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Item 9A. Controls and Procedures

2023-04-14 compared with 2022-08-19 · 752 added, 2313 removed, 602 unchanged (84% of the section changed)

AND PROCEDURES

of Disclosure Controls and Procedures

4 unchanged sentences

and procedures were not effective due to the material weaknesses described below.

Report on Internal Control over Financial Reporting

Annual Report on Internal Control over Financial Reporting

is responsible for establishing and maintaining adequate internal control over financial reporting.

5 unchanged sentences

GAAP and includes those policies and procedures that:

to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our

reasonable assurance that transactions are recorded as necessary to permit preparation

of financial statements in accordance with U.S.

GAAP, and that our receipts and expenditures

are being made only in accordance with authorizations of our management and directors;

reasonable assurance regarding prevention or timely detection of unauthorized acquisition,

use or disposition of our assets that could have a material effect on our consolidated

financial statements.

pertain to the maintenance of records that,

in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;

reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance

GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management

and directors;

reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets

that could have a material effect on our consolidated financial statements.

of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

5 unchanged sentences

Based on this evaluation, management concluded that the Company’s internal control over financial reporting was not effective

at the reasonable assurance level as of December 31, 2021 because of the material weakness described below.

at the reasonable assurance level as of December 31, 2022 because of the material weaknesses described below.

material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there

1 unchanged sentence

will not be prevented or detected on a timely basis.

Material Weaknesses

connection with management’s evaluation of the Company’s internal control over financial reporting described above,

management identified the deficiencies described below that constituted material weaknesses in our internal control over financial

reporting as of December 31, 2021.

These deficiencies led to material errors in our previously issued consolidated financial statements

for the annual periods ended December 31, 2020 and December 31, 2019 and the quarterly periods ended March 31, 2020, June 30,

2020 and September 30, 2020, respectively, which in turn led to the restatement of those previously issued consolidated financial

statements, as described in Part II, Item 8, Note 16 “Restatement of Previously Issued Consolidated Financial Statements”

in the notes to the consolidated financial statements included in this Annual Report on Form 10-K.

Environment, Risk Assessment, Control Activities and Monitoring

Q1 2021, we identified material weaknesses from the month end closing process and INFORXA module used by the Company to maintain

the perpetual inventory reporting.

The following issues were identified:

design and implementation of internal controls related to monitoring and review of inventory

costing were not sufficient to ensure proper valuation of appropriately stated inventory

costs, as detailed below.

design and implementation of internal controls related to preparation and review of financial

statement disclosures were not sufficient to ensure the completeness and accuracy of

required disclosures:

(2) Accounting

for Inventory & related IT environment

which resulted in the need to restate the 2020 Financial Statements of CPI:

Labor and Overhead:

The INFORXA module did not work as intended to prevent labor

applied to inventory from being just the amount of labor incurred and it did not include

any control or reporting to detect that a reversing transaction in the coding was not

occurring, which resulted in duplicate labor applied to inventory.

The Company did not

have a control in place to adequately review and approve the reasonableness of the entries

posted to the general ledger to record differences in cost of goods sold for the differences

between general ledger inventory and perpetual inventory.

As part of the Q1 2021 closing process, we identified that that the perpetual

inventory included some unit of measure errors which were not detected and corrected

within the 2020 general ledger.

Units of Measure (“UM”) were not consistent

between quantities ordered and quantities received for certain classes of purchased parts.

This resulted in overstatements of inventory values due to UM’s not being consistent

with unit prices on purchase orders to suppliers.

Errors occurred when the need for corrections

to unit costs went undetected until a subsequent quarter as a result of (a) only having

a detective control in place to scan for apparent UM issues that stand out when our accounting

department reviews the month-end perpetual inventory reports, and (b) not having a comprehensive

enough list of the commodity codes in the UM conversion tables within the INFORXA module.

The pre-implementation testing that was performed in the test environment on

an INFORXA Software Patch that was written and went live into the system in July 2020

did not detect that the system as patched would erroneously omit the reset of one field

used by the system in calculating the average cost per unit correctly, thus causing the

live system as patched to perform incorrect average cost calculations on some parts.

The monthly journal entry log used to manage the month end close process

did not contain the requirement to determine and post a month end QC01 (inventory received

in-house awaiting quality inspection) inventory accrual.

An automated accrual for goods

received, not yet in inventory does not occur until after the parts have passed QC.

the parts pass QC, they are in the warehouse location “QC01”.

the company needs to record an accrual to increase its purchases of inventory for those

goods in QC01 at each balance sheet date since there is no automated accrual by Infor.

of under-absorbed overhead in the balance sheet:

The monthly journal entry log used

to manage the month end close process did not contain the requirement to determine and

post a full absorption adjustment (under/over absorbed overhead deferral into inventory).

As such, the company did not have a process to record over or under absorbed overhead

at the end of each quarter.

which resulted in the need to restate the 2019 Financial Statements of CPI:

Contract Reserve for Contracts where Revenue and Costs are Recognized on a Point-in-Time

Basis (“Non-POC Contracts”):

There was no evaluation of Non-POC Contracts

to determine if a loss reserve should be established and maintained for Non-POC Contracts

which management has reason to believe may result in losses.

and Obsolete Inventory Reserve:

There was no process for evaluating and recording

reserves against inventory for excess and obsolete inventory.

Status of Previously Reported 2020 Material Weakness

connection with management’s evaluation of the Company’s internal control over financial reporting described above,

management has concluded that some, but not all, of the material weaknesses reported in its Annual Report on Form 10-K for the

year ended December 31, 2020 have been remediated and that some, but not all, internal controls put in place to prevent future

occurrences of these material weaknesses were effective as of December 31, 2021.

we continue to evaluate and work to improve our internal control over financial reporting, we may take additional measures to

further the overall objective to design and operate internal controls that mitigate identified risks and enable an effective system

of internal control over external financial reporting.

is a non-accelerated filer for 2021.

As such, CPI is not subject to the requirement to have an auditor attestation report on internal

control over financial reporting in the 10-K filed in 2022 for 2021.

Accordingly, based upon its internal testing, management

believes that as of December 31, 2021, it has not successfully remediated all of the internal control weaknesses which gave rise

to the material errors as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2020 as follows:

Environment, Risk Assessment, Control Activities and Monitoring

Remediated as of December 31, 2021

design and implementation of internal controls related to monitoring and review of inventory

costing were not sufficient to ensure proper valuation of appropriately stated inventory

2021, the Company Diagnosed, designed, tested and implemented software changes to its perpetual inventory system to improve management’s

ability to properly value stated inventory costs.

During 2022, the Company continues to improve its internal controls related

to monitoring and review of inventory costing.

design and implementation of internal controls related to preparation and review of financial

statement disclosures were not sufficient to ensure the completeness and accuracy of

required disclosures:

2021, the Company recruited and hired a new Chief Financial Officer, a new Controller, and several new financial team members,

and implemented additional review and control procedures over the financial close and financial reporting processes of the Company.

During 2022, the Company continues to improve its internal controls over the preparation and review of financial statement disclosures.

as of December 31, 2021

were insufficiently documented Company accounting policies and insufficiently detailed

Company procedures to put policies into effective action:

2021, management updated the Accounting Policies and Procedures Manual.

design and implementation of internal controls related to cut-off procedures were not

sufficient to ensure proper accounting for in-transit items:

2021, the Company implemented a newly designed month-end accrual for in-transit inventory.

design and implementation of internal controls related to the establishment, and monitoring

and review, of loss contract and excess and obsolete reserves were not sufficient to

ensure proper accounting for the associated reserves:

2021, the Company implemented new accounting procedures to ensure reserves are established and maintained for anticipated contract

losses, reductions in the market values of inventory below cost, and excess or obsolete inventory.

information technology general controls associated with proper change management were

not sufficient to ensure the accuracy and adequacy of the resulting changes:

2021, the Company implemented a policy over IT Change Management.

management identified material weaknesses in its internal controls over the processing and accrual of vendor invoices, the

reconciliation of accounts receivable and contract assets, and the documentation with respect to its internal controls over

described above, under the supervision and with the participation of our management, including our Chief Executive Officer and

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on such dates, in conformity with U.S.

Company was a non-accelerated filer for 2021.

As such, the Company was not subject to the requirement to have an auditor attestation

report on internal control over financial reporting in this Annual Report on Form 10-K for the fiscal year ended December 31,

2021 or for the Comprehensive Form 10-K/A for the fiscal year ended December 31, 2020.

is a non-accelerated filer for 2022.

As such, CPI is not subject to the requirement to have an auditor attestation report on internal

control over financial reporting in the 10-K filed in 2023 for 2022.

in Internal Control Over Financial Reporting

than the remediation efforts underway as referred to above, there were no changes in our internal control over financial reporting

during the quarter ended December 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal

control over financial reporting other than as described above.

were no changes in our internal control over financial reporting during the quarter ended December 31, 2022 that materially affected,

or are reasonably likely to materially affect, our internal control over financial reporting.

During the nine months ended September 30, 2022, we implemented additional

internal controls related to the monitoring and review of inventory costing, excess and obsolete materials and loss contracts.

on Effectiveness of Controls and Procedures

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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

following table sets forth the name, age, and position of each of the Company’s executive officers and members of the board

of directors:

and Board Committees

Chairman of the board of directors Compensation and Human Resources Committee (Chair), Nominating and Corporate Governance

Committee, Strategic Planning Committee, Oversight Committee (Chair)

and Finance Committee (Chair)

Chief Financial Officer

and Secretary

and Finance Committee, Nominating and Corporate Governance Committee (Chair)

Chief Executive Officer

and President and Director

Senior Vice President

of Operations

and Finance Committee, Nominating and Corporate Governance Committee, Oversight Committee

Emeritus of the board of directors, Compensation and Human Resources Committee, Nominating and Corporate Governance

Committee, Strategic Planning Committee (Chair)

of the board of directors Compensation and Human Resources Committee, Strategic Planning Committee

business experience of each of our directors and executive officers are described in the biographies set forth below.

Bond is the Non-Executive Vice Chairman of the board of directors, a position which he has held since August 2020.

Bond has been a director since December 2016, chair of our Compensation and Human Resources Committee since June 2019, and chair

of our Oversight Committee since March 2020.

Bond’s career as a corporate executive in the aviation industry has spanned

over 30 years, where he has held successful leadership roles in several areas such as aircraft development and production, sales,

service, and profit and loss ownership.

Bond spent 10 years at Sikorsky Aircraft Corporation, a corporation specializing in

designing, manufacturing and servicing helicopters, as Vice President, Corporate Strategy, Chief Marketing Officer, and President,

Commercial Systems and Services.

Bond currently serves on the board of directors of NWI Aerostructures and NWI Precision,

business units of Stony Point Group, a conglomerate of privately held aerospace companies.

Bond has also served on the board

of directors of domestic and international companies, namely Shanghai Sikorsky Aircraft Company Limited, New Eclipse Aerospace,

and PZL Mielec Aircraft Company.

Bond holds a Masters of Business Administration from Texas Christian University.

brings to our board of directors a seasoned expertise in the aerospace industry, an internationally-minded approach to business

development, and general business acumen.

Caswell has been a director since November 2020.

Caswell served as a senior advisor of Bombardier Inc.

from 2015-2020.

From 1993-2015, Mr.

Caswell served in several senior finance roles at United Technologies Corporation (now Raytheon Technologies

Corporation, NYSE:

RTX), including as Chief Financial Officer and Vice President, Finance of the Power, Controls & Sensing

Systems segment of United Technologies Aerospace Services, as Chief Financial Officer and Vice President, Finance of Sikorsky

Aircraft, and as Chief Financial Officer of Pratt & Whitney Canada.

Previously, from 1983-1993, Mr.

Caswell worked at Price

Waterhouse (now PricewaterhouseCoopers), where he was a certified public accountant and where he held positions of increasing

responsibility from staff auditor to senior audit manager.

Caswell received a B.A.

in economics from Alfred University and

in accounting from Syracuse University.

Caswell brings to our board of directors a substantial financial background

and extensive experience in financial planning, mergers and acquisitions, U.S.

government contracting, tax and accounting matters.

Davis has been employed by the Company since May 2021 and was appointed as our Chief Financial Officer and Secretary

in October 2021.

From 2017 to 2020, Mr.

Davis served as Chief Financial Officer of Altice Technical Services, a division of Altice

(NYSE:ATUS), one of the largest broadband communications and video services providers in the U.S.

From 2007 to 2017,

Davis worked at Emerson Radio Corporation, an NYSE-listed distributor of consumer electronics, first as vice president of

finance and corporate controller and then as executive vice president and chief financial officer, a position he held for more

than six years.

Davis holds a Master of Business Administration degree from University of Connecticut in finance and a Bachelor

of Business Administration degree in accounting from Iowa State University.

Faber has been a director since August 2013 and chair of our Nominating and Corporate Governance Committee since June 2014.

Since 1996, Mr.

Faber has served as Chief Executive Officer of NextPoint Management Company, Inc., an investment and strategic

advisory firm, advising family offices on a variety of issues, including asset manager selection and oversight, direct investing,

and trust and estates.

Additionally, Mr.

Faber currently serves as a lead director of Invesque, Inc., a director of Capitalworks

Emerging Markets Acquisition Corp., as a senior advisor to a family office with more than $2 billion in assets and as a director

or senior advisor to a number of private companies and asset management firms.

From 1990 to 2008, Mr.

Faber was a General Partner

of the NextPoint and Walnut family of investment funds, focusing on private equity, venture capital, and structured investments.

Previously, Mr.

Faber was a senior advisor to the law firm of Akerman, of counsel to the law firm of Mintz Levin, an attorney

with the law firm of Arnold & Porter, and a senior consultant to The Research Council of Washington, the predecessor to The

Corporate Executive Board Company.

Faber has served on audit and compensation committees for a number of companies.

is an honors graduate and John M.

Olin Fellow of the University of Chicago Law School and attended the Johns Hopkins University

School of International Studies and the State University of New York.

Faber brings to our board of directors his legal and

financial expertise as well as his years of investment and general business experience.

Hakim has been our Chief Executive Officer, President and a director since March 2022.

From March 2018 to August 2021, Ms.

Hakim served as Group Vice President of Parker Hannifin Aerospace where she directed global supply chain for 11 divisions, 25

manufacturing sites and two joint ventures and was accountable for $1.9 billion of spending.

From July 2017 to February 2018,

Hakim was Vice President, Corporate Program Management and Operations Excellence at Triumph Group Inc.

where she was responsible for implementing best practices in Program Management, delivery, and quality performance as well as

continuous improvement for four divisions.

From June 2016 to July 2017, Ms.

Hakim was Vice President, Program Management Precision

Components at Triumph responsible for major programs within seven operating companies and 22 sites, overseeing delivery and quality

performance, proposal estimating, and customer contract negotiations.

Hakim was employed by Sikorsky Aircraft Inc.

Director of Aftermarket Operations from June 2015 to April 2016, where she directed overhaul and repair facilities, customer service,

order management, material forecasting, forward stocking locations and material delivery functions supporting aircraft after delivery.

From August 2010 to June 2015, Ms.

Hakim was President & General Manager of Sikorsky Global Helicopters, Inc.

where she managed

fully integrated profit and loss including operations, continuous improvement, engineering, supply chain, facilities, health and

safety, finance, and human resources to support the final assembly and flight operations for the S-92®, S-76® and Light

Helicopter product lines and managed the completion center for all Sikorsky commercial aircraft.

From November 2009 to August

Hakim was Chief Procurement Officer at Vought Aircraft Inc.

(“Vought”), where she was head of supply chain

with an over $1 billion budget across six sites and two subsidiaries.

From February 2009 to October 2009, Ms.

Hakim was Director,

Supply Chain Management-Integrated Aerosystems Division at Vought.

Hakim also served in a number of capacities at Bell Helicopter

for over 21 years including as a Program Director of helicopter product lines and as a Director of strategic sourcing and supply

chain management.

Hakim earned an Executive Master of Business Administration from Texas Christian University and a Bachelor

of Arts, Business Administration and Finance from H.E.C.

at the University of Montreal.

She is certified as Six Sigma Black Belt

and has received several executive leadership certifications.

Hakim brings to our board of directors extensive experience

in the aerospace industry and, among other things, expertise in program, product, supply chain, operations, manufacturing, and

customer management.

Hauser has been our Senior Vice President of Operations since 2020.

Between 2013 and 2020, he was our Vice President of Global

Supply Chain Management.

Prior to that, he held the position of Director, Global Supply Chain Management for which he was hired

Before joining CPI Aero, Mr.

Hauser had a 30-year career at Northrop Grumman where he held various management positions

for Manufacturing/Operations and Global Supply Chain.

Hauser’s last position with Northrop Grumman was as the E-2D Global

Supply Chain Program Manager, where he had responsibility for cost, quality and schedule performance of all procured parts and

major aircraft structures.

Hauser holds a Bachelor of Technology in Management of Technology from State University of New

York at Farmingdale and a Master of Science in Management of Technology from Polytechnic University.

Paulick has been a director since April 1992.

He served as the chair of our Nominating and Corporate Governance Committee

from March 2004 until June 2015 and as chair of our Audit Committee from June 2006 until April 2007.

Paulick is a self-employed

real estate development consultant.

From 1982 to November 1992, Mr.

Paulick was a vice president of Parr Development Company,

Inc., a real estate development company.

From 1974 to 1982, Mr.

Paulick was a vice president of National Westminster U.S.A.

Paulick holds an Associate degree in Applied Science from Suffolk Community College and a Bachelor of Business Administration

from Dowling College.

Paulick’s background in banking and real estate development, and his general business knowledge

provides our board of directors with a diverse perspective on the Company’s industry and business in our region.

Rosenfeld is the Chairman Emeritus of our board of directors.

Rosenfeld served as the non-executive chairman of our

board of directors from January 2005 until November 2018.

He has also served as chair of our Strategic Planning Committee since

Rosenfeld has been the President and Chief Executive Officer of Crescendo Partners, L.P., a New York based investment

firm, since its formation in November 1998.

Prior to forming Crescendo Partners, he held the position of Managing Director at

CIBC Oppenheimer and its predecessor company, Oppenheimer & Co., Inc., for 14 years.

Rosenfeld currently serves as a director

for several companies.

Rosenfeld serves as lead independent director for Primo Water Corporation (formerly Cott), a leading

water delivery and filtration company.

He is also on the board at Pangaea Logistics Solutions Ltd., a maritime logistics and shipping

company, Aecon Group, Inc., a construction company, and Algoma Steel, Inc., a fully integrated producer of hot and cold rolled

steel products.

Rosenfeld has also served as Chairman and CEO for Arpeggio Acquisition Corporation, Rhapsody Acquisition Corporation,

Trio Merger Corp., Quartet Merger Corp.

and Harmony Merger Corp., all blank check corporations that later merged with Hill International,

Primoris Services Corporation, SAExploration Holdings, Pangaea Logistics Solutions Ltd.

and NextDecade Corporation, respectively.

Rosenfeld is currently the Chief SPAC Officer of Legato Merger Corp.

II, a blank check corporation.

Rosenfeld has also

served as the Chief SPAC Officer of Legato Merger Corp., a blank check corporation that later merged with Algoma Steel, Inc.

Rosenfeld is also currently the CEO of Allegro Merger Corp., a non-listed shell company.

He was also a director of Canaccord Genuity

Group, a full-service financial services company, NextDecade Corporation, a development stage company building natural gas liquefaction

plants, Absolute Software Corp., a leader in firmware-embedded endpoint security and management for computers and ultraportable

devices, AD OPT Technologies, an airline crew planning service, Sierra Systems Group Inc., an information technology, management

consulting and systems integration firm, Emergis Inc., an electronic commerce company, Hill International, a construction management

firm, Matrikon Inc., a company that provides industrial intelligence solutions, DALSA Corp., a digital imaging and semiconductor

firm, HIP Interactive, a video game company, GEAC Computer, a software company, Computer Horizons Corp.

(Chairman), an IT services

company, Pivotal Corp., a cloud software firm, Call-Net Enterprises, a telecommunication firm, Primoris Services Corporation,

a specialty construction company and SAExploration Holdings, a seismic exploration company.

Rosenfeld is a regular guest lecturer

at Columbia Business School and has served on numerous panels at Queen’s University Business Law School Symposia, McGill

Law School, the World Presidents’ Organization and the Value Investing Congress.

He is a senior faculty member at the Director’s

He is a guest lecturer at Tulane Law School.

He has also been a guest host on CNBC.

Rosenfeld received an A.B.

economics from Brown University and an M.B.A.

from the Harvard Business School.

The board nominated Mr.

Rosenfeld to be a director

because he has extensive experience serving on the boards of multinational public companies and in capital markets and mergers

and acquisitions transactions.

Rosenfeld also has valuable experience in the operation of worldwide business faced with a

myriad of international business issues.

Rosenfeld’s leadership and consensus-building skills, together with his experience

as a senior independent director of all boards on which he currently serves, make him an effective board member.

Stinson is the Non-Executive Chairman of the Board, a position which he has held since November 2018.

Stinson was the

chair of the compensation committee of the board from June 2014 until June 2018 and has been a director since June 2014.

is Chief Executive Officer of his own consulting practice, Stinson Consulting, LLC, a position he has held since 2001.

Consulting is engaged in strategic alliances and marketing for the aerospace industry.

From January 2013 until May 31, 2014, he

served as Executive Vice President of AAR CORP., an international, publicly traded aerospace manufacturing and services company.

Stinson currently serves as an independent consultant to AAR CORP.

From August 2007 until January 2013, Mr.

