What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-11-12 compared with 2024-05-14 · 185 added, 174 removed, 291 unchanged (55% of the section changed)

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This Quarterly Report contains forward-looking statements in addition to historical information.

Forward-looking statements include, but are not limited to those including such words as aims, anticipates, believes, continues, could, estimates, expects, hopes, intends, plans, predicts, projects, targets, or will, similar verbs, or nouns corresponding to such verbs, which may be forward looking.

Forward-looking statements also include other passages that are relevant to expected future events, performances, and actions or that can only be fully evaluated by events that will occur in the future.

Forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements.

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The Company provides its customers full engineering services, materials management, worldwide manufacturing facilities, assembly services, in-house testing, and worldwide distribution.

Its customers include some of the world’s leading original equipment manufacturers.

Our customers include some of the world’s leading original equipment manufacturers.

Our combined capabilities and vertical integration are proving to be a desirable offering to our expanded customer base.

Our international production capability provides our customers with benefits of improved supply-chain management, reduced inventories, lower transportation costs, and reduced product fulfillment time.

Our domestic and international production capability provides our customers with benefits of improved supply-chain management, reduced inventories, lower transportation costs, and reduced product fulfillment time.

We continue to make investments in all of our operating facilities to give us the production capacity, capabilities and logistical advantages to continue to win new business.

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Executive Summary

For the third quarter of fiscal year 2024, the Company reported total revenue of $140.5 million, down 14.6 percent from $164.6 million in the same period of fiscal year 2023 .

The decrease in revenue for the third quarter of fiscal year 2024 is partially a result of Key Tronic’s facilities in Mississippi and Arkansas being offline for approximately two weeks due to severe winter weather events.

We estimate that this shutdown approximated $5 million in lost net sales.

Additionally, the results are also partially due to softer demand from Mexico-based programs as previously reported throughout fiscal year 2024.

The Company expects sales to Mexico-based production customers to recover in future quarters due to recently won programs, and total revenue for the nine-months ending March 30, 2024 was $433.7 million, up 1.9% from $425.5 million in the same period of fiscal year 2023.

This increase is due to the successful ramp of new customer programs, increased production at the Company’s U.S.-based and Vietnam-based facilities, and the sale of approximately $8.1 million of inventory from a discontinued program, and is constrained by the factors described for the third quarter decrease.

As new customer programs ramp, the concentration of our top three customers’ net sales decreased to 28.5 percent of total sales in the third quarter of fiscal year 2024 from 34.0 percent in the same period of the prior fiscal year.

We expect that concentration to our top three customers will decrease during the fiscal year.

During the first quarter of fiscal year 2025, we won new programs involving manufacturing production equipment, vehicle lighting, and commercial pest control.

We reported net sales of $131.6 million, down 12.4 percent from $150.1 million in the same period of fiscal year 2024 .

Net sales in the first quarter was adversely impacted by design and qualification delays of three programs at our U.S.

production sites, of which two of these have subsequently been resolved and shipments have resumed in the second quarter.

However, production revenue increased in the first quarter sequentially in our Mexico facility.

Gross margin improved to 10.1 percent in the first quarter of fiscal year 2025, compared to 7.2 percent in the same period of the prior fiscal year.

The increase in gross margin is primarily due to benefits from recent restructuring and a weakening of the Mexican Peso.

The concentration of our top three customers’ net sales increased to 37.5 percent of total sales in the first quarter of fiscal year 2025 from 29.9 percent in the same period of the prior fiscal year.

As new customer programs ramp, we expect that concentration to our top three customers will decrease.

Net sales to our largest customers may vary significantly from quarter to quarter depending on the size and timing of customer program commencement, forecasts, delays, and design modifications.

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In addition, our capacity and core competencies for printed circuit board assemblies, precision molding, sheet metal fabrication, tool making, assembly, and engineering can be applied to a wide variety of products.

Gross profit as a percent of net sales was 5.8 percent for the third quarter of fiscal year 2024 as compared to 8.7 percent for the same quarter of the prior fiscal year.

Operating income/(loss) as a percentage of net sales similarly decreased over the same period from 3.1 percent to (0.4) percent.

During the third quarter of fiscal year 2024, our resu lts were adversely impacted by incurred severance costs of approximately $3.7 million, the severe winter weather events at the Mississippi and Arkansas facilities, and continued impacts of the strengthening of the Mexican Peso.

The net loss for the third quarter of fiscal year 2024 was $2.2 million or $0.21 per diluted share, as compared to net income of $2.0 million or $0.18 per diluted share for the third quarter of fiscal year 2023.

The year-over-ye ar decrease in earnings was a result of the factors discussed above, primarily the severance expenses associated with the workforce reduction in Mexico.

During the third quarter of fiscal year 2024, we won new programs involving energy management, consumer audio equipment, medical devices, and communication equipment, among various other programs.

Moving into the fourth quarter of fiscal year 2024, while we continue to see a favorable trend of contract manufacturing returning to North America, the strength of the Mexican peso and continued increases in Mexican wages, particularly along the US-Mexico border, have reduced the competitive advantage of Mexico-based manufacturing compared to U.S.-based manufacturin g.

In response to this sustained trend, the Company is restructuring its Juarez facility to focus on higher volume manufacturing, while lower volume products with higher service level requirements will migrate to our other sites, and the Company will begin to realize payroll expense reductions as a result of the severance charges incurred in the third quarter.

Additionally, global logistics problems, the war in Europe, and China-U.S.

geopolitical tensions continue to drive OEMs to examine their traditional outsourcing strategies.

Gross profit as a percent of net sales was 10.1 percent for the first quarter of fiscal year 2025 as compared to 7.2 percent for the same quarter of the prior fiscal year.

Operating income (loss) as a percentage of net sales similarly increased over the same period from 2.2 percent to 3.4 percent in the first quarter of fiscal year 2025.

Net income for the first quarter of fiscal year 2025 was $1.1 million or $0.10 per diluted share, as compared to net income of $0.3 million or $0.03 per diluted share for the first quarter of fiscal year 2024.

The year-over-year increase in earnings was a result of the factors discussed above, primarily operating efficiencies realized along with the weakening of the Mexican Peso.

Moving into the second quarter of fiscal year 2025, while we continue to see a favorable trend of contract manufacturing returning to North America, and continued increases in Mexican wages, particularly along the US-Mexico border, have reduced the competitive advantage of Mexico-based manufacturing compared to U.S.-based manufacturing.

The Company has begun, and will continue to realize payroll expense reductions as a result of the severance charges connected to this restructuring.

Additionally, global logistics problems, the wars in Europe, and China-U.S.

geopolitical tensions may continue to drive OEMs to examine their traditional outsourcing strategies.

We believe these customers increasingly realize they have become overly dependent on their China-based contract manufacturers not only for products, but also for design and logistics services.

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As a result, we see opportunities for continued growth.

