%20Risks%20Related%20to%20our%20Business) This section covers general business risks, including dependence on government contracts, competitive bidding, industry consolidation, regulatory compliance, supplier performance, and revenue recognition estimates - The Company heavily depends on government contracts, which are subject to congressional budget authorization, appropriation processes, and potential termination for convenience or default, impacting future sales and financial stability[214](index=214&type=chunk)[215](index=215&type=chunk)[218](index=218&type=chunk) - Risks associated with competitive bidding include unforeseen technological difficulties, cost overruns, substantial bid preparation efforts for unawarded contracts, and insufficient profitability[219](index=219&type=chunk) - Industry consolidation among customers, competitors, and suppliers could adversely affect business by delaying contracts, increasing competition, and raising supply costs[220](index=220&type=chunk) - Non-compliance with extensive environmental and FAA regulations could result in fines, remediation expenses, and disqualification from contracts[222](index=222&type=chunk)[224](index=224&type=chunk) - Failure of subcontractors or suppliers to perform contractual obligations could materially and adversely impact contract performance, future business, and profitability[226](index=226&type=chunk) - Fixed contract pricing exposes the Company to reduced profitability and potential loss of future business if contract costs increase due to technical challenges or incorrect initial estimates[227](index=227&type=chunk) - The use of estimates in revenue recognition (ASC 606) involves significant judgment, and inaccurate estimates or contract terminations could affect profitability and cash flow[229](index=229&type=chunk)[231](index=231&type=chunk) - The Company's ability to utilize its net operating loss (NOL) carryforwards may be substantially limited if it fails to generate sufficient income or experiences an 'ownership change' as defined by Section 382 of the Internal Revenue Code[244](index=244&type=chunk)[245](index=245&type=chunk) [Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds](index=41&type=section&id=Item%202%20%E2%80%93%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section indicates that there were no unregistered sales of equity securities or use of proceeds to report for the period - No unregistered sales of equity securities or use of proceeds to report[246](index=246&type=chunk) [Item 3 – Defaults Upon Senior Securities](index=41&type=section&id=Item%203%20%E2%80%93%20Defaults%20Upon%20Senior%20Securities) This section states that there were no defaults upon senior securities during the reporting period - No defaults upon senior securities to report[247](index=247&type=chunk) [Item 4 – Mine Safety Disclosures](index=41&type=section&id=Item%204%20%E2%80%93%20Mine%20Safety%20Disclosures) This section indicates that mine safety disclosures are not applicable to the company - This item is not applicable to the Company[248](index=248&type=chunk) [Item 5 – Other Information](index=42&type=section&id=Item%205%20%E2%80%93%20Other%20Information) This section states that there is no other information to report for the period - No other information to report[250](index=250&type=chunk) [Item 6 – Exhibits](index=42&type=section&id=Item%206%20%E2%80%93%20Exhibits) This section lists all exhibits filed with the Form 10-Q, including various certifications and Inline XBRL documents - Includes Section 302 Certifications by Chief Executive Officer and President, and Chief Financial Officer[251](index=251&type=chunk) - Includes Section 906 Certification by Chief Executive Officer and Chief Financial Officer[251](index=251&type=chunk) - Attached as Exhibit 101 are various financial statements and notes formatted in Inline XBRL[251](index=251&type=chunk) [Signatures](index=43&type=section&id=Signatures) This section contains the required signatures for the Form 10-Q, certifying its submission - The report was signed by Douglas J. McCrosson, Chief Executive Officer and President, and Thomas Powers, Acting Chief Financial Officer, on December 31, 2020[255](index=255&type=chunk)

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, 2020 OR ☐ 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 othe ...

Information contained herein is proprietary to CPI Aero and may be subject to ITAR regulations 1 Expertise in Aerospace Technologies 2020 Q2 Results Presentation Speakers: Douglas McCrosson, President & Chief Executive Officer Tom Powers, Acting Chief Financial Officer November 12, 2020 LISTED NYSE AMERICAN Disclosure Statements This presentation contains forward-looking statements that are based on current expectations of management and certain assumptions that are subject to risks and uncertainties. There ...

