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Item 1A. Risk Factors

2021-03-29 compared with 2020-03-27 · 423 added, 366 removed, 21 unchanged (97% of the section changed)

purchase of our common stock involves a very high degree of risk.

evaluating our common stock and our business, you should carefully consider the risks and uncertainties described below and the

other information and our consolidated financial statements and related notes included herein.

If any of the events described

in the risks below actually occurs, our financial condition or operating results may be materially and adversely affected, the

price of our common stock may decline, perhaps significantly, and you could lose all or a part of your investment.

risks below can be characterized into three groups:

related to our business, including risks specific to the defense and aerospace industry:

arising from our indebtedness;

related to our common stock.

The financial statements contained in this Report as well as

the description of our business contained herein, unless otherwise indicated, principally reflect the status of our business and

the result of operations as of December 31, 2019.

On March 11, 2020, the World Health Organization announced that infections caused

by the coronavirus disease of 2019 (“COVID-19”) had become pandemic, and on March 13, 2020, the U.S.

President announced

a national Emergency relating to the disease.

National, state and local authorities have adopted various regulations and orders,

including mandates on the number of people that may gather in one location and closing non-essential businesses.

To date, ours

has been deemed an essential business and we have not curtailed our operations, though the price of our common stock has declined.

The purchase of our

common stock involves a very high degree of risk.

In evaluating our common

stock and our business, you should carefully consider the risks and uncertainties described below and the other information and

our consolidated financial statements and related notes included herein.

If any of the events described in the risks below

actually occurs, our financial condition or operating results may be materially and adversely affected, the price of our common

stock may decline, perhaps significantly, and you could lose all or a part of your investment.

The risks below can

be characterized into four groups:

1) Risks related to COVID-19;

Risks related to our business, including risks specific to the defense and aerospace industry;

Risks arising from our indebtedness;

Risks related to our common stock.

The financial statements

contained in this Report, as well as the description of our business contained herein, unless otherwise indicated, principally

reflect the status of our business and the result of operations as of December 31, 2020.

Risks Related to COVID-19

The COVID-19 pandemic and the resulting

macroeconomic disruption have affected how we, our customers and our suppliers are operating our businesses, and the duration and

extent to which this will impact our future results of operations and overall financial performance remains uncertain.

In March 2020, the

World Health Organization announced that infections caused by the coronavirus disease of 2019 (“COVID-19”) had become

pandemic and the U.S.

President announced a National Emergency relating to the disease.

National, state and local authorities,

including those in which our offices and manufacturing facilities are located, have adopted various regulations and orders, including

“shelter in place”

rules, restrictions on travel, mandates on the number of people that may gather in one location

and closing non-essential businesses.

The global impact of the outbreak is continually evolving.

The measures adopted

by various governments and agencies, as well as the likelihood that many individuals and businesses will voluntarily shut down

or self-quarantine, are expected to have serious adverse impacts on domestic and foreign economies of uncertain severity and duration.

The effectiveness of economic stabilization efforts which may be adopted by governments is uncertain.

The likely overall economic

impact of the COVID-19 pandemic will be highly negative to the general economy.

While we have continued to operate in the normal

course, we may be forced to close or reduce operations for reasons such as the health of our employees or because of disruptions

in the continued operation of our supply chain and sources of supply.

We cannot forecast with any certainty whether and to what

degree the disruptions caused by the COVID-19 pandemic will increase, and whether and to what degree, they will impact our ability,

as well as the ability of our customers and suppliers, to operate in the ordinary course.

In reading the risk factors set forth

below, in each case, consider the additional uncertainties caused by the outbreak of COVID-19.

Related to Our Business

may need additional financing .

We may need to

obtain additional financing to fund acquisitions of capital items necessary for our growth and to upgrade equipment to remain competitive.

We may also need to obtain the

agreement of holders of portions of our debt to extend or otherwise refinance such debt.

We may need to offer these holders

increases in the rates of interest they receive or otherwise compensate them through payments of cash or issuances of our

equity securities.

Future financings or refinancings may involve the issuance of debt, equity and/or securities convertible

into or exercisable or exchangeable for our equity securities.

by various governments and agencies, as well as the decision by many individuals and businesses to voluntarily shut down or self-quarantine,

had and are expected to continue to have serious adverse impacts on domestic and foreign economies of uncertain severity and duration.

The effectiveness of economic stabilization efforts adopted by governments and their willingness to adopt further measures is uncertain.

The likely overall economic impact of the COVID-19 pandemic has been and will continue to be highly negative to the general economy.

While we continue to operate substantially in the normal course of business, we have implemented procedures to promote employee

safety including more frequent and enhanced cleaning and adjusted schedules and work-flows to support physical distancing.

actions resulted in increased operating costs.

Our facilities did not operate with full staff or with normal efficiency during

portions of 2020 primarily due to employee absenteeism and supplier disruptions.

Although business has substantially returned to

pre-Covid-19 operating levels, an increase in COVID-19 infections or changes in governmental regulations may force us to close

or reduce operations or otherwise adversely impact our operations in future periods.

The future economic

impact of Covid-19 cannot be predicted with certainty.

COVID continues to cause significant disruption to the commercial travel

and aerospace industries.

Although domestic air travel in the United States has increased, it may take several years for overall

economic conditions to return to normal and, particularly in the aerospace industry, for air travel and the resulting demand for

new and refurbished aircraft to return to normal.

If conditions do not improve, or if they worsen, it could make it difficult for

us to access debt and equity capital on attractive terms, or at all, and impact our ability to fund business activities and repay

debt on a timely basis.