Stinson served

as Group Vice President of AAR CORP.

From 2002 to 2005, Mr.

Stinson served as Chief Executive Officer of Xelus, Inc., a collaborative

enterprise service management solution company.

From 1998 to 2001, Mr.

Stinson was Chairman and Chief Executive Officer of Bell

Helicopter Textron Inc., the world’s leading manufacturer of vertical lift aircraft, and served as President from 1996 to

From 1991 to 1996, Mr.

Stinson served as Group Vice President and Segment President of Textron Aerospace Systems and Components

for Textron Inc.

From 1986 to 1996, he was President of the Hamilton Standard division of United Technologies Corporation, a defense

supply company.

Stinson previously served as a director of Lennox International Inc., a company engaged in the design and

manufacture of heating, ventilation, air conditioning, and refrigeration products, serving on such company’s Board Governance,

Compensation, and Human Resources Committees.

Stinson previously served as a director of Triumph Group, Inc., a company engaged

in the manufacturing and repair of aircraft components, subassemblies, and systems, from September 2003 to March 2008.

senior executive of two Fortune 500 companies, Mr.

Stinson contributes to our board of directors his extensive management and

marketing experience in the aerospace industry, as well as his general business acumen and experience developed by serving on

other public company boards.

Relationships

are no family relationships among any of the Company’s directors or executive officers.

board of directors has adopted a written code of ethics which applies to our directors, officers, and employees, and which is

designed to deter wrongdoing and to promote ethical conduct, full, fair, accurate, timely, and understandable disclosure in reports

that we file or submit to the SEC and others, compliance with applicable government laws, rules, and regulations, prompt internal

reporting of violations of the code, and accountability for adherence to the code.

A copy of the code of ethics may be found on

our website at www.cpiaero.com/board .

to Shareholder Director Nomination Procedures

have been no material changes to the procedures by which shareholders may recommend director nominees to our Board.

of Directors/Audit Committee Financial Expert

follow the rules of the NYSE American exchange in determining whether a director is independent.

The NYSE American exchange listing

standards define an “independent director” generally as a person, other than an officer or employee of the Company,

who does not have a relationship with the Company that would interfere with the director’s exercise of independent judgment.

Our board of directors consults with our legal counsel to ensure that our board of directors’ determinations are consistent

with NYSE American exchange rules and all relevant securities and other laws and regulations regarding the independence of directors.

Consistent with these considerations, the Nominating and Corporate Governance Committee determined on December 29, 2021 that

Carey Bond, Richard Caswell, Michael Faber, Walter Paulick, Eric Rosenfeld, and Terry Stinson will be independent directors of

the Company for the ensuing year.

The remaining director, Dorith Hakim, is not independent because she is currently employed by

All members of our Audit and Finance, Compensation and Human Resources, and Nominating and Corporate Governance Committees

are independent.

Our board of directors has determined that each of Messrs.

Caswell and Faber, members of our Audit and Finance

Committee, meet the criteria of an “Audit Committee Financial Expert” under applicable SEC rules.

board of directors has determined to keep separate the positions of board chairman and principal executive officer at this time.

This permits our principal executive officer to concentrate his efforts primarily on managing the Company’s business operations

and development.

This also allows us to maintain an independent chairman of the board who oversees, among other things, communications

and relations between our board of directors and senior management, consideration by our board of directors of the Company’s

strategies and policies, and the evaluation of our principal executive officers by our board of directors.

I ncorporated

herein by reference from the Company's definitive proxy statement, which will be filed no later than 120 days after December 31,

EXECUTIVE COMPENSATION

executive compensation program is designed to attract, retain, and motivate highly qualified executive officers in the competitive

aerospace and defense industry.

Additionally, a substantial portion of total compensation of our Named Executive Officers is variable

and delivers rewards based on Company and individual performance.

Company performance is measured against metrics established

by the Compensation and Human Resources Committee each year.

Such metrics typically focus on the achievement of financial targets

such as revenue and free cash flow, to align our executives’ pay with the Company’s financial results and the creation

of shareholder value.

Individual performance is measured against each individual’s contributions to the Company’s

overall success.

As in prior years, the Compensation and Human Resources Committee continued to engage the services of Talent

& Rewards LLC, an independent compensation consulting firm in 2021 to provide advice and guidance in evaluating and adjusting

the compensation of our Named Executive Officers.

are three major components to our compensation program for our Named Executive Officers:

Salary - fixed compensation, designed to recognize responsibilities, experience, and

Cash Incentives - annual cash incentive, as a percentage of base salary, paid upon the

achievement of Company performance goals set by the Compensation and Human Resources

This variable at-risk compensation motivates and rewards executives with respect

to short-term performance.

Equity Incentives - annual grants of restricted stock, 50% of which is subject to time-based

vesting, and 50% of which vests upon the achievement of Company financial performative-metric

thresholds set by our Compensation and Human Resources Committee.

This variable at-risk

compensation aligns executive interests with long-term shareholder value creation.

Compensation Table

following table sets forth the compensation paid to or earned by our Named Executive Officers for each of the fiscal years ended

December 31, 2021 and 2020.

Chief Executive Officer

Financial Officer

Vice President of Operations

actual base salary amounts paid for each of the years indicated.

grant date fair market value of restricted stock grants awarded to our Named Executive

Officers as part of their performance-based annual bonus.

(3) Represents

amounts awarded in 2020 or, in the case of 2021, to be considered for award in cash to

our Named Executive Officers as part of their performance-based annual bonus.

were earned in the year provided, but were or will not be made until the following fiscal

the grant date fair value of 64,698 shares of restricted stock granted to Mr.

on April 21, 2021, which shares were subject to time-based and performance-based vesting

over four years.

Does not reflect the forfeiture of all unvested shares occurring following

termination of his employment by the Company on March 8, 2022, in accordance with the

terms of his restricted stock award agreement with the Company.

the grant date fair value of 42,009 shares of restricted stock granted to Mr.

on August 26, 2020, which shares were subject to time-based and performance-based vesting

over four years.

Does not reflect the forfeiture of all unvested shares occurring following

termination of his employment by the Company on March 8, 2022, in accordance with the

terms of his restricted stock award agreement with the Company.

McCrosson and the Compensation and Human Resources Committee agreed that Mr.

would forego $224,457 of short-term incentive cash bonus that Mr.

McCrosson earned for

2020, in consideration of the recent decline in the Company’s stock price and the

challenges the Company was facing due to, among other things, economic conditions and

uncertainties resulting from the COVID-19 pandemic.

(7) Represents

(a) $9,695 of an automobile lease, insurance and maintenance attributable to personal

(b) $6,595 of disability insurance premiums;

and (c) $5,800 of 401(k) contributions.

(8) Represents

(a) $12,394 of an automobile lease, insurance and maintenance attributable to personal

(b) $6,968 of disability insurance premiums;

and (c) $5,418 of 401(k) contributions.

the grant date fair value of 28,916 shares of restricted stock granted to Mr.

May 12, 2021, which shares are subject to time-based and performance-based vesting over

(10) Represents

(a) $7,710 of an automobile allowance, insurance and maintenance attributable to personal

and (b) $3,576 of 401(k) contributions.

(11) Reflects

the grant date fair value of 18,986 shares of restricted stock granted to Mr.

on April 21, 2021, which shares are subject to time-based and performance-based vesting

over four years.

Does not reflect the forfeiture of 4,272 shares by Mr.

Hauser, in accordance

with the terms of his restricted stock award agreement with the Company.

(12) Reflects

the grant date fair value of 12,222 shares of restricted stock granted to Mr.

on August 26, 2020, which shares are subject to time-based and performance-based vesting

over four years.

Does not reflect the forfeiture of 3,093 shares by Mr.

Hauser on April

21, 2021, in accordance with the terms of his restricted stock award agreement with the

(13) Represents

(a) $4,080 of an automobile allowance, insurance and maintenance attributable to personal

(b) $881 of disability insurance premiums;

and (c) $4,599 of 401(k) contributions.

(14) Represents

(a) $4,440 of an automobile lease, insurance and maintenance attributable to personal

(b) $881 of disability insurance premiums;

and (c) $4,595 of 401(k) contributions.

Arrangements for Named Executive Officers

McCrosson’s base salary was $365,761.

He was entitled to receive a non-discretionary performance based cash bonus

equal to 60% of his base salary upon the attainment of Company growth targets measured by the Company’s ending cash balance

at December 31, 2020, amount of accounts payable delinquency at December 31, 2020, book to bill ratio, and full-year earnings

McCrosson and the Compensation and Human Resources Committee agreed that Mr.

McCrosson would forego $224,457 of

short-term incentive cash bonus that Mr.

McCrosson earned for 2020 in consideration of the recent decline in the Company’s

stock price and the challenges the Company was facing due to, among other things, economic conditions and uncertainties resulting

from the COVID-19 pandemic.

In addition, during 2020, Mr.

McCrosson was awarded an aggregate of 42,009 shares of restricted stock

(with a fair market value on the date of grant of $138,633) pursuant to the Company’s 2016 long-term incentive plan.

shares of restricted stock vest on a four year schedule, as follows:

50% of the shares are subject to time-based vesting, and

vest in four equal annual installments on the day after the filing of the Company’s Annual Report on Form 10-K each year;

the remaining 50% of the shares are subject to performance based vesting, and vest upon the achievement of all Company financial

performative-metric thresholds for each fiscal year as identified by our Compensation and Human Resources Committee.

2020 metrics were growth targets measured by accounts payable delinquency, the ratio of bank debt to cash, and 2020 net profit.

The 2020 performance-based vesting metrics were not all met and, therefore, Mr.

McCrosson forfeited an aggregate of 89,056 shares

of restricted stock, representing the performance-based portion of the restricted stock granted in 2021, 2020, 2019, 2018, 2017

McCrosson’s base salary was $374,905.

On March 8, 2022, Mr.

McCrosson’s employment was terminated by the

Company other than for cause, as defined in a Severance and Change in Control Agreement he entered into with us in 2016.

the terms of his Severance and Change in Control Agreement, Mr.

McCrosson is being paid continued salary for 18 months following

the termination of his employment and all of his unvested equity awards were forfeited.

No cash bonuses or other amounts were

paid or are payable to Mr.

McCrosson in connection with the termination of his employment.

Pursuant to the Severance and Change

in Control Agreement, Mr.

McCrosson is prohibited from disclosing confidential information and he has agreed not to compete with

us without our consent for 18 months following the termination of his employment, so long as we make severance pursuant to the

Davis joined the Company in May 2021.

During 2021, Mr.

Davis’ base salary was $300,000 and he was entitled to receive a

non-discretionary performance based cash bonus equal to 40% of his base salary upon the attainment of Company growth targets determined

by the Company’s Chief Executive Officer.

In addition, during 2021 Mr.

Davis was awarded an aggregate of 28,916 shares of

restricted stock (with a fair market value on the date of grant of $120,001) pursuant to the Company’s 2016 long-term incentive

The shares of restricted stock vest on a four year schedule, as follows:

50% of the shares are subject to time-based vesting,

and vest in four equal annual installments on the day after the filing of the Company’s Annual Report on Form 10-K each

the remaining 50% of the shares are subject to performance based vesting, and vest upon the achievement of all Company financial

performative-metric thresholds for each fiscal year as identified by our Compensation and Human Resources Committee.

2021 metrics were targets measured by accounts payable delinquency, amount of bank debt minus cash and 2021 net profit.

Davis entered into a Severance and Change in Control Agreement with us, the details of which are outlined below under

the heading “Payments upon Termination or Change in Control.” Pursuant to the Severance and Change in Control Agreement,

Davis is prohibited from disclosing confidential information and he has agreed not to compete with us without our consent

during the term of employment and for 12 months thereafter, so long as we make severance payments pursuant to the agreement.

Hauser’s base salary was $230,000 and he was entitled to receive a non-discretionary performance based cash bonus

equal to 35% of his base salary upon the attainment of Company growth targets determined by the Company’s Chief Executive

In addition, during 2020, Mr.

Hauser was awarded an aggregate of 12,222 shares of restricted stock (with a fair market

value on the date of grant of $40,333) pursuant to the Company’s 2016 long-term incentive plan.

The shares of restricted

stock vest on a four year schedule, as follows:

50% of the shares are subject to time-based vesting, and vest in four equal annual

installments on the day after the filing of the Company’s Annual Report on Form 10-K each year;

the remaining 50% of the

shares are subject to performance based vesting, and vest upon the achievement of all Company financial performative-metric thresholds

for each fiscal year as identified by our Compensation and Human Resources Committee no later than 90 days following January 1

of the applicable fiscal year.

The fiscal 2020 metrics were growth targets measured by accounts payable delinquency, the ratio

of bank debt to cash, and 2020 net profit.

The 2020 performance-based vesting metrics were not all met and, therefore, Mr.

forfeited an aggregate of 14,195 shares of restricted stock, representing the performance-based portion of the restricted stock

granted in 2020, 2019, 2018, 2017 and 2016.

Hauser’s base salary was $230,000 and he was entitled to receive a non-discretionary performance based cash bonus

equal to 35% of his base salary upon the attainment of Company growth targets determined by the Company’s Chief Executive

In addition, during 2021, Mr.

Hauser was awarded an aggregate of 18,986 shares of restricted stock (with a fair market

value on the date of grant of $80,501) pursuant to the Company’s 2016 long-term incentive plan.

The shares of restricted

stock vest on a four year schedule, as follows:

50% of the shares are subject to time-based vesting, and vest in four equal annual

installments on the day after the filing of the Company’s Annual Report on Form 10-K each year;

the remaining 50% of the

shares are subject to performance based vesting, and vest upon the achievement of all Company financial performative-metric thresholds

for each fiscal year as identified by our Compensation and Human Resources Committee.

The fiscal 2021 metrics were growth targets

measured by accounts payable delinquency, amount of bank debt minus cash, and 2021 net profit.

The 2021 performance-based vesting

metrics were not all met and, therefore, Mr.

Hauser forfeited an aggregate of 19,982 shares of restricted stock, representing

the performance-based portion of the restricted stock granted in 2021, 2020, 2019, 2018, 2017 and 2016.

Hauser entered into a Severance and Change in Control Agreement with us, the details of which are outlined below under

the heading “Payments upon Termination or Change in Control.” Pursuant to the Severance and Change in Control Agreement,

Hauser is prohibited from disclosing confidential information and he has agreed not to compete with us without our consent

during the term of employment and for 12 months thereafter, so long as we make severance payments pursuant to the agreement.

Equity Awards at Fiscal Year-End

following tables summarize the outstanding stock awards as of December 31, 2021 for each Named Executive Officer.

Number of Shares of

Stock Unvested (#) (1)

Shares (#) (2)

Market Value of

Shares Unvested ($) (3)

Equity Incentive

or Payout Value of

Unearned Shares ($) (3)

Douglas McCrosson – Former Chief Executive Officer

Andrew Davis – Chief Financial Officer

Kenneth Hauser – Sr.

Vice President of Operations

shares of restricted stock granted pursuant to the Company’s 2016 long-term incentive

plan which have yet to vest.

The shares of restricted stock vest on a four year schedule,

50% of the shares are subject to time-based vesting, and vest in four equal

annual installments on the day after the filing of the Company’s Annual Report

on Form 10-K each year;

the remaining 50% of the shares are subject to performance-based

vesting, and vest upon the achievement of all Company financial performative-metric thresholds

for each fiscal year as identified by our Compensation and Human Resources Committee.

The fiscal 2016 metrics were targets measured by EBITDA and revenue, the fiscal 2017

metrics were targets measured by revenue and year-end inventory, the fiscal 2018 metrics

were targets measured by backlog, revenue, and year-end inventory, the fiscal 2019 metrics

were targets measured by measured by revenue, pre-tax income, and cash flow from operations,

the fiscal 2020 metrics were targets measured by accounts payable delinquency, the ratio

of bank debt to cash, and 2020 net profit, and the fiscal 2021 metrics were measured

by accounts payable delinquency, bank debt minus cash and 2021 net profit.

shares of restricted stock granted pursuant to the Company’s 2016 long-term incentive

plan which were forfeited in 2017, 2018, 2019, 2020 and 2021 and shares of restricted

stock withheld to satisfy tax obligations.

Does not include shares of restricted stock

granted pursuant to the Company’s 2016 long-term incentive plan which may be forfeited

in 2022 (as such shares had not been forfeited as of December 31, 2021).

(3) Calculated

using the closing price per share of the Company’s common stock on the last date

of fiscal year 2021.

than our 401(k) plan, we do not maintain any other plan that provides for payments or other benefits at, following, or in connection

with retirement.

upon Termination or Change in Control

March 8, 2022, Mr.

McCrosson’s employment was terminated by the Company other than for cause, as defined in his Severance

and Change in Control Agreement.

Under the terms of his Severance and Change in Control Agreement, Mr.

McCrosson is being paid

continued salary for 18 months following the termination of his employment.

No cash bonuses or other amounts were paid or are

payable to Mr.

McCrosson in connection with the termination of his employment.

Severance and Change in Control agreements with Mr.

Davis and Mr.

Hauser provide for varying types and amounts of payments and

additional benefits upon termination of employment, depending on the circumstances of the termination as follows:

● Termination

without cause .

If employment is terminated by the Company other than for cause, as

defined in the Severance and Change in Control Agreements, then he is entitled to (x)

continued salary for 12 months, (y) any earned cash bonus not yet paid for the fiscal

year most recently ended prior to the date of termination, and (z) a prorated cash bonus

calculated using the cash bonus amount earned for the year most recently ended prior

to the date of termination.

A non-competition provision will apply for as long as severance

payments are being paid.

Any unvested restricted stock will be forfeited and any unexercised

options will expire.

● Termination

for cause, or if the executive quits .

Hauser voluntarily terminates

his employment, or if the Company terminates his employment for cause, he is not entitled

to any severance payments and is not bound by a non-compete clause, however he is still

bound by any confidentially and non-disparagement duties.

Any unvested restricted stock

will be forfeited and any unexercised options will expire.

● Termination

for disability .

Hauser is terminated because of a disability,

as defined in the Severance and Change in Control agreements, then he will receive severance

as if he had been terminated without cause.

● Termination

following a change in control .

If the employment of Mr.

Hauser is terminated

within 18 months following a change in control by the Company other than for cause or

disability or by him for good reason (all such terms as defined in the Severance and

Change in Control Agreements), he is entitled to (i) his base salary earned through the

date of termination, (ii) any earned cash bonus not yet paid for the fiscal year most

recently ended prior to the date of termination, and (iii) a prorated portion of his

annual cash bonus for the portion of the year he worked, assuming all applicable targets

had been met.

In addition, he will be entitled to a change in control payment in an amount

equal to one and one-half times his base salary for the fiscal year most recently ended

prior to the date of termination.

Upon any change in control, all of his outstanding

stock options and restricted stock will vest immediately.

Health insurance and other

fringe benefits will continue for a period of six months after termination.

following table summarizes the amounts payable upon termination of employment for Mr.

Davis and Mr.

Hauser, assuming termination

occurred on December 31, 2021 under the Severance and Change in Control Agreements.

For purposes of presenting amounts payable

over a period of time (e.g., salary continuation), the amounts are shown as a single total but not as a present value (the single

sum does not reflect any discount).

To the extent the termination accelerates vesting of equity awards, the value presented below

is based upon the Company’s stock price as of December 31, 2021, and assumes the achievement of all applicable performance

Termination Payments

without Cause

Change in Control

Kenneth Hauser

who are employees of the Company do not receive separate compensation for their service as a director.

Our non-executive directors

receive a mix of cash compensation and stock compensation for their service to our Company.

Each year, our Compensation and Human

Resources Committee determines the total amount of non-executive director compensation, as well as the allocation among cash and

stock compensation, and takes into consideration, among other things, the Company’s performance relative to its guidance,

the extent to which director compensation aligns the interests of our directors with the interests of our shareholders, compensation

awarded to directors of similarly sized companies in our industry, and past practices.

Our Compensation and Human Resources Committee

is also tasked with reviewing the annual compensation paid to non-executive directors and making recommendations to our board

of directors for any adjustments deemed necessary as a result of their review.

In December 2018, our board of directors determined

that the following structure would properly incentivize non-executive directors and adequately recognize the additional work performed

by board committee chairs:

Chairman of the Board, $200,000;

Chair of each of the Audit and Finance Committee and Strategic Planning

Committee, $140,000 each;

Chair of the Compensation and Human Resources Committee, $125,000;

Chair of the Nominating and Corporate

Governance Committee, $120,000;

and all other non-executive directors, $100,000 each.

The Chair of the Oversight Committee is

paid $96,000 in cash for such role.

In August 2020, our board of directors created a new position of Non-Executive Vice Chairperson

of the Board and set the compensation for such role at $165,000.

following table summarizes the compensation of our non-executive directors for the year ended December 31, 2021.

Richard Caswell

Michael Faber

Walter Paulick

Eric Rosenfeld

Terry Stinson

(1) Represents

stock awarded to directors during 2021 in the form of RSUs, all of which had vested by

December 31, 2021.

The Company accounts for compensation expense associated with RSUs

based on the fair value of the units on the date of grant.

Director Stock Ownership Policy

order to align the long-term interests of non-employee directors with our shareholders, our board of directors has adopted a stock

ownership policy for non-employee directors.

The policy provides that within five years of joining the board, non-employee directors

are expected to own shares of Company common stock equal to five times the then cash portion of the annual non-employee director’s

compensation.