Financial Data and Key Metrics Changes - Revenue for Q2 2020 was $19.7 million, a slight decrease from $20.1 million in Q2 2019, with military contracts increasing by $2.6 million and commercial aviation contracts decreasing by $3 million [18] - Gross profit margin improved significantly, increasing nearly 900 basis points sequentially from Q1 and nearly 200 basis points from the year-ago period [9] - Net loss narrowed to $0.6 million or $0.05 per share compared to $0.9 million or $0.07 per share in Q2 2019 [20] - Liquidity increased from approximately $1 million as of June 30, 2019, to $7 million as of June 30, 2020 [10] Business Line Data and Key Metrics Changes - The defense business showed resilience with revenue increases primarily from the Northrop Grumman E-2D program and T-38 Pacer program, while commercial aviation revenue faced declines [18] - Funded defense backlog reached $205.6 million, up $68.8 million or 50% since December 31, 2019, indicating strong demand in defense contracts [14] - The commercial backlog continued to decline due to COVID-19 impacts, with total funded backlog at $209.0 million, primarily from defense orders [16] Market Data and Key Metrics Changes - The trailing 12-month book-to-bill ratio as of June 30, 2020, was a robust 2.13, indicating strong order intake relative to revenue [13] - The company expects defense spending to remain stable despite political changes, positioning itself well for future contracts [15] Company Strategy and Development Direction - The company is focused on improving liquidity, balance sheet strength, and margin expansion, with initiatives to enhance cash flow and operational efficiency [25][27] - Growth outlook for the aerostructures business is projected at 12% to 14% through 2021, while the aerosystems segment is expected to grow at a compound annual growth rate of 22% to 26% [29][30] - The company aims to maintain positive operating cash flow and reduce debt further in 2021 [28] Management Comments on Operating Environment and Future Outlook - Management expressed optimism for a strong finish to 2020, with expectations for improved revenue and operating income compared to 2019 [33] - The company anticipates that ramping production of newer defense programs will enhance revenue and margins in the second half of 2020 [16][33] Other Important Information - The company received a Paycheck Protection Program loan of $4.8 million, which has been applied for full forgiveness [22] - The company is committed to disciplined debt repayment and enhancing liquidity through operational improvements [26] Q&A Session Summary Question: Expectations for gross margin improvement in the second half of the year - Management expects third quarter gross margin percentage to be higher than in the second quarter, with a significant increase anticipated for the second half of the year [35] Question: Positive earnings quarter this year - Management confirmed that there will be positive earnings quarters in 2020 [36] Question: Revenue expectations for the Next Gen Jammer program - Management indicated that the program is in the SDTA phase, with expected revenue contributions continuing through 2021 [37] Question: Pricing pressure in the defense sector - Management noted that most contracts are fixed price, limiting pricing pressure, and indicated that while there is price sensitivity, it is not as pronounced as in the commercial aviation sector [38][39]

Information contained herein is proprietary to CPI Aero and may be subject to ITAR regulations 1 Expertise in Aerospace Technologies 2020 Q1 Results Presentation Speakers: Douglas McCrosson, President & Chief Executive Officer Tom Powers, Acting Chief Financial Officer October 1, 2020 LISTED NYSE AMERICAN Disclosure Statements This presentation contains forward-looking statements that are based on current expectations of management and certain assumptions that are subject to risks and uncertainties. There c ...

CPI Aerostructures, Inc. (NYSE:CVU) Q1 2020 Results Conference Call October 1, 2020 8:30 AM ET Company Participants John Heilshorn - LHA Investor Relations Doug McCrosson - President and Chief Executive Officer Tom Powers - Acting Chief Financial Officer Conference Call Participants Ken Herbert - Canaccord Genuity Operator Good day and welcome to the CPI Aerostructures First Quarter 2020 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is ...

