Item 1A. Risk Factors
Item
1A. Risk Factors
Risks
Related to Business Operations and Our Industry
We
rely heavily on U.S. Government programs for a substantial portion of our business. Accordingly, changes in U.S. Government priorities
or delays or reductions in spending by the U.S. Government on such programs could have a material adverse effect on our business, financial
position, results of operations and/or cash flows.
Either
as a prime contractor or as a subcontractor, we rely heavily on U.S. Government programs, from which we derived approximately 91% and
94% of our sales in fiscal year 2026 and fiscal year 2025, respectively. These U.S Government programs may be only partially or incrementally
funded and are subject to potential termination. These programs may also be subject to funding reductions and/or delays due to changes
in government priorities or other factors. Whether direct contracts with the U.S. Government or contracts with prime contractors to the
U.S. Government, our contracts typically are funded at a level less than the full contract value and require periodic incremental additional
funding in order to continue. Should circumstances change regarding funding and sufficient funding become unavailable, contracts may
be terminated, delayed significantly or put on stop work status.
U.S.
Government contracts are subject to Congressional funding, which may be unavailable due to changes in priorities or subject to continuing
resolution, which may result in funding reductions, eliminations or other effects that could impact our business. Furthermore, budget
uncertainty, the risk of future budget cuts, the potential for U.S. Government shutdowns, and the federal debt ceiling could also adversely
affect our industry and the funding for our current and future contracts. If appropriations are delayed or a government shutdown was
to occur and was to continue for an extended period of time, we could be at risk of program or contract cancellations and other disruptions
and nonpayment. Finally, shifting funding priorities or federal budget changes, could also result in reductions in overall spending on
our contracts and projects, which could adversely impact our business, financial condition, results of operations and/or cash flows.
Changes in funding priorities could reduce opportunities in existing programs and in future programs where we intend to compete. While
we would expect to compete and be well positioned as the incumbent on existing programs, we may not be successful and, even if we are
successful, the replacement programs may be funded at lower levels, which could adversely affect our business, financial position, results
of operations and/or cash flows.
We
depend heavily on a small number of larger customers for a substantial portion of our business. The loss of one or more of our largest
customers or programs could have a material adverse effect on our business, financial position, results of operations and/or cash flows.
As
a subcontractor, the Company is reliant on a few large customers that generally hold the ultimate contract with the U.S. Government.
During fiscal year 2026, Lockheed Martin, L3Harris, and Boeing each accounted for more than 10% of the Company’s consolidated revenues.
These customers typically incorporate our products into larger programs. If these customers encounter technical, financial or other issues
unrelated to our products that affect the larger program’s operations, the related program may be terminated or require expensive,
unanticipated revisions. These issues, although unrelated to our products, could adversely impact us if our customers’ contracts
with the U.S. Government become subject to re-competition or are ultimately cancelled. Additionally, our larger customers are sophisticated
corporations with large research and development staffs and budgets. If one or more sought to design and manufacture replacements for
our products, they could potentially discontinue their need for our products. Alternatively, our larger customers could look to replace
our products with the products of one or more of our competitors. The loss of the U.S. Government or one or more of our other larger
customers or programs could adversely affect our business, financial position, results of operations and/or cash flows.
We
use estimates when accounting for contracts. Changes in estimated contract revenues and/or changes in costs can affect our profitability
and our overall financial position.
Contract
accounting requires significant judgment by the Company’s management with respect to estimating contract revenues and costs and
making assumptions for possible schedule and technical issues. These costs include planned costs for all phases of the contract and,
if needed, costs for any technical issues that arise. Due to the nature and complexity of many of our contracts, the estimation of total
revenues and costs at completion is subject to many variables and often difficult to predict accurately. As a result, it has, and could
in the future, be possible that the Company’s estimates when accounting for contracts may prove to be materially incorrect.