Although the impact of reduced air travel may be disproportionately felt in the commercial as opposed to

the defense aerospace industry, it should be expected that manufacturers in the commercial sector with excess capacity will increase

their efforts to win projects in the defense aerospace industry.

We cannot forecast

with any certainty whether the disruptions caused by the COVID-19 pandemic will increase, or the extent to which any recovery may

be negatively impacted by an increase in cases as a result of the spread of a new variant and restrictions imposed by various governments

in response to any such increase.

Any such disruption may materially impact our business and our consolidated financial position,

results of operations, and cash flows.

In reading the remaining

risk factors set forth below, in each case, consider the additional uncertainties caused by the outbreak of COVID-19.

Risks Related to Our Business

We may need additional financing .

We may need to obtain

additional financing to fund acquisitions of capital items necessary for our growth and to upgrade equipment to remain competitive.

We may also need to obtain the agreement of holders of portions of our debt to extend or otherwise refinance such debt.

need to offer these holders increases in the rates of interest they receive or otherwise compensate them through payments of cash

or issuances of our equity securities.

Future financings or refinancing may involve the issuance of debt, equity and/or securities

convertible into or exercisable or exchangeable for our equity securities.

Additional funding may not be available to us on reasonable

terms, if at all.

If we are able to consummate such financings or re-financings, the trading price of our common stock could

be adversely affected and the terms of such financings may adversely affect the interests of our existing stockholders.

failure to obtain additional working capital when required would have a material adverse effect on our business and financial

condition and may result in a decline in our stock price.

Any issuances of our common stock, preferred stock, or securities

such as warrants or notes that are convertible into, exercisable or exchangeable for, our capital stock, would have a

dilutive effect on the voting and economic interest of our existing stockholders.

and liquidations of our subsidiaries completed during 2019 and 2018 reduced our revenues.

2019 and 2018 we sold or otherwise liquidated some of our subsidiaries to enable us to focus on our capabilities in our Complex

Machining (AIM and NTW) and Turbine Engine Components (Sterling) segments.

The sale or liquidation of some of our subsidiaries

reduced the range of services we can provide to our customers and resulted in a reduction in revenues.

reduction in government spending on defense could materially adversely impact our revenues, results of operations and financial

large percentage of our revenue is derived from products for US military aviation.

There are risks associated with programs that

are subject to appropriation by Congress, which could be potential targets for reductions in funding.

Reductions in United States

Government spending on defense or future changes in the mix of defense products required by United States Government agencies

could limit demand for our products, and may have a materially adverse effect on our operating results and financial condition.

For the past several years, our operations have been impacted by volatility in government procurement cycles and spending patterns.

There can be no assurance that our financial condition and results of operations will not be materially adversely impacted by

future volatility in defense spending or a change in the mix of products purchased by defense departments in the United States

or other countries, or the perception on the part of our customers that such changes are about to occur.

depend on revenues from a few significant relationships.

Any loss, cancellation, reduction, or interruption in these relationships

could harm our business.

derive most of our revenues from a small number of customers.

Three customers represented approximately 76% and 70% of total sales

for the years ended December 31, 2019 and 2018, respectively.

The markets in which we sell our products are dominated by a relatively

small number of customers which have contracts with United States governmental agencies, thereby limiting the number of potential

If we are able to consummate such financings or re-financings, the trading price of our common stock could be

adversely affected and the terms of such financings may adversely affect the interests of our existing stockholders.

to obtain additional working capital when required would have a material adverse effect on our business and financial condition

and may result in a decline in our stock price.

Any issuances of our common stock, preferred stock, or securities such as warrants

or notes that are convertible into, exercisable or exchangeable for, our capital stock, would have a dilutive effect on the voting

and economic interest of our existing stockholders.

A reduction in government spending on defense could materially

adversely impact our revenues, results of operations and financial condition.

A large percentage

of our revenue is derived from products for US military aviation.

There are risks associated with programs that are subject to

appropriation by Congress, which could be potential targets for reductions in funding.

Reductions in United States Government spending

on defense or future changes in the mix of defense products required by United States Government agencies could limit demand for

our products, and may have a materially adverse effect on our operating results and financial condition.

For the past several years,

our operations have been impacted by volatility in government procurement cycles and spending patterns.

There can be no assurance

that our financial condition and results of operations will not be materially adversely impacted by future volatility in defense

spending or a change in the mix of products purchased by defense departments in the United States or other countries, or the perception

on the part of our customers that such changes are about to occur.

We depend on revenues from a few

significant relationships.

Any loss, cancellation, reduction, or interruption in these relationships could harm our business.

We derive most of our

revenues from a small number of customers.

Three customers represented approximately 74% and 76% of total sales for the years ended

December 31, 2020 and 2019, respectively.

The markets in which we sell our products are dominated by a relatively small number

of customers which have contracts with United States governmental agencies, thereby limiting the number of potential customers.

Our success depends on our ability to develop and manage relationships with significant customers.

We cannot be sure

that we will be able to retain our largest customers or that we will be able to attract additional customers, or that our customers

will continue to buy our products in the same amounts as in prior years.

The loss of one or more of our largest customers, any

reduction or interruption in sales to these customers, our inability to successfully develop relationships with additional customers

or future price concessions that we may have to make, could significantly harm our business.

depend on revenues from components for a few aircraft platforms and the cancellation or reduction of either production or use

of these aircraft platforms could harm our business.

derive a significant portion of our revenues from components for a few aircraft platforms, specifically the Sikorsky BlackHawk

helicopter, the Northrop Grumman E-2 Hawkeye naval aircraft, the F-16 Falcon and the F-18 Hornet.

