{"url_path":"/sec/feim/10-k/2026/item-1a","section_key":"item-1a","section_title":"Item 1A Risk Factors","topic":"sec","document":{"doc_type":"10-K","doc_date":"2026-07-17","source_url":"https://www.sec.gov/Archives/edgar/data/39020/0001185185-26-002997-index.html","accession_number":"0001185185-26-002997","cik":"0000039020","ticker":"FEIM","issuer_name":"FREQUENCY ELECTRONICS INC","edgar_url":"https://www.sec.gov/Archives/edgar/data/39020/0001185185-26-002997-index.html","primary_entity_key":"0000039020","primary_entity_name":"FREQUENCY ELECTRONICS INC"},"word_count":4198,"has_tables":true,"body_markdown":"Item\n1A. Risk Factors\n\n \n\n**Risks\nRelated to Business Operations and Our Industry**\n\n \n\n**We\nrely heavily on U.S. Government programs for a substantial portion of our business. Accordingly, changes in U.S. Government priorities\nor delays or reductions in spending by the U.S. Government on such programs could have a material adverse effect on our business, financial\nposition, results of operations and/or cash flows.**\n\n \n\nEither\nas a prime contractor or as a subcontractor, we rely heavily on U.S. Government programs, from which we derived approximately 91% and\n94% of our sales in fiscal year 2026 and fiscal year 2025, respectively. These U.S Government programs may be only partially or incrementally\nfunded and are subject to potential termination. These programs may also be subject to funding reductions and/or delays due to changes\nin government priorities or other factors. Whether direct contracts with the U.S. Government or contracts with prime contractors to the\nU.S. Government, our contracts typically are funded at a level less than the full contract value and require periodic incremental additional\nfunding in order to continue. Should circumstances change regarding funding and sufficient funding become unavailable, contracts may\nbe terminated, delayed significantly or put on stop work status.\n\n \n\nU.S.\nGovernment contracts are subject to Congressional funding, which may be unavailable due to changes in priorities or subject to continuing\nresolution, which may result in funding reductions, eliminations or other effects that could impact our business. Furthermore, budget\nuncertainty, the risk of future budget cuts, the potential for U.S. Government shutdowns, and the federal debt ceiling could also adversely\naffect our industry and the funding for our current and future contracts. If appropriations are delayed or a government shutdown was\nto occur and was to continue for an extended period of time, we could be at risk of program or contract cancellations and other disruptions\nand nonpayment. Finally, shifting funding priorities or federal budget changes, could also result in reductions in overall spending on\nour contracts and projects, which could adversely impact our business, financial condition, results of operations and/or cash flows.\nChanges in funding priorities could reduce opportunities in existing programs and in future programs where we intend to compete. While\nwe would expect to compete and be well positioned as the incumbent on existing programs, we may not be successful and, even if we are\nsuccessful, the replacement programs may be funded at lower levels, which could adversely affect our business, financial position, results\nof operations and/or cash flows.\n\n \n\n**We\ndepend heavily on a small number of larger customers for a substantial portion of our business. The loss of one or more of our largest\ncustomers or programs could have a material adverse effect on our business, financial position, results of operations and/or cash flows.**\n\n \n\nAs\na subcontractor, the Company is reliant on a few large customers that generally hold the ultimate contract with the U.S. Government.\nDuring fiscal year 2026, Lockheed Martin, L3Harris, and Boeing each accounted for more than 10% of the Company’s consolidated revenues.\nThese customers typically incorporate our products into larger programs. If these customers encounter technical, financial or other issues\nunrelated to our products that affect the larger program’s operations, the related program may be terminated or require expensive,\nunanticipated revisions. These issues, although unrelated to our products, could adversely impact us if our customers’ contracts\nwith the U.S. Government become subject to re-competition or are ultimately cancelled. Additionally, our larger customers are sophisticated\ncorporations with large research and development staffs and budgets. If one or more sought to design and manufacture replacements for\nour products, they could potentially discontinue their need for our products. Alternatively, our larger customers could look to replace\nour 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\ncustomers or programs could adversely affect our business, financial position, results of operations and/or cash flows.