In addition, the headwinds from the global supply chain continue to present uncertainty and multiple business challenges but do show some signs of gradually abating, particularly with respect to the recent price stabilization for some commodity componen ts.

At the same time, these price reductions are offset by increasing wages at our North American facilities.

In the fourth quarter of fiscal year 2024, the Company sees the Mexico Peso weakening relative to the U.S.

In the second quarter of fiscal year 2025, the Company sees a continuing of the Mexico Peso weakening relative to the U.S.

dollar, which may translate into improving conditions moving forward.

We maintain a strong balance sheet with a current ratio of 2.8 and a debt-to-equity ratio of 0.98 as of March 30, 2024.

Total cash provided by operating activities as defined on our cash flow statement was $6.1 million for the nine months ended March 30, 2024.

We believe we maintain sufficient liquidity for our expected future operations and had $112.9 million in borrowings under our asset-based revolving credit facility with $7.1 million remaining available and MXN78.0 million in borrowings under our line of credit facility with MXN22.0 million ($1.3 million USD) remaining available as of March 30, 2024.

We maintain a strong balance sheet with a current ratio of 2.6 and a debt-to-equity ratio of 0.9 as of September 28, 2024.

Total cash provided by operating activities as defined on our cash flow statement was $9.9 million for the three months ended September 28, 2024.

We believe we maintain sufficient liquidity for our expected future operations and had $101.5 million in borrowings under our asset-based revolving credit facility with $18.5 million remaining available.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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• Inactive, Obsolete, and Surplus Inventory Valuation

• Allowance for Doubtful Accounts

• Allowance for Credit Losses

• Income Taxes

Please refer to the discussion of critical accounting policies in our most recent Annual Report on Form 10-K for the fiscal year ended July 1, 2023, for further details.

Please refer to the discussion of critical accounting policies in our most recent Annual Report on Form 10-K for the fiscal year ended June 29, 2024, for further details.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 30, 2024 with the Three Months Ended April 1, 2023

Comparison of the Three Months Ended September 28, 2024 with the Three Months Ended September 30, 2023

The financial information and discussion below should be read in conjunction with the Consolidated Financial Statements and Notes.

The following table sets forth certain information regarding the components of our condensed consolidated statements of operations for the three months ended March 30, 2024 as compared to the three months ended April 1, 2023.

The following table sets forth certain information regarding the components of our condensed consolidated statements of operations for the three months ended September 28, 2024 as compared to the three months ended September 30, 2023.

It is provided to assist in assessing differences in our overall performance (in thousands):

Three Months Ended

March 30, 2024 % of

net sales April 1, 2023 % of

September 28, 2024 % of

net sales September 30, 2023 % of

net sales $ change % point

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Income tax provision (benefit) 57 — % (78) (0.1) % 135 0.1 %

Net (loss) income $ (2,221) (1.6) % $ 1,976 1.2 % $ (4,197) (2.8) %

Net sales of $140.5 million for the third quarter of fiscal year 2024 decreased by 14.6 percent as compared to net sales of $164.6 million for the third quarter of fiscal year 2023.

The $24.0 million decrease in net sales from the prior year period was partially due to constraints from the unanticipated lost production capacity for approximately two weeks at the Company’s Mississippi and Arkansas facilities due to severe winter weather events.

We estimate that this shutdown approximated $5 million of lost net sales.

Additionally, the results are due to the softening of demand from Mexico based programs which caused decreases in backlog early in fiscal year 2024.

Gross profit as a percentage of net sales for the three months ended March 30, 2024 was 5.8 percent compared to 8.7 percent for the three months ended April 1, 2023.

These results were adversely impacted by incurred severance costs of approximately $3.7 million, the severe winter weather events at the Mississippi and Arkansas facilities, and continued impacts of the strengthening Mexican Peso.

Net income $ 1,124 0.9 % $ 335 0.2 % $ 789 0.7 %

Effective income tax rate 4.8 % (30.4) %

Net sales of $131.6 million for the first quarter of fiscal year 2025 decreased by 12.4 percent as compared to net sales of $150.1 million for the first quarter of fiscal year 2024.

The $18.6 million decrease in net sales from the prior year period was partially due to design and qualification delays of three programs at our U.S.

production sites.

Two of these programs have subsequently been resolved and shipments have resumed in the second quarter.

We believe this impacted net sales by approximately $9 million.

Additionally, the results are due to the softening of demand from certain long-standing programs, which caused decreases in backlog throughout fiscal year 2024.

Gross profit as a percentage of net sales for the three months ended September 28, 2024 was 10.1 percent compared to 7.2 percent for the three months ended September 30, 2023.

These results were largely due to benefits from recent restructuring and a weakening of the Mexican Peso.

The level of gross margin is additionally impacted by facility utilization, product mix, timing, severity and steepness of new program ramps, pricing within the electronics industry and material costs, which can fluctuate significantly from quarter to quarter.

Included in gross profit are charges related to reductions in the carrying value of our inventory due to obsolescence.

We recorded an impairment of approximately $78,000 and $100,000 for obsolete inventory during the three months ended March 30, 2024 and April 1, 2023, respectively.

We recorded an impairment of approximately $296,000 and $265,000 for obsolete inventory during the three months ended September 28, 2024 and September 30, 2023, respectively.

We adjust the carrying value for estimated obsolescence as necessary in an amount equal to the difference between the cost of inventory and its net realizable value based on assumptions as to future demand and market conditions.

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Operating Expenses

There were no significant changes to operating expenses during the presented quarters.

T otal research, development, and engineering (RD&E) expenses were $2.2 million during the three months ended March 30, 2024 and $2.6 million during the three months ended April 1, 2023, respectively.

Total RD&E expenses as a percent of net sales were 1.6 percent during the three months ended March 30, 2024 and 1.6 percent during the three months ended April 1, 2023.

Total selling, general and administrative (SG&A) expenses were $6.4 million during the three months ended March 30, 2024 compared to $7.0 million for the three months ended April 1, 2023.

Total SG&A expenses as a percentage of net sales were 4.6 percent for the three months ended March 30, 2024 and 4.2 percent for the three months ended April 1, 2023.

There were no significant changes to interest expenses in the presented quarters.

Interest expense was $2.8 million during the three months ended March 30, 2024 and $2.7 million during the three months ended April 1, 2023.

The effective tax rate for the three months ended March 30, 2024 was 34.2 percent compared to 19.1 percent for the three months ended April 1, 2023.

There were no significant changes to operating expenses during the first quarter of fiscal year 2025.

T otal research, development, and engineering (“RD&E”) expenses were $2.3 million during the three months ended September 28, 2024 and $2.2 million during the three months ended September 30, 2023, respectively.

Total RD&E expenses as a percent of net sales were 1.7 percent during the three months ended September 28, 2024 and 1.5 percent during the three months ended September 30, 2023.