A reduction in demand for our

products as a result of either a reduction in the production of new aircraft or a reduction in the use of existing aircraft in

the fleet (reducing after-market demand) would have a material adverse effect on our operating results and financial condition.

competition in our markets may lead to a reduction in our revenues and market share.

defense and aerospace component manufacturing market is highly competitive and we expect that competition will increase and perhaps

Many competitors have significantly greater technical, manufacturing, financial and marketing resources than we do.

We may not be able to compete successfully against either current or future competitors.

Increased competition could result in

reduced revenue, lower margins or loss of market share, any of which could significantly harm our business, our operating results

and financial condition.

may lose sales if our suppliers fail to meet our needs or shipments of raw materials are not timely made.

we procure most of our parts and components from multiple sources or believe that these components are readily available from

numerous sources, certain components are available only from a sole or limited number of sources.

While we believe that substitute

components or assemblies could be obtained, use of substitutes would require development of new suppliers or would require us

to re-engineer our products, or both, which could delay shipment of our products and could have a materially adverse effect on

our operating results and financial condition.

Recently, due to our liquidity problems, we have had difficulties in securing timely

shipments of raw materials from certain vendors which has negatively impacted our results of operations.

Any delays in the shipment

of raw materials could significantly harm our business, our operating results and our financial condition.

are risks associated with the bidding processes in which we compete.

obtain many contracts through a competitive bidding process.

We must devote substantial time and resources to prepare bids and

proposals and may not have contracts awarded to us.

Even if we win contracts, there can be no assurance that the prices that we

have bid will be sufficient to allow us to generate a profit from any particular contract.

There are significant costs involved

with producing a small number of initial units of any new product and it may not be possible to recoup such costs on later production

to fixed contract pricing, increasing contract costs expose us to reduced profitability and the potential loss of future business.

cost estimation process requires significant judgment and expertise.

Reasons for cost growth may include unavailability and productivity

of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the

effect of any delays in performance, availability and timing of funding from the customer, natural disasters, and the inability

to recover any claims included in the estimates to complete.

A significant change in cost estimates on one or more programs could

have a material effect on our consolidated financial position or results of operations.

prices of raw materials we use are volatile.

prices of raw materials used in our manufacturing processes are volatile.

If the prices of raw materials rise, we may not be able

to pass along such increases to our customers and this could have an adverse impact on our consolidated financial position and

results of operations.

It is possible that some of the raw materials we use might become subject to new or increased tariffs.

Significant increases in the prices of raw materials could adversely impact our customers’

demand for certain products which

could lead to a reduction in our revenues and have a material adverse impact on our revenues and on our consolidated financial

position and results of operations.

of the products we produce have long lead times.

of the products we produce require months to produce and we sometimes produce products in excess of the number ordered intending

to sell the excess as spares when orders arise.

We cannot be sure that we will

be able to retain our largest customers or that we will be able to attract additional customers, or that our customers will continue

to buy our products in the same amounts as in prior years.

The loss of one or more of our largest customers, any reduction or interruption

in sales to these customers, our inability to successfully develop relationships with additional customers or future price concessions

that we may have to make, could significantly harm our business.

We depend on revenues from components

for a few aircraft platforms and the cancellation or reduction of either production or use of these aircraft platforms could harm

our business.

We derive a significant

portion of our revenues from components for a few aircraft platforms, specifically the Sikorsky BlackHawk helicopter, the Northrop

Grumman E-2 Hawkeye naval aircraft, the F-16 Falcon and the F-18 Hornet.

A reduction in demand for our products as a result of

either a reduction in the production of new aircraft or a reduction in the use of existing aircraft in the fleet (reducing after-market

demand) would have a material adverse effect on our operating results and financial condition.

Intense competition in our markets may lead to a reduction

in our revenues and market share.

The defense and aerospace

component manufacturing market is highly competitive and we expect that competition will increase and perhaps intensify.

In particular,

we anticipate that manufacturers which have historically operated predominately in the commercial sector may seek to increase the

revenue derived in the defense aerospace market to utilize excess capacity.

Many competitors have significantly greater technical,

manufacturing, financial and marketing resources than we do.

We may not be able to compete successfully against either current

or future competitors.

Increased competition could result in reduced revenue, lower margins or loss of market share, any of which

could significantly harm our business, our operating results and financial condition.

We may lose sales if our suppliers fail to meet our needs

or shipments of raw materials are not timely made.

Although we procure

most of our parts and components from multiple sources and rely upon a number of subcontractors to perform detailed services, or

believe that these components and services are readily available from numerous sources, certain components and services are available

only from a sole or limited number of sources.

While we believe that substitute components or assemblies and subcontractors could

be obtained, use of substitutes would require development of new suppliers or would require us to re-engineer our products, or

both, which could delay shipment of our products and could have a materially adverse effect on our operating results and financial

In the past, due to our liquidity problems, we had difficulties in securing timely shipments of raw materials from and

the timely performance of services by certain vendors which had negatively impacted our results of operations.

Any delays in the

shipment of raw materials or the performance of subcontracted services could significantly harm our business, our operating results

and our financial condition.

There are risks associated with the bidding processes

in which we compete.

We obtain many contracts

through a competitive bidding process.

We must devote substantial time and resources to prepare bids and proposals and may not

have contracts awarded to us.

Even if we win contracts, there can be no assurance that the prices that we have bid will be sufficient

to allow us to generate a profit from any particular contract.