Part I [Item 1 – Consolidated Financial Statements (Unaudited)](index=4&type=section&id=Item%201%20%E2%80%93%20Consolidated%20Financial%20Statements%20%28Unaudited%29) Unaudited Q1 2020 financials show decreased assets, increased liabilities, a widened net loss, and negative operating cash flow, with critical subsequent events [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) Total assets decreased to $42.3 million, liabilities increased to $52.5 million, and shareholders' deficit widened to $10.2 million by March 31, 2020 Consolidated Balance Sheet Highlights (Unaudited) | Balance Sheet Item | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | **Assets** | | | | Cash | $1,998,697 | $4,052,109 | | Total current assets | $33,403,441 | $34,831,456 | | Total assets | $42,251,352 | $44,339,580 | | **Liabilities & Shareholders' Deficit** | | | | Total current liabilities | $22,409,762 | $20,979,737 | | Total liabilities | $52,456,926 | $52,079,820 | | Total Shareholders' Deficit | $(10,205,574) | $(7,740,240) | [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations) Q1 2020 revenue decreased 23.3% to $16.9 million, resulting in a lower gross profit and a widened net loss of $2.8 million Consolidated Statements of Operations (Unaudited, for the three months ended March 31) | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Revenue | $16,858,386 | $21,988,384 | | Gross Profit | $697,819 | $2,483,416 | | Loss from Operations | $(2,395,271) | $(422,270) | | Net Loss | $(2,812,519) | $(934,716) | | Loss per common share – basic | $(0.24) | $(0.08) | [Consolidated Statements of Shareholders' Deficit](index=6&type=section&id=Consolidated%20Statements%20of%20Shareholders%27%20Deficit) Shareholders' deficit increased from $7.7 million to $10.2 million by March 31, 2020, primarily due to the $2.8 million net loss for the quarter - The total shareholders' deficit grew to **$(10,205,574)** at March 31, 2020, from **$(7,740,240)** at January 1, 2020, mainly due to the quarterly net loss of **$(2,812,519)**[10](index=10&type=chunk) [Consolidated Statements of Cash Flows](index=7&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Q1 2020 saw net cash used in operations at $1.4 million, a $2.1 million net decrease in cash, ending with $3.4 million in cash and restricted cash Consolidated Statements of Cash Flows (Unaudited, for the three months ended March 31) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash used in operating activities | $(1,427,522) | $(2,332,878) | | Net cash used in investing activities | $(3,200) | $(210,695) | | Net cash used in financing activities | $(622,690) | $(967,408) | | Net decrease in cash and restricted cash | $(2,053,412) | $(3,510,981) | | Cash and restricted cash at end of period | $3,379,381 | $2,617,161 | [Notes to Consolidated Financial Statements (Unaudited)](index=8&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements%20%28Unaudited%29) Notes detail accounting policies and key disclosures, crucially highlighting significant subsequent events such as a credit amendment, PPP loan, NYSE notice, stop-work order, and ongoing legal proceedings - The company has a **single operating and reportable segment**. Management believes its liquidity and debt resources are **sufficient to meet obligations for at least one year**, despite a continuing loss from operations and negative cash flow[16](index=16&type=chunk)[22](index=22&type=chunk) - The company was notified it was part of the **Defense Industrial Base Essential Critical Infrastructure Workforce**, allowing it to remain open during the COVID-19 pandemic, but the full financial impact remains uncertain[29](index=29&type=chunk) - As of March 31, 2020, the company had approximately **$211 million** in remaining performance obligations (backlog), with **46%** expected to be recognized as revenue in fiscal 2020[47](index=47&type=chunk) - Subsequent to the quarter end, on **August 24, 2020**, the company amended its credit agreement with BankUnited, extending maturity to **May 2022**, restructuring debt, and waiving certain covenant noncompliance[81](index=81&type=chunk)[83](index=83&type=chunk) - On **April 10, 2020**, the company received a **$4.8 million PPP loan**. In **April 2020**, it received a **stop-work order** from Triumph Group for the G650 program, impacting **$3.6 million** in backlog[85](index=85&type=chunk)[87](index=87&type=chunk) - The company is involved in **multiple legal proceedings**, including a **class action lawsuit**, **shareholder derivative actions**, and a **non-public SEC investigation** related to the restatement of prior financial statements[91](index=91&type=chunk)[92](index=92&type=chunk)[97](index=97&type=chunk) [Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations](index=21&type=section&id=Item%202%20%E2%80%93%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management