Total selling, general and administrative (“SG&A”) expenses were $6.6 million during the three months ended September 28, 2024 compared to $5.8 million for the three months ended September 30, 2023.

Total SG&A expenses as a percentage of net sales were 5.0 percent for the three months ended September 28, 2024 and 3.9 percent for the three months ended September 30, 2023.

These increases are attributable to increases in third party professional services, provision for credit losses, and indirect labor.

There were no significant changes to interest expenses in the first quarter of fiscal year 2025 as compared to the same period in fiscal year 2024.

Interest expense was $3.3 million during the three months ended September 28, 2024 and $3.0 million during the three months ended September 30, 2023.

The effective tax rate for the three months ended September 28, 2024 was 4.8 percent compared to (30.4) percent for the three months ended September 30, 2023.

The increase was primarily due to federal research and development tax credits and permanent book-to-tax differences relative to the respective pretax income (or loss) amounts of each period.

The company has departed from the annual effective tax rate method for determining interim income tax expense.

The existence of significant permanent book-to-tax differences in several jurisdictions, the impact of the tax holiday in Vietnam, and significant tax benefits related to federal research and development tax credits resulted in an inability to reliably estimate the annual effective tax rate applicable to projected full-year worldwide consolidated pre-tax income.

Accordingly, the company determined income tax expense for the quarter ended March 30, 2024, and the nine months ended March 30, 2024, based on actual year-to-date results.

For further information on taxes see Note 5 - “Income Taxes” of the Notes to Consolidated Financial Statements.

Our judgments regarding deferred tax assets and liabilities may change due to changes in market conditions, changes in estimates, changes in tax laws or other factors.

If assumptions and estimates change in the future, the deferred tax assets and liability will be adjusted accordingly and any increase or decrease will result in an additional deferred income tax expense or benefit in subsequent periods.

Comparison of the Nine Months Ended March 30, 2024 with the Nine Months Ended April 1, 2023

The financial information and discussion below should be read in conjunction with the Consolidated Financial Statements and Notes.

The following table sets forth certain information regarding the components of our condensed consolidated statements of operations for the nine months ended March 30, 2024 as compared to the nine months ended April 1, 2023.

It is provided to assist in assessing differences in our overall performance (in thousands):

Nine Months Ended

March 30, 2024 % of

net sales April 1, 2023 % of

net sales $ change % point

Net sales $ 433,707 100.0 % $ 425,524 100.0 % $ 8,183 — %

Cost of sales 403,001 92.9 % 391,950 92.1 % 11,051 0.8 %

Gross profit 30,706 7.1 % 33,574 7.9 % (2,868) (0.8) %

Research, development and engineering 6,233 1.4 % 7,162 1.7 % (929) (0.3) %

Selling, general and administrative 18,263 4.2 % 18,353 4.3 % (90) (0.1) %

Non-GAAP Financial Measures

To supplement our consolidated financial statements, which are prepared in accordance with generally accepted accounting principles in the United States (“GAAP”), we use certain non-GAAP financial measures, adjusted net income and adjusted net income per share, diluted.

We provide these non-GAAP financial measures because we believe they provide greater transparency related to our core operations and represent supplemental information used by management in its financial and operational decision making.

We exclude (or include) certain items in our non-GAAP financial measures as we believe the net result is a measure of our core business.

We believe this facilitates operating performance comparisons from period to period by eliminating potential differences caused by the existence and timing of certain income and expense items that would not otherwise be apparent on a GAAP basis.

Non-GAAP performance measures should be considered in addition to, and not as a substitute for, results prepared in accordance with GAAP.

The non-GAAP financial measures disclosed below should be read in conjunction with the remainder of this Quarterly Report on Form 10-Q, including the consolidated financial statements and footnotes thereto.

We strongly encourage investors and shareholders to review our financial statements and publicly-filed reports in their entirety and not to rely on any single financial measure.

Our non-GAAP financial measures may be different from those reported by other companies.

See the table below for reconciliations of adjusted net income to the most directly comparable GAAP measure, which is GAAP net income, and the computation of adjusted net income per share, diluted.

Three Months Ended

(in thousands, except per share amounts) September 28, 2024 September 30, 2023

GAAP net income (loss) 1,124 335

Gain on insurance proceeds (net of losses) — (431)

Total operating expenses 24,065 5.5 % 21,475 5.1 % 2,590 0.4 %

Operating income 6,641 1.5 % 12,099 2.8 % (5,458) (1.3) %

Interest expense, net 8,772 2.0 % 7,081 1.7 % 1,691 0.3 %

Income (loss) before income taxes (2,131) (0.5) % 5,018 1.2 % (7,149) (1.7) %

Income tax provision (1,329) (0.3) % 924 0.2 % (2,253) (0.5) %

Net (loss) income $ (802) (0.2) % $ 4,094 1.0 % $ (4,896) (1.2) %

Net sales of $433.7 million for the nine months ended March 30, 2024 increased by 1.9 percent as compared to net sales of $425.5 million for the nine months ended April 1, 2023.

The $8.2 million increase in net sales from the prior year period was primarily due to the successful ramp of new customer programs, increased production at the Company’s U.S.-based and Vietnam-based facilities, and the sale of approximately $8.1 million of inventory from a discontinued program.

However, the Company’s revenue was constrained by unanticipated lost production capacity for approximately two weeks at the Company’s Mississippi and Arkansas facilities due to severe winter weather events.

Gross profit as a percentage of net sales for the nine months ended March 30, 2024 was 7.1 percent compared to 7.9 percent for the nine months ended April 1, 2023.

This 0.8 percent decrease was primarily a result of the severance charges recorded during the third quarter partially offset by gains related to the temporary closure of our Juarez production facility in the second quarter.

The level of gross margin is impacted by facility utilization, product mix, timing, severity and steepness of new program ramps, pricing within the electronics industry and material costs, which can fluctuate significantly from quarter to quarter.

Included in gross profit are charges related to reductions in the carrying value of our inventory due to obsolescence.

We recorded an impairment of approximate ly $80,000 a nd $455,000 f or obsolete inventory during the nine months ended March 30, 2024 and April 1, 2023, respectively.

The provisions are established for inventory that we have determined customers are not contractually responsible for and for inventory that we believe customers will be unable to purchase.

Operating Expenses

Total research, development, and engineering (RD&E) expenses were $6.2 million during the nine months ended March 30, 2024 and $7.2 million during the nine months ended April 1, 2023, respectively.

The decrease relates to salary expense during the year.

Total RD&E expenses as a percent of net sales were 1.4 percent during the nine months ended March 30, 2024 and 1.7 percent during the nine months ended April 1, 2023.

Total selling, general and administrative (SG&A) expenses were $18.3 million during the nine months ended March 30, 2024 compared to $18.4 million for the nine months ended April 1, 2023.

Total SG&A expenses as a percentage of net sales were 4.2 percent for the nine months ended March 30, 2024 and 4.3 percent for the nine months ended April 1, 2023.