I ncorporated

herein by reference from the Company's definitive proxy statement, which will be filed no later than 120 days after December 31,

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

table and accompanying footnotes below set forth certain information as of August 1, 2022, with respect to the ownership of our

common stock by:

person or group who beneficially owns more than 5% of our common stock;

of our directors;

of our Named Executive Officers;

of our directors and executive officers as a group.

person is deemed to be the beneficial owner of securities that can be acquired by the person within 60 days from August 15, 2022.

Name and Address of Beneficial Owner (1)

Shares Beneficially

Directors and Named Executive Officers:

Douglas McCrosson

Kenneth Hauser

Richard Caswell

Michael Faber

Walter Paulick

Eric Rosenfeld

Terry Stinson

All current directors and named executive officers as a group (nine persons)

More Than Five Percent Holders:

Royce & Associates, LLC

Globis Capital Partners, L.P.

* Less than 1%

(1) Unless otherwise noted, the business address of each of the following persons is c/o CPI Aerostructures,

Inc., 91 Heartland Blvd., Edgewood, New York 11717, except that the current business address of Douglas McCrosson is not known by the

(2) Unless otherwise noted, we believe that all persons named in the table have sole voting and investment

power with respect to all common stock beneficially owned by them, subject to community property laws, where applicable.

to our named executive officers, this includes both time-based and performance-based restricted stock awards that are forfeitable until

the vesting date or performance certification date, as applicable.

It does not include portions of restricted stock awards which have

been forfeited.

With respect to our non-executive directors, this includes vested time-based restricted stock units (“RSUs”).

RSUs are granted yearly and vest quarterly.

Such shares of restricted stock and such RSUs are included herein because they may be deemed

to be beneficially owned under Rule 13d-3 promulgated under the Exchange Act.

(3) As of August 15, 2022, there were 12,335,986 shares of our common stock issued and outstanding.

person beneficially owns a percentage of our outstanding common stock equal to a fraction, the numerator of which is the number shares

of our common stock held by such person plus the number of shares of our common stock that such person can acquire within 60 days of August

15, 2022 upon the vesting of RSUs, if applicable and the denominator of which is 12,335,986, which is equal to the number of shares of

our common stock issued and outstanding as of August 15, 2022 plus the number of shares of our common stock such person can so acquire

during such 60-day period.

(4) Includes an aggregate of 18,588 shares subject to time-based vesting.

(5) Represents 28,916 shares subject to time-based or performance-based vesting.

(6) Includes an aggregate of 34,043 shares subject to time-based or performance-based vesting.

(7) Represents 302,847 shares of common stock owned individually and 510,270 shares of common stock held

by Crescendo Partners II, L.P.

Series L (“Crescendo Partners II”).

Rosenfeld is the senior managing member of the sole

general partner of Crescendo Partners II.

Rosenfeld disclaims beneficial ownership of the shares held by Crescendo Partners II, except

to the extent of his pecuniary interest therein.

(8) The information is derived from an Amendment to Schedule 13G/A filed with the SEC on January 14,

The business address of Royce & Associates, LLC is 745 Fifth Avenue, New York, NY 10151.

(9) Globis Capital Advisors, L.L.C, Globis Capital Management, L.P., Globis Capital, L.L.C.

and Paul Packer

share voting and dispositive power with respect to such shares.

Information is derived from a Schedule 13G filed by Globis Capital Partners,

with the SEC on February 14, 2022.

The business address of each of the reporting persons is 7100 W.

Camino Real, Suite 302-48, Boca

Raton, FL 33433.

RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Related-Party

Code of Ethics requires us to avoid, wherever possible, all related-party transactions that could result in actual or potential

conflicts of interest, except under guidelines approved by our board of directors (or our Audit and Finance Committee).

generally define related-party transactions as transactions in which (1) the aggregate amount involved will or may be expected

to exceed $120,000 in any calendar year, (2) we or any of our subsidiaries is a participant, and (3) any (a) executive officer,

director or nominee for election as a director, (b) greater than 5% beneficial owner of our common stock, or (c) immediate family

member of the persons referred to in clauses (a) and (b), has or will have a direct or indirect material interest (other than

solely as a result of being a director or a less than 10% beneficial owner of another entity).

A conflict of interest situation

can arise when a person takes actions or has interests that may make it difficult to perform his or her work objectively and effectively.

Conflicts of interest may also arise if a person, or a member of his or her family, receives improper personal benefits as a result

of his or her position.

Audit and Finance Committee, pursuant to its written charter, is responsible for reviewing and approving related-party transactions

to the extent we enter into such transactions.

Our Audit and Finance Committee considers all relevant factors when determining

whether to approve a related-party transaction, including whether the related-party transaction is on terms no less favorable

than terms generally available to an unaffiliated third-party under the same or similar circumstances and the extent of the related-party’s

interest in the transaction.

No director may participate in the approval of any transaction in which he or she is a related-party,

but that director is required to provide our Audit and Finance Committee with all material information concerning the transaction.

Additionally, we require each of our directors and executive officers to complete a directors’ and officers’ questionnaire

annually that elicits information about related-party transactions.

These procedures are intended to determine whether any such

related-party transaction impairs the independence of a director or presents a conflict of interest on the part of a director,

employee, or officer.

Related-Party

Transactions .

were no related-party transactions during the year ended December 31, 2021.

I ncorporated

herein by reference from the Company's definitive proxy statement, which will be filed no later than 120 days after December 31,

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

I ncorporated

herein by reference from the Company's definitive proxy statement, which will be filed no later than 120 days after December 31,

PRINCIPAL ACCOUNTANT FEES AND SERVICES

LLP (“CohnReznick”) served as our independent registered public accounting firm from 2004 until the completion of

their review of the Company’s consolidated financial statements for the quarter ended March 31, 2021.

In November 2021,

the Company engaged RSM US LLP (“RSM”) as our independent public accounting firm to review the Company’s consolidated

financial statements for the quarters ended June 30, 2021 and September 30, 2021 and to audit the Company’s financial statements

for the year ended December 31, 2021.

RSM’s address is 4 Times Square, 151 West 42 nd Street, 19 th

Floor, New York, NY 10036 and its PCAOB firm ID number is 49 .

following fees were invoiced or are expected to be invoiced by RSM to the Company for services which RSM rendered related to the

following 2021 activities:

Audit Fees (1)

Audit-Related Fees

All Other Fees

fees consist of fees billed or expected to be billed

for professional services by RSM for the audit of the Company’s consolidated

financial statements for the year ended December 31, 2021 and the review of the Company’s

consolidated financial statements for the quarters ended June 30, 2021 and September

30, 2021, as well as related services to those engagements normally provided in connection

with statutory and regulatory filings or engagements.

Policies and Procedures .

In accordance with Section 10A(i) of the Exchange Act, ,before we engage our independent registered

public accounting firm to render audit or non-audit services, the engagement is approved by our Audit and Finance Committee.

Our Audit and Finance Committee approved all of the fees referred to in the rows titled “Audit Fees” and “Audit-Related

Fees” in the tables above.

I ncorporated

herein by reference from the Company's definitive proxy statement, which will be filed no later than 120 days after December 31,

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

following documents are filed as part of this report:

The following documents

are filed as part of this report:

Financial Statements:

Reports of Independent Registered Public Accounting Firms

Consolidated Balance Sheets as of December 31, 2020 (As Restated) and 2019 (As Restated)

Consolidated Statements of Operations for the Years Ended December 31, 2020 (As Restated) and 2019 (As Restated)

Consolidated Statements of Shareholders’ Equity (Deficit) for the Years Ended December 31, 2020 (As Restated) and 2019 (As Restated)

Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 (As Restated) and 2019 (As Restated)

Notes to Financial Statements

Financial Statement Schedules:

of Independent Registered Public Accounting Firm

Balance Sheets as of December 31, 2022 and 2021

Statements of Operations for the Years Ended December 31, 2022 and 2021

Statements of Shareholders’ Equity (Deficit) for the Years Ended December 31, 2022 and 2021

Statements of Cash Flows for the Years Ended December 31, 2022 and 2021

to Financial Statements

(2) Financial

Statement Schedules:

The following Exhibits are filed as part of this report:

of Incorporation of the Company, as amended, (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report

on Form 10-K, filed on August 25, 2020).

of Amendment of the Certificate of Incorporation of Composite of Precision Industries, Inc., dated May 9, 1989 (incorporated

by reference to Exhibit 3.1.1 to the Company’s Annual Report on Form 10-K, filed on August 25, 2020).

of Amendment of the Certificate of Incorporation of Consortium Products International, Inc., dated June 30, 1992 (incorporated

by reference to Exhibit 3.1.2 to the Company’s Annual Report on Form 10-K, filed on August 25, 2020).

of Amendment of the Certificate of Incorporation of CPI Aerostructures, Inc., dated August 7, 1992 (incorporated by reference

to Exhibit 3.1.3 to the Company’s Annual Report on Form 10-K, filed on August 25, 2020).

of Amendment of the Certificate of Incorporation of CPI Aerostructures, Inc., dated June 3, 1997 (incorporated by reference

to Exhibit 3.1.4 to the Company’s Annual Report on Form 10-K, filed on August 25, 2020).

of Amendment of the Certificate of Incorporation of CPI Aerostructures, Inc., dated June 16, 1998 (incorporated by reference

to Exhibit 3.1.5 to the Company’s Annual Report on Form 10-K, filed on August 25, 2020).

Certificate of Incorporation of the Company, as amended, (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K, filed on August 25, 2020).

Certificate of Amendment of the Certificate of Incorporation of Composite of Precision Industries, Inc., dated May 9, 1989 (incorporated by reference to Exhibit 3.1.1 to the Company’s Annual Report on Form 10-K, filed on August 25, 2020).

Certificate of Amendment of the Certificate of Incorporation of Consortium Products International, Inc., dated June 30, 1992 (incorporated by reference to Exhibit 3.1.2 to the Company’s Annual Report on Form 10-K, filed on August 25, 2020).

Certificate of Amendment of the Certificate of Incorporation of CPI Aerostructures, Inc., dated August 7, 1992 (incorporated by reference to Exhibit 3.1.3 to the Company’s Annual Report on Form 10-K, filed on August 25, 2020).

Certificate of Amendment of the Certificate of Incorporation of CPI Aerostructures, Inc., dated June 3, 1997 (incorporated by reference to Exhibit 3.1.4 to the Company’s Annual Report on Form 10-K, filed on August 25, 2020).

Certificate of Amendment of the Certificate of Incorporation of CPI Aerostructures, Inc., dated June 16, 1998 (incorporated by reference to Exhibit 3.1.5 to the Company’s Annual Report on Form 10-K, filed on August 25, 2020).

Amended and Restated By-laws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K/A filed on November 24, 2021).

1 unchanged sentence

Securities of the Registrant.

Equity Plan 2009 (incorporated by reference to Appendix A to the Company’s Proxy Statement on Schedule 14A filed on

April 30, 2009).

Long-Term Incentive Plan, as amended (incorporated by reference from Exhibit 10.2 to the Company’s Annual Report on

Form 10-K filed on April 15, 2021).

Performance Equity Plan 2009 (incorporated by reference to Appendix A to the Company’s Proxy Statement on Schedule 14A filed on April 30, 2009).

2016 Long-Term Incentive Plan, as amended (incorporated by reference from Exhibit 10.2 to the Company’s Annual Report on Form 10-K filed on April 15, 2021).

Agreement of Lease, dated June 30, 2011, between Heartland Boys II L.P.

4 unchanged sentences

(incorporated by reference to Exhibit 10.3.2 to the Company’s Annual Report on Form 10-K/A filed on November 24, 2021).

Lease Amendment, dated November 10, 2021, between Heartland Boys II L.P.

and CPI Aerostructures, Inc.(incorporated by reference

from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 12, 2021).

and Restated Credit Agreement, dated as of March 24, 2016, among CPI Aerostructures, Inc., the several lenders from time to

time party thereto, and BankUnited, N.A.

(incorporated by reference from Exhibit 10.1 to the Company’s Current Report

on Form 8-K filed on March 28, 2016).

Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s

Current Report on Form 8-K filed on May 10, 2016).

Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.4.3 to the Company’s

Annual Report on Form 10-K filed on August 25, 2020).

Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s

Current Report on Form 8-K filed on August 16, 2018).

Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.2 to the Company’s

Current Report on Form 8-K filed on December 27, 2018).

Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s

Current Report on Form 8-K filed on June 26, 2019).

and Sixth Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s

Current Report on Form 8-K filed on August 24, 2020).

and Seventh Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s

Current Report on Form 8-K filed on May 17, 2021).

and Eighth Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s

Current Report on Form 8-K filed on October 28, 2021).

Second Lease Amendment, dated November 10, 2021, between Heartland Boys II L.P.

and CPI Aerostructures, Inc.

(incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 12, 2021).

Amended and Restated Credit Agreement, dated as of March 24, 2016, among CPI Aerostructures, Inc., the several lenders from time to time party thereto, and BankUnited, N.A.

(incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 28, 2016).

First Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 10, 2016).

Second Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.4.3 to the Company’s Annual Report on Form 10-K filed on August 25, 2020).

Third Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 16, 2018).

Fourth Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on December 27, 2018).

Fifth Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on June 26, 2019).

Waiver and Sixth Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 24, 2020).

Waiver and Seventh Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on May 17, 2021).

Waiver and Eighth Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on October 28, 2021).

Consent, Waiver and Ninth Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 12, 2022).

Consent, Waiver and Tenth Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 19, 2022).

and Restated Continuing General Security Agreement among CPI Aerostructures, Inc.

Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s

Current Report on Form 8-K filed on November 11, 2022).

Twelfth Amendment to the Amended and Restated Credit Agreement (incorporated by reference from Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 23, 2023).

Amended and Restated Continuing General Security Agreement among CPI Aerostructures, Inc.

and BankUnited N.A.

(incorporated by reference

to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 28, 2016).

(incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on March 28, 2016).

Severance and Change in Control Agreement, dated March 9, 2022, between the Company and Dorith Hakim (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on March 9, 2022).

Subsidiaries of the Registrant.

Consent of CohnReznick LLP.

Consent of RSM US LLP.

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Section 1350, as Adopted Pursuant to Section 905 of the Sarbanes-Oxley Act of 2002.

Instanse Document.

Taxonomy Extension Scheme Document.

Taxonomy Extension Calculation Linkbase Document.

Taxonomy Extension Definition Linkbase Document.

Taxonomy Extension Label Linkbase Document.

Taxonomy Extension Presentation Linkbase Document.

page formatted as Inline XBRL and contained in Exhibit 101

** Management

contract compensatory plan or arrangement.

*** Furnished

XBRL Instanse Document.

XBRL Taxonomy Extension Scheme Document.

XBRL Taxonomy Extension Calculation Linkbase Document.

XBRL Taxonomy Extension Definition Linkbase Document.

XBRL Taxonomy Extension Label Linkbase Document.

XBRL Taxonomy Extension Presentation Linkbase Document.

Cover page formatted as Inline XBRL and contained in Exhibit 101.

Filed herewith.

Management contract compensatory plan or arrangement.

Furnished herewith.

FORM 10-K SUMMARY

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TO FINANCIAL STATEMENTS

of Independent Registered Public Accounting Firm (For the Year Ended

December 31, 2021)

Report of Independent Registered Public Accounting Firm (For the Year Ended December 31, 2020)

Financial Statements:

Consolidated Balance Sheets as of December 31, 2021 and 2020 (As Restated)

Consolidated Statements of Operations for the Years Ended December 31, 2021 and 2020 (As Restated)

Consolidated Statements of Shareholders’ Deficit for the Years Ended December 31, 2021 and 2020 (As Restated)

Consolidated Statements of Cash Flows for the Years Ended December 31, 2021 and 2020 (As Restated)

Report of Independent Registered Public Accounting Firm

Consolidated Financial Statements:

Consolidated Balance Sheets as of December 31, 2022 and 2021

Statements of Operations for the Years Ended December 31, 2022 and 2021

Consolidated Statements of Shareholders’ Equity (Deficit) for the Years Ended December 31, 2022 and 2021

Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021

Notes to Consolidated Financial Statements

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

of Independent Registered Public Accounting Firm

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of CPI Aerostructures, Inc.

on the Financial Statements

have audited the accompanying consolidated balance sheet of CPI Aerostructures, Inc.

and Subsidiaries (the Company) as of December 31,

2021, the related consolidated statements of operations, shareholders’ deficit and cash flows for the year then ended, and the

related notes to the consolidated financial statements (collectively, the financial statements).

In our opinion, the financial statements

present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations

and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s

financial statements based on our audit.

We are a public accounting firm registered with the Public Company Accounting Oversight

Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S.

federal securities

laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

conducted our audit in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain

reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit

we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion

on the effectiveness of the Company’s internal control over financial reporting.

Opinion on the Financial Statements

We have audited the accompanying consolidated

balance sheets of CPI Aerostructures, Inc.

and Subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements

of operations, shareholders’ equity (deficit) and cash flows for the years then ended, and the related notes to the consolidated

financial statements (collectively, the financial statements).

In our opinion, the financial statements present fairly, in all material

respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows

for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility

of the Company’s management.

Our responsibility is to express an opinion on the Company’s financial statements based on our

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and

are required to be independent with respect to the Company in accordance with U.S.

federal securities laws and the applicable rules and

regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the

standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial

statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged

to perform, an audit of its internal control over financial reporting.

As part of our audit we are required to obtain an understanding

of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s

internal control over financial reporting.

Accordingly, we express no such opinion.

audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or

fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding

the amounts and disclosures in the financial statements.

Our audit also included evaluating the accounting principles used and significant

estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audit provide

a reasonable basis for our opinion.

Audit Matters

critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated

or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial

statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of critical audit matters

does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit

matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

described in Note 1 of the financial statements, inventories are reported at lower of cost or net realizable value using weighted average

As described in Note 5 of the financial statements, the Company's inventory balance was $4 million as of December 31, 2021.

the complexity and subjectivity of valuation of inventories of the Company’s wholly owned subsidiary, Welding Metallurgy, Inc.

(WMI), we identified inventory valuation for WMI as a critical audit matter.

Auditing these calculations and estimates required a high

Our audits included performing procedures to assess

the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond

to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating

the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below

are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to

the audit committee and that:

(1) relate to accounts or disclosures that are material to the financial statements and (2) involved our

especially challenging, subjective or complex judgments.

The communication of critical audit matters does not alter in any way our opinion

on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions

on the critical audit matters or on the accounts or disclosures to which they relate.

Tax Asset Valuation Allowance

As described in Note 1 and Note 11 of the financial

statements, the Company’s net deferred tax asset of approximately $6.6 million is net of a valuation allowance of approximately

$14.9 million as of December 31, 2022.

The Company recognizes deferred tax assets and liabilities for the expected future income tax consequences

of events that have been recognized in the Company’s financial statements.

Valuation allowances are provided for deferred tax assets

where it is considered more likely than not that the Company will not realize the benefit of such assets.

In evaluating the realizability

of deferred tax assets in future periods, the available positive and negative evidence, including projected future taxable income exclusive

of reversing temporary differences, history of book losses, tax planning strategies, and results of recent operations, are considered.

We identified management’s determination

of the value of deferred tax assets as a critical audit matter as there is significant judgment required by management to conclude that

it is more likely than not that these deferred tax assets will be realized in future periods.

In addition, the auditing of these elements

involved complex and subjective auditor judgment, including the need to involve personnel with specialized skill and knowledge.

procedures to evaluate management’s determination that sufficient taxable income will not be generated to realize deferred tax assets

included the following, among others:

· Evaluated the reasonableness of management’s

estimate in regard to the ability to generate future taxable income and utilize the deferred tax assets by evaluating the forecast of

future taxable income, including testing of management’s assumptions used in their projections.

· Utilized personnel with specialized

knowledge and skill in accounting for income taxes to assist in the evaluation of management’s assessment of positive and negative

evidence and their conclusion that it is more likely than not that the Company will not realize a benefit from a portion of its deferred

As described in Note 2 of the financial statements,

revenue for the year ended December 31, 2022 was $83 million.

The majority of the Company's revenues are from long-term contracts with

performance obligations satisfied over time as the Company (i) sells products with no alternative use to the Company and (ii) has an enforceable

right to recover costs incurred plus a reasonable profit margin for work completed to date.

The Company uses the cost-to-cost method to

measure progress for its performance obligations because it best depicts the transfer of control to the customer which occurs as the Company

incurs costs on its contracts.

Given the complexity and significant estimates

and assumptions management makes regarding revenue and costs associated with long-term contracts with performance obligations satisfied

over time, we identified revenue recognition over these contracts as a critical audit matter.

Auditing these estimates required a high

degree of auditor judgement and increased audit effort.

audit procedures related to the Company's valuation of inventory included the following, among others:

obtained an understanding of management’s process around the valuation of inventory,

including inventory reserves.

substantive test of details on a sample of inventory transactions by tracing inventory items

to underlying invoices and payroll support.

We also tested the overhead applied by testing

the supporting documentation to costs incurred and testing the appropriateness of amounts

and tested management's inventory reserve estimate by recalculating amounts reserved and

comparing to recorded amounts.

described in Note 2 of the financial statements, revenue for the year ended December 31, 2021 was $103 million.

The majority of the Company's

revenues are from long-term contracts with performance obligations satisfied over time as the Company (i) sells products with no alternative

use to the Company and (ii) has an enforceable right to recover costs incurred plus a reasonable profit margin for work completed to

The Company uses the cost-to-cost method to measure progress for its performance obligations because it best depicts the transfer

of control to the customer which occurs as the Company incurs costs on its contracts.

the complexity and significant estimates and assumptions management makes regarding revenue and costs associated with long-term contracts

with performance obligations satisfied over time, we identified revenue recognition over these contracts as a critical audit matter.