attributes Q1 2020's revenue decline and increased net loss to program timing, while highlighting strong backlog and subsequent liquidity actions [Backlog](index=23&type=section&id=Backlog) Total backlog was $556.4 million as of March 31, 2020, with funded backlog increasing to $211.1 million, and government contracts comprising approximately 90% Backlog Comparison (in thousands) | Backlog Category | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | **Total Backlog** | | | | Funded | $211,103 | $147,647 | | Unfunded | $345,268 | $414,231 | | **Total** | **$556,371** | **$561,878** | | **Government Backlog** | **$499,133** | **$496,702** | | **Commercial Backlog** | **$57,238** | **$65,176** | [Results of Operations](index=25&type=section&id=Results%20of%20Operations) Q1 2020 revenue decreased 23.3% to $16.9 million due to program timing, leading to a 72% drop in gross profit and a widened net loss of $2.8 million - Revenue decreased by **$5.1 million** (**23.3%**) YoY, mainly due to timing on the Raytheon NGJ Pod program[121](index=121&type=chunk) - Gross profit decreased by **$1.8 million** (**72%**) YoY, also primarily due to lower gross profit from the nearly completed Raytheon Pod program[133](index=133&type=chunk) Net Adjustments to Gross Profit (Loss) | Adjustment Type | Q1 2020 | Q1 2019 | | :--- | :--- | :--- | | Favorable adjustments | $373,040 | $675,968 | | Unfavorable adjustments | $(778,232) | $(164,789) | | **Net adjustments** | **$(405,192)** | **$511,179** | - Net loss increased by **201.4%** to **$(2,812,519)**, or **$(0.24)** per share, driven by the decrease in revenue[138](index=138&type=chunk)[140](index=140&type=chunk) [Liquidity and Capital Resources](index=27&type=section&id=Liquidity%20and%20Capital%20Resources) Working capital decreased 20.6% to $11.0 million, with cash falling to $2.0 million, though management believes liquidity is sufficient after a credit facility amendment - Working capital decreased by **$2.9 million** to **$11.0 million** at March 31, 2020[141](index=141&type=chunk) - The company's cash balance was **$2.0 million**, with an additional **$1.4 million** in restricted cash[147](index=147&type=chunk) - A subsequent amendment to the BankUnited credit facility in **August 2020** waived covenant violations and prospectively waived late delivery of financial statements for the first three quarters of 2020[150](index=150&type=chunk) - As of March 31, 2020, the company had **$26.7 million** outstanding under its Revolving Loan[151](index=151&type=chunk) [Item 3 – Quantitative and Qualitative Disclosures About Market Risk](index=29&type=section&id=Item%203%20%E2%80%93%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) This section is not applicable for the reporting period - Not applicable[154](index=154&type=chunk) [Item 4 – Controls and Procedures](index=29&type=section&id=Item%204%20%E2%80%93%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were ineffective due to material weaknesses, prompting significant remediation efforts - Management concluded that the Company's internal control over financial reporting was **not effective** as of December 31, 2019, and disclosure controls were **not effective** as of March 31, 2020[157](index=157&type=chunk)[173](index=173&type=chunk) - **Material weaknesses** were identified in: **Control Environment**, **Risk Assessment**, **Control Activities and Monitoring**; **Revenue Recognition Accounting**; **Accounting for Significant Non-Routine Complex Transactions**; and **Information Technology General Controls (ITGC)**[160](index=160&type=chunk)[163](index=163&type=chunk)[165](index=165&type=chunk)[166](index=166&type=chunk) - Remediation efforts include **hiring new finance leadership**, **updating revenue recognition policies** with external advice, and planning to implement an **improved ITGC testing program**[169](index=169&type=chunk)[170](index=170&type=chunk)[172](index=172&type=chunk) Part II [Item 1 – Legal Proceedings](index=32&type=section&id=Item%201%20%E2%80%93%20Legal%20Proceedings) The company faces significant legal and regulatory matters, including a working capital dispute, class action lawsuit, shareholder derivative actions, and a non-public SEC investigation - The company is in a legal dispute with Air Industries seeking a judgment of approximately **$3.5 million** related to a working capital adjustment from the WMI acquisition[174](index=174&type=chunk) - A **consolidated class action lawsuit** has been filed against the company, its officers, and underwriters, alleging violations of the Securities Act and Exchange Act related to false statements in financial reports and offering documents[175](index=175&type=chunk)[178](index=178&type=chunk) - **Two shareholder derivative actions** have