Interest expense was $8.8 million during the nine months ended March 30, 2024 and $7.1 million during the nine months ended April 1, 2023.

T he increase in interest expense is primarily related to increased interest rates and an increase in the average balance outstanding on our line of credit.

The effective tax rate for the nine months ended March 30, 2024 was 62.4 percent compared to 18.4 percent for the nine months ended April 1, 2023.

The increase was primarily due to federal research and development tax credits and permanent book-to-tax differences relative to the respective pretax income (or loss) amounts of each period.

The company has departed from the annual effective tax rate method for determining interim income tax expense.

Accordingly, the company determined income tax expense for the quarter ended March 30, 2024, and the nine months ended March 30, 2024, based on actual year-to-date results.

For further information on taxes see Note 5 - “Income Taxes” of the Notes to Consolidated Financial Statements.

Our judgments regarding deferred tax assets and liabilities may change due to changes in market conditions, changes in estimates, changes in tax law s or other factors.

If assumptions and estimates change in the future the deferred tax assets and liability will be adjusted accordingly and any increase or decrease will result in an additional deferred income tax expense or benefit in subsequent periods.

On March 30, 2024, we had an order backlog of approximately $275.8 million.

This compares with a backlog of approximately $380.6 million on April 1, 2023.

Stock-based compensation expense 67 59

Income tax effect of non-GAAP adjustments (1) (13) 74

Adjusted net income (loss):

Adjusted net income (loss) per share — non-GAAP Diluted $ 0.11 $ 0.00

Weighted average shares outstanding — Diluted 10,762 11,003

(1) Income tax effects are calculated using an effective tax rate of 20%, which approximates the effective statutory tax rate for the presented periods.

On September 28, 2024, we had an order backlog of approximately $210.8 million.

This compares with a backlog of approximately $319.8 million on September 30, 2023.

The decrease in order backlog is related to some softening on demand for a number of our Mexico-based programs, partially offset by an increase in demand for our U.S.

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Operating Cash Flow

Net cash provided by operating activities for the nine months ended March 30, 2024 was $6.1 million.

Net cash used in operating activities was $17.1 million for the nine months ended April 1, 2023.

The $6.1 million of net cash provided by operating activities for the nine months ended March 30, 2024 is primarily related to $0.8 million in net loss for the period adjusted for $8.2 million of depreciation and amortization, a $14.9 million decrease in accounts receivable, a $22.7 million decrease in inventory, a $1.3 million decrease in contract assets partially offset by a $1.5 million increase in other assets, a $6.3 million decrease in accrued compensation and vacation, a $33.7 million decrease in accounts payable, and a $0.8 million decrease in other liabilities.

The $17.1 million of net cash used in operating activities for the nine months ended April 1, 2023 is primarily related to $4.1 million in net income for the period adjusted for $6.9 million of depreciation and amortization, a $10.7 million increase in accounts payable, a $1.0 million decrease in inventory, a $2.6 million decrease in other assets, partially offset by a 17.0 million decrease in other liabilities, a $1.2 million decrease in accrued compensation and vacation, a $16.1 million increase in accounts receivable, and a $7.9 million increase in contract assets.

Net cash provided by operating activities for the three months ended September 28, 2024 was $9.9 million.

Net cash provided by operating activities was $5.6 million for the three months ended September 30, 2023.

The $9.9 million of net cash provided by operating activities for the three months ended September 28, 2024 was primarily related to $1.1 million in net income for the period adjusted for $3.0 million of depreciation and amortization, a $9.0 million decrease in inventory, a $0.4 million increase in accrued compensation and vacation, a $4.4 million increase in accounts payable, and a $2.2 million increase in other liabilities partially offset by a $1.6 million increase in accounts receivable, a $2.4 million increase in contract assets, and a $6.7 million increase in other assets.

The $5.6 million of net cash provided by operating activities for the three months ended September 30, 2023 was primarily related to $0.3 million in net income for the period adjusted for $2.8 million of depreciation and amortization, a $10.9 million decrease in inventory, a $9.2 million decrease in accounts receivable, and a $1.4 million decrease in other assets, partially offset by a $14.3 million decrease in accounts payable, a 1.0 million decrease in other liabilities, a $1.5 million decrease in accrued compensation and vacation, and a $3.0 million increase in contract assets.

Accounts receivable fluctuates based on the timing of shipments, terms offered, and collections that occurred during the quarter.

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Investing Cash Flow

Cash used in investing activities was $1.0 million during the nine months ended March 30, 2024 as compared to $1.4 million during the nine months ended April 1, 2023.

Our primary investing activity during the nine months ended March 30, 2024 and April 1, 2023, was purchasing equipment to support increased production levels for new programs.

Cash used in investing activities was $0.4 million during the three months ended September 28, 2024 as compared to cash provided by investing activities of $1.7 million during the three months ended September 30, 2023.

Our primary investing activities during the three months ended September 28, 2024 and September 30, 2023, related to purchasing equipment to support increased production levels for new programs, and insurance proceeds related to losses incurred at our Arkansas facility, respectively.

Leases are often utilized when potential technical obsolescence and funding requirement advantages outweigh the benefits of equipment ownership.

Total capital expenditures are expected to be $5 million during the fiscal year, a significant portion of which may be funded through finance leases.

Total capital expenditures are expected to be approximately $8-$10 million during the fiscal year, some of which may be funded through finance leases.

Capital expenditures and periodic lease payments are expected to be financed with internally generated funds as well as our revolving line of credit facility and equipment term loans.

Financing Cash Flow

Cash used in financing activities was $3.4 million during the nine months ended March 30, 2024 as compared to $16.8 million provided by financing activities in the same period of the previous fiscal year.

Our primary financing activities during the nine months ended March 30, 2024 and nine months ended April 1, 2023, were borrowings and repayments under our asset-based revolving line of credit facility with Bank of America (the “Loan Agreement”) and term loans.

As of March 30, 2024, the Company was not in compliance with the fixed charge coverage ratio under the Loan Agreement.

As a result the Company executed a fourth amendment to the Loan Agreement on May 7, 2024, effective as of March 29, 2024, to reduce the minimum requirement for the fixed charge coverage ratio from 1.25:1.00 to 1.00:1.00 as of March 30, 2024, and allow for the add back of severance expenses incurred during the quarter ended March 30, 2024, effectively waiving the Company’s default of the fixed charge coverage ratio for the quarter ended March 30, 2024.

The minimum requirement for the fixed charge coverage ratio will increase as follows:

1.05:1.00 on July 27, 2024, 1.15:1.00 on October 26, 2024, 1.20:1.00 on January 25, 2025, and 1.25:1.00 on and after March 29, 2025.

In addition, the amendment increased the interest rate by 100 basis points beginning on March 29, 2024, and moved forward the maturity date by one year to September 3, 2025.