\n\n \n\n**We\nuse estimates when accounting for contracts. Changes in estimated contract revenues and/or changes in costs can affect our profitability\nand our overall financial position.**\n\n \n\nContract\naccounting requires significant judgment by the Company’s management with respect to estimating contract revenues and costs and\nmaking assumptions for possible schedule and technical issues. These costs include planned costs for all phases of the contract and,\nif needed, costs for any technical issues that arise. Due to the nature and complexity of many of our contracts, the estimation of total\nrevenues and costs at completion is subject to many variables and often difficult to predict accurately. As a result, it has, and could\nin the future, be possible that the Company’s estimates when accounting for contracts may prove to be materially incorrect.\n\n \n\n6\n\n[Table of Contents](#TableOfContents)\n\n \n\nThe\nCompany’s operating income can be adversely affected when estimated contract costs increase. Reasons for increased estimated contract\ncosts include: design issues; changes in estimates of the nature and complexity of the work, including technical or quality issues or\nrequests for additional work; production challenges, including those resulting from the timeliness of customer funding and the unavailability\nor reduced productivity of qualified labor; the availability, performance, and quality of significant subcontractors; supplier issues,\nincluding the costs, timeliness and availability of materials and components; changes in laws or regulations; actions necessary for long-term\ncustomer satisfaction; and natural disasters or other matters. We have filed, and may file, requests for equitable adjustment or claims\nto seek recovery in whole or in part for our increased costs and aim to protect against these risks through contract terms and conditions\nwhen practical, but the prime contractor or the U.S. Government may disagree with our requests or may not have funding to cover them.\n\n \n\nDue\nto their nature, fixed price contracts inherently tend to have more financial risk than cost-type contracts, including as a result of\ninflationary pressures, labor shortages, and increased labor rates. In fiscal year 2026, 95% of our sales were derived from fixed-price\ncontracts. While the Company’s management uses its best judgment to estimate costs associated with fixed-price contracts, future\nevents may require adjustments, which could ultimately adversely affect the Company’s operating income.\n\n \n\nUnder\ncost-type contracts, allowable costs incurred by the contractor are generally subject to reimbursement plus a fee. These cost-type programs\nmay have award or incentive fees that are uncertain and may be earned over extended periods or towards the end of the contract. In these\ncases, the associated financial risks are primarily in recognizing profit, which ultimately may not be earned, or program cancellation\nif cost, schedule, or technical performance issues arise.\n\n \n\nChanges\nin underlying assumptions, circumstances or estimates, and the failure to prevail on related claims for equitable adjustments could have\na material adverse effect on our business, financial position, results of operations and/or cash flows.\n\n \n\n**We\nface substantial competition in our industry, and if we fail to win future business or experience undue pricing pressures as a result\nof such competition, our business, financial position, results of operations and/or cash flows could be adversely affected.**\n\n \n\nWe\noperate in a highly competitive industry focused on very high-performance products. Many of our competitors are larger, have greater\nfinancial resources and have larger R&D and marketing staffs. While we also maintain a robust internal R&D program that is intended\nto maintain our technical edge, the Company is limited in its resources and ultimately may not be able to successfully compete. Technology\nis advancing rapidly, and if we are unable to respond effectively to competition, we may lose existing customers, fail to win future\nbusiness or experience undue pricing pressures that could affect our financial performance. Certain of our current technologies may become\nsubject to significant future advancements, which may make our products obsolete or non-competitive. Competitors may be able to develop\nnew manufacturing technologies that afford them cost and/or schedule advantages compared to our products. Customers may elect a less\nexpensive product, even where it offers lower performance, compared to our current products. Specifically, the emergence of numerous\nLEO commercial satellite systems that have significantly lower requirements for life in orbit may result in new products based on commercial\nparts and processes not required for the high performance and/or longer lived geo-synchronous orbit satellites for which the Company\nhas typically