CVU US Equity☆

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)

(State or other jurisdiction of (I.R.S. Employer

incorporation or organization) Identification No.)

91 Heartland Blvd., Edgewood, New York 11717

(Address of principal executive offices)

(Registrant’s telephone number, including area code)

Securities

registered pursuant to Section 12(b) of the Act:

Title of Each Class Trading Symbol(s) Name of each exchange on which registered

Common Stock, $.001 par value CVU NYSE American

Securities

registered pursuant to Section 12(g) of the Act: None

Indicate

by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐

No ☒

Indicate

by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes ☐ No ☒

Indicate

by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities

Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such

reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes

☒ No ☐

Indicate

by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant

to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that

the registrant was required to submit such files). Yes ☒ No ☐

Indicate

by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting

company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,”

“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act (check one):

Large accelerated filer ☐ Accelerated filer ☐

Non-accelerated Filer ☒ Smaller reporting company ☒

Emerging growth company ☐

If

an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for

complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate

by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness

of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered

public accounting firm that prepared or issued its audit report. ☐

Indicate

by check mark whether the registrant is a shell company (as defined in Rule 12-b-2 of the Exchange Act).

Yes ☐

No ☒

As

of June 30, 2020 (the last business day of the registrant’s most recently completed second fiscal quarter), the aggregate

market value of the registrant’s common stock (based on its reported last sale price on the NYSE American on June 30,

2020 of $3.76) held by non-affiliates of the registrant was $35,301,795.

As

of April 15, 2021, the registrant had 12,132,606shares

of common stock, $.001 par value, outstanding.

Documents

Incorporated by Reference:

Part

III (Items 10, 11, 12, 13 and 14) from the definitive Proxy Statement for the 2021 Annual Meeting of Shareholders to be filed

with the Securities and Exchange Commission no later than 120 days after the end of the Registrant’s fiscal year covered

by this report.

1

CPI

AEROSTRUCTURES, INC. AND SUBSIDIARIES

FORM

10-K ANNUAL REPORT

FOR

THE FISCAL YEAR ENDED DECEMBER 31, 2020

TABLE

OF CONTENTS

PART I 3

Item 1. BUSINESS 11

Item 1A. RISK FACTORS 11

Item 1B UNRESOLVED STAFF COMMENTS 18

Item 2. PROPERTIES 18

Item 3. LEGAL PROCEEDINGS 18

Item 4. MINE SAFETY DISCLOSURES 20

PART II

Item 6. SELECTED FINANCIAL DATA 21

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26

Item 9A CONTROLS AND PROCEDURES 26

Item 9B. OTHER INFORMATION 30

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 30

Item 11. EXECUTIVE COMPENSATION 30

Item 14. PRINCIPAL ACCOUNTANTS FEES AND SERVICES 30

PART IV

INDEX TO FINANCIAL STATEMENTS 33

Item 16 FORM 10-K SUMMARY

2

PART

I

Item 1. BUSINESS

Forward

Looking Statements

This

Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform

Act of 1995. When used in this Annual Report on Form 10-K and in future filings by us with the Securities and Exchange Commission

(“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. In addition, any statements that refer to projections, forecasts or other

characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements. Readers

are cautioned not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made.

There can be no assurance that future developments will be those that have been anticipated. We may

not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements. Further, 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 “Item 1A: Risk Factors” and “Item 7: Management’s

Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K. We

have no obligation to publicly release 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.

You

should read the financial information set forth below in conjunction with our consolidated financial statements and notes thereto.

General

CPI

Aerostructures, Inc., including its wholly owned subsidiaries ("CPI Aero", ”CPI”, the "Company",

"us" or "we") is a manufacturer of structural assemblies, integrated systems, and kitted components for the

international aerospace and defense ("A&D") markets. Our products are generally used by customers in the production

of fixed wing aircraft, helicopters, electronic warfare ("EW") systems, intelligence, surveillance, and reconnaissance

("ISR") systems, missiles, and other sophisticated A&D products. We are primarily a Tier 1 supplier to Original

Equipment Manufacturers ("OEMs"). We are also a Tier 2 supplier to larger Tier 1 manufacturers and a prime contractor

to the U.S. Department of Defense ("DOD"), primarily the U.S. Air Force ("USAF"). Our products are used by

OEMs within both commercial aerospace and national security end markets. In addition to our assembly operations, we provide manufacturing

engineering, program management, supply chain management, and maintenance repair and overhaul ("MRO") services.

Our

OEM customers in the defense sector include leading prime defense contractors such as:

80%

and 72% of our revenue in 2020 and 2019, respectively, were generated by subcontracts with defense prime contractors.