As of March 30, 2024, approximately $7.1 million was available under the asset-based revolving credit facility and MXN22.0 million was available under our line of credit facility in Mexico.

See Note 4 - “Long-Term Debt” of the Notes to Consolidated Financial Statements for additional information.

Cash used in financing activities was $7.8 million during the three months ended September 28, 2024 as compared to $7.4 million provided by financing activities in the same period of the previous fiscal year.

Our primary financing activities during the three months ended September 28, 2024 and three months ended September 30, 2023, were borrowings and repayments under our asset-based revolving line of credit facility with Bank of America (the “Loan Agreement”) and term loans.

Our cash requirements are affected by the level of current operations and new programs.

We are in discussions with multiple financial institutions to either extend the borrowing capacity or maturity date on our Loan Agreement or to refinance the Loan Agreement in whole.

As discussed below, we are in discussions with multiple financial institutions to either extend the borrowing capacity or maturity date on our Loan Agreement or to refinance the Loan Agreement in whole.

If we are unable to meet projected operating results or restructure or refinance our Loan Agreement, we may need to delay the purchase of raw materials or require our customers to fund inventory raw material costs ahead of production.

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We believe that projected cash from operations, funds available under the Loan Agreement and Banorte line of credit, and leasing capabilities will be sufficient to meet our working and fixed capital requirements for at least the next 12 months.

As of March 30, 2024, we had approximately $3.8 million of cash held by foreign subsidiaries.

As of September 28, 2024, approximately $18.5 million was available under the Loan Agreement.

Due to the upcoming maturity of the Loan Agreement on December 3, 2025, we are in discussions with financial institutions to refinance our revolving line of credit.

The terms available to us may be less favorable than the terms of our existing Loan Agreement.

For additional information, see Note 4 - “Long Term Debt” of the Notes to Consolidated Financial Statements to this Quarterly Report on Form 10-Q, and Part II, Item 1A.

Risk Factors “Risks Related to Capital and Financing “⸻Our failure to comply with the covenants in our credit arrangements could materially and adversely affect our financial condition” and “⸻Our ability to secure and maintain sufficient credit arrangements is key to our continued operations .”

As of September 28, 2024, we had approximately $6.6 million of cash held by foreign subsidiaries.

If cash is to be repatriated in the future from these foreign subsidiaries, the Company would be subject to certain withholding taxes in the foreign jurisdictions.

The total amount of tax payments required for the amount of foreign subsidiary cash on hand as of March 30, 2024 would approximate $35,000.

The total amount of tax payments required for the amount of foreign subsidiary cash on hand as of September 28, 2024 would approximate $9,000.

We have accrued withholding taxes for expected future repatriation of foreign earnings as discussed in Note 5 of the “Notes to Consolidated Financial Statements.”

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONS

We have included a summary of our Contractual Obligations in our annual report on Form 10-K for the fiscal year ended July 1, 2023.

There have been no material changes in contractual obligations outside the ordinary course of business since July 1, 2023 except for the outstanding balance of the asset-based credit facility has moved from fiscal year 2027 to fiscal year 2026, which was $112.9 million as of March 30, 2024.

We have included a summary of our Contractual Obligations in our annual report on Form 10-K for the fiscal year ended June 29, 2024.

There have been no material changes in contractual obligations outside the ordinary course of business since June 29, 2024 except that the maturity date of the outstanding balance of the asset-based credit facility, which was $ 101.5 million as of September 28, 2024, has moved from fiscal year 2027 to fiscal year 2026.

See Note 4 - “Long-Term Debt” of the Notes to Consolidated Financial Statements for additional information.

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• our locations may also be impacted by future temporary closures and labor constraints as a result of local mandates for medical, climate, and unforeseen emergencies;

• our locations may be impacted by future temporary closure related to cyberattacks.

Our operations in certain foreign locations receive favorable income tax treatment in the form of tax credits or other incentives.

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Operating results can also fluctuate if changes are made to significant estimates and assumptions.

Significant estimates and assumptions include the allowance for doubtful receivables, provision for obsolete and non-saleable inventory, stock-based compensation, the valuation allowance on deferred tax assets, impairment of long-lived assets, long-term incentive compensation accrual, the provision for warranty costs, and the impact of hedging activities.

Due to the COVID-19 pandemic, we have seen extreme shifts in demand from our customer base.

The possibility of future temporary closures and labor constraints, as well as the inability to predict customer demand, costs, and future supply chain disruptions during the rapidly changing COVID-19 environment can materially impact operating results.

Significant estimates and assumptions include the allowance for credit losses, provision for inactive, obsolete, and surplus inventory, stock-based compensation, the valuation allowance on deferred tax assets, impairment of long-lived assets, long-term incentive compensation accrual, the provision for warranty costs, and the impact of hedging activities.

During the COVID-19 pandemic, we saw extreme shifts in demand from our customer base.

The possibility of future temporary closures and labor constraints, as well as the inability to predict customer demand, costs, and future supply chain disruptions during pandemics can materially impact operating results.

We are exposed to general economic conditions, which could have a material adverse impact on our business, operating results and financial condition.

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Additionally, the financial strength of our customers and suppliers and their ability to obtain and rely on credit financing may affect their ability to fulfill their obligations to us and have an adverse effect on our financial results.

Adverse macroeconomic conditions that were a result of COVID-19 have and may continue to affect our business.

Adverse macroeconomic conditions, such as those that were a result of COVID-19, have and may continue to affect our business.

The conditions affect the Company’s ability to predict and plan for future supply chain disruptions, fluctuations in customer demand and costs, and the ability to operate as there is uncertainty over future temporary closures.

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Inflation may further exacerbate other risk factors discussed in this Quarterly Report on Form 10-Q, including disruptions to international operations.

The majority of our sales come from a small number of customers, and a decline in sales to, or an inability to enforce contracts with, any of these customers could adversely affect our business.

The majority of our sales come from a small number of customers, and a decline in sales to any of these customers could adversely affect our business.

At present, our customer base is concentrated and could become more or less concentrated.

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The contraction in demand from certain industries could impact our customer orders and have a negative impact on our operations over the foreseeable future.

Our inability to enforce contracts with, or the bankruptcy or insolvency of, any of our principal customers could adversely affect our business.

We rely on timely and regular payments from our customers, and the inability or failure of our principal customers to meet their obligations to us or their bankruptcy, insolvency or liquidation may adversely affect our business, financial condition and results of operations.

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We have seen supply shortages in certain electronic components.

In addition, our suppliers' facilities may also experience earthquakes, tsunamis and other natural disasters which may cause a shortage of components.

In addition, our suppliers' facilities may also experience closures or limited production due to natural disasters or other reasons, which may cause a shortage of components.

This can result in longer lead times and the inability to meet our customers' requests for flexible production and extended shipment dates.

If demand for components outpaces supply, capacity delays could affect future operations.

