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COMMITMENTS AND CONTINGENCIES | 12 Months Ended
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Dec. 31, 2024
Commitments and Contingencies Disclosure [Abstract] |
COMMITMENTS AND CONTINGENCIES |
| 15. | COMMITMENTS AND CONTINGENCIES
The Company may be involved in various claims, suits, assessments, investigations, and legal proceedings that arise from time to time in the ordinary course of its business. The Company accrues a liability when it is both probable a liability has been incurred and the amount of the loss can be reasonably estimated. The Company reviews these accruals at least quarterly and adjusts them to reflect ongoing negotiations, settlements, rulings, advice of legal counsel, and other relevant information. To the extent new information is obtained and the Company’s views on the probable outcomes of claims, suits, assessments, investigations, or legal proceedings change, changes in the Company’s accrued liabilities would be recorded in the period such determination is made. For some matters, the amount of liability is not probable or the amount cannot be reasonably estimated and, therefore, accruals have not been made. The Company reached a settlement with the SEC on June 20, 2024 related to the Company's previously announced and filed restatements of certain of its financial statements for fiscal periods between January 1, 2018 and December 31, 2022. Under the terms of this settlement, if the Company fails to comply with various undertakings, a civil monetary penalty in the amount of $400,000 will be due to the SEC by June 30, 2025 (the “Undertakings”). The Undertakings are as follows: (a) the Company shall fully remediate its outstanding material weaknesses in Internal Controls over Financial Reporting (“ICFR”) and have effective ICFR and disclosure controls and procedures (“DCP”) by December 31, 2024; (b) the Company shall publicly disclose, concurrent with the filing of the 2024 Form 10-K, whether in management's opinion, the Company has fully remediated its material weaknesses in ICFR and has effective ICFR and DCP; and (c) the Company shall certify, in writing, compliance with the undertaking(s) set forth above. The certification shall be made by the Company's CEO and identify the undertaking(s), provide written evidence of compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate compliance. The certification and supporting material shall be submitted to the SEC no later than sixty (60) days from the date of the completion of the undertakings. Termination of Shareholder Derivative Actions and Class Action Lawsuit Termination of Shareholder Derivative Actions In 2020 and 2021, four shareholder derivative actions were filed against certain current and former members of our board of directors and certain of our current and former officers. All four of the actions—each described in further detail below—were based on substantially the same allegations and claims – specifically, that the defendants allegedly breached their fiduciary duties and/or violated securities laws by permitting false and misleading statements to be included in the Company’s registration statement and prospectus supplements issued in connection with the Company’s October 16, 2018 securities offering and/or by permitting false and misleading statements to be made in the Company’s periodic reports filed between March 22, 2018 and February 14, 2020. The first action (captioned Moulton v. McCrosson, et.al., No. 20-cv-02092) was filed on May 7, 2020, in the U.S. District Court for the Eastern District of New York. It purported to assert derivative claims against the individual defendants for violations of Section 10(b) and 21D of the Exchange Act, breach of fiduciary duty, and unjust enrichment and sought to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct. The complaint also sought declaratory, equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs. The second action (captioned Woodyard v. McCrosson, et al., Index No. 613169/2020) was filed on September 17, 2020, in the Supreme Court of the State of New York (Suffolk County). It purported to assert derivative claims against the individual defendants for breach of fiduciary duty and unjust enrichment and sought to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct, along with declaratory, equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs. The third action (captioned Berger v. McCrosson, et al., No. 1:20-cv-05454) was filed on November 10, 2020, in the U.S. District Court for the Eastern District of New York. The complaint, which was based on the shareholder’s inspection of certain corporate books and records, purported to assert derivative claims against the individual defendants for breach of fiduciary duty and unjust enrichment, and sought to implement reforms to the Company’s corporate governance and internal procedures and to recover on behalf of the Company an unspecified amount of monetary damages. The complaint also sought equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs. On March 19, 2021, the parties to the Moulton and Berger actions filed a joint stipulation consolidating the actions (under the caption In re CPI Aerostructures Stockholder Derivative Litigation, No. 20-cv-02092) and staying the consolidated action. The fourth action (captioned Wurst, et al. v. Bazaar, et al., Index No. 605244/2021) was filed on March 24, 2021, in the Supreme Court of the State of New York (Suffolk County). The complaint purported to assert derivative claims against the individual defendants for breach of fiduciary duty, unjust enrichment, and waste of corporate assets, and sought to recover on behalf of the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct. The complaint also sought declaratory, equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs. On June 13, 2022, plaintiffs in the consolidated