Auditing these estimates required a high degree of auditor judgement and increased audit effort.

audit procedures related to the Company's revenue, costs and profit for these contracts included the following, among others:

obtained an understanding of management’s process related to the accounting for contract

revenue including cost to complete estimates for long-term contracts with performance obligations

Our audit procedures related to the Company's

revenue, costs and profit for these contracts included the following, among others:

· Obtained an understanding of management’s process

related to the accounting for contract revenue including cost to complete estimates for long-term contracts with performance obligations

satisfied over time.

substantive test of details on a sample of contracts with customers to ensure modifications

were agreed to by the customer.

performed substantive analytical procedures relating to revenue using disaggregated data.

· Performed substantive test of details on a sample of contracts

with customers to ensure modifications were agreed to by the customer.

· Performed journal entry testing related to revenue.

the accuracy and completeness of the costs incurred to date on a sample of contracts.

performed procedures, including a retrospective and prospective review, over estimated costs

to complete on a sample of contracts.

a sample of contracts, we evaluated whether the revenue recognition over time on contracts

was appropriate based on the terms and conditions.

the mathematical accuracy of management’s calculation of revenue recognized on a sample

· Tested the accuracy and completeness of the costs incurred

to date on a sample of contracts.

· Performed procedures, including a retrospective and prospective

review, over estimated costs to complete on a sample of contracts.

· On a sample of contracts, we evaluated whether the revenue

recognition over time on contracts was appropriate based on the terms and conditions.

· Tested the mathematical accuracy of management’s calculation

of revenue recognized on a sample basis.

/s/ RSM US LLP

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New York, New York

August 19, 2022

of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

April 14, 2023

CPI AEROSTRUCTURES, INC.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance

sheet of CPI Aerostructures, Inc.

and Subsidiaries (the “Company”) as of December 31, 2020, and the related consolidated

statements of operations, shareholders’ deficit and cash flows for the year then ended, and the related notes (collectively referred

to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in

all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash

flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

Restatement of Previously Issued Consolidated

Financial Statements

Subsequent to the issuance of the Company’s

consolidated financial statements on April 15, 2021, management determined that these consolidated financial statements contained errors

as discussed in Note 16 to the consolidated financial statements.

The accompanying consolidated financial statements have been restated

to correct these errors.

Basis for Opinion

These consolidated financial statements are the responsibility

of the Company’s management.

Our responsibility is to express an opinion on these consolidated financial statements based on our

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)

and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable

rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards

of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated

financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were

we engaged to perform, an audit of its internal control over financial reporting.

As part of our audit we were required to obtain an

understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the

Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audit included performing procedures to assess

the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures

that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the

consolidated financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by

management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides

a reasonable basis for our opinion.

/s/ CohnReznick LLP

We served as the Company’s auditors from 2004

to December 2021

New York, New York

April 15, 2021, except for the effects on the

consolidated financial statements and related footnotes of the restatement described in Note 16, as to which the date is November

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

BALANCE SHEETS

(As Restated – see Note 16)

Current Assets:

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Property and equipment, net

Deferred tax asset

Intangibles, net

LIABILITIES AND SHAREHOLDERS’ DEFICIT

LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)

Current Liabilities:

3 unchanged sentences

Contract liabilities

Current portion of line of credit

Current portion of long-term debt

2 unchanged sentences

Total Current Liabilities

Line of credit

Line of credit, net of current portion

Long-term operating lease liabilities

1 unchanged sentence

Total Liabilities

Shareholders’ Deficit:

Shareholders’ Equity (Deficit):

Common stock - $ .001 par value;

4 unchanged sentences

( 78,181,151 )

Total Shareholders’ Deficit

( 5,335,073 )

Total Shareholders’ Equity (Deficit)

( 5,335,073 )

Total Liabilities and Shareholders’ Deficit

Total Liabilities and Shareholders’ Equity (Deficit)

notes to CONSOLIDATED financial statements

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STATEMENTS OF OPERATIONS

Years ended December 31,

ended December 31, 2022 and 2021

$ 103,369,544

1 unchanged sentence

Selling, general and administrative expenses

Income (loss) from operations

( 2,286,212 )

Income from operations

Other income (expense):

4 unchanged sentences

( 2,271,101 )

Income (loss) before provision for income taxes

( 3,708,167 )

Income before provision for income taxes

Provision for (benefit from) income taxes

Net income (loss)

( 6,553,131 )

Income (loss) per common share-basic

Income (loss) per common share-diluted

Shares used in computing income (loss) per common share:

Income per common share:

Income per common share-unrestricted shares

Income per common share-restricted shares

Shares used in computing income per common share:

Unrestricted shares

Restricted shares

notes to CONSOLIDATED financial statements

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AND SUBSIDIARIES

STATEMENTS OF SHAREHOLDERS’ DEFICIT

ended December 31, 2021 and 2020 (As Restated see Note 16)

STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

ended December 31, 2022 and 2021

Additional Paid-in

Shareholders’

Balance at January 1, 2020 (as restated)

$ ( 81,346,771 )

$ ( 10,040,323 )

Net loss (as restated)

Equity (Deficit)

Balance at January 1, 2021

$ ( 85,001,524 )

$ ( 12,983,732 )

Common stock forfeited

Stock-based compensation expense

Balance at December 31, 2020 (as restated)

Balance at December 31, 2021

( 78,181,151 )

4 unchanged sentences

$ ( 69,004,926 )

$ ( 5,335,073 )

notes to CONSOLIDATED financial statements

2 unchanged sentences

STATEMENTS OF CASH FLOWS

Years ended December 31,

(As Restated – see Note 16)

ended December 31, 2022 and 2021

Cash flows from operating activities:

Net income (loss)

$ ( 3,654,753 )

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

Amortization of debt issuance costs

Cash expended in excess of rent expense

Cash expended below (in excess of) rent expense

Stock-based compensation expense

Bad debt expense (recovery)

Deferred income taxes

( 6,574,463 )

Bad debt expense

Forgiveness of PPP loan

1 unchanged sentence

Changes in operating assets and liabilities:

(Increase) decrease in accounts receivable

Increase in contract assets

Decrease (increase) in accounts receivable

Increase in insurance recovery receivable

( 2,850,000 )

Increase in contract assets

( 2,925,201 )

Decrease (increase) in inventory

( 4,729,701 )

(Increase) decrease in prepaid expenses and other current assets

Decrease in refundable income taxes

(Decrease) increase in accounts payable and accrued expenses

Decrease in inventory

Increase in prepaid expenses and other current assets

Decrease in accounts payable and accrued expenses

( 1,157,019 )

Increase (decrease) in contract liabilities

( 1,499,000 )

Increase in litigation settlement obligation

Increase in contract liabilities

Decrease in loss reserve

( 1,956,666 )

Increase in insurance receivable

( 2,850,000 )

Increase in settlement of litigation obligation

Increase (decrease) in income taxes payable

Net cash provided by (used in) operating activities

( 1,602,455 )

Increase in income taxes payable

Net cash provided by operating activities

Cash flows from investing activities:

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Cash flows from financing activities:

Proceeds from PPP loan

Proceeds from line of credit

2 unchanged sentences

( 3,005,833 )

Debt issuance costs

Net cash (used) provided by financing activities

Net cash used in financing activities

( 3,365,181 )

Net increase in cash and restricted cash

( 2,494,518 )

Net increase (decrease) in cash

( 2,461,641 )

Cash at beginning of year

Cash at end of year

Supplemental schedule of noncash investing activities:

Eqsuipment acquired under capital lease

Supplemental schedule of cash flow information:

Supplemental disclosure of cash flow information:

Cash paid during the year for interest

Cash paid for (received from) income taxes

$ ( 488,052 )

notes to CONSOLIDATED financial statements

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Company consists of CPI Aerostructures, Inc.

(“CPI”) and Welding Metallurgy, Inc.

(“WMI”), a wholly owned

subsidiary acquired on December 20, 2018 and Compac Development Corporation, a wholly owned subsidiary of WMI (collectively the

(“CPI”), Welding Metallurgy, Inc.

(“WMI”) and Compac Development

Corporation, a wholly owned subsidiary of WMI (collectively the “Company”).

supplier of aircraft parts for fixed wing aircraft and helicopters in both the commercial and defense markets.

We manufacture

CPI manufactures

complex aerostructure assemblies, as well as aerosystems.

Additionally, we supply parts for maintenance, repair and overhaul (“MRO”)

and kitting contracts.

Additionally, CPI supplies parts for maintenance, repair and overhaul

(“MRO”) and kitting contracts.

operating segment, in part, is a component of an enterprise whose operating results are regularly reviewed by the chief operating

2 unchanged sentences

The Company’s CODM, the Chief Executive Officer, reviews

financial information presented on a consolidated basis, accompanied by disaggregated information about revenues for purposes

of making operating decisions and assessing financial performance.

The Company has determined that it has a single operating and

reportable segment.

accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries.

All intercompany

accounts and transactions have been eliminated in consolidation.

preparation of financial statements in conformity with accounting principles generally accepted in the United States of America

financial information presented on a consolidated basis for purposes of making operating decisions and assessing financial performance.

The Company has determined that it has a single operating and reportable segment.

balances have been reclassified to conform to presentation requirements, including consistent presentation of the components of

inventory (Note 5).

of Presentation and Principles of Consolidation

accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted

in the United States of America (“U.S.

GAAP”) and applicable rules and regulations of the United States Securities

and Exchange Commission (“SEC”).

The consolidated financial statements include the accounts of the Company and its

wholly-owned subsidiaries.

All intercompany accounts and transactions have been eliminated in consolidation.

preparation of financial statements in conformity with U.S.

GAAP requires the use of estimates by management.

Actual results could differ from these estimates.

Company applied acquisition accounting for the WMI acquisition in accordance with Accounting Standards Codification 805, “Business

Combinations” (“ASC 805”).

Acquisition accounting requires that the assets acquired and liabilities assumed

be recorded at their respective estimated fair values at the date of acquisition.

The excess purchase price over fair value of

the net assets acquired is recorded as goodwill.

In determining estimated fair values, we are required to make estimates and assumptions

that affect the recorded amounts including, but not limited to, expected future cash flows, discount rates, remaining useful lives

of long-lived assets, useful lives of identified intangible assets, replacement or reproduction costs of property and equipment

and the amounts to be recovered in future periods from acquired net operating losses and other deferred tax assets.

Our estimates

in this area impact, among other items, the amount of depreciation and amortization, impairment charges in certain instances if

the asset becomes impaired, and income tax expense or benefit that we report.

Our estimates of fair value are based upon assumptions

believed to be reasonable, but which are inherently uncertain.

January 1, 2018, the Company follows Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers”

(“ASC 606”), using the modified retrospective method.

In accordance with ASC 606, the Company recognizes revenue when

it transfers control of a promised good or service to a customer in an amount that reflects the consideration it expects to be

entitled to in exchange for the good or service.

The majority of the Company’s performance obligations are satisfied over-time

as the Company (i) sells products with no alternative use to the Company and (ii) has an enforceable right to recover costs incurred

plus a reasonable profit margin for work completed to date.

Under the over-time revenue recognition model, revenue and gross profit

are recognized over the contract period as work is performed based on actual costs incurred and an estimate of costs to complete

and resulting total estimated costs at completion.

In 2020, the Company corrected its application of ASC 606, which resulted in

a restatement of its previously issued consolidated financial statements for 2018 and the first three quarters of 2019.

Actual results could

differ from these estimates.

Company follows Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“ASC 606”),

using the modified retrospective method.

In accordance with ASC 606, the Company recognizes revenue when it transfers control

of a promised good or service to a customer in an amount that reflects the consideration it expects to be entitled to in exchange

for the good or service.

The majority of the Company’s performance obligations are satisfied over-time as the Company (i)

sells products with no alternative use to the Company and (ii) has an enforceable right to recover costs incurred plus a reasonable

profit margin for work completed to date.

Under the over-time revenue recognition model, revenue and gross profit are recognized

over the contract period as work is performed based on actual costs incurred and an estimate of costs to complete and resulting

total estimated costs at completion.

Note 2, “Revenue Recognition”, for additional information regarding the Company’s revenue recognition policy.

1 unchanged sentence

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

Company’s government contracts are subject to the procurement rules and regulations of the U.S.

22 unchanged sentences

The Company writes off accounts when they are deemed to be uncollectible.

are reported at lower of cost or net realizable value using weighted average actual cost.

which consist of raw materials, work in progress and finished goods, are reported at lower of cost or net realizable value using

weighted average actual cost.

and Equipment

and equipment are recorded at cost.

and amortization of property and equipment is provided by the straight-line method over the shorter of estimated useful lives

of the respective assets or the life of the lease, for leasehold improvements.

Company leases a building and equipment.

Under ASC 842, at contract inception we determine whether the contract is or contains

a lease and whether the lease should be classified as an operating or a finance lease.

Operating leases are included in ROU assets

and operating lease liabilities in our consolidated balance sheets.

and equipment are carried at cost, net of accumulated depreciation.

Depreciation is computed utilizing the straight-line method

over the estimated useful life of the asset.

Leasehold improvements depreciation is computed over the shorter of the lease term

or estimated useful life of the asset.

Additions and improvements are capitalized, while repairs and maintenance are expensed

Company leases a building and various equipment.

Under ASC 842, Leases (“ASC 842”), at contract inception we determine

whether the contract is or contains a lease and whether the lease should be classified as an operating or a finance lease.

leases are included in ROU assets and operating lease liabilities in our consolidated balance sheets.

assets represent the Company’s right to use an underlying asset during the lease term, and lease liabilities represent the

5 unchanged sentences

an option in a lease.

Both finance and operating lease ROU assets and liabilities are recognized at commencement date and measured

as the present value of lease payments to be made over the lease term.

As the interest rate implicit in the lease is not readily

available for most of the Company’s leases, the Company uses its estimated incremental borrowing rate in determining the

present value of lease payments.

The estimated incremental borrowing rate is derived from information available at the lease commencement

The lease ROU asset recognized at commencement is adjusted for any lease payments related to initial direct costs, prepayments,

and lease incentives.

operating leases, lease expense is recognized on a straight-line basis over the lease term.

For finance leases, lease expense

comprises the amortization of the ROU assets recognized on a straight-line basis generally over the shorter of the lease term

or the estimated useful life of the underlying asset and interest on the lease liability.

Variable lease payments not dependent

on a rate or index are recognized when the event, activity, or circumstance in the lease agreement upon which those payments are

contingent is probable of occurring and are presented in the same line of the consolidated balance sheet as the rent expense arising

from fixed payments.

The Company has lease agreements with lease and non-lease components.

Non-lease components are combined with

the related lease components and accounted for as lease components for all classes of underlying assets.

ROU assets and liabilities are recognized at commencement date and measured as the present value of lease

payments to be made over the lease term.

As the interest rate implicit in the lease is not readily available for most of the Company’s

leases, the Company uses its estimated incremental borrowing rate in determining the present value of lease payments.

The estimated

incremental borrowing rate is derived from information available at the lease commencement date.

The lease ROU asset recognized

at commencement is adjusted for any lease payments related to initial direct costs, prepayments, and lease incentives.

asset is amortized on a straight-line basis generally over the shorter of the lease term or the estimated useful life of the underlying

asset and interest on the lease liability.

leases are treated as the purchase of an asset on a financing basis.

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

December 31, 2021 the Company has right of use assets and lease liabilities of approximately $ 7.8 million and $ 8.0 million respectively.

At December 31, 2020 the Company has right of use assets and lease liabilities of approximately $ 4.1 million and $ 4.4 million

respectively.

Company reviews its long-lived assets and certain related intangibles for impairment whenever changes in circumstances indicate

that the carrying amount of an asset may not be fully recoverable.

As a result of its review, the Company does not believe that

any such change has occurred.

If such changes in circumstance are present, a loss is recognized to the extent the carrying value

of the asset is in excess of the undiscounted fair value of cash flows expected to result from the use of the asset and amounts

expected to be realized upon its eventual disposition.

TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2022, the Company has right of use assets and lease liabilities of $ 6,526,627 and $ 6,895,046 , respectively.

31, 2021, the Company had right of use assets and lease liabilities of $ 7,796,768 and $ 8,026,181 , respectively.

represents the excess of purchase price of an acquisition over the fair value of net assets acquired.

Goodwill is not amortized

but instead is assessed for impairment annually and when events and circumstances warrant an evaluation.

The Company evaluates

its goodwill on an annual basis during its fourth fiscal quarter.

The Company has determined that it has a single operating and

reportable segment, and assesses during its evaluation whether it believes it is more likely than not that the fair value of this

reporting unit is greater than or less than its carrying amount by comparing the fair value of this reporting unit with its carrying

If the carrying amount of a reporting unit exceeds the reporting unit’s fair value, the amount by which the carrying

value exceeds the fair value is recognized as an impairment loss.

The Company performed its annual impairment assessment of goodwill

as of December 31, 2022 and concluded that goodwill was not impaired.

The Company reviews its long-lived assets and certain related intangibles

for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable by comparing

the estimated undiscounted cash flows expected to result from the use of the asset and the estimated amounts expected to be realized upon

the asset’s eventual disposition with the carrying value of the asset.

If the carrying amount of the asset exceeds the aforementioned

estimated expected undiscounted cash flows and estimated expected disposition proceeds, the Company measures the amount of the impairment

to record by comparing the carrying amount of the asset with its estimated fair value.

As of December 31, 2022, the Company determined

that long-lived assets were not impaired.

fair value of the Company’s short-term debt is estimated based on the current rates offered to the Company for debt of similar

terms and maturities.

Using this method, the fair value of the Company’s short-term debt was not significantly different

than the stated value at December 31, 2021 and 2020.

Using this method, the fair value of the Company’s short-term debt was equal to the stated value at

December 31, 2022 and 2021.

December 31, 2022 and 2021, the fair values of the Company’s current assets and current liabilities approximated their carrying

values because of the short-term nature of these instruments.

of credit and long-term debt

Carrying Amount

Line of credit and long-term debt

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

(loss) per share

income (loss) per common share is computed using the weighted-average number of shares outstanding.

Diluted loss per common share

is computed using the weighted-average number of shares outstanding adjusted for the incremental shares attributed to outstanding

options to purchase common stock.

There were no incremental shares of that were used in the calculation of diluted earnings per

common share in 2021 since the restricted stock units were fully vested by December 31 2021.

Since the Company was in a loss position

in 2020, no incremental shares were used in the calculation of diluted loss per share since these shares would be considered anti-dilutive.

The Company complies with the accounting and disclosure requirements of

FASB ASC Topic 260, “Earnings Per Share” and uses the two-class method in the calculation of earnings per share.

per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period.

the twelve months ended December 31, 2022 and 2021, respectively, and as of December 31, 2022 and December 31, 2021, respectively, the

Company had restricted shares of common stock that were considered participating securities and unrestricted shares of common stock outstanding.

Earnings and losses are shared pro rata.

the years ended December 31, 2022 and 2021, respectively, our income per common share was calculated as follows:

Year ended December 31, 2022

Year ended December 31, 2021

Income per common share-unrestricted shares

Income per common share-restricted shares

Shares used in computing income per common share:

Unrestricted shares

Restricted shares

taxes are accounted for under the asset and liability method whereby deferred tax assets and liabilities are recognized for future

12 unchanged sentences

AND SUBSIDIARIES

Adopted Accounting Pronouncements

January 2017, the FASB issued Accounting Standards Update No.

2017-04, “Intangibles - Goodwill and Other (Topic 350):

the Test for Goodwill Impairment (“ASU-2017-04”).

ASU 2017-04 is intended to simplify how all entities assess goodwill

for impairment.

This is accomplished by removing the requirement to determine the fair value of individual assets and liabilities

in order to calculate a reporting unit’s “implied” goodwill.

The goodwill impairment test consists of one step

comparing the fair value of a reporting unit with its carrying amount.

An entity should recognize a goodwill impairment charge

for the amount by which the carrying amount exceeds the reporting unit’s fair value.

entity may still perform the optional qualitative assessment for a reporting unit to determine if it is more likely than not that

goodwill is impaired.

However, the ASU 2017-04 eliminates the requirement to perform a qualitative assessment for any reporting

unit with zero or negative carrying amount.

The Company adopted ASU-2017-4 for the year ended December 31, 2020 and there was

no impact of the adoption to the Company’s financial statements.

December 31, 2021, our cash balance was $ 6,308,866 compared to $ 6,033,537 at December 31, 2020, an increase of $ 275,329 .

receivable balance at December 31, 2021 increased to $ 4,967,714 from $ 4,962,906 at December 31, 2020.

At December 31, 2021, we

had working capital of $ 12,175,606 compared to working capital of $ 7,674,974 at December 31, 2020.

May 11, 2021, we entered into a Consent, Waiver and Seventh Amendment (the “Seventh Amendment”) to the Company’s

credit facility (the “BankUnited Facility” or the “Credit Agreement”) with BankUnited, N.A.

(“BankUnited”)

Credit Agreement.

Under the Seventh Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of

the Revolving Loan and the Term Loan to July 31, 2022 , and (b) amending the leverage ratio covenant.

Additionally, under

the Seventh Amendment, BankUnited waived late delivery of certain financial information.