We

have positioned our Company to take advantage of opportunities in the military aerospace market to a broad customer base, which

we believe will reduce the potential impact of industry consolidation. Our success as a subcontractor to defense prime contractors

has provided us with opportunities to act as a subcontractor to prime contractors in the production of commercial aircraft structures,

which we believe will also reduce our exposure to defense industry consolidation, government spending decisions, and other defense

industry risks.

3

Our

OEM customers in the civil aviation market include:

10%

and 21% of our revenue in 2020 and 2019, respectively, were generated by commercial contract sales.

CPI

also is a prime contractor to the DOD, primarily through contracts directly with the USAF and the Defense Logistics Agency (“DLA”).

10% and 7% of our revenue in 2020 and 2019, respectively, were generated by direct government sales.

CPI

Aero has over 40 years of experience as a contractor. Our team possesses extensive technical expertise and program management

and integration capabilities. Our competitive advantage lies in our ability to offer large contractor capabilities with the flexibility

and responsiveness of a small company, while staying competitive in cost and delivering superior quality products.

We

maintain a website located at www.cpiaero.com. Our corporate filings, including our Annual

Report on Form 10-K, our Quarterly Reports on Form 10-Q, our Current Reports on Form 8-K, our proxy statements and reports filed

by our officers and directors under Section 16(a) of the Securities Exchange Act of 1934, as amended (“Exchange Act”),

and any amendments to those filings, are available, free of charge, on our website as soon as reasonably practicable after we

electronically file such material with the SEC. The contents of our website are not incorporated in or otherwise to be regarded

as a part of this Annual Report on Form 10-K.

Significant

Contracts

Some

of our significant contracts are as follows:

Military

Aircraft – Subcontracts with Prime Contractors

NGC

E-2D “Advanced Hawkeye”: The NGC E-2 Hawkeye is an all-weather, carrier-based tactical Airborne Early Warning

aircraft. The twin turboprop aircraft was designed and developed in the 1950s by the Grumman Aircraft Company for the United States

Navy. The United States Navy aircraft has been progressively updated with the latest variant, the E-2D, first flying in 2007.

In 2008, we received an initial $7.9 million order from NGC to provide structural kits used in the production of Outer Wing Panels

(“OWP”) of the E-2D. We initially valued the long-term agreement at approximately $98 million over an eight-year period,

with the potential to be in excess of $195 million over the life of the aircraft program. In February of 2019, we announced a

new multi-year award valued at up to approximately $47.5 million. In June 2020, we announced that we had received firm orders

valued in excess of $43 million and $5 million in long-lead funding in anticipation of purchase orders for OWP structural components

and kits. Since 2008, the cumulative orders we have received on this program through December 31, 2020 exceed $207 million.

In

addition, in 2015 we won an award to supply structural components and kits for the Wet Outer Wing Panel (“WOWP”) on

the E-2D Advanced Hawkeye airborne early warning and control (“AEW&C”) aircraft that will be manufactured for

Japan. We are responsible for component source selection, supply chain management, delivery of kits, and are providing manufacturing

engineering services to NGC during the integration of the components into the WOWP. In late 2019, CPI Aero received additional

WOWP kit requirements increasing the total expected value of the WOWP program for Japan to be in excess of $37 million.

In

February 2020, the Company’s WMI subsidiary received from NGC approximately $4 million in purchase orders to provide numerous

welded structure and tubes for the E-2D Advanced Hawkeye. Under the terms of the purchase orders, WMI will manufacture more than

140 different items in support of the production of at least 25 E-2D aircraft. The period of performance is expected to be through

2022.

ALQ-249

Next Generation Jammer – Mid-Band Pod (NGJ-MB): The Raytheon NGJ-MB pod is an external jamming pod that will disrupt

and degrade enemy aircraft and ground radar and communication systems and will replace the ALQ-99 system on the U.S. Navy's EA-6B

Growler carrier-based electronic warfare aircraft. The U.S. Navy plans to install these pods on 138 EA-18G Growlers during the

production phase. There are 2 pods per aircraft. Raytheon received a $1 billion sole source contract from the U.S. Navy in April

2016, and CPI has a contract with Raytheon to assemble the pod structural housing and air management system (“AMS”).

In 2019, Raytheon authorized CPI Aero to begin production of pod structures and air management system components for the System

Demonstration and Test Article (“SDTA”) phase of the NGJ-MB program. All SDTA pods and AMS components are expected

to ship during 2021. CPI Aero estimates the value of the NGJ-MB program through the SDTA phase to be approximately $60 million.

We believe that the total value of the NGJ-MB program through production will be in excess of $210 million through 2030.