There are significant costs involved with producing a small number

of initial units of any new product and it may not be possible to recoup such costs on later production runs.

Due to fixed contract pricing, increasing

contract costs expose us to reduced profitability and the potential loss of future business.

The cost estimation

process requires significant judgment and expertise.

Reasons for cost growth may include unavailability and productivity of labor,

the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of

any delays in performance, availability and timing of funding from the customer, natural disasters, and the inability to recover

any claims included in the estimates to complete.

A significant change in cost estimates on one or more programs could have a material

effect on our consolidated financial position or results of operations.

The prices of raw materials we use are volatile.

The prices of raw materials

used in our manufacturing processes are volatile.

If the prices of raw materials rise, we may not be able to pass along such increases

to our customers and this could have an adverse impact on our consolidated financial position and results of operations.

possible that some of the raw materials we use might become subject to new or increased tariffs.

Significant increases in the prices

of raw materials could adversely impact our customers’

demand for certain products which could lead to a reduction in our

revenues and have a material adverse impact on our revenues and on our consolidated financial position and results of operations.

Some of the products we produce have long lead times.

Some of the products

we produce require months to produce and we sometimes produce products in excess of the number ordered intending to sell the excess

as spares when orders arise.

As a result, our inventory turns slowly and ties up our working capital.

Our inventory

represented approximately 56% of our assets as of December 31, 2019.

Any requirement to write down the value of our inventory

due to obsolescence or a drop in the price of materials could have a material adverse effect on our consolidated financial position,

results of operations and could result in a breach of the financial covenants in our Loan Facility.

do not own the intellectual property rights to products we produce.

all the parts and subassemblies we produce are built to customer specifications and the customer owns the intellectual property,

if any, related to the product.

Consequently, if a customer desires to use another manufacturer to fabricate its part or subassembly,

it would be free to do so, which could have a material adverse effect on our business, our operating results and financial condition.

are risks associated with new programs.

programs typically carry risks associated with design changes, acquisition of new production tools, funding commitments, imprecise

or changing specifications, timing delays and the accuracy of cost estimates associated with such programs.

In addition, any new

program may experience delays for a variety of reasons after significant expenditures are made.

If we were unable to perform under

new programs to the customers’

satisfaction or if a new program in which we had made a significant investment was terminated

or experienced weak demand, delays or other problems, then our business, financial condition and results of operations could be

materially adversely affected.

This could result in low margin or forward loss contracts, and the risk of having to write-off

costs and estimated earnings in excess of billings on uncompleted contracts if it were deemed to be unrecoverable over the life

of the program.

perform on new programs, we may be required to incur material up-front costs which may not have been separately negotiated and

may not be recoverable.

Such charges and the loss of up-front costs could have a material impact on our liquidity.

need to control our expenses will place a significant strain on our management and operational resources.

If we are unable to

control our expenses effectively, our business, results of operations and financial condition may be adversely affected.

and retaining executive talent and other key personnel is an essential element of our future success.

future success depends to a significant extent upon our ability to attract executive talent, as well as the continued service

of our existing executive officers and other key management and technical personnel.

Experienced management and technical, marketing

and support personnel in the defense and aerospace industries are in demand and competition for their talents is intense.

failure to attract executive talent, or retain our existing executive officers and key personnel, could have a material adverse

effect on our business, financial condition and results of operations.

are subject to strict governmental regulations relating to the environment, which could result in fines and remediation expense

in the event of non-compliance.

are required to comply with extensive and frequently changing environmental regulations at the federal, state and local levels.

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 substances into the environment.

This extensive regulatory framework imposes significant compliance burdens

and risks on us.

In addition, these regulations may impose liability for the cost of removal or remediation of certain hazardous

substances released on or in our facilities without regard to whether we knew of, or caused, the release of such substances.

Our inventory represented

approximately 56% of our assets as of December 31, 2020.

Any requirement to write down the value of our inventory due to obsolescence

or a drop in the price of materials could have a material adverse effect on our consolidated financial position, results of operations

and could result in a breach of the financial covenants in our Loan Facility.

We do not own the intellectual property rights to products

Nearly all the parts

and subassemblies we produce are built to customer specifications and the customer owns the intellectual property, if any, related

to the product.

Consequently, if a customer desires to use another manufacturer to fabricate its part or subassembly, it would

be free to do so, which could have a material adverse effect on our business, our operating results and financial condition.

There are risks associated with new programs.

New programs typically

carry risks associated with design changes, acquisition of new production tools, funding commitments, imprecise or changing specifications,

timing delays and the accuracy of cost estimates associated with such programs.

In addition, any new program may experience delays

for a variety of reasons after significant expenditures are made.

If we were unable to perform under new programs to the customers’

satisfaction or if a new program in which we had made a significant investment was terminated or experienced weak demand, delays

or other problems, then our business, financial condition and results of operations could be materially adversely affected.

could result in low margin or forward loss contracts, and the risk of having to write-off costs and estimated earnings in excess

of billings on uncompleted contracts if it were deemed to be unrecoverable over the life of the program.

To perform on new programs,

we may be required to incur material up-front costs which may not have been separately negotiated and may not be recoverable.

charges and the loss of up-front costs could have a material impact on our liquidity.

The need to control

our expenses will place a significant strain on our management and operational resources.

If we are unable to control our expenses

effectively, our business, results of operations and financial condition may be adversely affected.

Attracting and retaining executive

talent and other key personnel is an essential element of our future success.

Our future success

depends to a significant extent upon our ability to attract executive talent, as well as the continued service of our existing

executive officers and other key management and technical personnel.