developed products. This may result in a migration to less capable, but less expensive products compared to what the Company\nhas traditionally produced. This may result in reduced market share, lower revenues and adversely impact our business operations and\nfinancial conditions. Additionally, competitors may have the benefit of other contracts that enable them to produce in volume with a\nconcomitant cost advantage that affords them a price advantage. Many of our customers have in-house capability to develop products comparable\nto ours and may opt to do so. Accordingly, if we are unable to continue to compete successfully against our current or future competitors,\nwe may experience declines in future revenues and market share, which could have a material adverse effect on our business, financial\nposition, results of operations and/or cash flows.\n\n \n\n**Our\nproducts, which are often incorporated into larger systems, are technologically complex and require state-of-the-art technology and manufacturing\nexpertise. Any defect in the design, materials or workmanship with respect to our product could result in system failure.**\n\n \n\nOur\nproducts are technologically complex and require state-of-the-art technology and manufacturing expertise. If a defect in design, materials\nor workmanship is not identified prior to delivery, the defect can result in product failure and potentially the loss of mission capability\nfor the systems into which our products are integrated. All satellites cannot be recovered from orbit to repair failed sub-systems, therefore\nfailure of a Company product incorporated into a satellite may result in the complete loss of the satellite with a significant impact\nto the Company’s reputation and future business prospects. Penalties and possible litigation may result from these types of problems,\nwith potential significant impact to our business, financial position, results of operations and/or cash flows.\n\n \n\n7\n\n[Table of Contents](#TableOfContents)\n\n \n\n**We\nare dependent on numerous suppliers for various parts, materials, test services, facility operations and infrastructure. If these suppliers\nfail to perform or we are unable to procure or experience significant delays with respect to needed products, materials or services,\nour financial position, results of operations and/or cash flows could be materially adversely affected.**\n\n \n\nWe\nare dependent on numerous suppliers for various parts, materials, test services, facility operations and infrastructure who may, in turn,\nbe affected by factors such as raw material availability, skilled personnel shortages, pandemics, major weather events or natural disasters\nand other impacts that affect their ability to provide the goods and services we require. Disruptions or performance problems caused\nby our suppliers or failure to meet regulatory or contractual requirements, have had, and may continue to have, various adverse impacts\non the Company, including our ability to meet our commitments to customers. The inability of our suppliers to perform adequately has\nresulted in and could in the future result in the need for us to transition to alternate suppliers if available, which could result in\nsignificant incremental cost and delay or the need for us to provide other resources to support our existing suppliers. The Company is\nreliant on suppliers who are space-qualified, limiting the ability to procure certain key materials, such as circuit boards, from other\nvendors. When these key suppliers experience quality issues, their products may have to be rejected, causing delays in our ability to\ncomplete projects on schedule and at projected costs. The time and cost associated with resolution of these issues may impact our financial\nperformance. Consolidation of the industry can result in elimination of suppliers or discontinuation of certain product lines upon which\nwe are reliant, necessitating lifetime buys of components or the need to redesign electronics to incorporate different components, having\na negative effect on our financial position, results of operations and/or cash flows. Furthermore, latent supply chain quality issues\nmay affect our product performance and reliability, which may damage our reputation and impact future business.\n\n \n\n**The\nsuccess of our business and financial performance is dependent on our ability to identify, attract, train and retain a highly skilled\nworkforce.**\n\n \n\nWe\nrely on very unique skill sets in our employee population. Our average employee tenure is approximately 11 years and the median age is\napproximately 53. Our products rely on very experienced engineers, physicists and manufacturing personnel who are trained in-house and\nwho acquire competence only after a lengthy period of time. Given the median age of our average employee, we anticipate that a number\nof our key personnel will retire in the coming years. If we are unable to attract, train and retain competent and skilled replacement\nemployees, our ability to design, develop and manufacture our products will be adversely affected. Furthermore, our operating performance\nis also dependent upon personnel who hold security clearances and receive substantial training to work on certain programs or tasks.