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The
Company’s operating income can be adversely affected when estimated contract costs increase. Reasons for increased estimated contract
costs include: design issues; changes in estimates of the nature and complexity of the work, including technical or quality issues or
requests for additional work; production challenges, including those resulting from the timeliness of customer funding and the unavailability
or reduced productivity of qualified labor; the availability, performance, and quality of significant subcontractors; supplier issues,
including the costs, timeliness and availability of materials and components; changes in laws or regulations; actions necessary for long-term
customer satisfaction; and natural disasters or other matters. We have filed, and may file, requests for equitable adjustment or claims
to seek recovery in whole or in part for our increased costs and aim to protect against these risks through contract terms and conditions
when practical, but the prime contractor or the U.S. Government may disagree with our requests or may not have funding to cover them.
Due
to their nature, fixed price contracts inherently tend to have more financial risk than cost-type contracts, including as a result of
inflationary pressures, labor shortages, and increased labor rates. In fiscal year 2026, 95% of our sales were derived from fixed-price
contracts. While the Company’s management uses its best judgment to estimate costs associated with fixed-price contracts, future
events may require adjustments, which could ultimately adversely affect the Company’s operating income.
Under
cost-type contracts, allowable costs incurred by the contractor are generally subject to reimbursement plus a fee. These cost-type programs
may have award or incentive fees that are uncertain and may be earned over extended periods or towards the end of the contract. In these
cases, the associated financial risks are primarily in recognizing profit, which ultimately may not be earned, or program cancellation
if cost, schedule, or technical performance issues arise.
Changes
in underlying assumptions, circumstances or estimates, and the failure to prevail on related claims for equitable adjustments could have
a material adverse effect on our business, financial position, results of operations and/or cash flows.
We
face substantial competition in our industry, and if we fail to win future business or experience undue pricing pressures as a result
of such competition, our business, financial position, results of operations and/or cash flows could be adversely affected.
We
operate in a highly competitive industry focused on very high-performance products. Many of our competitors are larger, have greater
financial resources and have larger R&D and marketing staffs. While we also maintain a robust internal R&D program that is intended
to maintain our technical edge, the Company is limited in its resources and ultimately may not be able to successfully compete. Technology
is advancing rapidly, and if we are unable to respond effectively to competition, we may lose existing customers, fail to win future
business or experience undue pricing pressures that could affect our financial performance. Certain of our current technologies may become
subject to significant future advancements, which may make our products obsolete or non-competitive. Competitors may be able to develop
new manufacturing technologies that afford them cost and/or schedule advantages compared to our products. Customers may elect a less
expensive product, even where it offers lower performance, compared to our current products. Specifically, the emergence of numerous
LEO commercial satellite systems that have significantly lower requirements for life in orbit may result in new products based on commercial
parts and processes not required for the high performance and/or longer lived geo-synchronous orbit satellites for which the Company
has typically developed products. This may result in a migration to less capable, but less expensive products compared to what the Company
has traditionally produced. This may result in reduced market share, lower revenues and adversely impact our business operations and
financial conditions. Additionally, competitors may have the benefit of other contracts that enable them to produce in volume with a
concomitant cost advantage that affords them a price advantage. Many of our customers have in-house capability to develop products comparable
to ours and may opt to do so. Accordingly, if we are unable to continue to compete successfully against our current or future competitors,
we may experience declines in future revenues and market share, which could have a material adverse effect on our business, financial
position, results of operations and/or cash flows.
Our
products, which are often incorporated into larger systems, are technologically complex and require state-of-the-art technology and manufacturing
expertise. Any defect in the design, materials or workmanship with respect to our product could result in system failure.
Our
products are technologically complex and require state-of-the-art technology and manufacturing expertise. If a defect in design, materials
or workmanship is not identified prior to delivery, the defect can result in product failure and potentially the loss of mission capability
for the systems into which our products are integrated. All satellites cannot be recovered from orbit to repair failed sub-systems, therefore
failure of a Company product incorporated into a satellite may result in the complete loss of the satellite with a significant impact
to the Company’s reputation and future business prospects. Penalties and possible litigation may result from these types of problems,
with potential significant impact to our business, financial position, results of operations and/or cash flows.
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We
are dependent on numerous suppliers for various parts, materials, test services, facility operations and infrastructure. If these suppliers
fail to perform or we are unable to procure or experience significant delays with respect to needed products, materials or services,
our financial position, results of operations and/or cash flows could be materially adversely affected.