Experienced management and technical, marketing and support

personnel in the defense and aerospace industries are in demand and competition for their talents is intense.

Our failure to attract

executive talent, or retain our existing executive officers and key personnel, could have a material adverse effect on our business,

financial condition and results of operations.

We are subject to strict governmental regulations relating

to the environment, which could result in fines and remediation expense in the event of non-compliance.

We are required to

comply with extensive and frequently changing environmental regulations at the federal, state and local levels.

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 substances into the environment.

This extensive regulatory framework imposes significant compliance burdens and risks

In addition, these regulations may impose liability for the cost of removal or remediation of certain hazardous substances

released on or in our facilities without regard to whether we knew of, or caused, the release of such substances.

we are required to provide a place of employment that is free from recognized and preventable hazards that are likely to cause

1 unchanged sentence

in the use of such substances.

Our operations require the use of chemicals and other materials for painting and cleaning that

are classified under applicable laws as hazardous chemicals and substances.

If we are found to be in violation of any of these

rules, regulations or permits, we may be subject to fines, remediation expenses and the obligation to change our business practice,

any of which could result in substantial costs that would adversely impact our business operations and financial condition.

may be subject to fines and disqualification for non-compliance with Federal Aviation Administration regulations.

are subject to regulation by the 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.

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.

Our operations require the use of chemicals and other materials for painting and cleaning that are

classified under applicable laws as hazardous chemicals and substances.

If we are found to be in violation of any of these rules,

regulations or permits, we may be subject to fines, remediation expenses and the obligation to change our business practice, any

of which could result in substantial costs that would adversely impact our business operations and financial condition.

We may be subject to fines and disqualification for non-compliance

with Federal Aviation Administration regulations.

We are subject to regulation

by the 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.

We have never been subject to such fines or disqualification.

may be liable to CPI Aerostructures, Inc.

(“CPI”), which purchased our Welding Metallurgy, Inc subsidiary from us

in December 2018, for up to an additional amount of approximately $3,600,000, in connection with CPI’s claim for a purchase

price adjustment, which could materially and adversely impact our business.

December 20, 2018, we completed the sale of all of the outstanding shares of our subsidiary, Welding Metallurgy, Inc., which included

our subsidiaries Miller Stuart, Woodbine, Decimal and Compac Development Corp.

(collectively, the “WMI Group”), to

CPI Aerostructures, Inc.

(“CPI”) for a purchase price of $9,000,000, subject to an estimated closing working capital

adjustment as determined by us prior to closing of $1,093,000.

The Stock Purchase Agreement (“SPA”) required that

we deposit $2,000,000 into escrow as security for any amounts that might be due as a final closing working capital adjustment

and in respect of our obligation to indemnify CPI against damages arising out of the breach of our representations and warranties

and obligations under the SPA.

The amount of the closing working capital deficit has been contested by CPI.

In accordance with

the SPA, the issue of the amount of the closing working capital deficit was submitted to BDO USA, LLP (“BDO”), acting

as an expert, and it issued a report dated September 3, 2019, where it determined that the amount of the closing working capital

deficit was approximately $4,145,870.

On September 9, 2019, we received a demand from CPI for payment of such amount.

CPI that the determination of BDO is void because, among other things, we believe BDO exceeded the scope of its authority as set

forth in the SPA.

On September 27, 2019, CPI filed a notice of motion in the Supreme Court of the State of New York, County

of New York, against us seeking, among other things, an order of specific performance requiring us to deliver the funds deposited

in escrow, together with the balance of the closing working capital deficit which it claimed, and a judgment against us in the

amount of approximately $4,200,000.

On October 7, 2019, we released $619,316 of the $2,000,000 funds held in escrow to CPI in

respect of CPI’s claims related to the closing working capital deficit not related to the value of the WMI Group’s

the event a final judgement is enforced against us, and such judgement is not stayed pending appeal or otherwise discharged, we

may be in default under our loan and security agreement with our senior lender and our business may be materially and adversely

In addition, our cash flows may be negatively affected if we are required to pay any amount exceeding the $1.3 million

held in escrow, which may materially and adversely harm our business.

security attacks, internal system or service failures may adversely impact our business and operations.

system or service disruptions, including those caused by projects to improve our information technology systems, if not anticipated

and appropriately mitigated, could disrupt our business and impair our ability to effectively provide products and related services

to our customers and could have a material adverse effect on our business.

We could also be subject to systems failures, including

network, software or hardware failures, whether caused by us, third-party service providers, intruders or hackers, computer viruses,

natural disasters, power shortages or terrorist attacks.

Cyber security threats are evolving and include, but are not limited

to, malicious software, unauthorized attempts to gain access to sensitive, confidential or otherwise protected information related

to us or our products, customers or suppliers, or other acts that could lead to disruptions in our business.

Any such failures

could cause loss of data and interruptions or delays in our business, cause us to incur remediation costs or require us to pay

ransom to a hacker which takes over our systems, or subject us to claims and damage our reputation.

In addition, the failure or

disruption of our communications or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect

our business.

Although we utilize various procedures and controls to monitor and mitigate the risk of these threats, there can

be no assurance that these procedures and controls will be sufficient.

Our property and business interruption insurance may be

inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption which

would adversely affect our business, results of operations and financial condition.

Moreover, expenditures incurred in implementing

cyber security and other procedures and controls could adversely affect our results of operations and financial condition.

acts and acts of war may seriously harm our business, results of operations and financial condition.

States and global responses to actual or potential military conflicts, terrorism, perceived nuclear, biological and chemical threats

and other global political crises increase uncertainties with respect to U.S.

