What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-06 compared with 2022-08-15 · 85 added, 139 removed, 115 unchanged (66% of the section changed)

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(18) extraordinary or force majeure events affecting the business or operations of our business;

and (19) the impact of the novel COVID-19 pandemic and related impact on the global economy, which may exacerbate the above factors and/or impact our results of operations and financial condition.

and (19) the continued long term impact of the COVID-19 pandemic and related residual negative impact on the global economy, which may exacerbate the above factors and/or impact our results of operations and financial condition;

(20) in connection with its entry into the Forbearance Agreement, the Company is evaluating available financial alternatives, including obtaining acceptable alternative financing as well as seeking additional waivers, forbearances or amendments to the covenants or other provisions of the Credit Agreement to address any existing or future defaults and has engaged financial advisors to assist the Company.

If the Company is unable to reach an agreement with its lender to waive the defaults, extend the forbearance period or find alternative financing prior to the expiration of the forbearance period, the lender of the Credit Agreement may choose to accelerate repayment.

The Company cannot provide assurances that it will be successful in negotiating such a waiver or extension of the forbearance period, restructuring of existing debt obligations, obtaining capital or entering into a strategic alternative transaction which provides sufficient funding for the refinancing of its outstanding indebtedness prior to the expiration of the forbearance period or prior to the maturity date of its obligations under the Credit Agreements.

The Company is engaged in the production of forgings and machined components primarily for the A&E markets.

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The Company operates under one business segment.

The Company endeavors to plan and evaluate its business operations while taking into consideration certain factors including the following:

The Company endeavors to continue to plan and evaluate its business operations while taking into consideration certain factors including the following:

(i) the projected build rate for commercial, business and military aircraft, as well as the engines that power such aircraft;

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(iii) industrial gas and steam turbine engines for power generation units;

and (iv) other commercial applications.

and (iv) commercial space, semiconductor and other commercial applications.

Impact of COVID-19 & Other Factors

The lingering impact and residual effects of the coronavirus ("COVID-19") pandemic, along with other factors, such as ongoing geopolitical tensions, have created strains on supply chains, and general economic conditions.

While the exact timing and pace of recovery in our markets continues to be indeterminable, there are indications that commercial air travel is steadily recovering in certain areas.

The lingering impact and residual effects of the COVID-19 pandemic, along with other factors such as ongoing geopolitical tensions, continue to impact the United States and other countries in which the Company operates, including strains on supply chains and inflationary impacts.

During fiscal 2022, the ongoing impact of the COVID-19 pandemic continued to effect the Company’s results of operations.

Given the long lead times for certain of the Company's products, the Company has continued to see an impact related to the effects of COVID-19 on orders and deliveries in fiscal 2022.

While the exact timing and pace of recovery in our markets continues to be indeterminable, commercial air travel is steadily recovering.

While the long-term outlook remains positive given the nature of the industry, there continues to be uncertainty with the respect to when commercial air traffic will return to pre-COVID-19 levels.

Given the fluidity of the situation, it is still unclear how lasting and deep the ongoing economic impacts of COVID-19 will last.

During the third quarter of fiscal 2022, the effects of COVID-19 continued to have an impact on the Company’s results of operations.

The Company has been impacted by delays in receiving orders and obtaining materials required to produce certain products.

As sales volumes have fluctuated, the Company has taken measures to reduce costs by furloughing certain of its employees from time to time at one of its plant locations.

Additionally, our operations are subject to global economic and geopolitical risks.

For example, while the Company does not have a presence in these regions, the ongoing conflict between Russia and Ukraine has impacted economic activity as well as the availability and price of raw materials and energy.

The Company continues to actively monitor these factors and find ways to mitigate the impact on its operations.

The Company continues to actively monitor these factors and seeks to find ways to mitigate the impact on its operations.

Backlog of Orders

SIFCO’s total backlog at June 30, 2022 was $69.4 million, compared with $78.1 million as of June 30, 2021.

SIFCO’s total backlog at December 31, 2022 was $84.2 million, compared with $75.7 million as of December 31, 2021.

Orders may be subject to modification or cancellation by the customer with limited charges.

Sales in the A&E markets continue to be impacted by COVID-19, which has created increased pressure in these markets and accordingly restrained sales in such markets.

Recovery in the A&E markets coupled with extended raw material lead times has resulted in increased bookings.

Backlog information may not be indicative of future sales.

Nine Months Ended June 30, 2022 compared with Nine Months Ended June 30, 2021

Net sales comparative information for the first nine months of fiscal 2022 and 2021 is as follows:

(Dollars in millions) Nine Months Ended

June 30, Increase/ (Decrease)

Net Sales 2022 2021

Aerospace components for:

Fixed wing aircraft $ 30.3 $ 28.9 $ 1.4

Rotorcraft 12.0 21.7 (9.7)

Energy components for power generation units 12.9 14.8 (1.9)

Commercial product and other revenue 10.1 9.9 0.2

Total $ 65.3 $ 75.3 $ (10.0)

Net sales for the first nine months of fiscal 2022 decreased $10.0 million to $65.3 million, compared with $75.3 million in the comparable period of fiscal 2021.

In general, the production of the Company's products have lead times of varying lengths.

The varying lead times, coupled with constraints caused by pressures in timely obtaining raw materials, have contributed to the decline of sales year over year, along with the continued state of the commercial aerospace market, in particular, the wide body market.

Rotorcraft sales decreased $9.7 million compared with the same period last year due to delays in receiving customer orders and program volume reductions.

The energy components for power generation units decreased by $1.9 million due to variability in the steam turbine market that we serve.

Commercial products and other revenue increased $0.2 million in the first nine months of fiscal 2022 compared to the same period in fiscal 2021, primarily due to the timing of orders related to a munitions program and increased sales related to the commercial space industry.

Commercial net sales were 45.5% of total net sales and military net sales were 54.5% of total net sales in the first nine months of fiscal 2022, compared with 35.1% and 64.9%, respectively, in the comparable period in fiscal 2021.

Military net sales decreased by $13.3 million to $35.5 million in the first nine months of fiscal 2022, compared with $48.8 million in the comparable period of fiscal 2021, primarily due to timing in order placement and volume reductions related to certain rotorcraft programs and the ability to timely get material to produce parts, partially offset by increased sales in a munitions program.

Co mmercial net sales increased $3.3 million to $29.7 million in the first nine months of fiscal 2022, compared with $26.4 million in the comparable period of fiscal 2021 primarily due to an increase in fixed wing components and commercial space product.

Cost of Goods Sold

Cost of goods sold decreased by $1.9 million, or 2.9%, to $63.4 million, or 97.2% of net sales, during the first nine months of fiscal 2022, compared with $65.3 million or 86.8% of net sales, in the comparable period of fiscal 2021.

The decrease is primarily due to lower volume and $1.6 million in lower payroll costs, partially offset by higher material costs of $1.2 million $0.5 million of idle expense and $0.6 million in increased energy costs.

The same period in the prior year included approximately $0.5 million in insurance recoveries related to business interruption coverage under claims made in connection with the fire that occurred in December 2018 at the Orange, California ("Orange") location.

Gross profit decreased $8.2 million to $1.8 million in the first nine months of fiscal 2022, compared with $10.0 million of gross profit in the comparable period of fiscal 2021.

Gross margin percent of sales was 2.8% during the first nine months of fiscal 2022, compared with 13.2% in the comparable period in fiscal 2021.

The decrease in gross profit was primarily due to decreased volume and higher idle and energy costs as described above.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $9.0 million, or 13.8%, of net sales during the first nine months of fiscal 2022, compared with $10.3 million, or 13.7%, of net sales in the comparable period of fiscal 2021.

The decrease in selling, general and administrative expenses is primarily due lower depreciation expense of $0.6 million, a reduction in accrued incentive of $0.4 million and $0.2 million in lower commissions.

Amortization of Intangibles

Amortization of intangibles was $0.3 million in the first nine months of fiscal 2022, compared with $0.8 million in the comparable period of fiscal 2021.

The decrease was primarily due to certain intangible assets that became fully amortized during the prior fiscal year.

Other/General

Prior year results included a $2.5 million gain in insurance recoveries related to the assets that were damaged in the fire at the Orange location that occurred in December 2018.

In the first nine months of fiscal 2022, the Company recognized a gain on extinguishment of debt related to the PPP loan that was forgiven by the SBA for $5.1 million.

See Note 5, Debt for further discussion.

The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreement in the first nine months of both fiscal 2022 and 2021:

Weighted Average

Interest Rate

Nine Months Ended

June 30, Weighted Average

Outstanding Balance

Nine Months Ended

2022 2021 2022 2021

Revolving credit agreement 2.0 % 1.5 % $ 10.4 million $ 8.8 million

Foreign term debt 2.9 % 3.5 % $ 6.3 million $ 7.0 million

Other debt 0.6 % 0.9 % $ 2.3 million $ 5.7 million

The Company’s effective tax rate through the first nine months of fiscal 2022 was 1 %, compared with ( 79 )% for the same period of fiscal 2021.

The increase in the effective rate was primarily attributable to tax benefits from adjusting deferred taxes recorded in Italy recognized on a discrete basis in fiscal 2021, which were non-recurring in fiscal 2022.

The effective tax rate differs from the U.S.

federal statutory rate due primarily to the valuation allowance against the Company’s U.S.

deferred tax assets and income in foreign jurisdictions that are taxed at different rates than the U.S.

statutory tax rate.

Net (Loss) Income

Net loss was $2.7 million during the first nine months of fiscal 2022, compared with net income of $1.8 million in the comparable period of fiscal 2021.

The net loss is attributed to lower sales and decreased gross profit due to idle costs recorded, partially offset by the gain on loan extinguishment related to the PPP loan.

Prior year results included $2.5 million in insurance recoveries and a favorable tax benefit.

Three Months Ended June 30, 2022 compared with Three Months Ended June 30, 2021

Net sales for the third quarter of fiscal 2022 decreased 15.3% to $21.4 million, compared with $25.3 million in the comparable period of fiscal 2021.

Net sales comparative information for the third quarter of fiscal 2022 and 2021 is as follows:

Three Months Ended December 31, 2022 compared with Three Months Ended December 31, 2021

Net sales comparative information for the first three months of fiscal 2023 and 2022 is as follows:

(Dollars in millions) Three Months Ended

June 30, Increase (Decrease)

December 31, Increase/ (Decrease)

Net Sales 2022 2021

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Total $ 21.3 $ 19.2 $ 2.1

The decrease in commercial product and other revenues of $5.0 million was attributed to timing of orders for a munitions program, which was partially offset by the increase in sales related to the commercial space industry.

The decrease of $2.0 million in rotorcraft sales is primarily due to delays in receiving customer orders and program volume reductions.

There were increases of $1.7 million in energy components for power generation sales due to recovery in demand and $1.4 million in fixed wing aircraft primarily due to military programs.

Commercial net sales were 55.3% of total net sales and military net sales were 44.7% of total net sales in the third quarter of fiscal 2022, compared with 25.5% and 74.5%, respectively, in the comparable period of fiscal 2021.

Military net sales decreased by $9.3 million to $9.6 million in the third quarter of fiscal 2022, compared with $18.9 million in the comparable period of fiscal 202 1, primarily due to the timing of orders for a munitions program and lower build rates in certain programs.

Commercial net sales increased $5.4 million to $11.9 million in the third quarter of fiscal 2022, compared with $6.5 million in the comparable period of fiscal 2021 primarily due to increased sales related the commercial space industry and increased build rates in certain commercial programs.

Net sales for the first three months of fiscal 2023 increased $2.1 million to $21.3 million, compared with $19.2 million in the comparable period of fiscal 2022.

In general, the production of the Company's products have lead times of varying lengths.

The timing of shipments, coupled with increased demand in the steam turbine power generation market, have contributed to the increase of sales year over year.

Fixed wing sales increased $0.8 million compared with the same period last year primarily due to F35 and F18 programs.

Rotorcraft sales increased $0.9 million compared with the same period last year primarily due to commercial and Blackhawk programs.

The energy components for power generation units increased by $1.0 million due to growth in the steam turbine markets that we serve.

Commercial products and other revenue decreased $0.6 million in the first three months of fiscal 2023 compared to the same period in fiscal 2022, primarily due to the timing of orders related to a munitions program.

Commercial net sales were 47.8% of total net sales and military net sales were 52.2% of total net sales in the first three months of fiscal 2023, compared with 43.4% and 56.6%, respectively, in the comparable period in fiscal 2022.

Military net sales increased by $0.2 million to $11.1 million in the first three months of fiscal 2023, compared with $10.9 million in the comparable period of fiscal 2022, primarily due to timing in order placement.

Co mmercial net sales increased $1.8 million to $10.2 million in the first three months of fiscal 2023, compared with $8.3 million in the comparable period of fiscal 2022 primarily due to an increase in the power generation steam turbine market.

Cost of Goods Sold

Cost of goods sold was $21.1 million, or 98.3% of net sales, during the third quarter of fiscal 2022, compared with $22.0 million or 87.0% of net sales, in the comparable period of fiscal 2021, primarily due to higher material costs of $0.4 million, idle expense of $0.2 million, and increased energy costs of $0.1 million.

Gross profit decreased $2.9 million to $0.4 million during the third quarter of fiscal 2022, compared with $3.3 million in the comparable period of fiscal 2021.

Gross margin was 1.7% during the third quarter of fiscal 2022, compared with 13.0% in the comparable period in fiscal 2021.

The decrease in gross margin was primarily due to lower sales volume and higher costs incurred as noted above.

Cost of goods sold increased by $0.8 million, or 4.2%, to $20.0 million, or 94.1% of net sales, during the first three months of fiscal 2023, compared with $19.2 million or 99.9% of net sales, in the comparable period of fiscal 2022.

The increase is

primarily due to higher volume and $0.4 million idle expense partially offset by $0.5 million in lower payroll costs and NRV release of $0.8 million.

Gross profit increased $1.3 million to $1.3 million in the first three months of fiscal 2023, compared with nearly breakeven gross profit in the comparable period of fiscal 2022.

Gross margin percent of sales was 5.9% during the first three months of fiscal 2023, compared with nominal in the comparable period in fiscal 2022.

The increase in gross profit compared to prior fiscal year was primarily due to increased volume, lower payroll costs, release of NRV reserve $0.8 million and lower idle expense $0.9 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $2.8 million, or 13.1% of net sales, during the third quarter of fiscal 2022, compared with $2.9 million, or 11.5%, of net sales, in the comparable period of fiscal 2021.

The decrease is primarily due to a reduction in accrued incentive costs of $0.1 million.

Selling, general and administrative expenses were $3.3 million, or 15.4%, of net sales during the first three months of fiscal 2023, compared with $3.5 million, or 18.4%, of net sales in the comparable period of fiscal 2022.

The decrease in selling, general and administrative expenses is primarily due lower payroll costs $0.1 million and incentive compensation $0.2 million and $0.2 million lower commission.

Amortization of Intangibles

Amortization of intangibles was $0.1 million in the third quarter of fiscal 2022 compared with $0.2 million in the third quarter of fiscal 2021.

The decrease was due to certain intangible assets that became fully amortized during the prior fiscal year.

Amortization of intangibles was $0.1 million in the first three months of fiscal 2023 and fiscal 2022.

Other/General

Prior year results included $0.3 million gain on debt extin guishment due to partial loan forgiveness at the Company's Maniago location.

The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s Credit Agreement in the third quarter of both fiscal 2022 and 2021:

The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreement in the first three months of both fiscal 2023 and 2022:

Weighted Average

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Three Months Ended

June 30, Weighted Average

December 31, Weighted Average

Outstanding Balance

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Other debt 1.7 % 1.1 % $ 0.6 million $ 5.6 million

The Company's effective tax rate in the third quarter of fiscal 2022 was 0.

1 %, compared with (16)% for the same period of fiscal 2021.

The increase in the effective rate was primarily attributable to changes in jurisdictional mix of income during the three months ended June 30, 2022 compared to the same period of fiscal 2021.

The Company’s effective tax rate through the first three months of fiscal 2023 was (2.6%), compared with 1.3% for the same period of fiscal 2022.

The decrease in the effective rate was primarily attributable to changes in jurisdictional mix of income in fiscal 2023 compared with the same period of fiscal 2022.

The effective tax rate differs from the U.S.

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statutory tax rate.

Net (Loss) Income

Net loss was $2.7 million during the third quarter of fiscal 2022, compared with net income of $0.3 million in the comparable period of fiscal 2021.

The net loss is primarily attributed to lower volume and higher costs noted above.

Net loss was $2.6 million during the first three months of fiscal 2023, compared with net loss of $3.7 million in the comparable period of fiscal 2022.

The improvement compared with prior year is primarily due to higher volume and lower selling, general and administrative expenses.

Non-GAAP Financial Measures

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Although the Company uses EBITDA and Adjusted EBITDA for the reasons noted above, the use of these non-GAAP financial measures as analytical tools has limitations.

Therefore, reviewers of the Company’s financial information should not consider them in isolation, or as a substitute for analysis of the Company's results of operations as reported in accordance with GAAP.

Therefore, reviewers of the Company’s financial information should not consider them in isolation, or as a

substitute for analysis of the Company's results of operations as reported in accordance with GAAP.

Some of these limitations include:

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The following table sets forth a reconciliation of net income to EBITDA and Adjusted EBITDA:

Dollars in thousands Three Months Ended Nine Months Ended

June 30, June 30,

2022 2021 2022 2021

Net (loss) income $ (2,668) $ 254 $ (2,720) $ 1,756

Dollars in thousands Three Months Ended

Net loss $ (2,589) $ (3,691)

Depreciation and amortization expense 1,571 1,614

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Gain on disposal of assets (3) (11) —

Gain on insurance recoveries (4) — — — (2,495)

Gain on extinguishment of debt (5) — (287) (5,106) (287)

Equity compensation (4) 122 161

Pension settlement expense (7) 69 — 69 —

LIFO impact (5) 262 176

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(1) Represents the gain or loss from changes in the exchange rates between the functional currency and the foreign currency in which the transaction is denominated.

(2) Represents miscellaneous non-operating income or expense, such as pension costs or grant income.

(2) Represents miscellaneous non-operating income or expense, such as pension costs, grant income and loss on insurance recovery.

(3) Represents the difference between the proceeds from the sale of operating equipment and the carrying value shown on the Company's books or asset impairment of long-lived assets.

(4) Represents the difference between the insurance proceeds received for the damaged property and the carrying values shown on the Company's books for the assets that were damaged in the fire at the Orange location that occurred in December 2018.

(5) Represents the gain on extinguishment of debt and interest for the amount forgiven by the SBA as it relates to the PPP loan.

(4) Represents the equity-based compensation expense recognized by the Company under the 2016 Plan due to granting of awards, awards not vesting and/or forfeitures.

(7) Represents expense incurred by its defined benefit pension plans related to settlement of pension obligations.

(5) Represents the change in the reserve for inventories for which cost is determined using the last-in, first-out (“LIFO”) method.

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The main sources of liquidity for the Company have been cash flows from operations and borrowings under our Credit Agreement.

We anticipate that cash provided by the cash flows from operations and borrowing capacity under our Credit Agreement will be sufficient to meet our anticipated cash requirements for the next twelve months, which primarily include operating expenses, including salaries, working capital requirements and certain capital expenditures (see "Investing Activities," below).

The ongoing impact and magnitude of the consequences and effects of COVID-19, along with the pandemic itself, continues to remain uncertain (including the pandemic's continued effects on the global economy and potential for market disruptions) due to the continued interruptions to the business of our customers and suppliers, which in turn can impact our business operations and results as well as our liquidity and capital resources.

The Company's liquidity could be negatively affected by customers extending payment terms to the Company and/or the decrease in demand for our products as a result of the impact of COVID-19 on the commercial airline industry.

As the lingering impact of COVID-19 on the economy and the Company's operations continues to evolve, the Company and management will continue to assess and actively manage liquidity needs.

See "Results of Operation" for further discussion of the impact of COVID-19.

Cash and cash equivalents was $0.1 million at June 30, 2022 and $0.3 million at September 30, 2021.

At June 30, 2022, the majority of the Company’s cash and cash equivalents were in the possession of its non-U.S.

operating expenses, including salaries, working capital requirements and certain capital expenditures (see "Investing Activities," below).

The Company's liquidity could be negatively affected if the Company is unable to reach an agreement with its lender to waive the defaults, extend the forbearance period or find alternative financing prior to the expiration of the forbearance period, if customers extending payment terms to the Company, or if there is a general decrease in demand for our products.

The Company and management will continue to assess and actively manage liquidity needs.

See "Results of Operation" for further discussion of the lingering impacts of COVID-19.

See Note 7, Debt and Subsequent Event .

Cash and cash equivalents was $1.2 million at December 31, 2022 and $1.2 million at September 30, 2022.

At December 31, 2022, the majority of the Company’s cash and cash equivalents were in the possession of its non-U.S.

subsidiaries.

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Operating Activities

The Company’s operating activities provided $0.7 million of cash in the first nine months of fiscal 2022, primarily due to operating results, a decrease in accounts receivable of $2.7 million, partially offset by increases in inventory $1.0 million.

The Company’s operating activities provided $3.5 million of cash in the first nine months of fiscal 2021.

The cash provided by operating activities in the first nine months of fiscal 2021 was primarily due to net income of $1.8 million and $1.4 million decrease in net working capital, and $3.1 million in non-cash items, such as gain on insurance recovery, and deferred income taxes, depreciation and amortization, equity based compensation, and LIFO effect.

The cash provided by working capital was primarily due to a decrease in receivables due to customer collections and decreased sales.

The Company’s operating activities for the first three months of fiscal 2023 provided $0.3 million of cash, generated primarily by decreases in accounts receivable of $1.6 million and inventory reserves $0.8 million, partially offset by an increase in inventory $1.5 million compared with September 30, 2022.

The Company’s operating activities for the first three months of fiscal 2022 provided $1.2 million of cash, generated primarily by accounts receivable collections, an increase in accounts payable due to increased raw material purchases and other non-cash items, such as depreciation and amortization compared with September 30, 2021.

Cash generation activities were partially offset by the net loss of $3.7 million and a $2.7 million increase in inventory to support sales in fiscal 2022.

Investing Activities

Cash used for investing activities was $2.5 million in the first nine months of fiscal 2022, compared with $1.8 million in the first nine months of fiscal 2021.

The cash used for investing activities in the prior year included $4.1 million in proceeds recovered on the damaged property related to the fire at the Orange location.

Capital commitments as of June 30, 2022 were $1.9 m illion.

Cash used for investing activities was $0.5 million in the first three months of fiscal 2023 and the first three months of fiscal 2022 for capital expenditures.

Capital commitments as of December 31, 2022 were $1.0 m illion.

The Company anticipates that the remaining total fiscal 2023 capital expenditures will be within the range of $1.0 million to $1.5 million and will relate principally to the further enhancement of production and product offering capabilities and drive operating cost reductions.

Financing Activities

Cash provided by financing activities was $1.6 million in the first nine months of fiscal 2022, compared with cash used for financing activities of $1.9 million in the first nine months of fiscal 2021.

As discussed in Note 5, Debt, the Company's Maniago location obtained new borrowings from a lender during the first nine months of fiscal 2022 for approximately $1.1 million with a six year term.

Cash provided by financing activities was $0.1 million in the first three months of fiscal 2023, compared with cash used for financing activities of $0.4 million in the first three months of fiscal 2022.

As discussed in Note 7, Debt and Subsequent Event, the Company's Maniago location obtained new borrowings from a lender during the first three months of fiscal 2022 for approximately $1.1 million with a six year term.

The proceeds of this loan are to be used for working capital purposes.

Short-term debt repayments were $0.1 million in the first nine months of fiscal 2022 compared with net short-term debt advances of $1.6 million in the first nine months of fiscal 2021.

The Company had net borrowings to the revolver under the Credit Agreement of $1.2 million in the first nine months of fiscal 2022 compared with net repayments of $3.0 million in the first nine months of fiscal 2021.

Under the Company's Credit Agreement, the Company is subject to certain customary loan covenants regarding availability as discussed in Note 5, Debt.

The availability at June 30, 2022 was $14.1 million, which was greater than the 10.0% of the Revolving Commitment as of June 30, 2022.

As such, no covenant calculation was required.

If availability had fallen short, the Company would be required to meet the fixed charge coverage ratio ("FCCR") covenant, which must not be less than 1.1 to 1.0.

In the event of a default, we may not be able to access our revolver, which could impact the ability to fund working capital needs, capital expenditures and invest in new business opportunities.

As noted in Note 5, Debt, the Company entered its Sixth Amendment which amends the Credit Agreement to, among other things, (i) revise the fixed coverage ratio to exclude the first $1.5 million of unfunded capital expenditures through April 20, 2023, (ii) increase the letter of credit sub-limit from $2.0 million to $3.0 million, (iii) modify the reference rate from the London interbank offered rate ("LIBOR") to the secured overnight financing rate ("SOFR") under the Credit Agreement, and (iv) revise the property, plant and equipment component of the borrowing base under the Credit Agreement.

The Company had nominal net short-term debt repayments in the first three months of fiscal 2023 compared with net short-term debt repayments of $1.5 million in the first three months of fiscal 2022.

The Company had net borrowings to the revolver under the Credit Agreement of $0.3 million in the first three months of fiscal 2023 compared with net borrowings of $0.3 million in the first three months of fiscal 2022.

Under the Company's Credit Agreement, the Company is subject to certain customary loan covenants regarding availability as discussed in Note 7, Debt and Subsequent Event.

The availability at December 31, 2023 was $8.1 million, which was greater than the 10.0% of the Revolving Commitment as of December 31, 2023.

If availability falls below the 10% level or an event of default occurs, the Company is required to meet the fixed charge coverage ratio covenant, which must not be less than 1.1 to 1.0.

As noted in Note 7, Debt and Subsequent Event on February 6, 2023, the Company received a Notice from its Lender, with respect to (i) that certain Credit Agreement dated as of August 8, 2018;

and (ii) that certain Export Credit Agreement dated as of December 17, 2018.

The Notice indicated that the Loan Parties to the Credit Agreements have informed Lender of the occurrence of Events of Defaults under the Credit Agreements as a result of the failure to deliver the required Borrowing Base Certificates thereunder and other Events of Default.

The Notice indicated further that Lender is in the process of evaluating the Existing Defaults and reserves all of its rights and remedies under the Credit Agreements and any other Loan Documents with respect thereto.

The failure by the Company to provide timely borrowing base certificates and monthly financial reports for the periods of December 2022, January 2023 and February 2023 in accordance with the terms of the Credit Agreements were a result of information access limitations experienced due to the cybersecurity incident that occurred on December 30, 2022.

As a secondary default, the Company failed to maintain a FCCR not less than 1.1 to 1.0 for the periods of December 2022, January 2023, February 2023 and March 2023.

The secondary default voided the availability spring minimum threshold and triggered the FCCR covenant compliance.

See Note 12, Commitments & Contingencies .

As noted in Note 7, Debt and Subsequent Event on April 28, 2023, the Company and its subsidiary guarantors entered into a Forbearance Agreement with J.P.

Morgan Chase Bank, N.A.

in respect to the Event of Default under the Credit Agreement.

Pursuant to the Forbearance Agreement, during the forbearance period defined therein:

(i) the Reserves under the Borrowing Base in the ABL Credit Agreement are reduced to $2.0 million;

(ii) the aggregate outstanding principal balance of the Revolving Exposure under the ABL Credit Agreement and Export Revolving Loan may not at any time exceed the lesser of $19.0 million and the Borrowing Base.

As noted in Note 7, Debt and Subsequent Event, the Company entered its Sixth Amendment which amends the Credit Agreement to, among other things, (i) revise the fixed coverage ratio to exclude the first $1.5 million of unfunded capital expenditures through April 20, 2023, (ii) increase the letter of credit sub-limit from $2.0 million to $3.0 million, (iii) modify the reference rate from the London interbank offered rate ("LIBOR") to the secured overnight financing rate ("SOFR") under the Credit Agreement, and (iv) revise the property, plant and equipment component of the borrowing base under the Credit Agreement.

Additionally, the Export Credit Agreement was amended by the Second Amendment, which replaces the reference rate from LIBOR to SOFR in the Export Credit Agreement.

The Company received forgiveness of the $5.0 million PPP Loan, plus accrued interest, from the SBA in January 2022.

As such, the Company derecognized the liability in the second quarter of fiscal 2022 and has been legally released from the loan.

Future cash flows from the Company’s operations may be used to pay down amounts outstanding under the Credit Agreement and its foreign related debts.

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The Company was able to obtain new financing at its Maniago location to provide Maniago with sufficient liquidity.

Additionally, the credit and capital markets have seen significant volatility during the course of the pandemic.

Tightening of the credit market and standards, as well as capital market volatility caused by various factors, included the continued effects of COVID-19 and/or ongoing geopolitical tensions, could negatively impact our ability to obtain additional debt financing on terms equivalent to our existing Credit Agreement, in the event the Company seeks additional liquidity sources as a result of the continued impact of COVID-19.

Additionally, the credit and capital markets saw significant volatility during the course of the pandemic.

Tightening of the credit market and standards, as well as capital market volatility caused by various factors, including the continued long term effects of COVID-19 and/or ongoing geopolitical tensions, could negatively impact our ability to obtain additional debt financing on terms equivalent to our existing Credit Agreement, in the event the Company seeks additional liquidity sources.

Capital market uncertainty and volatility, together with the Company’s market capitalization and status as a smaller reporting company could also negatively impact our ability to obtain equity financing.

Recently Adopted Accounting Standards

For recently adopted accounting standards refer to Note 1, Summary of Significant Accounting Policies - Recently Adopted Accounting Standards for further detail.

Recent Accounting Standards Not Yet Adopted

For recent accounting standards not yet adopted refer to Note 1, Summary of Significant Accounting Policies - Recent Accounting Standards Not Yet Adopted for further detail.

Additionally, the Company's significant accounting policies and procedures are explained in the Management's Discussion and Analysis section of the Company's Annual Report on Form 10-K for the year ended September 30, 2022.

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