been filed, based on similar facts as the class action, alleging breach of fiduciary duty[179](index=179&type=chunk)[180](index=180&type=chunk) - On **May 22, 2020**, the company received a **subpoena from the SEC Division of Enforcement** as part of an investigation into the financial restatements and other matters. The company intends to cooperate fully[183](index=183&type=chunk) [Item 1A – Risk Factors](index=33&type=section&id=Item%201A%20%E2%80%93%20Risk%20Factors) The company faces significant risks from financial restatement and material weaknesses, the COVID-19 pandemic, and general business operations, including government contract dependence and cybersecurity threats [Risks Related to the Restatement and Material Weaknesses](index=34&type=section&id=Risks%20Related%20to%20the%20Restatement%20and%20Material%20Weaknesses) Financial restatement and material weaknesses pose severe risks, including eroded investor confidence, stock delisting, litigation, and hindering future capital raises - The restatement may continue to **erode investor confidence**, **negatively impact the stock price**, and result in **further litigation**[187](index=187&type=chunk) - **Material weaknesses** in internal controls, if not remediated, could **adversely affect** the ability to report financial results accurately and on time[188](index=188&type=chunk) - The company is currently **ineligible to use its Form S-3 shelf registration statement**, which could **adversely affect its ability to raise future capital**[202](index=202&type=chunk) - Failure to regain compliance with NYSE American timely filing rules could lead to **delisting of the common stock**[204](index=204&type=chunk)[205](index=205&type=chunk) [Risks Related to COVID-19](index=37&type=section&id=Risks%20Related%20to%20COVID-19) The COVID-19 pandemic poses significant risks to supply chain, costs, customer demand, and liquidity, with uncertainty regarding full forgiveness of the $4.8 million PPP loan - The COVID-19 pandemic could **disrupt the supply chain**, **increase costs**, and cause **delays or limit the ability of customers to perform**[209](index=209&type=chunk) - The pandemic could **negatively impact liquidity and cash flows**, potentially making it difficult to obtain additional financing if needed[210](index=210&type=chunk) - There is a risk that the company may **not meet the standards for full forgiveness** of its **$4.8 million PPP Loan**[213](index=213&type=chunk) [Risks Related to our Business](index=39&type=section&id=Risks%20Related%20to%20our%20Business) Business risks include heavy dependence on government contracts, fixed-price contract profitability, backlog termination, cybersecurity threats, and potential limitations on tax NOLs - A significant portion of revenue comes from **government contracts**, which are subject to **budget uncertainties** and can be **terminated for convenience**[215](index=215&type=chunk)[216](index=216&type=chunk) - **Fixed-price contracts** expose the company to **reduced profitability** if contract costs increase unexpectedly[226](index=226&type=chunk) - The company's backlog is **not guaranteed revenue**, as demonstrated by the Triumph Group's cancellation of G650 orders, which reduced backlog by **$3.6 million**[230](index=230&type=chunk)[231](index=231&type=chunk) - The ability to use approximately **$93 million** in federal NOLs could be **substantially limited** if the company experiences an **"ownership change"** under Section 382 of the Internal Revenue Code[246](index=246&type=chunk)[247](index=247&type=chunk) [Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds](index=45&type=section&id=Item%202%20%E2%80%93%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) There were no unregistered sales of equity securities or use of proceeds to report for the period - None[251](index=251&type=chunk) [Item 3 – Defaults Upon Senior Securities](index=45&type=section&id=Item%203%20%E2%80%93%20Defaults%20Upon%20Senior%20Securities) There were no defaults upon senior securities to report for the period - None[252](index=252&type=chunk) [Item 4 – Mine Safety Disclosures](index=45&type=section&id=Item%204%20%E2%80%93%20Mine%20Safety%20Disclosures) This section is not applicable to the company - Not applicable[253](index=253&type=chunk) [Item 5 – Other Information](index=45&type=section&id=Item%205%20%E2%80%93%20Other%20Information) There was no other information to report for the period - None[254](index=254&type=chunk) [Item 6 – Exhibits](index=45&type=section&id=Item%206%20%E2%80%93%20Exhibits) This section lists the exhibits filed with the report, including Section 302 and 906 certifications by the CEO and CFO, and the XBRL financial data - Exhibits filed include **CEO and CFO certifications (31.1, 31.2, 32)** and **XBRL data (101)**[250](index=250&type=chunk)