Delays in deliveries from suppliers or the inability to obtain sufficient quantities of components and raw materials have and may continue to cause delays or reductions in shipment of products to our customers which could adversely affect our operating results and damage customer relationships.

Delays in deliveries from suppliers or the inability to obtain sufficient quantities of components and raw materials

have and may continue to cause delays or reductions in shipment of products to our customers which could adversely affect our operating results and damage customer relationships.

We operate in a highly competitive industry;

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The primary impact of currency exchange fluctuations is on the cash, receivables, payables and expenses of our operating entities.

As part of our hedging strategy, we currently use Mexican Peso forward contracts to hedge foreign currency fluctuations for a portion of our Mexican Peso denominated expenses.

As part of our hedging strategy, we currently use Mexican Peso forward contracts to hedge future foreign currency fluctuations for a portion of our Mexican Peso denominated expenses.

We currently do not hedge expenses denominated in RMB and have occasionally also been unable to hedge expenses denominated in Mexican Peso.

Unexpected losses have occurred from increases in the value of these currencies relative to the United States dollar and further unexpected losses could occur, which could be material to our business, financial results or operations..

Global economic and political events, including as a result of COVID-19, significant currency exchange fluctuations can occur causing unexpected losses.

Losses have occurred from increases in the value of these currencies relative to the United States dollar and further losses could occur, which could be material to our business, financial results or operations.

Global economic and political events or significant currency exchange fluctuations, can occur, and cause further unexpected losses.

Future temporary closures of production facilities in Mexico could also cause significant changes in our ability to qualify for hedge accounting treatment of our forward contracts to hedge foreign currency fluctuations.

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In addition, we must successfully manage transition issues that may result from the departure or retirement of members of our leadership team.

For example, our Chief Executive Officer will retire at the end of fiscal year 2024 and will be succeeded by our current Chief Financial Officer.

Any significant leadership change or senior management transition involves inherent risks and any failure to ensure a smooth transition could hinder our strategic planning, business execution, and future performance.

We cannot provide assurances that any current or future changes of management personnel will not cause disruption to operations or customer relationships or a decline in our operating results

For example, our Chief Executive Officer retired at the end of fiscal year 2024 and is succeeded by our former Chief Financial Officer.

Any significant leadership change or senior management transition involves inherent risks and failure to ensure a smooth transition could hinder our strategic planning, business execution, and future performance.

We cannot provide assurances that any changes of management personnel will not cause disruption to operations or customer relationships or a decline in our operating results.

Start-up costs and inefficiencies related to new or transferred programs can adversely affect our operating results and such costs may not be recoverable if such new programs or transferred programs are canceled or don’t meet expected sales volumes.

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These factors also affect our ability to efficiently use labor and equipment.

We are currently managing a number of new programs.

Consequently, our exposure to these factors has increased.

We continuously manage a number of new programs.

Consequently, our exposure to these factors is consistently elevated.

In addition, if any of these new programs or new customer relationships were terminated, our operating results could be harmed, particularly in the short term.

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We must determine the levels of business that we will seek and accept from customers, set production schedules, commit to procuring inventory, and allocate personnel and resources, based on our estimates of our customers' requirements.

Customers can require sudden increases and decreases in production which can put added stress on resources and reduce margins.

Sudden decreases in

production can lead to excess inventory on hand which may or may not be reimbursed by our customers even when under contract.

Customers can require sudden

increases and decreases in production which can put added stress on resources and reduce margins.

Sudden decreases in production can lead to excess inventory on hand which may or may not be reimbursed by our customers even when under contract.

Continued growth could further lead to capacity constraints.

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In addition, increasing governmental focus on climate change may result in new environmental regulations that may negatively affect us, our vendors or our customers.

As a result, we may incur additional costs or obligations in complying with any new environmental and reporting requirements, as well as increased indirect costs resulting from our vendors or customers that get passed on to us.

If we fail to comply with any present or future regulations, we could be subject to future liabilities or the suspension of current manufacturing operations.

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TECHNOLOGY RISKS

Our operations are subject to cyberattacks that could have a material adverse effect on our business.

Our operations are subject to cyberattacks that have had and could have a material adverse effect on our business.

We are increasingly dependent on digital technologies and services to conduct our operations.

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Nevertheless, we have experienced attempted security breaches, such as phishing emails and other targeted attacks.

For example, as previously disclosed in our Form 8-K filed with the SEC on May 10, 2024, we became aware of unauthorized access to our IT systems (the “Previously Disclosed Cyber Incident”).

We expect that our operations will continue to be subject to cyber threats, and any cybersecurity incident could significantly disrupt our operations.

Cybersecurity incidents could also result in the misappropriation of proprietary or confidential information of the Company or that of its customers, employees, vendors or customers.

We have incurred, and expect continued incurrence of, costs to mitigate against the Previously Disclosed Cyber Incident as our investigation is ongoing and other cybersecurity incidents as threats are expected to continue to become more persistent and sophisticated.

For example, as previously disclosed in our Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on May 10, 2024, as amended, we became aware of unauthorized access to our IT systems that resulted in a material impact on our financial condition and results of operations during the fourth quarter of fiscal year 2024 ending on June 29, 2024 (the "Previously Disclosed Cyber Incident").

We expect that our operations will continue to be subject to cyber threats, and any future cybersecurity incident could significantly disrupt our operations.

The threat actor in the Previously Disclosed Cyber Incident exfiltrated certain personally identifiable information, and future cybersecurity incidents could also result in the misappropriation of proprietary or confidential information of the Company or that of its customers, employees, vendors or suppliers.

We have incurred and expect to continue to incur costs to mitigate against the Previously Disclosed Cyber Incident and other cybersecurity incidents as threats are expected to continue to become more persistent and sophisticated.

If our systems for protecting against cybersecurity incidents, including the Previously Disclosed Cyber Incident, prove not to be sufficient, we could be adversely affected by, among other things, loss of or damage to intellectual property, proprietary or confidential information, or employee, vendor or customer data;

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and increased costs to prevent, respond to or mitigate cybersecurity incidents.

In addition, our investigation of the Previously Disclosed Cyber Incident is ongoing, and we may discover other impacts or new events related to this incident that could affect the Company, including our business operations, financial condition or results of operations.

Any of these risks could harm our reputation and our relationships with employees, vendors and customers and may result in claims or enforcement actions and investigations against us.

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RISKS RELATED TO CAPITAL AND FINANCING

Our ability to secure and maintain sufficient credit arrangements is key to our continued operations.

There is no assurance that we will be able to retain or renew our credit agreements in the future on terms acceptable to us, or at all.

In addition, we have restrictive covenants with our financial institutions which could impact how we manage our business.

We have not always met these covenants in the past and have had to obtain waivers and amend our credit agreements, including for fiscal quarter ended March 30, 2024, to adjust these covenants.

The amendment for fiscal quarter ended March 30, 2024 resulted in an increase in interest rates and shortened the maturity date to September 3, 2025.