4

A-10

Thunderbolt II “Warthog”: The Boeing A-10 Thunderbolt II, also known as the Warthog, is a twin-engine aircraft

that provides close-air support of ground forces and employs a wide variety of conventional munitions including general-purpose

bombs. The simple, effective and survivable single-seat aircraft can be used against all ground targets, including tanks and other

armored vehicles. On August 21, 2019, Boeing announced an award from the USAF with a maximum contract value of $999 million to

manage the production of up to 112 new wing sets and spares kits for A-10 aircraft. The USAF ordered 27 wing sets immediately

at contract award. In 2019, CPI announced the receipt of an Indefinite Delivery/Indefinite Quantity (IDIQ) contract with a maximum

ceiling value of $48 million from Boeing for structural assemblies for the A-10. Under the terms of the IDIQ contract, CPI Aero

will manufacture major structural subassemblies of the A-10 aircraft’s wing. The Company also announced that it has received

initial purchase orders under the IDIQ contract valued at approximately $6 million for the production of 4 shipsets of assemblies

and associated program start-up costs. In May 2020, CPI Aero announced the receipt of additional purchase orders totaling approximately

$14 million from Boeing.

F-35

Lightning II: The Lockheed F-35 Lightning II is a family of single-seat, single-engine, all-weather stealth multirole

fighters designed to perform ground attack, aerial reconnaissance, and air defense missions. The DOD plans to acquire over 2,400

F-35's by 2034 and 11 other countries also have plans to acquire the aircraft. The Company has two significant contracts for products

used on the F-35. In 2015, CPI was awarded a multi-year contract to supply four different lock assemblies for the arresting gear

door on the F-35A CTOL. CPI made its first delivery under that contract in May 2017. In 2018, the Company received a new long-term

agreement value at approximately $8 million for lock assemblies to be delivered between 2020 and 2024. In November 2017, CPI was

awarded an additional $15.8 million multi-year contract to manufacture canopy activation drive shaft assemblies for the F-35A,

F-35B, and F-35C aircraft.

UH-60

“BLACK HAWK”: The Sikorsky UH-60 BLACK HAWK helicopter is the leader in multi-mission-type-aircraft. Among

the mission configurations its serves are troop transport, medical evacuation, electronic warfare, attack, assault support and

special operations. More than 3,000 BLACK HAWK helicopters are in use today, operating in 29 countries. CPI Aero and its WMI subsidiary

manufacture several different structural assemblies, including welded structure, for the BLACK HAWK helicopter. The majority of

CPI’s contracts for the BLACK HAWK are as a Tier 1 supplier to Sikorsky. The Company also is a Tier 2 supplier to GKN Aerospace

for ultimate use on the BLACK HAWK. In 2017, CPI Aero received an approximate $21 million long-term agreement through 2022 for

the production of fuel panel assemblies, work it has performed for Sikorsky since 2010. Also in 2017, the Company received an

$8 million long-term agreement through 2022 to manufacture machine gunner window assemblies, continuing work it has performed

since 2010. More recently, since October 2018, CPI Aero has received multiple purchase orders totaling $22 million for Hover Infrared

Suppression System (HIRSS) module assemblies for use as spares on older variants of the UH-60 BLACK HAWK helicopter. The HIRSS

is a defensive countermeasures system that is integral to the survival of the UH-60 Black Hawk by reducing the opportunity for

an infrared-seeking threat system to acquire, lock onto, track, and destroy the helicopter.

F-16V

Fighting Falcon: The Lockheed Martin F-16 is the world’s most successful, combat-proven multirole fighter. Approximately

3,000 operational F-16s are in service today in 25 countries. The F-16V is a new variant, sold exclusively to international air

forces and is the most technologically advanced, fourth generation fighter in the world. In 2019, the Company announced it had

been awarded a multi-year contract by Lockheed Martin to manufacture Rudder Island and Drag Chute Canister (RI/DCC) assemblies

for the F-16V. The RI/DCC is a large structural sub-assembly that is installed on the tail section of the aircraft. Deliveries

are expected to begin during late 2020 and continue through 2024. In June 2020, the Company announced that it had been awarded

a follow-on order from Lockheed Martin to manufacture structural assemblies for new production F-16 Block 70/72 aircraft. The

total value of the RI/DCC program is approximately $21 million and we have received more than $8.7 million in orders through December

31, 2020.

CH-53K

King Stallion: The CH-53K is a heavy-lift helicopter being developed by Sikorsky for the United States Marine Corps. Flight

testing began in 2018. We manufacture composite electronics racks as a Tier 2 supplier to Spirit AeroSystems, Inc., the manufacturer

of the CH-53K cockpit and cabin. Through December 31, 2020, we have received orders for development and test valued at more than

$2.5 million, including a $1.1 million order for rack with delivery requirements commencing in mid-2020 through 2021.