\nIf we experience unanticipated attrition with respect to these employees, it will be difficult for us to replace them on a timely basis.\n\n \n\n**Adverse\nchanges in global economic or geopolitical conditions may adversely affect business operations and financial condition.**\n\n \n\nGlobal\neconomic and geopolitical conditions may adversely affect our business operations and financial condition. Turmoil in world financial\nmarkets may impact our supply chain resulting in unavailability of key components and materials, increasing costs due to delays, need\nto redesign certain electronics in order to mitigate shortages or schedule impacts and increasing costs to establish alternate qualified\nsuppliers. These impacts may adversely affect our business due to customer cancellations, reduced demand for our products and increased\ncosts, which could impact our financial condition. We are also subject to inflation and recessionary pressures. The current inflationary\nenvironment has and may continue to increase our cost of labor as well as our other operating costs. Likewise, deteriorating economic\nconditions could reduce the demand for our products, which could adversely affect our business operations and financial condition.\n\n \n\n**We\nface various risks related to health epidemics, pandemics and similar outbreaks, which may have material adverse effects on our business,\nfinancial position, results of operations and/or cash flows.**\n\n \n\nHealth\nepidemics, pandemics and similar outbreaks create substantial risk to the Company. Employees work in close proximity to one another.\nTherefore, if an employee is infected with a communicable disease or suspected of being infected, other employees he or she has come\nin 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\nto clean and disinfect the areas where the employee was working and had frequented in the facility. The nature of the Company’s\nbusiness requires mostly “hands-on” activities related to design, manufacturing and testing. Therefore, absenteeism resulting\nfrom infectious diseases and cleaning procedures to disinfect various areas of our facilities can have a significant impact on a contract’s\nschedule, with a corresponding impact to costs. The Company is not able to predict possible future health epidemics, pandemics, or similar\noutbreaks, but if they manifest, they could have significant adverse effects on our business, financial position, results of operations\nand/or cash flows.\n\n \n\n8\n\n[Table of Contents](#TableOfContents)\n\n \n\n**Our\nbusiness could be adversely impacted by various external disruptions.**\n\n \n\nA\nnatural disaster, terrorism, insider threat, workplace violence, civil unrest, damaging weather, fire, act of war, or similar acts or\nevents could limit our access to our facilities or cause interruption in the supply of electricity, natural gas, or water or preclude\ndelivery of various supplies or limit the movement of our workforce, which may have a significant adverse impact to our operations and\nfinancial performance. The nature of our business requires mostly “hands-on” activities at our facilities to design and manufacture\nour products. Additionally, our products undergo lengthy testing, and interruption of these tests for any reason can cause damage to\nthe product and/or necessitate the need to repeat test cycles, with adverse cost and schedule impacts. Catastrophic effects that result\nin intrusion of damaging water or other contaminants may cause damage to sensitive capital equipment, inventory or facilities that could\nbe material. Our ability to recover from these catastrophes may be limited. As a result, such disruptions could adversely impact our\nfinancial position, results of operations and/or cash flows.\n\n \n\n**Noncompliance\nwith any of the covenants in the Company’s $10 million senior secured revolving credit facility (the “Credit Agreement”),\nwhich matures on June 12, 2029, could result in any debt outstanding thereunder becoming due, which could have a material adverse effect\non its financial position, operations and liquidity.**\n\n** **\n\nThe\nCredit Agreement contains customary restrictive covenants and financial covenants, including those related to total leverage and minimum\nfixed charge coverage, that, if violated, could restrict the Company’s operational and financial flexibility. Failure to comply\nwith these covenants could result in an event of default. If any such event of default is not cured or waived, the lender could elect\nto declare any outstanding debt under the Credit Agreement at such time to be due and payable and could cease making further loans and\ninstitute foreclosure proceedings against the Company’s assets, all of which could have a material adverse effect on the Company’s\nfinancial position, operations and liquidity.