We may not meet these covenants in the future and may not be able to obtain waivers or amendments from the relevant lenders on terms acceptable to us, or at all.

In addition, if we cannot meet our financial covenants, our borrowings could become immediately payable which could have a material adverse impact on our financial statements.

Our failure to comply with the covenants in our credit arrangements could materially and adversely affect our financial condition.

We have restrictive covenants with our financial institutions that impact how we manage our business.

We have not always met these covenants in the past and have had to obtain waivers and amend our Loan Agreement, including for events of default related to breaches of the fixed charge coverage ratio for fiscal quarter ended March 30, 2024 and the periods ended June 29, 2024 and July 27, 2024.

The amendment waiving the event of default for fiscal quarter ended March 30, 2024 resulted in an increase in interest rates and shortened the maturity date to September 3, 2025.

In addition, this amendment reduced the minimum requirement for the fixed charge coverage ratio from 1.25:1.00 to 1.00:1.00 as of March 30, 2024, with the minimum requirement to increase as follows:

1.05:1.00 on July 27, 2024, 1.15:1.00 on October 26, 2024, 1.20:1.00 on January 25, 2025 and 1.25:1.00 on and after March 29, 2025.

As noted above, we were unable to meet this ratio for the periods ended June 29, 2024 and July 27, 2024, and we also breached a covenant requiring us to deliver audited financial statements to the lender within 90 days of the Company’s fiscal year-end.

As a result, we had to further amend our Loan Agreement on October 9, 2024.

The amendment waiving these events of default resulted in an increase in interest rates and increased the availability block, which reduces the calculated borrowing base under the Loan Agreement, from $8 million to $10 million, with further increases to $11 million and $12 million to be effective on December 31, 2024 and March 31, 2025, respectively.

We may not meet the minimum fixed charge coverage ratio or comply with other covenants in the future and may not be able to obtain waivers or amendments from the relevant lenders on terms acceptable to us, or at all.

In the event we breach any covenant that results in an event of default, our lenders could choose to accelerate payment of the amounts owed by the Company.

Under those circumstances our borrowings could become immediately payable.

The amendment of our credit arrangements on unfavorable terms or the acceleration of our payment obligations thereunder, would have a material adverse effect on our business, financial condition, results of operations and cash flows.

For a summary of our debt obligations, see Note 4 - “Long-Term Debt” of the Notes to Consolidated Financial Statements.

In addition, the event our business grows rapidly or there is uncertainty in the macroeconomic climate, additional financing resources could be necessary in the current or future fiscal years.

Our ability to secure and maintain sufficient credit arrangements is key to our continued operations.

There is no assurance that we will be able to retain, renew, or refinance our credit arrangements on terms acceptable to us, or at all.

As noted in the prior risk factor, a recent amendment to our Loan Agreement shortened the maturity date to September 3, 2025.

On September 27, 2024, in connection with the preparation of our Annual Report on Form 10-K for fiscal year 2024, we entered into an additional amendment to the Loan Agreement to extend the maturity date by three months to December 3, 2025.

Because our Loan Agreement terminates on December 3, 2025, we need to extend, renew or refinance this agreement in the coming months.

The terms available to us may be less favorable than the terms of our existing Loan Agreement.

Our inability to extend, renew, or refinance our indebtedness on a timely basis could also result in unfavorable accounting treatment.

This could include management and our independent auditors concluding on risks over the Company's ability to continue as a going concern.

Our inability to extend, renew or refinance our credit arrangements could have a material adverse impact on our business, financial condition, results of operations and cash flows.

Additionally, in the event that our business grows rapidly or there is uncertainty in the macroeconomic climate, additional financing resources could be necessary in the current or future fiscal years.

There is no assurance that we will be able to obtain equity or debt financing at acceptable terms, or at all, in the future.

Adverse changes in the interest rates for our borrowings could adversely affect our financial condition.

Adverse changes in the interest rates of our borrowings could adversely affect our financial condition.

We are exposed to interest rate risk under our revolving line of credit and term loans.

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Our stock price has and may continue to be subject to wide fluctuations and possible rapid increases or declines over a short time period.

These fluctuations may be due to factors specific to us such as our stock's thinly traded nature, variations in quarterly operating results, changes in earnings estimates, or the Audit Committee's internal investigation, or to factors relating to the contract manufacturing industry or to the securities markets in general, which, in recent years, have experienced significant price fluctuations.

These fluctuations may be due to factors specific to us such as our stock's thinly traded nature, variations in quarterly operating results, changes in earnings estimates, matters arising from the subject matter of the Audit Committee's internal investigation, or to factors relating to the contract manufacturing industry or to the securities markets in general, which, in recent years, have experienced significant price fluctuations.

These fluctuations often have been unrelated to the operating performance of the specific companies whose stocks are traded.

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RISKS RELATED TO OUR CONTROLS AND PROCEDURES AND THE INTERNAL INVESTIGATION

If we fail to maintain proper and effective internal controls, our business and financial condition could be materially adversely impacted.

We have previously identified a material weakness in our internal control over financial reporting, and undertook remediation efforts to address the identified deficiencies and concluded that the material weakness was remediated as of July 3, 2021.

If other deficiencies in our internal control over financial reporting are discovered or occur in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial results and incur the additional costs and expenses associated therewith.

Moreover, because of the inherent limitations of any control system, material misstatements due to error or fraud may not be prevented or detected on a timely basis, or at all.

As of July 2, 2023, we are a non-accelerated filer under the Exchange Act and are not required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act).

We have concluded that our internal control over financial reporting and our disclosure controls and procedures were not effective as of June 29, 2024 due to material weaknesses, which has adversely affected our ability to report our financial results in a timely and accurate manner and could have a material adverse impact our business and financial condition.

We are required to evaluate the effectiveness of our disclosure controls and procedures and our internal control over financial reporting on a periodic basis and publicly disclose the results of these evaluations and related matters in accordance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”).

As described in Item 9A.

Controls and Procedures of our Annual Report on Form 10-K, we identified a material weakness in the design and implementation of effective controls over the accounting for revenue recognition relating to cost recovery of material price variances.

We also identified a material weakness in the design and implementation of effective controls over the adoption of new accounting standards.

As a result of these material weaknesses, our management concluded that our internal control over financial reporting and disclosure controls and procedures were not effective as of June 29, 2024.

We are engaged in developing and implementing a remediation plan, as described in Item 9A.

Controls and Procedures of our Annual Report on Form 10-K, designed to address the material weaknesses, but our remediation efforts are not complete and are ongoing.

Although we are working to remedy the ineffectiveness of the Company’s internal control over financial reporting, there can be no assurance as to when the remediation plan will be fully developed, when it will be fully implemented or the aggregate cost of implementation.

Until our remediation plan is fully implemented, our management will continue to devote time and attention to these efforts.