We
are dependent on numerous suppliers for various parts, materials, test services, facility operations and infrastructure who may, in turn,
be affected by factors such as raw material availability, skilled personnel shortages, pandemics, major weather events or natural disasters
and other impacts that affect their ability to provide the goods and services we require. Disruptions or performance problems caused
by our suppliers or failure to meet regulatory or contractual requirements, have had, and may continue to have, various adverse impacts
on the Company, including our ability to meet our commitments to customers. The inability of our suppliers to perform adequately has
resulted in and could in the future result in the need for us to transition to alternate suppliers if available, which could result in
significant incremental cost and delay or the need for us to provide other resources to support our existing suppliers. The Company is
reliant on suppliers who are space-qualified, limiting the ability to procure certain key materials, such as circuit boards, from other
vendors. When these key suppliers experience quality issues, their products may have to be rejected, causing delays in our ability to
complete projects on schedule and at projected costs. The time and cost associated with resolution of these issues may impact our financial
performance. Consolidation of the industry can result in elimination of suppliers or discontinuation of certain product lines upon which
we are reliant, necessitating lifetime buys of components or the need to redesign electronics to incorporate different components, having
a negative effect on our financial position, results of operations and/or cash flows. Furthermore, latent supply chain quality issues
may affect our product performance and reliability, which may damage our reputation and impact future business.
The
success of our business and financial performance is dependent on our ability to identify, attract, train and retain a highly skilled
workforce.
We
rely on very unique skill sets in our employee population. Our average employee tenure is approximately 11 years and the median age is
approximately 53. Our products rely on very experienced engineers, physicists and manufacturing personnel who are trained in-house and
who acquire competence only after a lengthy period of time. Given the median age of our average employee, we anticipate that a number
of our key personnel will retire in the coming years. If we are unable to attract, train and retain competent and skilled replacement
employees, our ability to design, develop and manufacture our products will be adversely affected. Furthermore, our operating performance
is also dependent upon personnel who hold security clearances and receive substantial training to work on certain programs or tasks.
If we experience unanticipated attrition with respect to these employees, it will be difficult for us to replace them on a timely basis.
Adverse
changes in global economic or geopolitical conditions may adversely affect business operations and financial condition.
Global
economic and geopolitical conditions may adversely affect our business operations and financial condition. Turmoil in world financial
markets may impact our supply chain resulting in unavailability of key components and materials, increasing costs due to delays, need
to redesign certain electronics in order to mitigate shortages or schedule impacts and increasing costs to establish alternate qualified
suppliers. These impacts may adversely affect our business due to customer cancellations, reduced demand for our products and increased
costs, which could impact our financial condition. We are also subject to inflation and recessionary pressures. The current inflationary
environment has and may continue to increase our cost of labor as well as our other operating costs. Likewise, deteriorating economic
conditions could reduce the demand for our products, which could adversely affect our business operations and financial condition.
We
face various risks related to health epidemics, pandemics and similar outbreaks, which may have material adverse effects on our business,
financial position, results of operations and/or cash flows.
Health
epidemics, pandemics and similar outbreaks create substantial risk to the Company. Employees work in close proximity to one another.
Therefore, if an employee is infected with a communicable disease or suspected of being infected, other employees he or she has come
in contact with may also be infected, with a cascading effect on the workforce. In addition to the time off to recover, there is a need
to clean and disinfect the areas where the employee was working and had frequented in the facility. The nature of the Company’s
business requires mostly “hands-on” activities related to design, manufacturing and testing. Therefore, absenteeism resulting
from infectious diseases and cleaning procedures to disinfect various areas of our facilities can have a significant impact on a contract’s
schedule, with a corresponding impact to costs. The Company is not able to predict possible future health epidemics, pandemics, or similar
outbreaks, but if they manifest, they could have significant adverse effects on our business, financial position, results of operations
and/or cash flows.
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Our
business could be adversely impacted by various external disruptions.