\n\n \n\n**Risks\nRelated to Legal, Regulatory and Compliance Matters**\n\n \n\n**Our\nfailure to comply with laws, regulations and/or terms we are subject to could adversely affect our business.**\n\n \n\nWe operate in a highly regulated\nindustry and are routinely audited and reviewed by the U.S. Government and its agencies. These agencies review performance under our contracts,\nour cost structure and accounting, and our compliance with applicable laws, regulations, terms and standards, as well as the adequacy\nof our systems in meeting government requirements. If an audit uncovers improper or illegal activities, we would be subject to possible\ncivil and criminal penalties, sanctions, forfeiture of profits or suspension or debarment. Most of our contracts are subject to Federal\nAcquisition Regulations (FARs) or Defense Federal Acquisition Regulation Supplement (DFARS). Violation of any of these regulations can\nresult in significant consequences, including fines, debarments or other punitive measures by the U.S. Government. Additionally, the Company\nhas defense department security clearance that is required for performance on several contracts. Failure to maintain compliant security\nprocedures may result in suspension of our security clearance and inability to perform on current contracts, as well as limit our ability\nto be awarded future contracts. The Company is also subject to export control requirements, anti-boycott regulations and Office of Foreign\nAssets Control (OFAC) sanctions against business dealings with certain persons and entities, including its investment in Morion, Inc.,\na less than wholly-owned subsidiary of state-owned Russian bank Gazprombank. For example, the U.S. Ukraine-related sanctions regime has\nsince 2014 included a list of sectoral sanctions identifications (“SSI”) pursuant to Executive Order 13662, which prohibits\ncertain transactions, including certain extensions of credit, with an entity designated as an SSI or certain affiliates of an entity designated\nas an SSI. On July 16, 2014, after the Company’s investment in Morion, Gazprombank was designated as an SSI. As previously disclosed,\nin light of Morion’s relationship with Gazprombank, in 2020, the Company evaluated, with the assistance of external legal counsel,\ncertain sales to Morion and the timing of payments by Morion to the Company in connection with those sales to determine whether payments\nby Morion may have inadvertently constituted extensions of credit in violation of Directive 1 under Executive Order 13662. The Company\ndetermined that certain payments by Morion – the majority of which occurred more than five years ago – were not timely. Following\nthe evaluation, on May 7, 2020, the Company voluntarily disclosed its findings to OFAC. The Company’s voluntary disclosure to OFAC\nrelated solely to delays in collection of accounts receivable that exceeded then-applicable payment windows set forth in sanctions regulations\nand did not relate to any other type of payment or transaction. On February 17, 2021, the Company received a Cautionary Letter from OFAC\nindicating that OFAC has completed its review of the matter. According to OFAC, the Cautionary Letter was issued instead of pursuing a\ncivil monetary penalty or taking other enforcement action. On October 30, 2024, OFAC designated Morion as a Specially Designated National,\nresulting in the blocking of all Morion property and property interests and the termination of all commercial relationships between the\nCompany and Morion. Although the Company’s prior voluntary disclosure to OFAC discussed above did not lead to any civil monetary\npenalty or other enforcement action and although the Company has terminated all commercial relationships with Morion following Morion’s\ndesignation as a Specially Designated National, the Company continues to hold a minority equity interest in Morion, and there can be no\nassurance that the Company’s historical or continuing relationship with Morion will not result in additional regulatory scrutiny\nor liability. Any future violation of any of the requirements, governmental regulations discussed above, including OFAC sanctions, or\nother similar laws, regulations, terms or standards could have a material adverse effect on our financial position, results of operations\nand/or cash flows.\n\n \n\n**We\nare subject to various investigations, claims, disputes, enforcement actions, litigation, and other legal proceedings that could ultimately\nbe resolved against us.