federal action informed the court that the Company and all defendants had reached an agreement in principle with all plaintiffs to settle the shareholder derivative lawsuits described above. On June 16, 2022, plaintiffs in the consolidated federal action filed an unopposed motion for preliminary approval of the settlement. On February 14, 2023, the magistrate judge recommended that the court grant the motion in its entirety. On March 6, 2023, the Court granted preliminary approval of the proposed settlement. On May 17, 2023, plaintiffs in the consolidated federal action filed an unopposed motion for final approval of the settlement. The magistrate judge held a final approval hearing on June 7, 2023. On October 27, 2023, the magistrate judge recommended that the Court grant the final approval motion in its entirety. On December 11, 2023, the Court adopted that recommendation and entered orders granting final approval to the settlement and closing the case. Pursuant to the settlement agreement, after the federal court’s final approval of the settlement, the plaintiffs in the Woodyard and Wurst state-court actions voluntarily requested that those actions be dismissed. The parties to the Woodyard action filed a stipulation of dismissal on December 15, 2023, and the Court entered an order dismissing the action on December 19, 2023. The parties to the Wurst action filed a stipulation of dismissal on December 14, 2023, and the Court entered an order dismissing the action on December 18, 2023. As part of the settlement, the Company agreed to undertake (or confirm that it has undertaken already) certain corporate governance reforms. In addition, the Company and/or its insurer have agreed to pay a total of $585,000 in attorneys’ fees to plaintiffs’ counsel. The Company’s insurer paid the full amount due of $585,000. Because the settlement amount was transferred to counsel for plaintiffs on May 5, 2023 from the escrow account established for this purpose, we relieved from our balance sheet, as of that date, the amounts previously owed from our directors’ and officers’ insurance carrier and to that plaintiff. Termination of Class Action Lawsuit A consolidated class action lawsuit (captioned Rodriguez v. CPI Aerostructures, Inc., et al., No. 20-cv-01026) was filed in the U.S. District Court for the Eastern District of New York against the Company; Douglas McCrosson, the Company’s former Chief Executive Officer; Vincent Palazzolo, the Company’s former Chief Financial Officer; and the two underwriters of the Company’s October 16, 2018 offering of common stock, Canaccord Genuity LLC and B. Riley FBR. The Amended Complaint in the action asserted claims on behalf of two plaintiff classes: (i) purchasers of the Company’s common stock issued pursuant to and/or traceable to the Company’s offering conducted on or about October 16, 2018; and (ii) purchasers of the Company’s common stock between March 22, 2018 and February 14, 2020. The Amended Complaint alleged that the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act by negligently permitting false and misleading statements to be included in the registration statement and prospectus supplements issued in connection with its October 16, 2018 securities offering. The Amended Complaint also alleged that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated by the SEC, by making false and misleading statements in the Company’s periodic reports filed between March 22, 2018 and February 14, 2020. Plaintiff sought unspecified compensatory damages, including interest; rescission or a rescissory measure of damages; unspecified equitable or injunctive relief; and costs and expenses, including attorney’s fees and expert fees. On February 19, 2021, the Company moved to dismiss the Amended Complaint. Plaintiff submitted a brief in opposition to the motion to dismiss on April 23, 2021. On May 20, 2021, the parties reached a settlement in the amount of $3,600,000, subject to court approval. On July 9, 2021, Plaintiff filed an unopposed motion for preliminary approval of the settlement. On November 10, 2021, a magistrate judge recommended that the court grant the motion for preliminary approval in its entirety. The Court adopted the recommendation on May 27, 2022, and entered an order granting preliminary approval of the settlement on June 7, 2022. On August 5, 2022, the Plaintiff filed an unopposed motion for final approval. The magistrate judge held a hearing on the final approval motion on September 9, 2022. On February 16, 2023, the magistrate judge recommended that the Court grant the final approval motion in its entirety. The Court adopted that recommendation in its entirety on March 10, 2023, and terminated the case on March 13, 2023. On May 5, 2023, the Settlement Amount was transferred to plaintiff’s counsel from the escrow account established for this purpose. Litigation Settlement Obligation and Insurance Recovery Receivable Pertaining to the Class Action Lawsuit and Shareholder Derivative Action The attorneys’ fees for both the class action lawsuit and the shareholder derivative actions were covered and paid by our directors’ and officers’ insurance carrier, after satisfaction of our $750,000 retention. As of December 31, 2023, we had previously paid and accrued to our financial statements covered expenses totaling $750,000, and had therefore met our insurance carrier’s directors’ and officers’ retention requirement, which capped the Company’s expenses pertaining to the class action suit at $750,000. Because the Settlement Amount was transferred to counsel for plaintiff in the class action lawsuit on May 5, 2023, from the escrow account established for this purpose, we have relieved from our balance sheet, as of that date, the amounts previously owed from our directors’ and officers’ insurance carrier and to that plaintiff.

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