Cyber security attacks, internal

system or service failures may adversely impact our business and operations.

Any system or service

disruptions, including those caused by projects to improve our information technology systems, if not anticipated and appropriately

mitigated, could disrupt our business and impair our ability to effectively provide products and related services to our customers

and could have a material adverse effect on our business.

We could also be subject to systems failures, including network, software

or hardware failures, whether caused by us, third-party service providers, intruders or hackers, computer viruses, natural disasters,

power shortages or terrorist attacks.

Cyber security threats are evolving and include, but are not limited to, malicious software,

unauthorized attempts to gain access to sensitive, confidential or otherwise protected information related to us or our products,

customers or suppliers, or other acts that could lead to disruptions in our business.

Any such failures could cause loss of data

and interruptions or delays in our business, cause us to incur remediation costs or require us to pay ransom to a hacker which

takes over our systems, or subject us to claims and damage our reputation.

In addition, the failure or disruption of our communications

or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business.

Although we utilize

various procedures and controls to monitor and mitigate the risk of these threats, there can be no assurance that these procedures

and controls will be sufficient.

Our property and business interruption insurance may be inadequate to compensate us for all losses

that may occur as a result of any system or operational failure or disruption which would adversely affect our business, results

of operations and financial condition.

Moreover, expenditures incurred in implementing cyber security and other procedures and

controls could adversely affect our results of operations and financial condition.

Terrorist acts and acts of war may seriously harm our

business, results of operations and financial condition.

United States and global

responses to actual or potential military conflicts, terrorism, perceived nuclear, biological and chemical threats and other global

political crises increase uncertainties with respect to the U.S.

and other business and financial markets.

factors associated, directly or indirectly, with actual or potential military conflicts, terrorism, perceived nuclear, biological

and chemical threats, and other global political crises and responses thereto, may adversely affect the mix of products purchased

by defense departments in the United States or other countries to platforms not serviced by us.

A shift in defense budgets to

product lines we do not produce could have a material adverse effect on our business, financial condition and results of operations.

Related to Our Indebtedness

indebtedness may have a material adverse effect on our operations.

have substantial indebtedness under our Loan Facility.

As of December 31, 2019, we had approximately $16,343,000 of indebtedness

outstanding under the Loan Facility.

Several factors associated,

directly or indirectly, with actual or potential military conflicts, terrorism, perceived nuclear, biological and chemical threats,

and other global political crises and responses thereto, may adversely affect the mix of products purchased by defense departments

in the United States or other countries to platforms not serviced by us.

A shift in defense budgets to product lines we do not

produce could have a material adverse effect on our business, financial condition and results of operations.

Risks Related to Our Indebtedness

Our indebtedness may have a material adverse effect on

our operations.

We have substantial

indebtedness under our Loan Facility.

As of December 31, 2020, we had approximately $21,207,000 of indebtedness outstanding under

the Loan Facility.

All of our indebtedness under the Loan Facility is secured by substantially all of our assets.

We also have outstanding

a significant amount of indebtedness in the form of subordinated convertible notes which are payable on December 31, 2020.

are unable to pay or refinance the outstanding principal and accrued interest on these notes when due, our operations may be materially

and adversely affected.

We may need to offer the holders of this debt increases in the rates of interest they receive or otherwise

compensate them through payments of cash or issuances of our equity securities.

Future financings or re-financings may involve

the issuance of debt, equity and/or securities convertible into or exercisable or exchangeable for our equity securities.

are able to consummate such financings or re-financings, the trading price of our common stock could be adversely affected and

the terms of such financings may adversely affect the interests of our existing stockholders.

Any failure to obtain additional

working capital when required would have a material adverse effect on our business and financial condition and may result in a

decline in our stock price.

Any issuances of our common stock, preferred stock, or securities such as warrants or notes that are

convertible into, exercisable or exchangeable for, our capital stock, would have a dilutive effect on the voting and economic interest

of our existing stockholders.

leverage may adversely affect our ability to finance future operations and capital needs, may limit our ability to pursue business

opportunities and may make our results of operations more susceptible to adverse economic conditions.

indebtedness may limit our ability to pay dividends in the future.

currently do not pay dividends and the terms of our Loan Facility require that we maintain certain financial covenants.

we are in compliance with our Loan Facility in the future, we would need to seek covenant changes under our Loan Facility to pay

dividends in the future.

We also have approximately

$ 6,012,000 of indebtedness outstanding in the form of subordinated notes payable on July 1, 2023.

These notes are held by related

parties, specifically Michael N.

Taglich (our Chairman) and Robert F.

Taglich (a Director), and their affiliates.

Notes with a principal

value of approximately $4,412,000 are convertible into approximately 3,791,000 shares of common stock at a weighted average conversion

price of $1.16 per share.

These notes carry interest rates from 6% to 15% per annum with a weighted average interest rate of 7.8%

If we are unable to

pay or refinance the outstanding principal and accrued interest on these notes when due, our operations may be materially and adversely

We may need to offer the holders of this debt increases in the rates of interest they receive or otherwise compensate

them through payments of cash or issuances of our equity securities.

Future financings or re-financings may involve the issuance

of debt, equity and/or securities convertible into or exercisable or exchangeable for our equity securities.

If we are able to

consummate such financings or re-financings, the terms of such financings may adversely affect the trading price of our common

stock and the interests of our existing stockholders.

Any failure to obtain additional working capital when required would have

a material adverse effect on our business and financial condition and may result in a decline in our stock price.