October 28, 2021, we entered into Waiver and Eighth Amendment (the “Eighth Amendment”) to the Credit Agreement.

the Eighth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan and the

Term Loan to December 31, 2022 , (b) reducing the availability under the Revolving Loan from $ 24 million to $ 21 million

while eliminating the requirement to maintain a minimum $ 3 .0 million in a combination of Revolving Loan availability and unrestricted

cash, (c) providing for the repayment of an additional $ 750,000 of the principal balance of the Term Loan in three installments

of $ 250,000 on November 30, 2021, December 31, 2021 and March 31, 2022 in addition to $ 200,000 regular monthly principal

payments through December 31, 2022, (d) amending the minimum debt service coverage ratio covenant and (e) amending the maximum

leverage coverage ratio.

Additionally, under the Eighth Amendment, BankUnited waived certain covenant non-compliance and waived

temporarily, late delivery of certain financial information.

In connection with the Eighth Amendment, a $ 250,000 amendment

fee (the “Amendment Fee”) was earned by the lenders on December 31, 2021 which the Company elected to pay in kind

and accrue and capitalize rather than pay in cash.

As at December 31, 2021, the Amendment Fee payable was posted by BankUnited

to the Revolving Loan and on February 11, 2022, in agreement with the Company, the Amendment Fee was reclassified by BankUnited

to the Term Loan.

The Company has recorded this payable to its financial statements accordingly.

April 12, 2022 the Company entered into a Consent, Waiver and Ninth Amendment (the “Ninth Amendment”) to the Credit

Under the Ninth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving

Loan and the Term Loan to September 30, 2023 , (b) providing for the repayment of an additional $ 750,000 of the principal

balance of the Term Loan in three installments of $ 250,000 on September 30, 2022, December 31, 2022 and March 31,

2023 in addition to $ 200,000 regular monthly principal payments through December 31, 2022 and (c) increasing the interest

on the Revolving Loan, Term Loan, and the Amendment Fee as follows:

through June 30, 2022, Prime Rate (as defined in the Credit

Agreement) plus 2.5 %;

from July 1, 2022 through August 31, 2022, Prime Rate plus 5 %;

from September 1, 2022 through

October 31, 2022, Prime Rate plus 6 %;

from November 1, 2022 through December 31, 2022, Prime Rate plus 7 %;

and from January 1, 2023 through September 30, 2023, Prime Rate plus 8 %.

Additionally, under the Ninth Amendment, the Credit

Agreement financial covenants were amended.

BankUnited also waived or consented to certain covenant non-compliance, waived temporarily

or consented to, late delivery of certain financial information and waived permanently late delivery of certain pro-forma budget

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

August 19, 2022, we entered into a Consent, Waiver and Tenth Amendment (the “Tenth Amendment”) to the Credit Agreement.

the Tenth Amendment, the parties amended the Credit Agreement by (a) increasing the maximum leverage ratio applicable for the fiscal

quarter ending September 30, 2022 to 5.0

to 1.0, (b) waiving and/or consenting to the

exclusion from the Company’s covenant compliance requirements for the fiscal quarters ended December 31, 2021, March 31, 2022,

June 30, 2022 and September 30, 2022 up to (i) $ 566,024.81

of losses incurred and reserves taken under the

Borrower’s welded product contracts, and (ii) $ 367,044.51

of reserves taken with respect to the Borrower’s

welded product inventory, and (c) waiving and/or consenting to the exclusion from the Company’s covenant compliance requirements

for the fiscal quarters ended March 31, 2022, June 30, 2022, September 30, 2022 and December 31, 2022 up to $ 795,997.06

of accrued severance and COBRA costs and employer

taxes incurred by the Company during the fiscal quarter ended March 31, 2022.

Additionally, under the Tenth Amendment, BankUnited waived

or consented to late delivery of certain financial information required by the Credit Agreement.

Credit Agreement, as amended, requires us to maintain the following financial covenants (subject to the exclusions provided for

in the previous paragraph):

(a) minimum debt service coverage ratio of no less than 1.5 to 1.0 for the trailing four

quarter period ended March 31, 2022, 0.95 to 1.0 for the trailing four quarter period ended June 30, 2022, and 1.5 to

1.0 for the trailing four quarter period ended September 30, 2022 and for the trailing four quarter periods ended thereafter;

(b) maximum leverage ratio of no less than 7.30 to 1.0 for the trailing four quarter period ended March 31, 2022, 6.30 to

1.0 for the trailing four quarter period ended June 30, 2022, and 5.0 to 1.0 for the trailing four quarter period ended

September 30, 2022 and 4.0 to 1 for the trailing four quarter periods thereafter;

end of each fiscal quarter being no less than $ 1.00 commencing June 30, 2022;

and (d) a minimum adjusted EBITDA at the end

of each quarter of no less than $ 1 .0 million (waived for the quarter ended March 31, 2022).

The additional principal

payments, increase in interest and the Amendment Fee provided for in the Eight Amendment and Ninth Amendment are excluded for

purposes of calculating compliance with each of the financial covenants.

TO CONSOLIDATED FINANCIAL STATEMENTS

Company accounts for stock-based compensation in accordance with ASC 718, Compensation - Stock Compensation (“ASC 718”).

ASC 718 establishes accounting for stock-based awards exchanged for employee and nonemployees.

Under the provisions of ASC 718,

stock-based compensation cost is measured at the grant date, based on the fair value of the award on the grant date, and is recognized

as expense over the employee’s requisite service period (generally the vesting period of the equity grant).

stock awards are granted at the discretion of the Company’s board of directors.

These awards are restricted as to the transfer

of ownership and generally vest over the requisite service period.

The Company recognizes forfeitures at the time the forfeiture

Issued Accounting Standards

June 2016, the FASB issued Accounting Standard Update (“ASU”) 2016-13, Financial Instruments – Credit Losses

(Topic 326), which require that financial assets measured at amortized cost be presented at the net amount expected to be collected.

The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset to

present the net carrying value at the amount expected to be collected.

The income statement reflects the measurement of credit

losses for newly recognized financial assets, as well as the increase or decreases of expected credit losses that have taken place

during the period.

The measurement of expected credit losses is based upon historical experience, current conditions, and reasonable

and supportable forecasts that affect the collectability of the reported amount.

On November 15, 2019, the FASB delayed the effective

date for smaller reporting companies.

The amendments in this update are now effective for fiscal years beginning after December

15, 2022 and interim periods within those annual periods.

Early adoption for fiscal years beginning after December 15, 2018 is

Management has evaluated the effect of this update on the Company’s consolidated financial statements and currently

believes it will not have a material impact.

December 31, 2022, our cash balance was $ 3,847,225 compared to $ 6,308,866 at December 31, 2021, a decrease of $ 2,461,641 .

accounts receivable, net balance at December 31, 2022 decreased to $ 4,857,772 from $ 4,967,714 at December 31, 2021.

31, 2022, we had working capital of $ 12,896,602 compared to working capital of $ 12,175,776 at December 31, 2021.

is management’s estimation that there will likely not be any individual conditions or combination of events that will occur

1 unchanged sentence

However, there can be no assurance that such plans will accomplish their intended goals.

December 2018, the Company completed the acquisition of WMI from Air Industries for a purchase price of $ 7.9 million , subject

to a potential post-closing working capital adjustment.

Of the purchase price, $ 2 million was placed in escrow at closing and

was to be released after the completion of the working capital adjustment and for indemnification contingencies.

Air Industries

objected to the Company’s calculation of the post-closing working capital adjustment and rejected the determination of BDO,

the independent accountant appointed by the parties to resolve the dispute.

On September 27, 2019, the Company filed a notice

of motion in the Supreme Court of the State of New York, County of New York, against Air Industries seeking, among other things,

a judgment against Air Industries in the amount of approximately $ 4.1 million.

In October 2019, Air Industries and the Company

jointly authorized the release to the Company of approximately $ 619,000 from escrow, which represented the value of certain

undisputed items.

Company and Air Industries entered into a settlement agreement dated as of December 23, 2020, to resolve the post-closing working

capital adjustment dispute in exchange for the release to the Company of the $ 1,381,000 cash remaining in escrow.

was released from escrow to the Company on December 28, 2020.

As part of the settlement agreement CPI Aero agreed to give up the

right to pursue the additional disputed working capital amount of approximately $ 2.1 million.

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

REVENUE RECOGNITION

TO CONSOLIDATED FINANCIAL STATEMENTS

majority of the Company’s performance obligations are satisfied over time as the Company (i) sells products with no alternative

use to the Company and (ii) has an enforceable right to recover costs incurred plus a reasonable profit margin for work completed

This is known as the over time revenue recognition.

Under the over time revenue recognition model, revenue and gross

profit are recognized over the contract period as work is performed based on actual costs incurred as a percentage of total estimated

costs at completion of the contract.

Company also has contracts that are considered point in time.

Under the point in time revenue recognition model, revenue is recognized

when control of the components has transferred to the customer;

in most cases this will be based on shipping terms.

with Customers and Performance Obligations

32 unchanged sentences

contracts with the U.S.

government typically are subject to the Federal Acquisition Regulation (FAR) which provides guidance on

the types of costs that are allowable in establishing prices for goods and services provided under U.S.

government typically are subject to the FAR, which provides guidance on the types of costs that are allowable

in establishing prices for goods and services provided under U.S.

government contracts.

The pricing for commercial contractors are based on the specific negotiations with each customer and any taxes imposed by governmental

authorities are excluded from revenue.

The transaction price is primarily comprised of fixed consideration as the customer typically

pays a fixed fee for each product sold.

The Company does not adjust the amount of revenue to be recognized under a customer contract

for the effects of the time value of money when the timing difference between receipt of payment and transferring the good or

service is less than one year.

The pricing for commercial contractors

are based on the specific negotiations with each customer and any taxes imposed by governmental authorities are excluded from

The transaction price is primarily comprised of fixed consideration as the customer typically pays a fixed fee for each

product sold.

The Company does not adjust the amount of revenue to be recognized under a customer contract for the effects of

the time value of money when the timing difference between receipt of payment and transferring the good or service is less than

majority of the Company’s performance obligations are satisfied over time as the Company (i) sells products with no alternative

21 unchanged sentences

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

contracts contain forms of variable consideration, such as price discounts and performance penalties.

13 unchanged sentences

Estimates are reviewed quarterly and the effect of

any change in the estimated gross margin percentage for a contract is reflected in revenue in the period the change becomes known.

ASC 606 involves considerable use of estimates and judgment in determining revenues, costs and profits and in assigning the amounts

to accounting periods.

For instance, management must make assumptions and estimates regarding labor productivity and availability,

the complexity of the work to be performed, the availability of materials, the length of time to complete the performance obligation,

execution by our subcontractors, the availability and timing of funding from the customer, and overhead cost rates, among other

The Company continually evaluates all of the factors related to the assumptions, risks and uncertainties inherent with

the application of the cost-to-cost input method;

any change in the total estimated costs expected at completion for a contract is reflected in revenue in the period the change

becomes known.

ASC 606 involves considerable use of estimates and judgment in determining revenues, costs and profits and in assigning

the amounts to accounting periods.

For instance, management must make assumptions and estimates regarding labor productivity and

availability, the complexity of the work to be performed, the availability of materials, the length of time to complete the performance

obligation, execution by our subcontractors, the availability and timing of funding from the customer, and overhead cost rates,

among other variables.

The Company continually evaluates all of the factors related to the assumptions, risks and uncertainties

inherent with the application of the cost-to-cost input method;

however, it cannot be assured that estimates will be accurate.

are not accurate, or a contract is terminated which will affect estimates at completion, the Company is required to adjust revenue

in the period the change is determined.

If estimates are not accurate, or a contract is terminated which will affect estimates at completion, the Company is required

to adjust revenue in the period the change is determined.

changes are required for the estimated total revenue on a contract, these changes are recognized on a cumulative catch-up basis

23 unchanged sentences

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

Price Allocated to Remaining Performance Obligations

3 unchanged sentences

or partially satisfied performance obligations as of December 31, 2022.

The Company estimates that it will recognize approximately

52 % of this amount in fiscal year 2022, approximately 42 % in fiscal year 2023 and the remainder in fiscal year 2024.

CONTRACT ASSETS

AND LIABILITIES

assets represent revenue recognized on contracts in excess of amounts invoiced to the customer and the Company’s right to consideration

is conditional on something other than the passage of time.

ASSETS AND LIABILITIES

assets represent revenue recognized on contracts in excess of amounts invoiced to the customer and the Company’s right to

consideration is conditional on something other than the passage of time.

Amounts may not exceed their net realizable value.

Under the typical payment

terms of our government contracts, the customer retains a portion of the contract price until completion of the contract, as a measure

of protection for the customer.

Our government contracts therefore typically result in revenue recognized in excess of billings, which

we present as contract assets.

Contract assets are classified as current.

The Company’s contract liabilities represent customer

payments received or due from the customer in excess of revenue recognized.

Contract liabilities are classified as current.

the typical payment terms of our government contracts, the customer retains a portion of the contract price until completion of

the contract, as a measure of protection for the customer.

Our government contracts therefore typically result in revenue recognized

in excess of billings, which we present as contract assets.

Contract assets are classified as current assets.

The Company’s

contract liabilities represent customer payments received or due from the customer in excess of revenue recognized.

Contract liabilities

are classified as current liabilities.

of contract assets and liabilities

3 unchanged sentences

recognized for the year ended December 31, 2022, that was included in the contract liabilities balances as of January 1, 2022

was $ 1.6 million and as of January 1, 2020 was $ 3.6 million .

was $ 3.6 million.

Revenue recognized for the year ended December 31, 2021, that was included in the contract liabilities balances

as of January 1, 2021 was $ 1.6 million.

ACCOUNTS RECEIVABLE

5 unchanged sentences

AND SUBSIDIARIES

components of inventory consisted of the following:

TO CONSOLIDATED FINANCIAL STATEMENTS

components of inventory consist of the following:

Raw materials

7 unchanged sentences

PROPERTY AND EQUIPMENT

Schedule of property plant and equipment

components of property and equipment consist of the following:

Useful Life (years)

Machinery and equipment

3 unchanged sentences

Leasehold improvements

Lesser of lease

term or 10 years

Total gross property

and equipment

Less accumulated

depreciation and amortization

property and equipment, net

and amortization expense for the years ended December 31, 2021 and 2020 was $ 904,067 and $ 907,984 , respectively.

the years ended December 31, 2021 and 2020, the Company acquired $ 0 and $ 134,900 , respectively, of property and equipment under

capital leases.

The assets acquired under capital lease as of December 31, 2021 and 2020, are as follows:

Lesser of lease term or 10 years

Total gross property and equipment

Less accumulated depreciation and amortization

( 10,397,273 )

( 9,834,177 )

Total property and equipment, net

expense for the years ended December 31, 2022 and 2021 was $ 563,096 and $ 904,067 , respectively.

the years ended December 31, 2022 and 2021, the Company did not acquire any property and equipment under finance leases.

acquired under finance leases as of December 31, 2022 and 2021, are as follows:

Machinery and equipment

1 unchanged sentence

Leasehold improvements

Total assets acquired under capital lease

Total assets acquired under finance leases

Less accumulated depreciation and amortization

1 unchanged sentence

( 1,439,073 )

Total assets acquired under capital lease, net

Total assets acquired under finance leases, net

INTANGIBLES AND GOODWILL

Schedule of intangibles and goodwill

components of intangibles and goodwill consist of the following:

Gross Intangibles

3 unchanged sentences

AND SUBSIDIARIES

discussed in Note 1, the Company completed the WMI Acquisition on December 20, 2018.

The acquisition was accounted for as a business

combination in accordance with ASC Topic 805.

Accordingly, the Company recorded the fair value of the assets and liabilities assumed

at the date of acquisition.

a result of the acquisition, the Company recorded Goodwill of $ 1,784,254 .

The Company’s intangible asset is comprised of

the value of the customer relationships acquired as part of the WMI Acquisition.

The useful life is four years representing the

remaining economic life.

expense was $ 125,000 during each of the years ended December 31, 2021 and December 31, 2020.

March 24, 2016, the Company entered into the Credit Agreement.

TO CONSOLIDATED FINANCIAL STATEMENTS

Company acquired WMI on December 20, 2018.

The acquisition was accounted for as a business combination in accordance with ASC

Accordingly, the Company recorded the fair value of the assets and liabilities assumed at the date of acquisition.

As a result of the acquisition of WMI on December 30, 2018, the Company recorded Goodwill of $ 1,784,254 .

as a result of the acquisition, the Company recorded an intangible asset of $ 500,000 comprised of the value of the customer relationships

The useful life of the intangible asset was four years representing the remaining economic life at the time of acquisition,

and is fully amortized as of December 31, 2022.

Amortization expense was $ 125,000 during each of the years ended December 31,

2022 and December 31, 2021.

March 24, 2016, the Company entered into an Amended and Restated Credit Agreement with the lenders named therein and BankUnited,

(“BankUnited”) as Sole Arranger, Agent and a Lender, dated as of March 24, 2016 (as amended, the “Credit

Agreement” or the “BankUnited Facility”).

The BankUnited Facility originally provided for a revolving credit

1 unchanged sentence

The Revolving Loan bears interest at a rate based upon a pricing grid, as defined in the Credit Agreement.

August 24, 2020, the Company entered into a Sixth Amendment and Waiver to the Credit Agreement (the “Sixth Amendment”).

Under the Sixth Amendment, the parties amended the Credit Agreement by extending the maturity date of the Revolving Loan and Term

Loan to May 2, 2022 and making conforming changes to the repayment schedule of the Term Loan.

The availability under

the Revolving Loan was reduced by $ 6 million, to $ 24 million, and the outstanding principal amount on the Term Note

was increased to approximately $ 7,933,000 .

May 11, 2021, the Company entered into the Seventh Amendment.

Under the Seventh Amendment, the parties amended the Credit Agreement

by (a) extending the maturity date of the Revolving Loan and the Term Loan to July 31, 2022 , and (b) amending the leverage

ratio covenant.

Additionally, under the Seventh Amendment, BankUnited waived late delivery of certain financial information.

October 28, 2021, the Company entered into the Eighth Amendment.

Under the Eighth Amendment, the parties amended the Credit

Agreement by (a) extending the maturity date of the Revolving Loan and the Term Loan to December 31, 2022, (b) reducing the

availability under the Revolving Loan from $ 24 million

to $ 21 million

while eliminating the requirement to maintain a minimum $ 3 .0 million

in a combination of Revolving Loan availability and unrestricted cash, (c) providing for the repayment of an additional $ 750,000 of

the principal balance of the Term Loan in three installments of $ 250,000 on

November 30, 2021, December 31, 2021 and March 31, 2022 in addition to $ 200,000 regular

monthly principal payments through December 31, 2022, (d) amending the minimum debt service coverage ratio covenant, (e) amending

May 11, 2021, the Company entered into a Waiver and Seventh Amendment (“Seventh” Amendment”) to the Credit Agreement.

Under the Seventh Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan

and the Term Loan to July 31, 2022 , and (b) amending the leverage ratio covenant.

Additionally, under the Seventh Amendment,

BankUnited waived late delivery of certain financial information.

October 28, 2021, the Company entered into a Waiver and Eighth Amendment (the “Eighth Amendment”) to the Credit Agreement.

Under the Eighth Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan

and the Term Loan to December 31, 2022 , (b) reducing the availability under the Revolving Loan from $ 24 million to $ 21 million

while eliminating the requirement to maintain a minimum $ 3 .0 million in a combination of Revolving Loan availability and

unrestricted cash, (c) providing for the repayment of an additional $ 750,000 of the principal balance of the Term Loan in

three installments of $ 250,000 on November 30, 2021, December 31, 2021 and March 31, 2022 in addition to $ 200,000 regular

monthly principal payments through December 31, 2022, (d) amending the minimum debt service coverage ratio covenant, and (e) amending

the maximum leverage ratio covenant.

Additionally, under the Eighth Amendment, BankUnited waived certain covenant non-compliance and

waived temporarily, late delivery of certain financial information.

In connection with the Eighth Amendment, a $ 250,000

amendment fee (the “Amendment Fee”) was earned by the lenders on December 31, 2021 which the Company elected to pay in

kind and accrue and capitalize rather than pay in cash.

Additionally, under the Eighth Amendment, BankUnited waived certain covenant non-compliance

and waived temporarily, late delivery of certain financial information.

In connection with the Eighth Amendment, a $ 250,000 amendment

fee (the “Amendment Fee”) was earned by the lenders on December 31, 2021, which the Company elected to pay in kind

and accrue and capitalize rather than pay in cash.

As at December 31, 2021, the Amendment Fee payable was posted by BankUnited

to the Revolving Loan and on February 11, 2022, in agreement with the Company, the Amendment Fee was reclassified by BankUnited to

the Term Loan.

to the Revolving Loan and on February 11, 2022, in agreement with the Company, the Amendment Fee was reclassified by BankUnited

to the Term Loan.

The Company has recorded this payable to its financial statements accordingly.

18 unchanged sentences

AND SUBSIDIARIES

August 19, 2022, we entered into the Tenth Amendment.

Under the Tenth Amendment, the parties amended the Credit Agreement by (a) increasing

the maximum leverage ratio applicable for the fiscal quarter ending September 30, 2022 to 5.0

to 1.0, (b) waiving and/or consenting to the

exclusion from the Company’s covenant compliance requirements for the fiscal quarters ended December 31, 2021, March 31, 2022,

June 30, 2022 and September 30, 2022 up to (i) $ 566,024.81

of losses incurred and reserves taken under the

Borrower’s welded product contracts, and (ii) $ 367,044.51

of reserves taken with respect to the Borrower’s

welded product inventory, and (c) waiving and/or consenting to the exclusion from the Company’s covenant compliance requirements

for the fiscal quarters ended March 31, 2022, June 30, 2022, September 30, 2022 and December 31, 2022 up to $ 795,997.06

of accrued severance and COBRA costs and employer

taxes incurred by the Company during the fiscal quarter ending March 31, 2022.