A
natural disaster, terrorism, insider threat, workplace violence, civil unrest, damaging weather, fire, act of war, or similar acts or
events could limit our access to our facilities or cause interruption in the supply of electricity, natural gas, or water or preclude
delivery of various supplies or limit the movement of our workforce, which may have a significant adverse impact to our operations and
financial performance. The nature of our business requires mostly “hands-on” activities at our facilities to design and manufacture
our products. Additionally, our products undergo lengthy testing, and interruption of these tests for any reason can cause damage to
the product and/or necessitate the need to repeat test cycles, with adverse cost and schedule impacts. Catastrophic effects that result
in intrusion of damaging water or other contaminants may cause damage to sensitive capital equipment, inventory or facilities that could
be material. Our ability to recover from these catastrophes may be limited. As a result, such disruptions could adversely impact our
financial position, results of operations and/or cash flows.
Noncompliance
with any of the covenants in the Company’s $10 million senior secured revolving credit facility (the “Credit Agreement”),
which matures on June 12, 2029, could result in any debt outstanding thereunder becoming due, which could have a material adverse effect
on its financial position, operations and liquidity.
The
Credit Agreement contains customary restrictive covenants and financial covenants, including those related to total leverage and minimum
fixed charge coverage, that, if violated, could restrict the Company’s operational and financial flexibility. Failure to comply
with these covenants could result in an event of default. If any such event of default is not cured or waived, the lender could elect
to declare any outstanding debt under the Credit Agreement at such time to be due and payable and could cease making further loans and
institute foreclosure proceedings against the Company’s assets, all of which could have a material adverse effect on the Company’s
financial position, operations and liquidity.
Risks
Related to Legal, Regulatory and Compliance Matters
Our
failure to comply with laws, regulations and/or terms we are subject to could adversely affect our business.
We operate in a highly regulated
industry and are routinely audited and reviewed by the U.S. Government and its agencies. These agencies review performance under our contracts,
our cost structure and accounting, and our compliance with applicable laws, regulations, terms and standards, as well as the adequacy
of our systems in meeting government requirements. If an audit uncovers improper or illegal activities, we would be subject to possible
civil and criminal penalties, sanctions, forfeiture of profits or suspension or debarment. Most of our contracts are subject to Federal
Acquisition Regulations (FARs) or Defense Federal Acquisition Regulation Supplement (DFARS). Violation of any of these regulations can
result in significant consequences, including fines, debarments or other punitive measures by the U.S. Government. Additionally, the Company
has defense department security clearance that is required for performance on several contracts. Failure to maintain compliant security
procedures may result in suspension of our security clearance and inability to perform on current contracts, as well as limit our ability
to be awarded future contracts. The Company is also subject to export control requirements, anti-boycott regulations and Office of Foreign
Assets Control (OFAC) sanctions against business dealings with certain persons and entities, including its investment in Morion, Inc.,
a less than wholly-owned subsidiary of state-owned Russian bank Gazprombank. For example, the U.S. Ukraine-related sanctions regime has
since 2014 included a list of sectoral sanctions identifications (“SSI”) pursuant to Executive Order 13662, which prohibits
certain transactions, including certain extensions of credit, with an entity designated as an SSI or certain affiliates of an entity designated
as an SSI. On July 16, 2014, after the Company’s investment in Morion, Gazprombank was designated as an SSI. As previously disclosed,
in light of Morion’s relationship with Gazprombank, in 2020, the Company evaluated, with the assistance of external legal counsel,
certain sales to Morion and the timing of payments by Morion to the Company in connection with those sales to determine whether payments
by Morion may have inadvertently constituted extensions of credit in violation of Directive 1 under Executive Order 13662. The Company
determined that certain payments by Morion – the majority of which occurred more than five years ago – were not timely. Following
the evaluation, on May 7, 2020, the Company voluntarily disclosed its findings to OFAC. The Company’s voluntary disclosure to OFAC
related solely to delays in collection of accounts receivable that exceeded then-applicable payment windows set forth in sanctions regulations
and did not relate to any other type of payment or transaction. On February 17, 2021, the Company received a Cautionary Letter from OFAC
indicating that OFAC has completed its review of the matter. According to OFAC, the Cautionary Letter was issued instead of pursuing a
civil monetary penalty or taking other enforcement action. On October 30, 2024, OFAC designated Morion as a Specially Designated National,
resulting in the blocking of all Morion property and property interests and the termination of all commercial relationships between the
Company and Morion. Although the Company’s prior voluntary disclosure to OFAC discussed above did not lead to any civil monetary
penalty or other enforcement action and although the Company has terminated all commercial relationships with Morion following Morion’s
designation as a Specially Designated National, the Company continues to hold a minority equity interest in Morion, and there can be no
assurance that the Company’s historical or continuing relationship with Morion will not result in additional regulatory scrutiny
or liability. Any future violation of any of the requirements, governmental regulations discussed above, including OFAC sanctions, or
other similar laws, regulations, terms or standards could have a material adverse effect on our financial position, results of operations
and/or cash flows.