Undisclosed

Vehicle: In 2018 the Company received an initial purchase order from Raytheon Missile Systems Company, a subsidiary of

Raytheon Company, to manufacture structural assemblies on an undisclosed vehicle. In 2019 CPI Aero completed the initial order

and in January 2021 announced a subsequent purchase order to manufacture additional units. The undisclosed vehicle is currently

under development. Terms of the order will not be disclosed.

5

Undisclosed

Pod Structure: In 2019 the Company received an initial purchase order from Raytheon to manufacture pod structures for

an undisclosed application. The initial value of the order is approximately $2.3 million for manufacturing engineering service,

development of assembly tooling and the production of the prototypes. The undisclosed vehicle is currently under development.

A prototype is expected to be manufactured during 2021.

Military

Aircraft – Prime Contracts with U.S. Government

F-16

“Fighting Falcon”: Since 2014, we have been a prime contractor to the DLA to provide structural wing components

and logistical support for global F-16 aircraft MRO operations. Through December 31, 2020 we have received almost $15 million

in orders on this program.

T-38

Pacer Classic III, Phase 2: For more than 50 years, the Northrop T-38 has been the principal supersonic jet trainer used

by the USAF. The T-38C Pacer Classic III Fuselage Structural Modification Kit Integration program (“PC III”) and the

Talon Repair Inspection and Maintenance (“TRIM”) programs are expected to increase the structural service life of

the T-38 beyond 2030. In 2015, CPI Aero was awarded Phase 2 of PC III and has received purchase orders valued at approximately

$2 million from the USAF to provide structural modification kits for the PC III aircraft structural modification program. Through

December 2020, we have received $23.8 million in orders on this program.

T-38

Pacer Classic III, Phase 3 and TRIM: In July 2019, the Company announced a new $65.7 million IDIQ contract from the USAF

for the final phase of PC III as well as TRIM. The TRIM program is a separate USAF structural modification effort that will extend

the structural service life of T-38A and T-38 model types, as well as, T-38C models that were not modified during PC III. Through

December 31 2020, the Company has received orders valued at approximately $15.3 million for the PC III, Phase 3 and TRIM programs.

In February 2021, the Company announced it had received orders for additional requirements valued at $8.7 million, bringing total

orders under this long term contract to approximately $24 million.

Commercial

Aircraft – Subcontracts with Prime Contractors

G650/G650ER:The Gulfstream G650 is a twin-engine business jetairplane produced

by Gulfstream Aerospace that can be configured to carry from 11 to 18 passengers.

Gulfstream began the G650 program in 2005 and revealed it to the public in 2008. The G650 is Gulfstream’s largest and fastest

business jet. The G650ER is an extended range version of the aircraft. In 2020, Gulfstream announced the launch of a new derivative

the G700. In March 2008, Spirit AeroSystems, Inc. awarded us a contract to provide fixed leading edges (FLE) for the Gulfstream

G650 business jet, and derivative models, a commercial program that Spirit was supporting. In December 2014, Spirit transferred

its work-scope on this program to Triumph Group. Due to the impact of the COVID-19 pandemic, in May 2020, Triumph Group cancelled

nearly all open orders with the Company. On May 27, 2020, Triumph Group announced it had reached an agreement in principle to

sell the G650 wing program to Gulfstream Aerospace, and on June 12, 2020, we received a joint communication from Gulfstream Aerospace

and Triumph Group that stated Gulfstream’s intention at the conclusion of the transaction is to continue to purchase G650

wing components from the Company. In December 2020, we received purchase orders directly from Gulfstream for wing components for

use on the G650, G650ER and/or G700 aircraft.

Phenom

300:The Phenom 300 is a twin-engine, executive jet produced by Brazilian aircraft company Embraer, S.A. that can carry

between 6 and 10 passengers and a crew of 2. We have been producing engine inlet assemblies for Embraer under a long-term agreement

we entered into in 2012. We have received approximately $36 million in orders on this program through December 31 2020. We estimate

the potential value of the program to be in excess of $52 million.

Sales

and Marketing

We

are recognized within the aerospace industry as a Tier 1 or Tier 2 supplier to major aircraft suppliers. Additionally, we may

bid for military contracts set aside specifically for small businesses.

We

are generally awarded initial contracts for our products and services through the process of competitive bidding. This process

begins when we first learn, formally or otherwise, of a potential contract from a prospective customer and concludes after all

negotiations are completed upon award. When preparing our response to a prospective customer for a potential contract, we evaluate

the contract requirements and determine and outline the services and products we can provide to fulfill the contract at a competitive

price.

6

Many

times for our defense programs, after the initial contract, subsequent follow-on contracts are awarded on a sole-source basis,

subject to cost-justification and direct negotiation with our customer and in some cases, the federal government.

Our

average sales cycle, which generally commences at the time a prospective customer issues a request for proposal and ends upon

delivery of the final product to the customer, varies widely.