**\n\n \n\nWe have and may in the future\nbecome subject to investigations, claims, disputes, enforcement actions and administrative, civil or criminal litigation, arbitration\nor other legal proceedings across a broad array of matters, including government contracts, commercial transactions, false claims, false\nstatements, compliance with government orders, mischarging, contract performance, fraud, procurement integrity, securities laws and requirements,\nproducts liability, warranties, hazardous materials, personal injury claims, environmental, stockholder derivative actions, acquisitions\nand divestitures, intellectual property, tax, corporate law and obligations, employment, export/import, anti-corruption, debt and equity,\nlabor, health and safety, accidents, and employee benefits and plans, including plan administration, improper payments and issues related\nto privacy and security (cyber and physical). These matters can divert financial and management resources; result in administrative, civil\nor criminal fines, penalties or other sanctions (including judgments, convictions, consent or other voluntary decrees or agreements),\ncompensatory, treble or other damages, non-monetary relief or other liabilities; and otherwise harm our business and our ability to obtain\nand retain new business. Certain allegations against us can lead to suspension or debarment from government contracts. A suspension or\ndebarment could have a material adverse effect on the Company because of our reliance on U.S. Government contracts. Additionally, an investigation,\nclaim, dispute, enforcement action or litigation, even if pending or not ultimately substantiated or if fully indemnified or insured,\ncan also negatively impact our reputation among our customers, and make it substantially more difficult for us to compete effectively\nfor business in the future. Accordingly, investigations, claims, disputes, enforcement actions, litigation or other legal proceedings\ncould have a material adverse effect on our financial position, results of operations and/or cash flows.\n\n \n\n9\n\n[Table of Contents](#TableOfContents)\n\n \n\n**Risks\nRelated to Information Technology and Intellectual Property**\n\n \n\n**Our\nbusiness could be adversely impacted by significant cybersecurity attacks.**\n\n \n\nAs\na U.S. Government defense industry contractor, the Company has experienced cybersecurity attacks in the past and may be subjected to\nsignificant cybersecurity attacks in the future in an effort to, among other things, steal intellectual property, disrupt operations,\nembed ransomware or initiate insider attacks. Although we implement various measures and controls to monitor and mitigate risks associated\nwith these threats and to increase the cyber resiliency of our infrastructure and products, there can be no assurance that these processes\nwill be sufficient. Our inability to defend effectively against cyberattacks may result in disruption of operations, loss of significant\nintellectual property, compromise of employee’s personal information or violation of government contractor requirements for information\nsecurity. These could result in reputational damage, fines, litigation, operational impacts or significant costs for mitigation and/or\nrecovery, all with adverse consequences to our financial position, results of operations and/or cash flows.\n\n \n\n**Claims\nby third parties that our products infringe their intellectual property could result in costly disputes and/or require us to develop\nalternate designs.**\n\n \n\nWe\nmay become subject to claims for infringement of intellectual property, which could result in litigation costs or require us to incur\ncosts for developing alternate designs that may require extensive testing and qualification to meet contract obligations. This could\nresult in adverse consequences to our financial position, results of operations and/or cash flows.\n\n \n\n**Risks\nRelated to Our Common Stock**\n\n \n\n**Our\nstock price may continue to be volatile.**\n\n \n\nThe trading price of our common\nstock has been, and may continue to be volatile and subject to wide fluctuations in response to various factors, many of which we cannot\ncontrol. As a result, investors in our common stock may experience substantial losses. This volatility may or may not be related to our\noperating performance. Our operating results, from time to time, may be below the expectations of public market analysts and investors,\nwhich could have a material adverse effect on the market price of our common stock.\n\n \n\n**If\nsignificant existing stockholders sell large numbers of shares of our common stock, our common stock price could decline.**\n\n \n\nApproximately 38.5% of our\noutstanding common stock is held by 5 individuals or entities. The market price of our common stock could decline if a large number of\nour shares of outstanding common stock are sold in the public market by our existing stockholders or as a result of the perception that\nsuch sales could occur.\n\n \n\n10\n\n[Table of Contents](#TableOfContents)"}