We
are subject to various investigations, claims, disputes, enforcement actions, litigation, and other legal proceedings that could ultimately
be resolved against us.
We have and may in the future
become subject to investigations, claims, disputes, enforcement actions and administrative, civil or criminal litigation, arbitration
or other legal proceedings across a broad array of matters, including government contracts, commercial transactions, false claims, false
statements, compliance with government orders, mischarging, contract performance, fraud, procurement integrity, securities laws and requirements,
products liability, warranties, hazardous materials, personal injury claims, environmental, stockholder derivative actions, acquisitions
and divestitures, intellectual property, tax, corporate law and obligations, employment, export/import, anti-corruption, debt and equity,
labor, health and safety, accidents, and employee benefits and plans, including plan administration, improper payments and issues related
to privacy and security (cyber and physical). These matters can divert financial and management resources; result in administrative, civil
or criminal fines, penalties or other sanctions (including judgments, convictions, consent or other voluntary decrees or agreements),
compensatory, treble or other damages, non-monetary relief or other liabilities; and otherwise harm our business and our ability to obtain
and retain new business. Certain allegations against us can lead to suspension or debarment from government contracts. A suspension or
debarment could have a material adverse effect on the Company because of our reliance on U.S. Government contracts. Additionally, an investigation,
claim, dispute, enforcement action or litigation, even if pending or not ultimately substantiated or if fully indemnified or insured,
can also negatively impact our reputation among our customers, and make it substantially more difficult for us to compete effectively
for business in the future. Accordingly, investigations, claims, disputes, enforcement actions, litigation or other legal proceedings
could have a material adverse effect on our financial position, results of operations and/or cash flows.
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Risks
Related to Information Technology and Intellectual Property
Our
business could be adversely impacted by significant cybersecurity attacks.
As
a U.S. Government defense industry contractor, the Company has experienced cybersecurity attacks in the past and may be subjected to
significant cybersecurity attacks in the future in an effort to, among other things, steal intellectual property, disrupt operations,
embed ransomware or initiate insider attacks. Although we implement various measures and controls to monitor and mitigate risks associated
with these threats and to increase the cyber resiliency of our infrastructure and products, there can be no assurance that these processes
will be sufficient. Our inability to defend effectively against cyberattacks may result in disruption of operations, loss of significant
intellectual property, compromise of employee’s personal information or violation of government contractor requirements for information
security. These could result in reputational damage, fines, litigation, operational impacts or significant costs for mitigation and/or
recovery, all with adverse consequences to our financial position, results of operations and/or cash flows.
Claims
by third parties that our products infringe their intellectual property could result in costly disputes and/or require us to develop
alternate designs.
We
may become subject to claims for infringement of intellectual property, which could result in litigation costs or require us to incur
costs for developing alternate designs that may require extensive testing and qualification to meet contract obligations. This could
result in adverse consequences to our financial position, results of operations and/or cash flows.
Risks
Related to Our Common Stock
Our
stock price may continue to be volatile.
The trading price of our common
stock has been, and may continue to be volatile and subject to wide fluctuations in response to various factors, many of which we cannot
control. As a result, investors in our common stock may experience substantial losses. This volatility may or may not be related to our
operating performance. Our operating results, from time to time, may be below the expectations of public market analysts and investors,
which could have a material adverse effect on the market price of our common stock.
If
significant existing stockholders sell large numbers of shares of our common stock, our common stock price could decline.
Approximately 38.5% of our
outstanding common stock is held by 5 individuals or entities. The market price of our common stock could decline if a large number of
our shares of outstanding common stock are sold in the public market by our existing stockholders or as a result of the perception that
such sales could occur.
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