Any issuances

of our common stock, preferred stock, or securities such as warrants or notes that are convertible into, exercisable or exchangeable

for, our capital stock, would have a dilutive effect on the voting and economic interest of our existing stockholders.

Our leverage may adversely

affect our ability to finance future operations and capital needs, may limit our ability to pursue business opportunities and may

make our results of operations more susceptible to adverse economic conditions.

Our indebtedness may limit our ability to pay dividends

in the future.

We currently do not

pay dividends and the terms of our Loan Facility require that we maintain certain financial covenants.

Unless we are in compliance

with our Loan Facility in the future, we would need to seek covenant changes under our Loan Facility to pay dividends in the future.

There can be no assurance our lenders would agree to covenant changes acceptable to us or at all.

addition, we may in the future incur indebtedness or otherwise become subject to agreements whose terms restrict our ability to

pay dividends in the future.

Related to our common stock

price of our common stock decreased as a result of the impact of COVID-19.

In addition, we may in the future

incur indebtedness or otherwise become subject to agreements whose terms restrict our ability to pay dividends in the future.

Risks Related to our common stock

The price of our common stock can fluctuate.

The financial markets

have been adversely impacted by the reactions to the outbreak of the COVID-19 pandemic.

The price of our common stock decreased

along with those of nearly all companies.

We cannot forecast with any certainty whether and to what degree the disruption caused

by the COVID-19 pandemic and reactions thereto will continue to impact financial markets.

ownership of our common stock is highly concentrated, and your interests may conflict with the interests of our existing stockholders.

of our directors, Michael N.

have been impacted in various ways by the reactions to the outbreak of the COVID-19 pandemic and government stimulus programs adopted

in response to the pandemic.

The price of our common stock has and is expected to continue to be volatile.

We cannot forecast with

any certainty whether and to what degree the disruption caused by the COVID-19 pandemic and reactions thereto will continue to

adversely impact financial markets and the impact to our common stock.

Likewise, we cannot state with certainty the degree to which

financial markets were supported by government stimulus programs and whether such support will continue as governments elect not

to adopt similar measures in the future.

The ownership of our common stock

is highly concentrated, and your interests may conflict with the interests of our existing stockholders.

Two of our directors,

Taglich and Robert F.

Taglich, and their affiliates own a significant number of shares of our outstanding

common stock, which together with their position as directors of our company;

give them significant influence over the outcome

of corporate actions requiring stockholder approval and the terms on which we complete transactions with their affiliates.

interests of these directors may be different from the interests of other stockholders on these matters.

This concentration of

ownership could also have the effect of delaying or preventing a change in our control or otherwise discouraging a potential acquirer

from attempting to obtain control of us, which in turn could reduce the price of our common stock.

can provide no assurance that our common stock will continue to meet NYSE American listing requirements.

If we fail to comply

with the continuing listing standards of the NYSE American, our common stock could be delisted.

we fail to satisfy the continued listing requirements of the NYSE American, the NYSE American may take steps to delist our common

The delisting of our common stock would likely have a negative effect on the price of our common stock and would impair

your ability to sell or purchase common stock when you wish to do so.

is only a limited public market for our common stock.

common stock is listed on the NYSE American.

However, trading volume has been limited and a more active public market for our

common stock may not develop or be sustained over time.

The lack of a robust market may impair a stockholder’s ability to

sell shares of our common stock.

In the absence of a more active trading market, any attempt to sell a substantial number of our

shares could result in a decrease in the price of our stock.

Specifically, you may not be able to resell your shares of common

stock at or above the price you paid for such shares or at all.

sales of our common stock in the public market, or the perception that such sales could occur, could negatively impact the price

of our common stock.

As a result, you may not be able to sell your shares of our common stock in short time periods, or possibly

at all, and the price per share of our common stock may fluctuate significantly.

we fail to meet the expectations of securities analysts or investors, our stock price could decline significantly.

quarterly and annual operating results are likely to fluctuate significantly due to a variety of factors, some of which are outside

Accordingly, we believe period-to-period comparisons of our results of operations are not meaningful and should not

be relied upon as indications of future performance.

Some of the factors that could cause quarterly or annual operating results

to fluctuate include conditions inherent in government contracting and our business such as the timing of cost and expense recognition

for contracts, the United States Government contracting and budget cycles, introduction of new government regulations and standards,

contract closeouts, variations in manufacturing efficiencies, our ability to obtain components and subassemblies from contract

manufacturers and suppliers, general economic conditions and economic conditions specific to the defense market.

Because we base

our operating expenses on anticipated revenue trends and a high percentage of our expenses are fixed in the short term, any delay

in generating or recognizing forecasted revenues could significantly harm our business.

in quarterly results or announcements of extraordinary events such as acquisitions or litigation may cause earnings to fall below

the expectations of securities analysts and investors.

In this event, the trading price of our common stock could significantly

These fluctuations, as well as general economic and market conditions, may adversely affect the future market price of

our common stock, as well as our overall operating results.

Taglich, and their affiliates own a significant number of shares of our outstanding common stock

as well as a significant amount of debt convertible into our common stock, which together with their position as directors of our

company, give them significant influence over the outcome of corporate actions requiring stockholder approval and the terms on

which we complete transactions with their affiliates.

The interests of these directors may be different from the interests of other

stockholders on these matters.

This concentration of ownership could also have the effect of delaying or preventing a change in

our control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which in turn could reduce

the price of our common stock.

We can provide no assurance that our common stock will

continue to meet NYSE American listing requirements.

If we fail to comply with the continuing listing standards of the NYSE American,

our common stock could be delisted.