Because

of the complexities inherent in the aerospace industry, the time from the initial request for proposal to award ranges from as

little as a few weeks to several years. Additionally, our contracts have ranged from six months to as long as 10 years. Also,

repeat and follow-on jobs for current contracts frequently provide additional opportunities with minimal start-up costs and rapid

rates to production.

The

Market

We

have positioned our Company to take advantage of opportunities in the military aerospace market to a broad customer base, thereby

reducing the impact of direct government contracting limitations. Our success as a subcontractor to defense prime contractors

has provided us with opportunities to act as a subcontractor to prime contractors in the production of commercial aircraft structures,

which also reduced our exposure to government spending decisions.

Over

time, our Company has expanded in both size and capabilities, with growth in our operational and global supply chain program management.

These expansions have allowed us the ability to supply more complex aerostructure assemblies and aerosystems and structures in

support of our government-based programs as well as to pursue opportunities within the commercial and business jet markets. Our

capabilities have also allowed us to acquire MRO and kitting contracts.

Approximately

$2.9 million and $3.3 million of our revenue for the years ended December 31, 2020 and 2019, respectively, were from

customers outside the U.S. All other revenue for the years ended December 31, 2020 and 2019 has been attributable to

customers within the U.S. We have no assets outside the U.S.

Government-based

contracts are subject to national defense budget and procurement funding decisions that, accordingly, drive demand for our business

in that market. Government spending and budgeting for procurement, operations and maintenance are affected not only by military

action, but also the related fiscal consequences of these actions, as well as the political process.

Backlog

We

produce custom assemblies pursuant to long-term contracts and customer 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 (“ASC606”), and including estimates of future contract price escalation. Unfunded backlog

is the estimated amount of future orders under the expected duration of the program. Substantially all of our backlog 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.

The

total backlog at December 31, 2020 is primarily comprised of long-term programs with Raytheon (Next Generation Jammer –

Mid Band), Northrop Grumman (E-2D), USAF (T-38), Boeing (A-10), and Embraer (Phenom 300). Funded backlog is primarily

from purchase orders under long-term contracts with Northrop Grumman (E-2D), Sikorsky (BLACK HAWK), Lockheed Martin (F-16V), and

the USAF (T-38). Approximately 54% of the funded backlog at December 31, 2020 is expected to be recognized as revenue during 2021.

7

Our

total backlog as of December 31, 2020 and 2019 was as follows:

Approximately

96% of the total amount of our backlog at December 31, 2020 was attributable to government contracts, compared to 88% at December

31, 2019. Our backlog attributable to government contracts at December 31, 2020 and 2019 was as follows:

Our

backlog attributable to commercial contracts at December 31, 2020 and 2019 was as follows:

Material

and Parts

We

subcontract production of substantially all parts incorporated into our products to third-party manufacturers under firm fixed

price orders. Our decision to purchase certain components generally is based upon whether the components are available to meet

required specifications at a cost and with a delivery schedule consistent with customer requirements. From time to time, we are

required to purchase custom made parts from sole suppliers and manufacturers in order to meet specific customer requirements.

We

obtain our raw materials from several commercial sources. Although certain items are only available from limited sources of supply,

we believe that the loss of any single supplier would not have a material adverse effect on our business.

Competition

We

face competition in our role as both a prime contractor to the U.S. Government and as a Tier 1 or Tier 2 subcontractor to military

and commercial aircraft manufacturers. Within our aerostructures capability, we often compete against much larger Tier 1

suppliers, such as Triumph Group, Spirit AeroSystems, Kaman Aerospace, GKN, Ducommun, and LMI Aerospace. We believe that

we can compete effectively with these larger companies by delivering products with the same level of quality and performance at

a better value for our customer. Within our aerosystems capability, such as our portfolio of EW and ISR integrated pod structures,

we find more limited competition and are not aware of competition from any of the aerostructures companies mentioned above. In

these cases, we typically compete with the internal manufacturing arm of our customer. We believe our unique skills related to

integrated pod structures combined with a very efficient and generally much lower cost structure creates a competitive advantage

for bidding on aerosystems contracts.

For

certain unrestricted contracts for the U.S. Government, we may compete against well-established prime contractors, including NGC,

Lockheed and Boeing. All of these competitors possess significantly larger infrastructures, greater resources and the capabilities

to respond to much larger contracts. We believe that our competitive advantage lies in our ability to offer large contractor

capabilities with the flexibility and responsiveness of a small company, while staying competitive in cost and delivering superior

quality products. While larger prime contractors compete for significant modification awards, they generally do not compete

for awards in smaller modifications, spares and replacement parts, even for aircraft for which they are the original manufacturer. In

certain instances, the large prime contractors often subcontract much of the work they win to their Tier 1 suppliers so we also

may act as a subcontractor to some of these major prime contractors. Further, in some cases these companies are not permitted

to bid, for example when the U.S. Government designates a contract as a Small Business Set-Aside. In these restricted contracts

for the U.S. Government, CPI Aero typically competes against numerous small business competitors. We believe we compete effectively

against the smaller competitors because smaller competitors generally do not have the expertise we have in responding to requests

for proposals for government contracts, nor will they typically have the more than 40 years of past performance in conducting

thousands of contracts for the U.S. Government.