Additionally, under the Tenth Amendment, BankUnited waived

or consented to late delivery of certain financial information required by the Credit Agreement.

TO CONSOLIDATED FINANCIAL STATEMENTS

August 19, 2022, we entered into a Consent, Waiver and Tenth Amendment (the “Tenth Amendment”) to the Credit Agreement.

Under the Tenth Amendment, the parties amended the Credit Agreement by (a) increasing the maximum leverage ratio applicable for

the fiscal quarter ending September 30, 2022 to 5.0 to 1.0, (b) waiving and/or consenting to the exclusion from the Company’s

covenant compliance requirements for the fiscal quarters ended December 31, 2021, March 31, 2022, June 30, 2022 and September

30, 2022 up to (i) $ 566,025 of losses incurred and reserves taken under the Borrower’s welded product contracts, and (ii)

$ 367,045 of reserves taken with respect to the Borrower’s welded product inventory, and (c) waiving and/or consenting to

the exclusion from the Company’s covenant compliance requirements for the fiscal quarters ended March 31, 2022, June 30,

2022, September 30, 2022 and December 31, 2022 up to $ 795,997 of accrued severance and COBRA costs and employer taxes incurred

by the Company during the fiscal quarter ending March 31, 2022.

Additionally, under the Tenth Amendment, BankUnited waived or

consented to late delivery of certain financial information required by the Credit Agreement.

November 10, 2022, the Company entered into an Eleventh Amendment to the Credit Agreement (the “Eleventh Amendment”).

Under the Eleventh Amendment, the parties amended the Credit Agreement by (a) extending the maturity date of the Revolving Loan

and the Term Loan to November 30, 2023 or with respect to the Term Loan, if earlier, until the outstanding principal balance is

paid in full (the “Term Loan Maturity Date”), (b) providing for regular monthly principal payments of $ 200,000 on

the Term Loan from January 1, 2023 through the Term Loan Maturity Date (in addition to the Company’s existing obligation

to make two principal payments on the term loan of $ 250,000 on each of December 31, 2022 and March 31, 2023) and (c) decreasing

the interest rate on the Revolving Loan, the Term Loan and the Amendment Fee to the Prime Rate plus 3.5 % effective as of November

March 23, 2023, the Company entered into a Twelfth Amendment to the Credit Agreement (the “Twelfth Amendment”).

the Twelfth Amendment, the parties amended the Credit Agreement by :

(a) extending the maturity date of the Company’s existing

revolving line of credit and its existing term loan to November 30, 2024 (under the terms of the Credit Agreement, the outstanding

principal balance of the term loan will be repaid by June 30, 2023);

(b) providing for reduction of the aggregate maximum principal

amount of all revolving line of credit loans to $ 20,520,000 from October 1, 2023 through December 31, 2023, $ 19,800,000 from January

1, 2024 through March 31, 2024, $ 19,080,000 from April 1, 2024 through June 30, 2024, $ 18,360,000 from July 1, 2024 through September

30, 2024, and $ 17,640,000 from October 1, 2024 and thereafter, and for payments to be made by the Company to comply therewith

(if any such payments are necessary), on the first day of each such period;

and (c) payment of a $ 250,000 capitalized fee incurred

in connection with the Eighth Amendment to the Credit Agreement in two installments, the first installment to be paid on June

1, 2023 in the amount of $ 116,667 and the second installment to be paid July 1, 2023 in the amount of $ 133,333 , together with

all unpaid interest accrued at the term loan interest rate on the capitalized fee through each such date.

Credit Agreement, as amended, requires us to maintain the following financial covenants (subject to the exclusions provided for

4 unchanged sentences

(b) maximum leverage ratio of no less than 7.30 to 1.0 for the trailing four quarter period ended March 31, 2022, 6.30 to

1.0 for the trailing four quarter period ended June 30, 2022, and 5.0 to 1.0 for the trailing four quarter period ended

September 30, 2022 and 4.0 to 1.0 for the trailing four quarter periods thereafter;

end of each fiscal quarter being no less than $ 1.00 commencing June 30, 2022;

and (d) a minimum adjusted EBITDA at the end

of each quarter of no less than $ 1 .0 million (waived for the quarter ended March 31, 2022).

The additional principal

payments, increase in interest and the Amendment Fee provided for in the Eight Amendment and Ninth Amendment are excluded for

purposes of calculating compliance with each of the financial covenants.

1.0 for the trailing four quarter period ended June 30, 2022, 5.0 to 1.0 for the trailing four quarter period ended September

30, 2022 and 4.0 to 1.0 for the trailing four quarter periods thereafter;

each fiscal quarter being no less than $ 1.00 commencing June 30, 2022;

and (d) a minimum adjusted EBITDA at the end of each

quarter of no less than $ 1 .0 million (waived for the quarter ended March 31, 2022).

The additional principal payments,

increase in interest and the Amendment Fee provided for in the Eight Amendment and Ninth Amendment are excluded for purposes of

calculating compliance with each of the financial covenants.

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

of December 31, 2022 and December 31, 2021, the Company had $ 21,000,000 and $ 21,250,000 , respectively, outstanding under the BankUnited

Revolving Loan Facility.

As at December 31, 2021, the Amendment Fee payable was posted by BankUnited to the Revolving Loan and

As of December 31, 2021, the Amendment Fee payable was posted by BankUnited to the Revolving Loan and

on February 11, 2022, in agreement with the Company, the Amendment Fee was reclassified by BankUnited to the Term Loan.

has recorded this payable to its financial statements accordingly.

$ 1,200,000 of the revolving line of credit matures and is payable

by December 31, 2023 and the remaining balance of $ 19,800,000 of the revolving line of credit matures and is payable by November

BankUnited Facility is secured by all of the Company’s assets.

described above, in connection with the Twelfth Amendment, the Company and BankUnited agreed to amend the Credit Agreement by:

(a) extending the maturity date of the Company’s existing revolving line of credit and its existing term loan to November

30, 2024 (under the terms of the Credit Agreement, the outstanding principal balance of the term loan will be repaid by June 30,

(b) providing for reduction of the aggregate maximum principal amount of all revolving line of credit loans to $ 20,520,000

from October 1, 2023 through December 31, 2023, $ 19,800,000 from January 1, 2024 through March 31, 2024, $ 19,080,000 from April

1, 2024 through June 30, 2024, $ 18,360,000 from July 1, 2024 through September 30, 2024, and $ 17,640,000 from October 1, 2024

and thereafter, and for payments to be made by the Company to comply therewith (if any such payments are necessary), on the first

day of each such period;

and (c) payment of a $ 250,000 capitalized fee incurred in connection with the Eighth Amendment to the

Credit Agreement in two installments, the first installment to be paid on June 1, 2023 in the amount of $ 116,667 and the second

installment to be paid July 1, 2023 in the amount of $ 133,333 , together with all unpaid interest accrued at the term loan interest

rate on the capitalized fee through each such date.

described above, in connection with the Eleventh Amendment, the Company and BankUnited agreed to amend the Credit Agreement by

(a) extending the maturity date of the Revolving Loan and the Term Loan to November 30, 2023 or with respect to the Term Loan,

if earlier, until the outstanding principal balance is paid in full (the “Term Loan Maturity Date”), (b) providing

for regular monthly principal payments of $ 200,000 on the Term Loan from January 1, 2023 through the Term Loan Maturity Date (in

addition to the Company’s existing obligation to make two principal payments on the term loan of $ 250,000 on each of December

31, 2022 and March 31, 2023) and (c) decreasing the interest rate on the Revolving Loan, the Term Loan and the Amendment Fee to

the Prime Rate plus 3.5 % effective as of November 1, 2022.

described above, in connection with the Tenth Amendment, the Company and BankUnited agreed to amend the Credit Agreement by (a)

22 unchanged sentences

in the preceding note.

Company paid to BankUnited, commitment and agent fees in the amount of $ 250,000 in 2021, together with out of pocket costs, expenses,

2022, as consideration for the lenders entering into the Ninth Amendment, the Company paid a $ 62,833 fee to the lenders.

the Company paid to BankUnited, commitment and agent fees in the amount of $ 250,000 , together with out of pocket costs, expenses,

and reasonable attorney’s fees incurred by BankUnited in connection with the Eighth Amendment.

The Company paid to BankUnited,

commitment and agent fees in the amount of $ 107,540 in 2020, together with out of pocket costs, expenses, and reasonable attorney’s

fees incurred by BankUnited in connection with the Sixth Amendment.

The Company has cumulatively paid approximately $ 846,000 of

total debt issuance costs in connection with the BankUnited Facility of which approximately $ 265,000 is included in other assets

at December 31, 2021.

The Company has cumulatively

paid approximately $ 908,000 of total debt issuance costs in connection with the BankUnited Facility of which approximately $ 131,000

is included in other assets at December 31, 2022.

April 10, 2020, we entered into the Paycheck Protection Program (PPP) Loan, with BNB Bank (now part of Dime Community Bank) as

the Lender, in an aggregate principal amount of $ 4,795,000 , pursuant to the Paycheck Protection Program under the CARES Act.

PPP Loan was evidenced by the Note.

Subject to the terms of the Note, the PPP Loan bore interest at a fixed rate of one percent

( 1 %) per annum, with the first six months of interest deferred, had an initial term of two years , and was unsecured and guaranteed

by the Small Business Administration (SBA).

The Note provided for customary events of default including, among other things, cross-defaults

on any other loan with the Lender.

the Lender, in an aggregate principal amount of $ 4,795,000 , pursuant to the Paycheck Protection Program under the Coronavirus

Aid, Relief and Economic Security Act (“CARES Act”).

The PPP Loan was evidenced by the Note.

Subject to the terms

of the Note, the PPP Loan bore interest at a fixed rate of one percent ( 1 %) per annum, with the first six months of interest deferred,

had an initial term of two years , and was unsecured and guaranteed by the Small Business Administration (“SBA”).

Note provided for customary events of default including, among other things, cross-defaults on any other loan with the Lender.

The PPP Loan could have been accelerated upon the occurrence of an event of default.

November 2, 2020, the Company applied to the Lender for full forgiveness of the PPP Loan as calculated in accordance with the terms

of the CARES Act, as modified by the Paycheck Protection Flexibility Act.

We were notified by our lender that our application was

accepted and forwarded to the SBA.

All amounts have been classified as current or long term in accordance with the Note

November 2, 2020, the Company applied to the Lender for full forgiveness of the PPP Loan as calculated in accordance with the

terms of the CARES Act, as modified by the Paycheck Protection Flexibility Act.

We were notified by our lender that our application

was accepted and forwarded to the SBA.

All amounts have been classified as current or long term in accordance with the Note terms.

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

July 13, 2021, the Company received notification through Dime that the PPP Loan and accrued interest thereon were fully forgiven

by the SBA and that the forgiveness payment date was July 1, 2021.

The forgiveness of the PPP Loan was recognized during the Company’s

third fiscal quarter ending September 30, 2021.

The forgiveness of the PPP Loan was recognized as other income

during the year ended December 31, 2021.

SBA reserves the right to audit any PPP Loan, for eligibility and other criteria, regardless of size.

1 unchanged sentence

forgiveness has been granted.

In accordance with the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”),

all borrowers are required to maintain their PPP loan documentation for six years after the PPP Loan was forgiven and to provide

that documentation to the SBA upon request.

In accordance with the CARES Act, all borrowers are required to maintain their PPP loan documentation

for six years after the PPP Loan was forgiven and to provide that documentation to the SBA upon request.

maturities of the long-term debt (excluding unamortized debt issuance costs) as of December 31, 2022, are as follows:

Year ending December 31,

in the long-term debt are financing leases and notes payable $ 422,595 and $ 678,428 at December 31, 2021 and 2020, respectively,

in the long-term debt are financing leases and notes payable totaling $ 207,414 and $ 422,595 at December 31, 2022 and 2021, respectively,

including a current portion of $ 136,433 and $ 215,181 , respectively.

BankUnited Facility is secured by all of the Company’s assets and both the Revolving Loan and Term Loan bear interest at

the Prime Rate + 0.75 % as of December 31, 2021.

December 31, 2021 and December 31, 2020, the Term Loan, had an aggregate principal balance due of $ 4,483,333 and $ 7,233,333 , respectively,

payable in monthly installments, as defined in the Credit Agreement.

the Prime Rate + 3.50 %.

The Prime Rate was 7.50 % as of December 31, 2022 and as such, the Company’s interest rate on the

Revolving Loan and Term Loan was 11.00 % as of December 31, 2022.

December 31, 2022 and 2021, the Term Loan had an aggregate principal balance due of $ 1,583,333 and $ 4,483,333 , respectively, payable

in monthly installments, as defined in the Credit Agreement.

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

Company leases a building and equipment.

Under ASC 842, at contract inception we determine whether the contract is or contains

a lease and whether the lease should be classified as an operating or a financing lease.

Operating leases are included in ROU

assets and operating lease liabilities in our consolidated balance sheets.

TO CONSOLIDATED FINANCIAL STATEMENTS

Company leases manufacturing and office space under an agreement classified as an operating lease.

The lease agreement, as amended,

expires on April 30, 2026 and does not include any renewal options.

The agreement provides for an initial monthly base amount

plus annual escalations through the term of the lease.

In addition to the monthly base amounts in the lease agreement, the Company

is required to pay real estate taxes and operating expenses during the lease terms.

On November 10, 2021, the Company

executed the second amendment to the lease agreement for its manufacturing and office space, which extends the lease agreement’s

expiration date to April 30, 2026.

The lease agreement does not include any renewal options.

The agreement provides for an initial

monthly base amount plus annual escalations through the term of the lease.

In addition to the monthly base amounts in the lease

agreement, the Company is required to pay real estate taxes and operating expenses during the lease terms.

Company also leases office equipment in agreements classified as operating leases.

9 unchanged sentences

Long-term operating lease liabilities

Total ROU liabilities

non-cash amortization expense of these assets under operating leases was $ 1,717,365 and $ 1,783,280 for the years ended December

Total lease liabilities

amortization expense of these assets under operating leases was $ 1,738,989 and $ 1,717,365 for the years ended December 31, 2022

and 2021, respectively.

Company’s weighted average remaining lease term for its operating leases is 4.3 years.

November 10, 2021, the Company executed the second amendment to the lease agreement for its manufacturing and office space, which

extends the lease agreement’s expiration date to April 30, 2026.

Company’s weighted average remaining lease term for its operating leases is 3.4 years as of December 31, 2022.

The Company’s

weighted average discount rate for its operating leases is 5.3 % as of December 31, 2022.

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

account for income taxes in accordance with ASC 740 Income Taxes.

20 unchanged sentences

Year ended December 31,

( 6,428,448 )

( 6,553,131 )

difference between the income tax provision computed at the federal statutory rate and the actual tax provision (benefit) is accounted

for as follows:

Taxes computed at the federal statutory rate

$ ( 778,715 )

State income tax, net

Research and development tax credit

computed at the federal statutory rate

State income tax,

Research and development

Change in valuation allowance

PPP loan forgiveness

( 1,006,950 )

Refund from IRS audit

Accrued loss reserve

Permanent differences

Provision(benefit) for income taxes

Provision(benefit)

for income taxes

components of deferred income tax assets and liabilities are as follows:

Deferred Tax Assets:

Allowance for doubtful accounts

Capitalized R&D

Credit carryforwards

10 unchanged sentences

Valuation allowance

( 22,235,611 )

( 22,704,931 )

Deferred Tax Liabilities:

3 unchanged sentences

Deferred tax liabilities

Net deferred tax liabilities

Net deferred tax assets

AEROSTRUCTURES, INC.

3 unchanged sentences

The Federal NOLs begin

to expire in 2034, losses generated in 2018 and forward have an indefinite life.

The state NOLs begin to expire in 2034.

to expire in 2034.

Losses generated in 2018 and forward of $ 15.9 million have an indefinite life and can offset up to 80 % of taxable

income in the future.

Federal NOLs generated prior to 2018 can offset 100 % of future taxable income.

The state NOLs begin to expire

a result of the Tax Cuts and Jobs Act of 2017 and the Coronavirus Aid, Relief, and Economic Security Act of 2020, federal NOLs

16 unchanged sentences

relevant lookback period.

The Company has not completed a Section 382 analysis for the year ended December 31, 2021;

The Company believes that no ownership change occurred during the relevant lookback period that would limit our ability to use

The sale of additional equity securities in the future may trigger an ownership change under IRC Section 382, which

could significantly limit our ability to utilize our tax benefits.

The Company will recognize a tax benefit in the consolidated

financial statements for an uncertain tax position only if management’s assessment is that the position is “more likely

than not” (i.e., a likelihood greater than 50%) to be allowed by the tax jurisdiction based solely on the technical merits

of the position.

The term “tax position” refers to a position in a previously filed tax return or a position expected

to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities for financial

reporting purposes.

provision for income tax for the year ended December 31, 2021 was $ 14,609 , an effective tax rate of 0.21 %.

The tax provision was

mostly the result of state franchise and minimum taxes.

The Company has completed a Section 382 analysis for the year ended December 31, 2022, and believes

that no ownership change occurred during the relevant lookback period that would limit our ability to use our NOLs.

additional equity securities in the future may trigger an ownership change under IRC Section 382, which could significantly limit

our ability to utilize our tax benefits.

The Company will recognize a tax benefit in the consolidated financial statements for

an uncertain tax position only if management’s assessment is that the position is “more likely than not” (i.e.,

a likelihood greater than 50%) to be allowed by the tax jurisdiction based solely on the technical merits of the position.

term “tax position” refers to a position in a previously filed tax return or a position expected to be taken in a

future tax return that is reflected in measuring current or deferred income tax assets and liabilities for financial reporting

the realizability of deferred tax assets requires the determination of whether it is more likely than not that some portion or

all the deferred tax assets will not be realized.

In assessing the need for a valuation allowance, the Company considers all available

positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable

income, loss carryback and tax-planning strategies.

Generally, more weight is given to objectively verifiable evidence, such as

the cumulative loss in recent years, as a significant piece of negative evidence to overcome.

As of December 31, 2022, the Company

achieved three years of cumulative book income, along with projections of profitability, for which management determined that

there is sufficient positive evidence to conclude that it is more likely than not that a portion of the deferred tax assets will

As such, $ 6.5 million of the valuation allowance has been released as of December 31, 2022, leaving a balance in

the valuation allowance of $ 14.9 million as of December 31, 2022.

income tax (benefit) for the year ended December 31, 2022 was $ ( 6,553,131 ) , an effective tax (benefit) rate of ( 249.8 %) .

(benefit) was mostly the result of a reduction in the valuation allowance on deferred tax assets recorded by the Company during

the fourth quarter of fiscal year 2022 based on management’s estimates of the likelihood and level of the future taxable

income of the Company.

Management makes these estimates quarterly in order to determine the appropriate level of valuation allowance

to include in the Company’s financial statements at the balance sheet date.

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

Company accounts for stock-based compensation based on the fair value of the stock or stock based instrument on the date of grant.

The Company’s net income (loss) for the years ended December 31, 2021 and 2020, respectively, includes approximately $ 828,000

and $ 711,000 of stock based compensation expense, respectively, for the grant of RSUs and shares.

January 2021, the Company granted 135,512 restricted stock units (“RSUs”) to its board of directors as partial compensation

for the 2021 year.

RSUs vest quarterly on a straight-line basis over a one-year period.

In January 2020, the Company granted 73,551

RSUs to its board of directors as partial compensation for the 2020 year.

August 2020, the Company granted 2,617 RSUs to one of its board members as partial compensation for the 2020 year.

2020, the company granted 949 shares of common stock to one of its board members as partial compensation for the 2020 year.

November 2020, the Company granted 5,758 shares of common stock to one of its board members as partial compensation for the 2020

Company’s net income (loss) for the years ended December 31, 2021 and 2020, respectively, includes approximately $ 546,000

and $ 532,000 , respectively, of non-cash compensation expense related to the RSU grants to the board of directors.

is recorded as a component of selling, general and administrative expenses.

April 2021, the Company granted 137,512 RSUs to various officers and employees.

In May 2021, the Company granted 28,916 to an

In the event that any of these employees voluntarily terminates their employment prior to certain dates, portions of

the shares may be forfeited.

In addition, if certain Company performance criteria are not achieved, portions of these shares may

be forfeited.

These shares will be expensed during various periods through March 2025 based upon the service and performance thresholds.

In April 2021, 33,915 of the shares granted between 2017 and 2020 were forfeited because the Company failed to achieve certain

performance criteria for the year ended December 31, 2020.

February 2020, a former CFO forfeited 10,000 shares of common stock upon his resignation.

In August 2020, the Company granted

84,383 shares of common stock to various officers and employees.

In the event that any of these employees voluntarily terminates

their employment prior to certain dates, portions of the shares may be forfeited.

In addition, if certain Company performance

criteria are not achieved, portions of these shares may be forfeited.

These shares will be expensed during various periods through

March 2024 based upon the service and performance thresholds.

In August 2020, the Company granted 9,346 shares to an employee.

The shares will be fully vested August 26, 2021.

In August 2020, 66,242 of the shares granted in 2016, 2017, 2018 and 2019, respectively,

were forfeited because the Company failed to achieve certain performance criteria for the year ended December 31, 2019.