If we fail to satisfy

the continued listing requirements of the NYSE American, the NYSE American may take steps to delist our common stock.

The delisting

of our common stock would likely have a negative effect on the price of our common stock and would impair your ability to sell

or purchase common stock when you wish to do so.

There is only a limited public market for our common stock.

Our common stock is

listed on the NYSE American.

However, trading volume has been limited and a more active public market for our common stock may

not develop or be sustained over time.

The lack of a robust market may impair a stockholder’s ability to sell shares of our

common stock.

In the absence of a more active trading market, any attempt to sell a substantial number of our shares could result

in a decrease in the price of our stock.

Specifically, you may not be able to resell your shares of common stock at or above the

price you paid for such shares or at all.

Moreover, sales of

our common stock in the public market, or the perception that such sales could occur, could negatively impact the price of our

common stock.

As a result, you may not be able to sell your shares of our common stock in short time periods, or possibly at all,

and the price per share of our common stock may fluctuate significantly.

If we fail to meet the expectations of securities analysts

or investors, our stock price could decline significantly.

Our quarterly and annual

operating results fluctuate significantly due to a variety of factors, some of which are outside our control.

Accordingly, we believe

period-to-period comparisons of our results of operations are not meaningful and should not be relied upon as indications of future

Some of the factors that could cause quarterly or annual operating results to fluctuate include conditions inherent

in government contracting and our business such as the timing of cost and expense recognition for contracts, the United States

Government contracting and budget cycles, introduction of new government regulations and standards, contract closeouts, variations

in manufacturing efficiencies, our ability to obtain components and subassemblies from contract manufacturers and suppliers, general

economic conditions and economic conditions specific to the defense market.

Because we base our operating expenses on anticipated

revenue trends and a high percentage of our expenses are fixed in the short term, any delay in generating or recognizing forecasted

revenues could significantly harm our business.

Fluctuations in quarterly

results or announcements of extraordinary events such as an award of a new contract, acquisitions or litigation may cause earnings

to fall below the expectations of securities analysts and investors.

In this event, the trading price of our common stock could

significantly decline.

These fluctuations, as well as general economic and market conditions, may adversely affect the future market

price of our common stock, as well as our overall operating results.

Consequently, our share price may experience significant volatility

and may not necessarily reflect the value of our expected performance.

financings or acquisitions may adversely affect the market price of our common stock.

sales or issuances of our common stock, including upon conversion of our outstanding convertible notes, upon exercise of our outstanding

warrants or as part of future financings or acquisitions, would be substantially dilutive to the outstanding shares of common

Any dilution or potential dilution may cause our stockholders to sell their shares, which would contribute to a downward

movement in the price of common stock.

incur significant costs as a result of operating as a public company, and our management is required to devote substantial time

to compliance requirements, including establishing and maintaining internal controls over financial reporting, and we may be exposed

to potential risks if we are unable to comply with these requirements.

a public company, we incur significant legal, accounting and other expenses under the Sarbanes-Oxley Act of 2002, together with

rules implemented by the Securities and Exchange Commission and applicable market regulators.

These rules impose various requirements

on public companies, including requiring certain corporate governance practices.

Our management and other personnel will need

to devote a substantial amount of time to these requirements.

Moreover, these rules and regulations will increase our legal and

financial compliance costs and will make some activities more time-consuming and costly.

Sarbanes-Oxley Act, among other things, requires that we maintain effective internal controls for financial reporting and disclosure

controls and procedures.

In particular, we must perform system and process evaluations and testing of our internal controls over

financial reporting to allow management to report on the effectiveness of our internal controls over financial reporting, as required

by Section 404 of the Sarbanes-Oxley Act.

Compliance with Section 404 may require that we incur substantial accounting expenses

and expend significant management efforts.

Our testing may reveal deficiencies in our internal controls over financial reporting

that are deemed to be material weaknesses.

Future financings or acquisitions may adversely affect

the market price of our common stock.

Future sales or issuances

of our common stock, including upon conversion of our outstanding convertible notes, upon exercise of our outstanding warrants

or as part of future financings or acquisitions, would be substantially dilutive to the outstanding shares of common stock.

dilution or potential dilution may cause our stockholders to sell their shares, which would contribute to a downward movement in

the price of common stock.

We incur significant costs as a result

of operating as a public company, and our management is required to devote substantial time to compliance requirements, including

establishing and maintaining internal controls over financial reporting, and we may be exposed to potential risks if we are unable

to comply with these requirements.

As a public company,

we incur significant legal, accounting and other expenses under the Sarbanes-Oxley Act of 2002, together with rules implemented

by the Securities and Exchange Commission and applicable market regulators.

These rules impose various requirements on public companies,

including requiring certain corporate governance practices.

Our management and other personnel will need to devote a substantial

amount of time to these requirements.

Moreover, these rules and regulations will increase our legal and financial compliance costs

and will make some activities more time-consuming and costly.

The Sarbanes-Oxley

Act, among other things, requires that we maintain effective internal controls for financial reporting and disclosure controls

and procedures.

In particular, we must perform system and process evaluations and testing of our internal controls over financial

reporting to allow management to report on the effectiveness of our internal controls over financial reporting, as required by

Section 404 of the Sarbanes-Oxley Act.

Compliance with Section 404 may require that we incur substantial accounting expenses and

expend significant management efforts.

Our testing may reveal deficiencies in our internal controls over financial reporting that

are deemed to be material weaknesses.

In the event we identify significant deficiencies or material weaknesses in our internal

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Item 1A. Risk Factors