8

COVID-19

Coronavirus Pandemic Impact on Our Business

The

outbreak of the COVID-19 coronavirus was declared a pandemic by the World Health Organization during our first quarter of 2020.

During the latter part of our first quarter and subsequent to our quarter end, the COVID-19 pandemic grew, causing non-essential

businesses to shut down and many people to observe the shelter-in-place directive from our state government. Our business and

operations and the industries in which we operate have been impacted by public and private sector policies and initiatives in

the U.S. to address the transmission of COVID-19, such as the imposition of travel restrictions and the adoption of remote work.

The COVID-19 pandemic has contributed to a general slowdown in the global economy, has adversely impacted the businesses of certain

of our customers and suppliers, and, if it continues for an extended period of time, it could adversely impact our results of

operations and financial condition. In response to the COVID-19 impact on our business, we have been and continue to actively

mitigate costs and adjust production schedules. We have also been taking actions to preserve capital and protect the long-term

needs of our businesses, including negotiating progress payments with our customers and reducing discretionary spending. For more

information on the current and potential impact of the COVID-19 pandemic on our business, see Risk Factors included in Part I,

Item 1A of this Annual Report on Form 10-K.

Government

Regulation

Environmental

Regulation

We

are subject to regulations administered by the U.S. Environmental Protection Agency, the U.S. Occupational Safety and Health Administration,

various state agencies and county and local authorities acting in cooperation with federal and state authorities. Among other

things, these regulatory bodies impose restrictions to control air, soil and water pollution, to protect against occupational

exposure to chemicals, including health and safety risks, and to require notification or reporting of the storage, use and release

of certain hazardous chemicals and substances. The extensive regulatory framework imposes compliance burdens and risks on us.

Governmental authorities have the power to enforce compliance with these regulations and to obtain injunctions or impose civil

and criminal fines in the case of violations.

The

Comprehensive Environmental Response, Compensation and Liability Act of 1980 (“CERCLA”) imposes strict, joint and

several liability on the present and former owners and operators of facilities that release hazardous substances into the environment.

The Resource Conservation and Recovery Act of 1976 (“RCRA”) regulates the generation, transportation, treatment, storage

and disposal of hazardous waste. In New York State, the handling, storage and disposal of hazardous substances are governed by

the Environmental Conservation Law, which contains the New York counterparts of CERCLA and RCRA. In addition, the Occupational

Safety and Health Act, which requires employers to provide a place of employment that is free from recognized and preventable

hazards that are likely to cause serious physical harm to employees, obligates employers to provide notice to employees regarding

the presence of hazardous chemicals and to train employees in the use of such substances.

Our

operations require the use of a limited amount of chemicals and other materials for painting and cleaning, including solvents

and thinners, which are classified under applicable laws as hazardous chemicals and substances. We have obtained a permit from

the Town of Islip, New York, Building Division in order to maintain a paint booth containing flammable liquids.

Federal

Aviation Administration Regulation

We

are subject to regulation by the Federal Aviation Administration (“FAA”) under the provisions of the Federal Aviation

Act of 1958, as amended. The FAA prescribes standards and licensing requirements for aircraft and aircraft components. We are

subject to inspections by the FAA and may be subjected to fines and other penalties (including orders to cease production) for

noncompliance with FAA regulations. Our failure to comply with applicable regulations could result in the termination of or our

disqualification from some of our contracts, which could have a material adverse effect on our operations.

Government

Contract Compliance

Our government contracts and

sub-contracts are subject to the procurement rules and regulations of the U.S. Government. Many of the contract terms are dictated by

these rules and regulations. Specifically, cost-based pricing is determined under the Federal Acquisition Regulation (“FAR”),

which provide guidance on the types of costs that are allowable in establishing prices for goods and services under U.S. Government contracts.

For example, costs such as those related to charitable contributions, advertising, interest expense, and public relations are unallowable,

and therefore not recoverable through sales. During and after the fulfillment of a government contract, we may be audited in respect

of the direct and allocated indirect costs attributed thereto. These audits may result in adjustments to our contract costs. Additionally,

we may be subject to U.S. Government inquiries and investigations because of our participation in government procurement. Any inquiry

or investigation can result in fines or limitations on our ability to continue to bid for government contracts and fulfill existing contracts.