If we do not complete our remediation in a timely fashion, or at all, or if our remediation plan is inadequate, there will continue to be an increased risk that we will be unable to timely file future periodic reports with the SEC and that our future consolidated financial statements could contain errors that will be undetected.

If we are unable to report our results in a timely and accurate manner, our stock may be delisted from the NASDAQ Global Market and we will not be able to comply with the applicable covenants in our financing arrangements, including our Loan Agreement, as described in —Risks Related to Capital and Financing—“Our failure to comply with the covenants in our credit arrangements could materially and adversely affect our financial condition.” In addition, we could be subject to regulatory investigations and penalties or stockholder litigation.

Any of these risks could have a material adverse impact on our business and financial condition.

If we fail to remediate our material weaknesses, or in the future fail to maintain proper and effective internal controls, our business and financial condition could be materially adversely impacted.

We cannot assure you that we will not discover additional deficiencies in our internal control over financial reporting.

Moreover, as discussed in the following risk factor, because of the inherent limitations of any control system, material misstatements due to error or fraud may not be prevented or detected on a timely basis, or at all.

As of June 29, 2024, we are a non-accelerated filer under the Exchange Act and are not required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act.

Therefore, our internal controls over financial reporting will not receive the level of review provided by the process relating to the auditor attestation included in annual reports of issuers that are subject to the auditor attestation requirements.

If we are unable to provide reliable and timely financial reports in the future, our business and reputation may be further harmed.

Restated financial statements and failures in internal controls may also cause us to fail to meet additional reporting obligations, negatively affect investor confidence in our management and the accuracy of our financial statements and disclosures, or result in adverse publicity and concerns from investors, any of which could have a negative effect on the price of our common stock, subject us to regulatory investigations and penalties or stockholder litigation, and materially adversely impact our business, financial condition, results of operations and cash flows.

Matters relating to or arising from the subject of the Audit Committee’s internal investigation, including expenses and diversion of personnel and resources, regulatory investigations, and proceedings and litigation matters, could have an adverse effect on our business, results of operations and financial condition.

We have incurred, and may continue to incur, significant expenses related to legal, accounting and other professional services in connection with matters relating to or arising from the subject of the Audit Committee’s internal investigation.

We have taken steps in order to remediate identified deficiencies in our internal control over financial reporting and attempt to reduce the risk of future recurrence.

To the extent these steps were not successful, we may incur significant additional time and expense.

In addition, we are cooperating with the SEC regarding matters related to the internal investigation.

The completion of the internal investigation did not automatically resolve the SEC’s inquiries.

If the SEC or any other regulator were to commence legal action against us, we could be required to pay significant additional legal fees, as well as penalties and become subject to injunctions, cease and desist orders or other remedies.

We can provide no assurances as to the outcome of any governmental inquiry or investigation.

Further, we, our officers and members of our board of directors could be named as defendants in lawsuits asserting claims arising out of the subject matter of the Audit Committee’s internal investigation.

As a result of any legal proceedings and any related indemnification requirements to our officers and directors, we could be required to pay additional legal fees and/or monetary damages that may be in excess of our insurance coverage or may have additional penalties or other remedies imposed against us or our officers and directors.

All of these expenses and the diversion of the attention of management and other personnel that has occurred and is expected to continue, could adversely affect our business, financial condition, results of operations and cash flows.

Further and continued determinations that there are deficiencies in the effectiveness of the Company’s internal control over financial reporting could result in another restatement of our consolidated financial statements, cause us to fail to meet our reporting obligations, reduce our ability to obtain financing, negatively affect investor confidence in our management and the accuracy of our financial statements and disclosures, or result in adverse publicity and concerns from investors, any of which could have a negative effect on the price of our common stock, subject us to regulatory investigations and penalties or stockholder litigation, and materially adversely impact our business, financial condition, results of operations and cash flows.

Due to inherent limitations, there can be no assurance that our system of disclosure and internal controls and procedures will be successful in preventing all errors, theft and fraud, or in informing management of all material information in a timely manner.

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Due to the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

To the extent these steps taken to remediate identified deficiencies in our internal controls over financial reporting were not successful, we may incur significant additional time and expense.

In addition, we continue to cooperate with the SEC regarding matters related to the internal investigation.

The completion of the internal investigation in fiscal year 2022 did not automatically resolve the SEC’s inquiries.

If the SEC or any other regulator were to commence legal action against us, we could be required to pay significant penalties and become subject to injunctions, cease and desist orders or other remedies.

We can provide no assurances as to the outcome of any governmental inquiry or investigation.

Further, we, our officers and members of our Board of Directors could be named as defendants in lawsuits asserting claims arising out of the subject matter of the Audit Committee’s internal investigation.

As a result of any legal proceedings and any related indemnification requirements to our officers and directors, we could be required to pay monetary damages that may be in excess of our insurance coverage or may have additional penalties or other remedies imposed against us or our officers and directors.

All of these expenses, and the diversion of the attention of management and other personnel that has occurred and is expected to continue, could adversely affect our business, financial condition, results of operations and cash flows.

LEGAL AND ACCOUNTING RISKS

We restated certain of our prior consolidated financial statements in our Annual Report on Form 10-K, which resulted in unanticipated costs and may lead to additional risks and uncertainties, including loss of investor confidence, regulatory action or litigation.

As previously disclosed, in our Annual Report on Form 10-K, we have restated or revised certain of our previously issued financial statements.

This process was time-consuming and expensive, including unanticipated costs for accounting and legal fees.

The restatement and revisions also expose us to additional risks that could adversely affect our business and financial condition, such as litigation, regulatory action or loss of investor confidence.

Lawsuits or regulatory investigations may invoke federal and state securities law claims, contractual claims or other claims arising from the restatement, revisions and material weaknesses in our internal control over financial reporting.

We may incur substantial defense costs regardless of the outcome of any litigation or regulatory investigation, and such events might cause a diversion of our management’s time and attention.

If we do not prevail in any litigation or regulatory action, we could be required to pay substantial damages, penalties or settlement costs.

In addition, the restatement and revisions may lead to a loss of investor confidence and have negative impacts on the trading price of our common stock.

We are involved in various legal proceedings.

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In addition, the costs associated with noncompliance with additional securities laws and regulations could also impact our business.

Changes in financial accounting standards may affect our reported financial condition or results of operations as well increase costs related to implementation of new standards and modifications to internal controls.

Changes in financial accounting standards may affect our reported financial condition or results of operations as well as increase costs related to implementation of new standards and modifications to internal controls.

Our consolidated financial statements are prepared in conformity with accounting standards generally accepted in the United States, or U.S.

These principles are subject to amendments made primarily by the Financial Accounting Standards Board (FASB) and the SEC.

These principles are subject to amendments made primarily by the Financial Accounting Standards

Board (FASB) and the SEC.

A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions which are completed before a change is announced.

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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-Q

Item 2. Management’s Discussion and Analysis