Company’s net income (loss) for the years ended December 31, 2021 and 2020 includes approximately $ 282,000 and $ 179,000 ,

respectively, of non-cash compensation expense related to the RSU grants to the officers and employees.

This expense is recorded

as a component of cost of goods sold of approximately $ 51,000 and $ 57,000 , respectively, and as a component of selling, general

and administrative expenses of approximately $ 231,000 and $ 122,000 , respectively.

2009, the Company adopted the Performance Equity Plan 2009 (the “2009 Plan”).

The 2009 Plan reserved 500,000 common

shares for issuance.

The 2009 Plan provides for the issuance of either incentive stock options or nonqualified stock options to

employees, consultants or others who provide services to the Company.

The Company has 2,364 shares available for grant under the

2009 Plan as of December 31, 2021.

2016, the Company adopted the 2016 Long Term Incentive Plan (the “2016 Plan”).

The 2016 Plan reserved 600,000 common

shares for issuance, provided that, no more than 200,000 common shares be granted as incentive stock options.

Awards may be made

or granted to employees, officers, directors and consultants in the form of incentive stock options, non-qualified stock options,

stock appreciation rights, restricted stock, restricted stock units and other stock-based awards.

Any shares of common stock granted

in connection with awards other than stock options and stock appreciation rights are counted against the number of shares reserved

for issuance under the 2016 Plan as one and one-half shares of common stock for every one share of common stock granted in connection

with such award.

Any shares of common stock granted in connection with stock options and stock appreciation rights are counted

against the number of shares reserved for issuance under the 2016 Plan as one share for every one share of common stock issuable

upon the exercise of such stock option or stock appreciation right awarded.

In the fourth quarter of 2020 the company added 800,000

shares to the plan.

The Company has 472,681 shares available for grant under the 2016 Plan as of December 31, 2021.

TO CONSOLIDATED FINANCIAL STATEMENTS

compensation expense for restricted stock in the consolidated statements of operations is summarized as follows:

Selling, general

and administrative

stock-based compensation expense

Company grants restricted stock units (“RSUs”) to its board of directors as partial compensation.

These RSUs vest

quarterly on a straight-line basis over a one-year period.

Company grants shares of common stock (“Restricted Stock Awards”) to select employees.

In the event that the

employee’s employment is voluntarily terminated prior to certain vesting dates, portions of the shares may be forfeited.

In addition, if certain Company performance criteria are not achieved, portions of these shares may be forfeited.

following table summarizes activity related to outstanding RSUs and Restricted Stock Awards for the year ended December 31, 2022:

Restricted Stock Awards

Weighted Average

Fair Value of

Restricted Stock

Weighted Average

Fair Value of

Non-vested – January 1, 2022

Non-vested – December 31, 2022

of December 31, 2022, unamortized stock-based compensation costs related to restricted share arrangements was $ 213,244 .

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

TO CONSOLIDATED FINANCIAL STATEMENTS

September 11, 1996, the Company’s board of directors instituted a defined contribution plan under Section 401(k) of the

7 unchanged sentences

The amount of contributions

recorded by the Company in 2021 and 2020 amounted to $ 381,066 and $ 288,553 , respectively.

recorded by the Company during the years ended December 31, 2022 and 2021 amounted to $ 343,077 and $ 381,066 , respectively.

the year ended December 31, 2022, 35 %, 17 %, 12 % and 10 % of our revenue was generated from our four largest customers.

year ended December 31, 2021, 32 %, 19 %, 12 % and 10 % of our revenue was generated from our four largest customers.

December 31, 2021, 30 %, 23 % and 18 % of accounts receivable were due from our three largest customers.

December 31, 2022, 38 %, 21 %, 17 %, and 13 % of accounts receivable were due from our four largest customers.

At December 31, 2021,

24 %, 15 % and 13 % of accounts receivable were due from our four largest customers.

December 31, 2021, 34 %, 16 % and 12 % of our contract assets were related to our three largest customers.

30 %, 23 % and 18 % of accounts receivable were due from our three largest customers.

December 31, 2022, 27 %, 20 %, 16 %, and 16 % of our contract assets were related to our four largest customers.

At December 31, 2021,

39 %, 20 %, 12 %, and 9 % of our contract assets were related to our four largest customers.

34 %, 16 % and 12 % of our contract assets were related to our three largest customers.

Action Lawsuit

previously disclosed, a consolidated class action lawsuit (captioned Rodriguez v.

CPI Aerostructures, Inc., et al.

20-cv-01026) has been filed in the U.S.

District Court for the Eastern District

of New York against the Company, Douglas McCrosson, the Company’s Chief Executive Officer, Vincent Palazzolo, the

Company’s former Chief Financial Officer, and the two underwriters of the Company’s October 16, 2018 offering of common

stock, Canaccord Genuity LLC and B.

The Amended Complaint in the action asserts claims on behalf of two plaintiff classes:

purchasers of the Company’s common As previously disclosed, a consolidated class action lawsuit (captioned Rodriguez

A consolidated

class action lawsuit (captioned Rodriguez v.

CPI Aerostructures, Inc., et al.

20-cv-01026) has been filed against the Company, Douglas McCrosson, the Company’s

former Chief Executive Officer, Vincent Palazzolo, the Company’s former Chief Financial Officer, and the two underwriters

of the Company’s October 16, 2018 offering of common stock, Canaccord Genuity LLC and B.

The Amended Complaint

in the action asserts claims on behalf of two plaintiff classes:

(i) purchasers of the Company’s common stock issued

pursuant to and/or traceable to the Company’s offering conducted on or about October 16, 2018;

and (ii) purchasers of the

Company’s common stock between March 22, 2018 and February 14, 2020.

The Amended Complaint alleges that the defendants violated

Sections 11, 12(a)(2), and 15 of the Securities Act by negligently permitting false and misleading statements to be included in

the registration statement and prospectus supplements issued in connection with its October 16, 2018 securities offering.

Amended Complaint also alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as

amended (the “Exchange Act”), and Rule 10b-5 promulgated by the SEC, by making false and misleading statements in

the Company’s periodic reports filed between March 22, 2018 and February 14, 2020.

Plaintiff seeks unspecified compensatory

damages, including interest;

20-cv-01026) was filed in the

District Court for the Eastern District of New York against the Company;

Douglas McCrosson, the Company’s former Chief Executive

Vincent Palazzolo, the Company’s former Chief Financial Officer;

and the two underwriters of the Company’s October

16, 2018 offering of common stock, Canaccord Genuity LLC and B.

The Amended Complaint in the action asserted claims on behalf

of two plaintiff classes:

(i) purchasers of the Company’s common stock issued pursuant to and/or traceable to the Company’s

offering conducted on or about October 16, 2018;

and (ii) purchasers of the Company’s common stock between March 22, 2018 and February

The Amended Complaint alleged that the defendants violated Sections 11, 12(a)(2), and 15 of the Securities Act by negligently

permitting false and misleading statements to be included in the registration statement and prospectus supplements issued in connection

with its October 16, 2018 securities offering.

The Amended Complaint also alleged that the defendants violated Sections 10(b) and 20(a)

of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated by the SEC, by making

false and misleading statements in the Company’s periodic reports filed between March 22, 2018 and February 14, 2020.

sought unspecified compensatory damages, including interest;

rescission or a rescissory measure of damages;

unspecified equitable or injunctive relief;

and expenses, including attorney’s fees and expert fees.

On February 19, 2021, the Company moved to dismiss the Amended

unspecified equitable or injunctive

and costs and expenses, including attorney’s fees and expert fees.

On February 19, 2021, the Company moved to dismiss the

Amended Complaint.

Plaintiff submitted a brief in opposition to the motion to dismiss on April 23, 2021.

May 20, 2021, the parties reached a settlement in the amount of $ 3,600,000 , subject to court approval.

On July 9, 2021, Plaintiff

filed an unopposed motion for preliminary approval of the settlement.

On November 10, 2021, a magistrate judge recommended that

the Court grant the motion for preliminary approval in its entirety.

The Court adopted the recommendation on May 27, 2022, and

entered an order granting preliminary approval of the settlement on June 7, 2022.

The magistrate judge will hold a hearing on

September 9, 2022 to decide whether to grant final approval of the settlement.

After satisfaction of our $ 750,000 retention,

the Settlement Amount will be covered and paid by our directors’ and officers’ insurance carrier.

As of March 31,

2021, we have previously paid or accrued to our financial statements covered expenses totaling $ 750,000 , and have therefore met

our directors’ and officers’ retention requirement, which caps the Company’s expenses pertaining to the class

of December 31, 2021, in order to reflect the amounts owed from our directors’ and officers’ insurance carrier and

to the Plaintiffs, we have recorded to our balance sheet a litigation settlement obligation of $ 3,003,259 and an insurance recovery

receivable of $ 2,850,000 ;

this obligation and receivable will be relieved from our balance sheet upon the payment of the Settlement

Amount to the Plaintiff by our directors’ and officers’ insurance carrier.

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

Derivative Action

shareholder derivative actions, each based on substantially the same facts as those alleged in the class action discussed above,

have been filed against current members of our board of directors and certain of our current and former officers.

first action (captioned Moulton v.

On May 20, 2021,

the parties reached a settlement in the amount of $ 3,600,000 , subject to court approval.

On July 9, 2021, Plaintiff filed an unopposed

motion for preliminary approval of the settlement.

On November 10, 2021, a magistrate judge recommended that the court grant the motion

for preliminary approval in its entirety.

The Court adopted the recommendation on May 27, 2022, and entered an order granting preliminary

approval of the settlement on June 7, 2022.

On August 5, 2022, the Plaintiff filed an unopposed motion for final approval.

The magistrate

judge held a hearing on the final approval motion on September 9, 2022.

On February 16, 2023, the magistrate judge recommended that the

Court grant the final approval motion in its entirety.

The Court adopted that recommendation in its entirety on March 10, 2023, and terminated

the case on March 13, 2023.

Shareholder Derivative Action

Four shareholder

derivative actions, each based on substantially the same facts as those alleged in the class action discussed above, have been filed against

current members of our board of directors and certain of our current and former officers.

The first action

(captioned Moulton v.

McCrosson, et.al.

20-cv-02092) was filed in the United States District Court

for the Eastern District of New York.

It purports to assert derivative claims against the individual defendants for violations

of Section 10(b) and 21D of the Exchange Act, breach of fiduciary duty and unjust enrichment, and seeks to recover on behalf of

the Company for any liability the Company might incur as a result of the individual defendants’ alleged misconduct.

complaint also seeks declaratory, equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs.

20-cv-02092) was filed in the U.S.

District Court for the Eastern District of

It purports to assert derivative claims against the individual defendants for violations of Section 10(b) and 21D of the Exchange

Act, breach of fiduciary duty, and unjust enrichment and seeks to recover on behalf of the Company for any liability the Company might

incur as a result of the individual defendants’ alleged misconduct.

The complaint also seeks declaratory, equitable, injunctive,

and monetary relief, as well as attorneys’ fees and other costs.

On October 26, 2020, the plaintiff filed an amended complaint.

On January 27, 2021, the Court stayed the action pursuant to a

joint stipulation filed by the parties.

second action (captioned Woodyard v.

On January 27, 2021, the court stayed the action pursuant to a joint stipulation filed by the parties.

The second action

(captioned Woodyard v.

McCrosson, et al.

613169/2020) was filed on September 17, 2020, in

the Supreme Court of the State of New York (Suffolk County).

It purports to assert derivative claims against the individual defendants

for breach of fiduciary duty and unjust enrichment, and seeks to recover on behalf of the Company for any liability the Company

might incur as a result of the individual defendants’ alleged misconduct, along with declaratory, equitable, injunctive

and monetary relief, as well as attorneys’ fees and other costs.

On December 22, 2020, the parties filed a joint stipulation

staying the action pending further developments in the class action.

third action (captioned Berger v.

613169/2020) was filed on September 17, 2020, in the Supreme Court of

the State of New York (Suffolk County).

It purports to assert derivative claims against the individual defendants for breach of fiduciary

duty and unjust enrichment, and seeks to recover on behalf of the Company for any liability the Company might incur as a result of the

individual defendants’ alleged misconduct, along with declaratory, equitable, injunctive and monetary relief, as well as attorneys’

fees and other costs.

On December 22, 2020, the parties filed a joint stipulation staying the action pending further developments in the

class action.

The third action

(captioned Berger v.

McCrosson, et al.

1:20-cv-05454) was filed on November 10, 2020, in the United

States District Court for the Eastern District of New York.

The complaint, which is based on the shareholder’s inspection

of certain corporate books and records, purports to assert derivative claims against the individual defendants for breach of fiduciary

duty and unjust enrichment, and seeks to implement reforms to the Company’s corporate governance and internal procedures

and to recover on behalf of the Company an unspecified amount of monetary damages.

The complaint also seeks equitable, injunctive,

and monetary relief, as well as attorneys’ fees and other costs.

March 19, 2021, the parties to the Moulton and Berger actions filed a joint stipulation consolidating the actions

(under the caption In re CPI Aerostructures Stockholder Derivative Litigation , No.

20-cv-02092) and staying the consolidated

action pending further developments in the class action.

fourth action (captioned Wurst v.

Bazaar, et al.

605244/2021) was filed on March 24, 2021, in the Supreme

Court of the State of New York (Suffolk County).

The complaint purports to assert derivative claims against the individual defendants

for breach of fiduciary duty, unjust enrichment, and waste of corporate assets, and seeks to recover on behalf of the Company

for any liability the Company might incur as a result of the individual defendants’ alleged misconduct.

The complaint also

seeks declaratory, equitable, injunctive, and monetary relief, as well as attorneys’ fees and other costs.

2021, the parties filed a joint stipulation staying the action pending further developments in the class action.

June 13, 2022, the plaintiffs in the consolidated federal action informed the Court that the Company and all defendants had reached

an agreement in principle with all plaintiffs to settle the shareholder derivative lawsuits described above.

2022, the plaintiffs in the consolidated federal action filed an unopposed motion for preliminary approval of the settlement.

On July 22, 2022, the Court referred the motion to the magistrate judge;

the motion remains pending.

The settlement is subject

to Court approval and, if approved, will result in the dismissal of the shareholder derivative lawsuits.

the proposed settlement, the Company has agreed to undertake (or confirm that it has undertaken already) certain corporate governance

reforms and to pay attorneys’ fees to plaintiffs’ counsel.

The attorneys’ fees will be covered and paid by our

directors’ and officers’ insurance carrier, after satisfaction of our $ 750,000 retention.

Investigation

May 22, 2020, the Company received a subpoena from the SEC 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, 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 SEC 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.”

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

RESTATEMENT OF

PREVIOUSLY ISSUED CONSOLIDATED FINANCIAL STATEMENTS

previously reported, on June 4, 2021, the audit and finance committee (the “Audit and Finance Committee”) of the board

of directors of CPI Aerostructures, Inc.

(the “Company”), determined, based on the recommendation of management and

in consultation with CohnReznick LLP (“CohnReznick”), then the Company’s independent registered public accounting

firm, that the Company’s financial statements which were included in its Annual Report on Form 10-K for the year ended December

31, 2020 and Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020, June 30, 2020, and September 30, 2020 as filed

with the Securities and Exchange Commission (the “SEC”) should no longer be relied upon due to errors in such financial

statements relating to the recording and reporting of inventory costing and related internal controls (the “Inventory Costing

Errors”) and that management’s reports on the effectiveness of internal control over financial reporting, press releases,

and investor communications describing the Company’s financial statements for such periods should no longer be relied upon.

The Company’s management identified the Inventory Costing Errors during its inventory testing procedures for the preparation

of the Company’s financial statements for the quarterly period ended March 31, 2021.

At the time of the June 2021 disclosure,

the Company estimated and disclosed that the Inventory Costing Errors were expected to increase 2020 net loss reported on the

Annual Report on Form 10-K for the year ended December 31, 2020 by $1.9 million to $2.3 million .

The Company has now determined

that the Inventory Costing Errors increased 2020 net loss by $ 2,010,084 .

correction of the Inventory Costing Errors resulted in the determination that certain contracts were in a loss position and certain

inventory items required additional reserves.

The Company re-evaluated the sufficiency of its provisions for loss contracts and

inventory reserves that it had previously recorded and concluded that increases to these reserves were required.

The insufficient

reserves resulting from such reserve increases are referred to as “Additional Inventory Reserves” and “Loss

Contract Reserve” and are together referred to as the “Insufficient Reserves.” It was further determined by

management that the appropriate starting point for increasing the Insufficient Reserves was during the fourth quarter of 2019.

November 16, 2021, the Audit and Finance Committee determined, based on the analysis and recommendation of management and in consultation

with CohnReznick, that the Company’s financial statements as of and for the period ended December 31, 2019 which were included

in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019 should no longer be relied upon

due to errors in such financial statements relating to the recording and reporting of the Insufficient Reserves, that, similarly,

management’s reports on the effectiveness of internal control over financial reporting, press releases, and investor communications

describing the Company’s financial statements for such period should no longer be relied upon, and

stated that the Company expected to restate its Annual Report on Form 10-K for the years ended December 31, 2020 and December

31, 2019, and its Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020, June 30, 2020, and September 30, 2020

as filed with the SEC (the “Original Forms 10-Q”) by filing the Comprehensive Form 10-K/A.

Company, upon conducting an analysis of the impact of the Insufficient Reserves on previously reported financial results, determined

that net loss for the years ended December 31, 2020 and 2019 is $ 324,231 and $ 2,189,728 , respectively, greater than the net loss

reported in the Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and the Company’s Annual Report on

Form 10-K for the fiscal year ended December 31, 2019.

both the Inventory Costing Errors and the Insufficient Reserves, the Company determined that the net loss for the years ended

December 31, 2020 and 2019 is $ 2,334,315 and $ 2,300,083 , respectively, greater than the net loss reported in the Annual Report

on Form 10-K for the fiscal year ended December 31, 2020 and the Company’s Annual Report on Form 10-K for the fiscal year

ended December 31, 2019 and net loss for the quarters ended March 31, 2020 and June 30, 2020 is $ 544,836 and $ 763,730 , respectively,

greater than the net loss reported in the respective Quarterly Reports on Form 10-Q for such periods and the net income for the

quarter ended September 30, 2020 is $ 24,556 more than the net income reported in the Quarterly Report for such period.

Inventory Costing Errors resulted from software processing and coding errors, inconsistent units of measure being used for quantities

ordered and quantities received of certain purchased parts, incorrect accruals to accounting periods of the cost of certain goods

received and the Company not having a procedure to address over or under absorbed overhead costs at the end of accounting periods.

The Inventory Costing Errors affected the income reported with respect to the Company’s product lines for which revenue

is recognized when a product ships to customers, which accounted for approximately 15% of total 2020 revenue (the “Non-POC

The Inventory Costing Errors did not affect income reported with respect to the Company’s products for

which revenue is recognized over time using percentage of completion accounting (the “POC Contracts”).

The Loss Contract

Reserve and the Additional Inventory Reserves also only affect the income reported with respect to the Company’s Non-POC

Contracts, and do not affect the income reported with respect to the Company’s POC Contracts.

The Inventory Costing Errors

and the Insufficient Reserves did not affect either prior reported revenue or cash flow for fiscal 2020 and 2019.

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

has considered the effect of the Inventory Costing Errors and the Insufficient Reserves on the Company’s prior conclusions

of the adequacy of its internal control over financial reporting and disclosure controls and procedures as of the end of each

of the applicable periods.

As a result of the Inventory Costing Errors and the Insufficient Reserves, management has determined

that a material weakness existed in the Company’s internal control over financial reporting as of the end of the quarterly

periods ended March 31, 2020, June 30, 2020, September 30, 2020 and for the years ended December 31, 2020 and 2019.

Item 9A – Controls and Procedures within this Form 10-K for a description of these matters.

a result of the restatement included herein caused by the Inventory Costing Errors and Insufficient Reserves, the Company is reporting

herein net loss for the years ended December 31, 2020 and December 31, 2019 which is $ 2,334,315 and $ 2,300,083 , respectively,

greater than the net loss reported in the Original Form 10-K and the Company’s Annual Report on Form 10-K for the fiscal

year ended December 31, 2019, net loss for the quarters ended March 31, 2020 and June 30, 2020 which is $ 544,836 and $ 763,730 ,

respectively, greater than the net loss reported in the respective Original Forms 10-Q, and net income for the quarter ended September

30, 2020 which is $ 24,556 greater than the net income reported in the Original Form 10-Q.

The Inventory Costing Errors and the

Insufficient Reserves did not affect reported revenue or cash flows for the years ended December 31, 2020 or December 31, 2019,

or for the quarters ended March 31, June 30 and September 30, 2020.

and 2019 Restatement

following is a discussion of the restatement adjustments that were made to the Company’s previously issued December 31,

2020 and December 31, 2019 consolidated financial statements due to the Inventory Costing Errors, Loss Contract Reserve and Additional

Inventory Reserves.

Inventory Costing Errors

Company determined that the Inventory Costing Errors resulted in incorrectly reported inventory values and reported income for

the annual periods ended December 31, 2020 and December 31, 2019, and the quarterly periods ended March 31, 2020, June 30, 2020

and September 30, 2020.

The Inventory Costing Errors were comprised of the following:

Labor costs for work in process were overstated in the detailed inventory records due to an automated reversing entry not processing

A customized IT program to calculate weighted average cost was not tested thoroughly enough, which allowed errors in average cost

calculations to occur in certain situations;

Units of Measure were not consistent between quantities ordered and quantities received for certain classes of purchased parts,

which resulted in overstatements of inventory values due to units of measure not being consistent with unit prices on purchase

orders to suppliers;

The cost of goods received which had not yet processed through the Company’s quality inspection process at the time of the

period-end accounting closes were not properly accrued to the period financial statements;

The Company did not have a process to address over-absorbed or under-absorbed overhead costs at the end of each accounting period.