We believe that we are in compliance with all federal, state and local laws and regulations governing our operations and have obtained

all material licenses and permits required for the operation of our business.

9

The

U.S. Government generally has the ability to terminate our contracts, in whole or in part, without prior notice, for convenience

or for default based on performance. If a U.S. Government contract were to be terminated for convenience, we generally would be

protected by provisions covering reimbursement for costs incurred on the contract and profit on those costs, but not the anticipated

profit that would have been earned had the contract been completed. In the unusual circumstance where a U.S. Government contract

does not have such termination protection, we attempt to mitigate the termination risk through other means. Termination resulting

from our default may expose us to liability and could have a material adverse effect on our ability to compete for other contracts.

The U.S. Government also has the ability to stop work under a contract for a limited period of time for its convenience. In the

event of a stop work order, we generally would be protected by provisions covering reimbursement for costs incurred on the contract

to date and for costs associated with the temporary stoppage of work on the contract. However, such temporary stoppages and delays

could introduce inefficiencies for which we may not be able to negotiate full recovery from the U.S. Government, and could ultimately

result in termination for convenience or reduced future orders on certain contracts. Additionally, we may be required to continue

to perform for some period of time on certain of our U.S. Government contracts, even if the U.S. Government is unable to make

timely payments.

Insurance

We

maintain a $2 million general liability insurance policy, a $100 million products liability insurance policy, and a $5 million

umbrella liability insurance policy. Additionally, we maintain a $10 million director and officers’ insurance policy. We

believe this coverage is adequate for claims that have been and may be brought against us, and for the types of products presently

marketed because of the strict inspection standards imposed on us by our customers before they take possession of our products.

Additionally, the FAR generally provide that we will not be held liable for any loss of or damage to property of the U.S. Government

that occurs after the U.S. Government accepts delivery of our products and that results from any defects or deficiencies in our

products unless the liability results from willful misconduct or lack of good faith on the part of our managerial personnel.

Proprietary

Information

None

of our current assembly processes or products is protected by patents. We rely on proprietary know-how and information and employ

various methods to protect the processes, concepts, ideas and documentation associated with our products. These methods, however,

may not afford complete protection and there can be no assurance that others will not independently develop such processes, concepts,

ideas and documentation.

CPI

Aero® is a registered trademark of the Company.

Human

Capital Management

As

of December 31, 2020, we had 267 full-time employees. We employ temporary personnel with specialized disciplines on an as-needed

basis. We depend on a highly educated and skilled workforce. We seek to advance a diverse, equitable and inclusive work environment

for all employees. Our ability to attract, develop and retain the best talent, particularly those with technical, engineering

and science backgrounds or experience, is critical for us to execute our strategy and grow our businesses. Our management, with

oversight from the Compensation & Human Resources Committee of our board of directors, monitors the hiring, retention and

management of our employees and regularly conducts succession planning to ensure that we continue to cultivate the pipeline of

talent needed to operate our business.

In

addition, we have taken measures to protect our workforce in response to the COVID-19 pandemic, including allowing employees to

work from home when possible and implementing safety protocols to support our essential employees required to work onsite, such

as making changes to shift work to promote social distancing among our manufacturing personnel, and providing masks and hand sanitizer.

None

of our employees is a member of a union. We believe that our relations with our employees are good.

10

Item

1A. RISK FACTORS

In

addition to other risks and uncertainties described in this Annual Report on Form 10-K, the following material risk factors should

be carefully considered in evaluating our business because such factors may have a significant impact on our business, operating

results, liquidity and financial condition. As a result of the risk factors set forth below, actual results did and could continue

to differ materially from those projected in any forward-looking statements.

Risks

Related to the Restatement of our Prior Period Consolidated Financial Statements and Material Weaknesses in our Internal Control

In

2020, we restated our consolidated financial statements for several prior periods, which has affected and may continue to affect

investor confidence, our stock price, our ability to raise capital in the future, and our reputation with our customers, which

has resulted and may continue to result in stockholder litigation and may reduce customer confidence in our ability to complete

new contract opportunities.

In

August 2020 we filed an Annual Report on Form 10-K for the year ended December 31, 2019, which included a restatement of the financial

statements which were previously filed with our Annual Report on Form 10-K for the year ended December 31, 2018. The prior restatement

of our consolidated financial statements primarily reflects the correction of certain errors relating to our recognition of revenue,

which errors resulted from an incorrect application of U.S. GAAP. Such restatement has had and may continue to have the effect of eroding

investor confidence in the Company and our financial reporting and accounting practices and processes, has negatively impacted and may

continue to negatively impact the trading price of our common stock, has resulted and may continue to result in stockholder litigation,

may make it more difficult for us to raise capital on acceptable terms, if at all, and may negatively impact our reputation with our

customers and cause customers to place new orders with other companies.

As described in Item 9A this Annual Report on Form 10-K, we have

taken a number of steps in order to strengthen our accounting function so as to allow us to be able to provide timely and accurate financial

reporting. However, we cannot assure you that these steps will be successful and we cannot assure you that additional material weaknesses

in our internal control over financial reporting will not arise or be identified in the future. To the extent these steps are not successful,

we could be required to incur significant additional time and expense. Moreover, because of the inherent limitations of any control system,

material misstatements due to error or fraud may not be prevented or detected and corrected on a timely basis, or at all. If we are unable

to provide reliable and timely financial reports in the future, our business and reputation may be further harmed. The occurrence of

any future errors, misstatements, or failures in internal control may also cause us to fail to meet reporting obligations, negatively

affect investor and customer confidence in our management and the accuracy of our financial statements and disclosures, result in events

of default under our banking agreements, or result in adverse publicity and concerns from investors and customers, any of which could

have a negative effect on the price of our common stock, subject us to regulatory investigations and penalties or additional stockholder

litigation, and have a material adverse impact on our business and financial condition.

We

face litigation and regulatory action relating to the restatement of the Non-Reliance Period consolidated financial statements.

Our

Company and certain of our current and former executive officers and directors are defendants in litigation arising out of the

errors in and restatements of our financial statements for the year ended December 31, 2018, and quarters ended March 31, 2018,

June 30, 2018, September 30, 2018, March 31, 2019, June 30, 2019, and September 30, 2019 (“Non-Reliance Periods”).

Please see Part I, Item 3, “Legal Proceedings.” These proceedings may result in significant expenses and the diversion

of management attention from our business. We cannot ensure that additional litigation or other claims by shareholders will not

be brought in the future arising out of the same subject matter.

As

previously disclosed, on May 22, 2020, the Company received a subpoena from the Securities and Exchange Commission (the “Commission”)

Division of Enforcement (the “Division”) seeking documents and information relating, among other things, to previously

disclosed errors in and restatement of the Company’s financial statements, the Company’s October 16, 2018 equity offering

and the recent separation of the Company’s former Chief Financial Officers. By letter dated March 12, 2021 and received

on March 16, 2021, the Division Staff notified the Company that the Division has concluded its investigation and, based on the

information the Division has as of such date, it does not intend to recommend an enforcement action by the Commission against

the Company. The Division’s notice was provided under the guidelines described in the final paragraph of Securities Act

Release No. 5310 which states in part that the notice “must in no way be construed as indicating that the party has been

exonerated or that no action may ultimately result from the staff’s investigation.” Please see Part I, Item 3, “Legal

Proceedings.” We may also be subject to further examinations, investigations, proceedings and orders by regulatory authorities,

including a cease and desist order, suspension of trading of our securities, delisting of our securities and/or the assessment

of possible civil monetary penalties. Any such further actions could be expensive and damaging to our business, results of operations

and financial condition.

11

We

are in compliance with various covenants under our credit facility with BankUnited as of December 31, 2020 but there can be no

assurance that we will not fall out of compliance with the amended covenants in the future.

The

Company is in compliance with the various covenants under our credit facility (the “BankUnited Facility”) with BankUnited,

N.A. (“BankUnited”) for the year ended December 31, 2020. If we fall out of compliance with our banking covenants,

BankUnited. may declare a default under the BankUnited Facility and, among other remedies, could declare the full amount of the

BankUnited Facility immediately due and payable and could foreclose against our collateral. If this

were to occur, we may be unable to secure outside financing, if needed, to fund ongoing operations and for other capital needs.

Any sources of financing that may be available to us could also be at higher costs and require us to satisfy more restrictive

covenants, which could limit or restrict our operations, cash flows and earnings. We cannot ensure that additional financing would

be available to us, or be sufficient or available on satisfactory terms.

We

are currently ineligible to file a registration statement on Form S-3 to register the offer and sale of securities, which could

adversely affect our ability to raise future capital.

We

did not file our Annual Report for the year ended December 31, 2019 or our Quarterly Reports for the three months ended March

31, 2020, June 30, 2020 and September 30, 2020 within the respective timeframes required by the SEC. However, we regained status

as a current filer when we filed our Quarterly Report for the three months ended September 30, 2020. However, we will not be considered

a timely filer and will not be eligible to offer and sell securities using our existing shelf registration statement on Form S-3

or file a new short-form registration statement on Form S-3 to register the offer and sale of our securities until twelve full

calendar months from the date we regain status as a current filer. If we wish to register the offer and sale of our securities

to the public prior to such time, we will be required to use the long-form registration statement, Form S-1, which may increase