Loss Contract Reserve

correcting its financial statements for the Inventory Costing Errors, the Company determined that is was a party to some contracts

to deliver product upon which the Company would lose money, and thus the Company’s Loss Contract Reserve was increased accordingly

for the year ended December 31, 2020 and December 31, 2019, and for the quarterly periods ended March 31, 2020, June 30, 2020

and September 30, 2020.

Additional Inventory Reserves

correcting its financial statements for the Inventory Costing Errors, the Company determined that its inventory required additional

reserves to reflect current market value and demand, and thus the Company’s Inventory Reserves were increased accordingly

for the year ended December 31, 2020 and December 31, 2019, and for the quarterly periods ended March 31, 2020, June 30, 2020

and September 30, 2020.

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

were no material tax adjustments to the Company’s Provision for/(benefit from) income taxes or Net deferred tax assets (liabilities)

related to the impact of the 2020 and 2019 Restatement.

following tables present the impact of the restatement on the Company’s previously reported financial statements as of December

September 30, 2020;

June 30, 2020 and March 31, 2020 and December 31, 2019:

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

on Consolidated Balance Sheets

effect of the Restatement described above on the accompanying consolidated balance sheets as of December 31, 2020;

September 30,

June 30, 2020;

March 31, 2020 and December 31, 20019 are as follows:

Balance Sheet as at December 31, 2020

receivable, net

expenses and other current assets

Current Assets

lease right-of-use assets

and equipment, net

and Shareholders’ Deficit

portion of long-term debt

lease liabilities

taxes payable

Current Liabilities

operating lease liabilities

debt, net of current portion

Shareholders’

paid-in capital

Shareholders’ Deficit

Liabilities and Shareholders’ Deficit

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

Balance Sheet as at September 30, 2020

Previously Reported

Contract Reserve

Inventory Reserve

receivable, net

expenses and other current assets

Current Assets

lease right-of-use assets

and equipment, net

and Shareholders’ Deficit

portion of long-term debt

lease liabilities

taxes payable

Current Liabilities

operating lease liabilities

debt, net of current portion

Shareholders’

paid-in capital

Shareholders’ Deficit

Liabilities and Shareholders’ Deficit

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

Balance Sheet as at June 30, 2020

receivable, net

expenses and other current assets

Current Assets

lease right-of-use assets

and equipment, net

and Shareholders’ Deficit

portion of long-term debt

lease liabilities

taxes payable

Current Liabilities

operating lease liabilities

debt, net of current portion

Shareholders’

paid-in capital

Shareholders’ Deficit

Liabilities and Shareholders’ Deficit

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

Balance Sheet as at March 31, 2020

receivable, net

expenses and other current assets

Current Assets

lease right-of-use assets

and equipment, net

and Shareholders’ Deficit

portion of long-term debt

lease liabilities

taxes payable

Current Liabilities

operating lease liabilities

debt, net of current portion

Shareholders’

paid-in capital

Shareholders’ Deficit

Liabilities and Shareholders’ Deficit

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

Balance Sheet as at December 31, 2019

receivable, net

expenses and other current assets

Current Assets

lease right-of-use assets

and equipment, net

and Shareholders’ Deficit

portion of long-term debt

lease liabilities

taxes payable

Current Liabilities

operating lease liabilities

debt, net of current portion

Shareholders’

paid-in capital

Shareholders’ Deficit

Liabilities and Shareholders’ Deficit

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

on Consolidated Statements of Operations

effect of the Restatement described above on the accompanying consolidated statement of operations for the twelve months ended

December 31, 2020 is as follows:

Statement of Operation For the twelve months ended December 31, 2020

Previously Reported

Contract Reserve

Cost of sales

general and administrative expenses

Income (loss) from

Other expense:

Interest expense

before provision for income taxes

from income taxes

per common share - basic

per common share - diluted

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

effect of the Restatement described above on the accompanying consolidated statement of operations for the three and nine months

ended September 30, 2020 is as follows:

Statement of Operation For the three months ended September 30, 2020 (Unaudited)

general and administrative expenses

from operations

before provision for income taxes

for income taxes

per common share - basic

per common share - diluted

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

Statement of Operation For the nine months ended September 30, 2020 (Unaudited)

Previously Reported

general and administrative expenses

from operations

before provision for income taxes

for income taxes

per common share - basic

per common share - diluted

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

effect of the Restatement described above on the accompanying consolidated statement of operations for the three and six months

ended June 30, 2020 is as follows:

Statement of Operation For the three months ended June 30, 2020 (Unaudited)

Previously Reported

Contract Reserve

general and administrative expenses

from operations

before provision for income taxes

for income taxes

per common share - basic

per common share - diluted

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

Statement of Operation For the six months ended June 30, 2020 (Unaudited)

general and administrative expenses

from operations

before provision for income taxes

for income taxes

per common share - basic

per common share - diluted

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

effect of the Restatement described above on the accompanying consolidated statement of operations for the three months ended

March 31, 2020 is as follows:

Statement of Operation For the three months ended March 31, 2020 (Unaudited)

Previously Reported

Contract Reserve

general and administrative expenses

from operations

before provision for income taxes

for income taxes

per common share - basic

per common share - diluted

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

effect of the Restatement described above on the accompanying consolidated statement of operations for the twelve months ended

December 31, 2019 is as follows:

Statement of Operation For the twelve months ended December 31, 2019

Previously Reported

Contract Reserve

Cost of sales

Selling, general

and administrative expenses

Loss from operations

Other income (expense):

Loss before provision

for income taxes

Provision for income

Loss per common share - basic

Loss per common share - diluted

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

Effect of Prior Period Adjustments

following table presents the impact of the Restatement on the Company’s shareholders’ deficit as of December 31, 2019

(as restated) and December 31, 2020 (as restated):

Paid-in Capital

Shareholders’ Deficit

December 31, 2019

(As previously reported)

Inventory Costing

Loss Contract Reserve

Cumulative restatement

December 31, 2019

(As Restated)

Net Loss (as previously

Inventory Costing

Loss Contract Reserve

Cumulative restatement

Net Loss (as restated)

March 31, 2020

(As Restated)

Net Loss (as previously

Inventory Costing Errors

Loss Contract Reserve

Inventory Reserve

Cumulative restatement

Net Loss (as restated)

Stock-based compensation

June 30, 2020

(As Restated)

Net Income (as previously

Inventory Costing

Loss Contract Reserve

Cumulative restatement

Net Income (as restated)

Stock-based compensation

September 30, 2020

(As Restated)

Inventory Costing

Loss Contract Reserve

Cumulative restatement

income (as restated)

Stock-based compensation

December 31, 2020

(As Restated)

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

on Consolidated Statement of Cash Flows

effect of the Restatement described above on the accompanying consolidated statement of cash flows for the twelve months ended

December 31, 2020 is as follows:

Statements of Cash Flows for the twelve months

ended December 31, 2020

Cash flows from

operating activities:

to reconcile net loss to net cash used in operating activities:

and amortization

of debt issuance cost

expended in excess of rent expense

compensation expense

in operating assets and liabilities:

in accounts receivable

in contract assets

in prepaid expenses and other current assets

in refundable income taxes

in accounts payable and accrued expenses

in contract liabilities

in loss reserve

in income taxes payable

cash used in operating activities

flows from investing activities:

of property and equipment

cash used in investing activities

flows from financing activities:

from PPP loan

on long-term debt

issuance costs

cash provided by financing activities

Net increase in

cash and restricted cash

and restricted cash at beginning of year

and restricted cash at end of year

schedule of noncash investing activities:

acquired under capital lease

schedule of cash flow information:

paid during the year for interest

(received) from income taxes

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

on Consolidated Statement of Cash Flows

effect of the Restatement described above on the accompanying consolidated statement of cash flows for the nine months ended September

30, 2020 is as follows:

Statements of Cash Flows for the nine months

ended September 30, 2020 (Unaudited)

Cash flows from

operating activities:

to reconcile net loss to net cash used in operating activities:

and amortization

of debt issuance cost

expended in excess of rent expense

compensation expense

Changes in operating

assets and liabilities:

in accounts receivable

in contract assets

in prepaid expenses and other current assets

in refundable income taxes

in accounts payable and accrued expenses

in contract liabilities

in loss reserve

cash used in operating activities

Cash flows from

investing activities:

of property and equipment

cash used in investing activities

flows from financing activities:

from PPP loan

on long-term debt

issuance costs

cash provided by financing activities

Net decrease in

cash and restricted cash

and restricted cash at beginning of year

and restricted cash at end of year

schedule of cash flow information:

paid during the year for interest

(received) from income taxes

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

on Consolidated Statement of Cash Flows

effect of the Restatement described above on the accompanying consolidated statement of cash flows for the six months ended June

30, 2020 is as follows:

Statements of Cash Flows for the six months ended June 30, 2020 (Unaudited)

Cash flows from

operating activities:

to reconcile net loss to net cash used in operating activities:

and amortization

of debt issuance cost

expended in excess of rent expense

compensation expense

Changes in operating

assets and liabilities:

in accounts receivable

in contract assets

in prepaid expenses and other current assets

in refundable income taxes

in accounts payable and accrued expenses

in contract liabilities

in loss reserve

cash used in operating activities

flows from investing activities:

of property and equipment

cash used in investing activities

flows from financing activities:

from PPP loan

on long-term debt

cash provided by financing activities

Net increase in

cash and restricted cash

and restricted cash at beginning of year

and restricted cash at end of year

schedule of cash flow information:

paid during the year for interest

(received) from income taxes

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

on Consolidated Statement of Cash Flows

effect of the Restatement described above on the accompanying consolidated statement of cash flows for the three months ended

March 31, 2020 is as follows:

Statements of Cash Flows for the three months

ended March 31, 2020 (Unaudited)

Cash flows from

operating activities:

to reconcile net loss to net cash used in operating activities:

and amortization

of debt issuance cost

of right of use asset

compensation expense

Changes in operating

assets and liabilities:

in accounts receivable

in contract assets

in prepaid expenses and other current assets

in refundable income taxes

in accounts payable and accrued expenses

in contract liabilities

in loss reserve

cash used in operating activities

Cash flows from

investing activities:

of property and equipment

cash used in investing activities

flows from financing activities:

on long-term debt

issuance costs

cash used in financing activities

Net decrease in

cash and restricted cash

and restricted cash at beginning of year

and restricted cash at end of period

schedule of cash flow information:

paid during the year for interest

(received) from income taxes

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

on Consolidated Statement of Cash Flows

effect of the Restatement described above on the accompanying consolidated statement of cash flows for the twelve months ended

December 31, 2019 is as follows:

Consolidated Statements of Cash Flows for the twelve months ended December 31, 2019

Cash flows from operating activities:

$ ( 4,450,152 )

$ ( 110,355 )

$ ( 1,314,950 )

$ ( 874,778 )

$ ( 6,750,235 )

Adjustments to reconcile net loss to net cash used in operating activities:

Depreciation and amortization

Amortization of debt issuance cost

Cash expended in excess of rent expense

Stock-based compensation expense

Common Stock Issued as Employee Compensation

Changes in operating assets and liabilities:

Decrease in accounts receivable

Decrease in contract assets

Decrease in inventory

Decrease in prepaid expenses and other current assets

Decrease in refundable income taxes

Decrease in accounts payable and accrued expenses

Decrease in contract liabilities

( 1,968,872 )

Decrease in loss reserve

( 1,012,597 )

Decrease in income taxes payable

Net cash used in operating activities

Cash flows from investing activities:

Purchase of property and equipment

Net cash used in investing activities

Cash flows from financing activities:

Proceeds from Line of Credit

Payments of Line of Credit

( 1,300,000 )

Payments on long-term debt

( 2,436,786 )

Debt issuance costs

Stock offering costs paid

Net cash provided by financing activities

Net decrease in cash and restricted cash

Cash and restricted cash at beginning of year

Cash and restricted cash at end of year

Supplemental schedule of noncash investing activities:

Equipment acquired under capital lease

Supplemental schedule of cash flow information:

Cash paid during the year for interest

Cash (received) from income taxes

$ ( 378,652 )

1:20-cv-05454) was filed on November 10, 2020, in the U.S.

District Court for

the Eastern District of New York.

The complaint, which is based on the shareholder’s inspection of certain corporate books and records,

purports to assert derivative claims against the individual defendants for breach of fiduciary duty and unjust enrichment, and seeks to

implement reforms to the Company’s corporate governance and internal procedures and to recover on behalf of the Company an unspecified

amount of monetary damages.

The complaint also seeks equitable, injunctive, and monetary relief, as well as attorneys’ fees and

AEROSTRUCTURES, INC.

AND SUBSIDIARIES

SUBSEQUENT EVENTS

NYSE American

Listing Standards Non-Compliance and Delisting Determination

May 19, 2022, the NYSE American exchange (the “Exchange”) announced the suspension of trading of our common stock

due to non-compliance with the SEC annual and quarterly report timely filing criteria provided for in Section 1007 of the Exchange’s

Company Guide (the “Company Guide”) and announced that it was initiating proceedings to delist our common stock.

a result of the suspension, our common stock began trading on May 20, 2022 under the symbol “CVUA” on the OTC Pink

Limited Information market tier, which is operated by OTC Markets Group Inc.

The Company filed a request for review of the Exchange’s

determination to initiate delisting proceedings to a Committee of the Board of Directors of NYSE Regulation (the “Committee”).

A hearing for this review before a Listing Qualification Panel of the Committee has been scheduled for September 7, 2022 (the

The delisting action has been stayed pending the outcome of the review although trading of our common

stock on the Exchange remains suspended.

We will become current with our SEC reports upon the filing of our Quarterly Report on Form 10-Q for the three months ended March 31, 2022 (the “2022 Q1 Form 10- Q”) and our Quarterly Report on Form 10-Q for the three and six months ended June 30, 2022 (the “2022 Q2 Form 10-Q”).

The Company believes that becoming current with our SEC reports will resolve the condition that led to NYSE American suspending trading in the Company’s common stock on the Exchange and its determination to commence proceedings to delist the common stock from the Exchange.

The 2022 Q1 Form 10-Q and 2022 Q2 Form 10-Q will be filed as soon as practicable.

We cannot assure you that if the Company becomes current with our SEC reports before the Hearing or the outcome of the Hearing will result in the Exchange changing its delisting determination or that our common stock will resume trading on the Exchange in the future.

September 17, 2021, we received notice from the Exchange indicating that the Company does not meet the continued listing standards

set forth in Part 10 of the Company Guide.

The Company is not in compliance with Section 1003(a)(i) of the Company Guide since

it has stockholders’ equity of less than $ 2 .0 million and losses from continuing operations and/or net losses in two of

its three most recent fiscal years and Section 1003(a)(ii) of the Company Guide since it has stockholders’ equity of less

than $ 4 .0 million and losses from continuing operations and/or net losses in three of its four most recent fiscal years.

is therefore subject to the procedures and requirements of Section 1009 of the Company Guide and was required to, and timely did,

submit a plan to the Exchange addressing how the Company intends to regain compliance with the continued listing standards by

March 17, 2023 (the “Plan”).

On November 19, 2021, we received notice from the Exchange that it accepted the Plan,

subject to periodic review, including quarterly monitoring, for compliance with the Plan.

If the Company’s common stock

is not delisted from the Exchange as a result of the Company’s delayed filings as described above and (i) the Company is

not in compliance with the continued listing standards by March 17, 2023 or (ii) the Company does not make progress consistent

with the Plan during the plan period, the Exchange staff may initiate delisting proceedings as appropriate.

of Common Stock on Expert Market

Company is not current in its SEC reporting obligations with respect to its 2022 Q1 Form 10-Q.

Companies that are not current

in their SEC reporting obligations in accordance with the provisions of Rule 15c-11 (“Rule 15c2-11”) promulgated under

the Securities Exchange Act of 1934, as amended, do not have current information publicly available and do not meet the requirements

for ongoing quoting of their securities on one of the public markets (the “OTC Markets”) operated by the OTC Markets

Effective July 15, 2022, the Company’s common stock is quoted on the OTC Markets Group’s “Expert

Expert Market is available for unsolicited quotes only, meaning broker-dealers may use the Expert Market to publish unsolicited

quotes representing orders from retail and institutional investors who are not affiliates or insiders of the Company.

in Expert Market securities are made available to broker-dealers, institutions, and other sophisticated investors.

investors are not assured of the opportunity to purchase or sell their shares when they desire to do so or at all.

Part I Item 1A Risk Factors - “There is currently a very limited trading market for our common stock and investors are

not assured of the opportunity to make transactions in our common stock.” Cost reduction

the first quarter of 2022, the Company began a cost reduction initiative designed to improve operational efficiency and reduce

costs during fiscal year 2022.

Management is reallocating resources and reducing operating and general administrative expenses

to more properly align the Company’s costs to anticipated near-term revenue given the timing differences between the conclusion

of certain mature programs and the commencement of new programs in 2022.

The Company executed a headcount reduction and furlough

action in March 2022 and is implementing cost controls and cuts during the balance of fiscal year 2022.

The Company anticipates

recording severance costs related to the headcount reduction in its first fiscal quarter of 2022 and the cost reductions of these

actions are anticipated to positively impact the financial results of the Company beginning in the second fiscal quarter of 2022.

TO CONSOLIDATED FINANCIAL STATEMENTS

2021, the parties to the Moulton and Berger actions filed a joint stipulation consolidating the actions (under the caption In

re CPI Aerostructures Stockholder Derivative Litigation , No.

20-cv-02092) and staying the consolidated action pending further developments

in the class action.

The fourth action

(captioned Wurst v.

Bazaar, et al.

605244/2021) was filed on March 24, 2021, in the Supreme Court of the State

of New York (Suffolk County).

The complaint purports to assert derivative claims against the individual defendants for breach of fiduciary

duty, unjust enrichment, and waste of corporate assets, and seeks to recover on behalf of the Company for any liability the Company might

incur as a result of the individual defendants’ alleged misconduct.

The complaint also seeks declaratory, equitable, injunctive,

and monetary relief, as well as attorneys’ fees and other costs.

On April 12, 2021, the parties filed a joint stipulation staying

the action pending further developments in the class action.

2022, the plaintiffs in the consolidated federal action informed the court that the Company and all defendants had reached an agreement

in principle with all plaintiffs to settle the shareholder derivative lawsuits described above.

On June 16, 2022, the plaintiffs

in the consolidated federal action filed an unopposed motion for preliminary approval of the settlement.

On July 22, 2022, the Court referred

the motion to the magistrate judge.

The magistrate judge held a conference on September 9, 2022 in the consolidated federal action.

February 14, 2023, the magistrate judge recommended that the Court grant the motion in its entirety.

On March 6, 2023, the court granted preliminary approval

of the proposed settlement.

The proposed settlement is subject to final approval by the court.

addition to requiring final approval by the court, the proposed settlement is subject to certain conditions, including the filing with

the SEC of the stipulation of settlement agreed to by the Company and plaintiff (the “Stipulation of Settlement”), and sending

notice to potential class members.

The terms of the proposed settlement are set forth in the Stipulation of Settlement.

Should the proposed

settlement receive final approval from the Court, it will result in the dismissal of the shareholder derivative lawsuits.

As part of the

proposed settlement, the Company has agreed to undertake (or confirm that it has undertaken already) certain corporate governance reforms.

In addition, the Company and/or its insurer have agreed to pay a total of $ 585,000 in attorneys’ fees to plaintiffs’ counsel.

Litigation Settlement Obligation

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

The attorneys’

fees for both the Class Action Lawsuit and the Shareholder Derivative Action will be covered and paid by our directors’ and officers’

insurance carrier, after satisfaction of our $ 750,000 retention.

As of December 31, 2022, we have previously paid and accrued to

our financial statements covered expenses totaling $ 750,000 , and have therefore met our insurance carrier’s directors’ and

officers’ retention requirement, which caps the Company’s expenses pertaining to the class action suit at $ 750,000 .

December 31, 2022, in order to reflect the amounts owed from our directors’ and officers’ insurance carrier and to the Plaintiffs,

we have recorded to our balance sheet a litigation settlement obligation of $ 3,600,000 and an insurance recovery receivable of $ 3,600,000

owing from the Company’s insurance carrier to the Company with respect to the settlement obligation;

this obligation and receivable

will be relieved from our balance sheet upon the payment of the settlement amount to the Plaintiff by our directors’ and officers’

insurance carrier.

AEROSTRUCTURES, INC.

2 unchanged sentences

to be signed on its behalf by the undersigned, thereunto duly authorized.

August 19, 2022

AEROSTRUCTURES, INC.

6 unchanged sentences

Board of Directors

August 19, 2022

April 14, 2023

Terry Stinson

1 unchanged sentence

the Board of Directors

August 19, 2022

April 14, 2023

Chief Executive Officer and

August 19, 2022

April 14, 2023

President (Principal

1 unchanged sentence

Financial Officer and Secretary

Financial and Accounting Officer)

Walter Paulick

August 19, 2022

Walter Paulick

Eric Rosenfeld

August 19, 2022

Eric Rosenfeld

(Principal Financial

and Accounting Officer)

Michael Faber

August 19, 2022

April 14, 2023

Michael Faber

Richard Caswell

August 19, 2022

April 14, 2023

Richard Caswell

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures