What changed in this filing

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Item 2. Management’s Discussion and Analysis

2024-02-14 compared with 2023-09-28 · 84 added, 152 removed, 117 unchanged (67% of the section changed)

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

and (20) in connection with its entry into the Seventh Amendment to its Credit Agreement and Third Amendment to its Export Credit Agreement, the Company is evaluating available financial alternatives, including obtaining acceptable alternative financing.

The Company has obtained lender waiver

on Existing Defaults and concluded the forbearance period as described under the Forbearance Agreement dated April 28, 2023.

If the Company is unable to find alternative financing as contemplated by the terms of the Seventh Amendment, the lender under the Credit Agreement may choose to accelerate repayment.

The Company cannot provide assurances that it will be able to provide the remaining post closing deliverable as established under the Seventh Amendment of the Credit Agreement or be successful in 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 maturity date of its obligations under the Credit Agreements.

and (20) in connection with its entry into the Ninth Amendment (the "Ninth Amendment") to its Credit Agreement and Fourth Amendment (the "Fourth Amendment") to its Export Credit Agreement, and as a condition to the consummation by the Company’s senior lender of the transactions contemplated thereby:

(a) the Company incurred a secured subordinated loan from Garnet Holdings, Inc., a California corporation owned and controlled by Mark J.

Silk ("GHI") (Mr.

Silk is a member of the Board of Directors of the Company and considered a related party), in the original principal amount of $3.0 million, which subordinated loan is subject to the terms and conditions of an Intercreditor and Subordination Agreement by and among the Company, GHI and the Company’s senior lender;

Silk executed and delivered a personal guaranty in favor of the Company’s senior lender of certain Company indebtedness under the Credit Agreement and the Export Credit Agreement.

The Company is evaluating available financial alternatives, including obtaining acceptable alternative financing.

If the Company is unable to restructure existing debt obligations, obtain capital or enter into a strategic alternative transaction which provides sufficient funding for the refinancing of its outstanding indebtedness prior to the maturity date of its obligations by the terms of the Ninth Amendment, the lender under the Credit Agreement may choose to accelerate repayment.

The Company cannot provide assurances that it will be successful in restructuring the 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 maturity date of its obligations under the Credit Agreements.

The Company engages in the production of forgings and machined components primarily for the A&E and commercial space markets.

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The Company operates within a cost structure that includes a significant fixed component.

Therefore, higher net sales volumes are expected to result in greater operating income because such higher volumes allow the business operations to better leverage the fixed component of their respective cost structures.

Therefore, higher net sales volumes are expected to result in greater operating income because such higher volumes allow the business operations to better leverage

the fixed component of their respective cost structures.

Conversely, the opposite effect is expected to occur at lower net sales and related production volumes.

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

In fiscal 2023, the Company continued to see an impact on its operations with respect to supply chain lead times and ongoing challenges in the labor market.

The Company’s domestic operations during this period were also impacted by the Cyber Incident which resulted in production delays and delayed shipments due to information access limitations.

The Company has since completed data recovery and restoration from the Cyber Incident.

See Note 12, Commitments and Contingencies.

In fiscal 2022, the residual impact of the COVID-19 pandemic (including a decrease in commercial air travel) and certain geopolitical factors impacting the availability of energy and raw materials continued to effect the Company’s results of operations.

While commercial air travel and energy prices began to stabilize beginning in the second quarter of fiscal 2023, the Company continues to monitor these factors and seeks to find ways to mitigate any future impact on its operations.

Backlog of Orders

SIFCO’s total backlog at June 30, 2023 was $122.8 million, compared with $69.4 million as of June 30, 2022.

SIFCO’s total backlog at December 31, 2023 was $130.1 million, of which $103.6 million are anticipated to be complete within the next 12 months, compared with total backlog of $84.2 million as of December 31, 2023.

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

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Backlog information may not be indicative of future sales.

Nine Months Ended June 30, 2023 compared with Nine Months Ended June 30, 2022

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

(Dollars in millions) Nine Months Ended

June 30, Increase/ (Decrease)

Three Months Ended December 31, 2023 compared with Three Months Ended December 31, 2022

Net sales comparative information for the first three months of fiscal 2024 and 2023 is as follows:

(Dollars in millions) Three Months Ended

December 31, Increase/ (Decrease)

Net Sales 2023 2022

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Total $ 21.1 $ 21.3 $ (0.2)

Net sales for the first nine months of fiscal 2023 decreased $2.9 million to $62.4 million, compared with $65.3 million in the comparable period of fiscal 2022.

Net sales for the first three months of fiscal 2024 decreased $0.2 million to $21.1 million, compared with $21.3 million in the comparable period of fiscal 2023.

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

The cybersecurity incident, due to information access limitations and system constraints, impacted domestic operations and the timing of shipments in the second quarter of fiscal 2023.

Year over year, the Cyber Incident and extended raw material lead times have resulted in delayed shipments.

The delayed shipments, coupled with demand shift between military and commercial revenue, largely drove the decrease in sales.

The Company's foreign operations were not impacted by the Cyber Incident and is reflected in the sales to the power generation market that it primarily serves.

Fixed wing sales decreased $0.8 million compared with the same period last year primarily due to F18 demand reduction and timing of orders on the 767 and other programs.

Rotorcraft sales were flat compared with the same period last year.

Rotorcraft sales decreased $1.2 million compared with the same period last year primarily due to V22 demand reduction.

The energy components for power generation units increased by $1.6 million due to growth in the steam turbine markets.

Commercial products and other revenue decreased $4.7 million in the first nine months of fiscal 2023 compared to the same period in fiscal 2022, primarily due to timing of orders related to a munitions program.

Commercial net sales were 55.5% of total net sales and military net sales were 44.5% of total net sales in the first nine months of fiscal 2023, compared with 45.5% and 54.5%, respectively, in the comparable period in fiscal 2022.

Military net sales decreased by $7.8 million to $27.8 million in the first nine months of fiscal 2023, compared with $35.5 million in the comparable period of fiscal 2022, primarily due to F18 demand reduction and timing of a munitions program.

Co mmercial net sales increased $4.9 million to $34.6 million in the first nine months of fiscal 2023, compared with $29.7 million in the comparable period of fiscal 2022, primarily due to an increase in the power generation steam turbine market and commercial space.

Cost of Goods Sold

Cost of goods sold decreased by $7.5 million, or 11.8%, to $55.9 million, or 89.7% of net sales, during the first nine months of fiscal 2023, compared with $63.4 million or 97.2% of net sales, in the comparable period of fiscal 2022.

The decrease is primarily due to lower volume, ERC benefit of $1.5 million, reduction of NRV reserve of $1.4 million primarily resulting from operational improvements and lower idle and labor expense of $0.7 million and $0.2 million, respectively partially offset by higher outside service costs of $0.3 million.

Gross profit increased $4.6 million to $6.5 million in the first nine months of fiscal 2023, compared with $1.8 million gross profit in the comparable period of fiscal 2022.

Gross profit percent of sales was 10.3% during the first nine months of fiscal 2023, compared with 2.8% in the comparable period in fiscal 2022.

The increase in gross profit compared to prior fiscal year was primarily due to product mix, ERC benefit of $1.5 million, reduction of NRV reserve $1.4 million primarily resulting from operational improvements and lower idle and labor expense of $0.7 million and $0.2 million, respectively partially offset by higher outside service costs of $0.3 million.

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $10.5 million, or 16.9%, of net sales during the first nine months of fiscal 2023, compared with $9.0 million, or 13.8%, of net sales in the comparable period of fiscal 2022.

The increase in selling, general and administrative expenses is primarily due to incremental IT costs related to the cybersecurity incident of $1.2 million and professional fees primarily related to the ERC credit of $0.4 million partially offset by ERC benefit of $0.2 million.

See Note 12, Commitments and Contingencies for further discussion.

Amortization of Intangibles

Amortization of intangibles was $0.2 million in the first nine months of fiscal 2023, compared with $0.3 million in the comparable period of fiscal 2022.

Other/General

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 and Subsequent Event 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 2023 and 2022:

Weighted Average

Interest Rate

Nine Months Ended

June 30, Weighted Average

Outstanding Balance

Nine Months Ended

2023 2022 2023 2022

Revolving credit agreement 6.6 % 2.0 % $ 12.6 million $ 10.4 million

Foreign term debt 4.4 % 2.9 % $ 7.3 million $ 6.3 million

Other debt 1.6 % 0.6 % $ 0.5 million $ 2.3 million

The Company’s effective tax rate through the first nine months of fiscal 2023 was (2.3)%, compared with 1% 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.

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 was $5.6 million during the first nine months of fiscal 2023, compared with net loss of $2.7 million in the comparable period of fiscal 2022.

The decrease compared with prior year is primarily due to PPP forgiveness in fiscal 2022, lower volume and higher selling, general and administrative expenses partially offset by reduction of NRV reserve $1.4 million primarily resulting from operational improvements and net ERC benefit of $1.4 million.

Three Months Ended June 30, 2023 compared with Three Months Ended June 30, 2022

Net sales for the third quarter of fiscal 2023 increased 1.9% to $21.9 million, compared with $21.4 million in the comparable period of fiscal 2022.

Net sales comparative information for the third quarter of fiscal 2023 and 2022 is as follows:

(Dollars in millions) Three Months Ended

June 30, Increase (Decrease)

Net Sales 2023 2022

Aerospace components for:

Fixed wing aircraft $ 8.7 $ 10.3 $ (1.6)

Rotorcraft 4.1 4.1 —

Energy components for power generation units 7.0 4.9 2.1

Commercial product and other revenue 2.1 2.1 —

Total $ 21.9 $ 21.4 $ 0.5

Rotorcraft and commercial product and other revenues sales were flat compared with the same period last year.

Fixed wing sales decreased $1.6 million compared with the same period last year primarily due to F18 demand reduction and timing of orders on 737 and 767 programs.

This was offset by an increase of $2.1 million in power generation sales driven by growth in the steam turbine market.

Commercial net sales were 59.9% of total net sales and military net sales were 40.1% of total net sales in the third quarter of fiscal 2023, compared with 55.3% and 44.7%, respectively, in the comparable period of fiscal 2022.

Military net sales

decreased by $0.8 million to $8.8 million in the third quarter of fiscal 2023, compared with $9.6 million in the comparable period of fiscal 2022, primarily due to F18 demand reduction and timing of certain orders.

Commercial net sales increased $1.2 million to $13.1 million in the third quarter of fiscal 2023, compared with $11.9 million in the comparable period of fiscal 2022 primarily due to increase in sales related power generation steam blades.

Commercial products and other revenue were slightly higher compared with the same period last year.

Commercial net sales were 62.9% of total net sales and military net sales were 37.1% of total net sales in the first three months of fiscal 2024, compared with 47.8% and 52.2%, respectively, in the comparable period in fiscal 2023.

Military net sales decreased by $3.3 million to $7.8 million in the first three months of fiscal 2024, compared with $11.1 million in the comparable period of fiscal 2023, primarily due to F18 and V22 demand reduction.

Co mmercial net sales increased $3.0 million to $13.2 million in the first three months of fiscal 2024, compared with $10.2 million in the comparable period of fiscal 2023, primarily due to an increase in the power generation steam turbine market and commercial space.

Cost of Goods Sold

Cost of goods sold was $18.4 million, or 84.1% of net sales, during the third quarter of fiscal 2023, compared with $21.1 million or 98.3% of net sales, in the comparable period of fiscal 2022, primarily due to ERC benefit of $1.5 million, reduction of idle expense $0.3 million and reduction of NRV reserve $0.2 million primarily resulting from operational improvements, partially offset by higher labor costs of $0.3 million.

Gross profit increased $3.1 million to $3.5 million during the third quarter of fiscal 2023, compared with $0.4 million in the comparable period of fiscal 2022.

Gross margin was 15.9% during the third quarter of fiscal 2023, compared with 1.7% in the comparable period in fiscal 2022.

The increase in gross margin was primarily due to ERC benefit of $1.5 million and lower costs incurred as noted above.

Cost of goods sold increased by $0.3 million, or 1.4%, to $20.3 million, or 96.5% of net sales, during the first three months of fiscal 2024, compared with $20.0 million or 94.1% of net sales, in the comparable period of fiscal 2023.

The increase is primarily due to product mix, higher labor costs of $0.4 million, outside services $0.3 million and $0.1 million of hiring costs as the Company increased production to meet customer demands.

Gross profit decreased $0.5 million to $0.7 million in the first three months of fiscal 2024, compared with $1.3 million gross profit in the comparable period of fiscal 2023.

Gross profit percent of sales was 3.5% during the first three months of fiscal 2024, compared with 5.9% in the comparable period in fiscal 2023.

The decrease in gross profit compared to prior fiscal year

was primarily due to product mix, higher labor costs of $0.4 million, outside services $0.3 million and $0.1 million of hiring costs

Selling, General and Administrative Expenses

Selling, general and administrative expenses were $3.4 million, or 15.5% of net sales, during the third quarter of fiscal 2023, compared with $2.8 million, or 13.1% of net sales, in the comparable period of fiscal 2022.

The increase is primarily due to IT incident costs of $0.2 million and professional fees primarily related to the ERC credit of $0.4 million partially offset by ERC benefit of $0.2 million.

Selling, general and administrative expenses were $3.6 million, or 17.0%, of net sales during the first three months of fiscal 2024, compared with $3.3 million, or 15.4%, of net sales in the comparable period of fiscal 2023.

The increase in selling, general and administrative expenses is primarily due to higher legal costs of $0.2 million related to strategic alternatives and higher salaries and benefits $0.1 million.

Amortization of Intangibles

Amortization of intangibles was $0.1 million in the third quarter of fiscal 2023 compared with $0.1 million in the third quarter of fiscal 2022.

Amortization of intangibles was $0.1 million in the first three months of fiscal 2024 and fiscal 2023.

Other/General

Included in other expense, net, in the third quarter of fiscal 2023 is $0.2 million reclassification of utility rebates into cost of goods sold and $0.1 million of pension settlement expense.

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 2023 and 2022:

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 2024 and 2023:

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 1.0 % 1.7 % $ 0.3 million $ 0.6 million

The Company's effective tax rate in the third quarter of fiscal 2023 was (5.8)%, compared with 0.1% for the same period of fiscal 2022.

The decrease in the effective rate was primarily attributable to changes in jurisdictional mix of income during the three months ended June 30, 2023 compared to the same period of fiscal 2022.

The Company’s effective tax rate through the first three months of fiscal 2024 was (1.5)%, compared with (2.6)% for the same period of fiscal 2023.

The decrease in the effective rate was primarily attributable to changes in jurisdictional mix of income in fiscal 2024 compared with the same period of fiscal 2023.

The effective tax rate differs from the U.S.

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statutory tax rate.

Net loss was $0.6 million during the third quarter of fiscal 2023, compared with $2.7 million in the comparable period of fiscal 2022.

The lower net loss in fiscal 2023 is primarily attributed to the higher volume, net ERC benefit of $1.4 million and lower costs noted above.

Net loss was $3.4 million during the first three months of fiscal 2024, compared with net loss of $2.6 million in the comparable period of fiscal 2023.

Increase in net loss is due to higher labor costs, outside services and hiring costs as the Company positions itself for increased demand.

Non-GAAP Financial Measures

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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,

2023 2022 2023 2022

Dollars in thousands Three Months Ended

Net loss $ (3,422) $ (2,589)

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Interest expense, net 430 275

Income tax expense (benefit) 35 (3) 128 (29)

Income tax expense 50 66

EBITDA (1,380) (677)

Foreign currency exchange loss (gain), net (1) 4 (3)

Other expense (income), net (2) 295 (46) 149 (114)

Other expense, net (2) 54 72

Gain on disposal of assets (3) — (11)

Gain on extinguishment of debt (4) — — — (5,106)

Equity compensation (4) 86 122

Pension settlement expense (6) 78 69 78 69

LIFO impact (5) 293 262

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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 and foreign energy tax credits.

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

(2) Represents miscellaneous non-operating income or expense, such as pension costs or grant income (prior year included $0.1 million in loss on insurance recovery, separately reclassed to IT incident costs, net line).

(3) Represents the difference between the proceeds from the sale of operating equipment and the carrying value shown on the Company's books.

(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.

(6) 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.

(8) Represents incremental information technology costs as it relates to the cybersecurity incident and loss on insurance recovery.

(6) Represents incremental information technology costs as it relates to the cybersecurity incident and loss on insurance recovery (prior year balance includes reclassed amount of $0.1 million from footnote two above).

(7) Represents expense related to evaluation of strategic alternatives.

1 unchanged sentence

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

The Company's liquidity could be negatively affected if the Company is unable to find alternative financing prior to the expiration of the Credit Agreement, by customers extending payment terms to the Company and/or the decrease in demand for our products.

The Company's liquidity could be negatively affected if the Company is unable to restructure existing debt obligations, obtain capital or enter into a strategic alternative transaction which provides sufficient funding for the refinancing of its outstanding indebtedness prior to the maturity date of its obligations under the Credit Agreements, by customers

extending payment terms to the Company and/or the 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 $0.6 million at June 30, 2023 and $1.2 million at September 30, 2022.

At June 30, 2023, the majority of the Company’s cash and cash equivalents were in the possession of its non-U.S.

See Note 7 , Debt .

Cash and cash equivalents was $3.2 million at December 31, 2023 and $0.4 million at September 30, 2023.

At December 31, 2023, the majority of the Company’s cash and cash equivalents were in the possession of its non-U.S.

subsidiaries.

See Note 7, Debt - Foreign subsidiary borrowings in USD.

Distributions from the Company's non-U.S.

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Operating Activities

The Company’s operating activities used $2.3 million of cash in the first nine months of fiscal 2023, primarily due to operating results and an increase in accounts receivable of $3.2 million partially offset by contract asset and inventory reductions of $1.2 million and $0.9 million, respectively.

The increase in accounts receivable is primarily driven by timing of shipments and accrual of ERC refund of $0.5 million.

The decrease in inventory is primarily driven by timing of raw material receipts.

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 $1.4 million.

The Company’s operating activities used $2.1 million of cash in the first three months of fiscal 2024, primarily due to net operating loss of $3.4 million partially offset by depreciation and amortization of $1.6 million and change in inventory valuation accounts of $0.4 million and LIFO effect of $0.3 million.

The uses of cash from working capital of $1.0 million was primarily due to increase in inventory of $4.0 million, contract asset of $0.9 million and other assets/prepaids of $0.7 million, partially offset by accounts receivable reductions of $2.2 million and increase in accrued liabilities $2.4 million.

The increase in inventory is primarily driven by increase in work in process to meet heightened customer demand.

The increase in accrued liabilities is primarily driven by increases in deferred revenue of $1.7 million and legal and professional fess.

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.

Investing Activities

Cash used for investing activities was $1.9 million in the first nine months of fiscal 2023, compared with $2.5 million in the first nine months of fiscal 2022.

Capital commitments as of June 30, 2023 were $1.1 million.

Cash used for investing activities was $0.5 million in the first three months of fiscal 2024 and fiscal 2023, respectively.

Capital commitments as of December 31, 2023 were $0.5 million.

The Company anticipates that the remaining total fiscal 2024 capital expenditures will be within the range of $3.5 million to $4.0 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 $3.5 million in the first nine months of fiscal 2023, compared with $1.6 million in the first nine months of fiscal 2022.

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

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

The Company had $0.5 million of net short-term debt borrowings in the first nine months of fiscal 2023 compared with net short-term debt borrowings of $0.1 million in the first nine months of fiscal 2022.

The Company had net borrowings to the revolver under the Credit Agreement of $3.8 million in the first nine months of fiscal 2023 compared with net borrowings of $1.2 million in the first nine 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 June 30, 2023 was $2.6 million, which exceeds both the collateral and total commitment threshold as of June 30, 2023.

As noted in Note 7, Debt and Subsequent Event, on March 23, 2022, 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.

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, on August 9, 2023, the Company entered into the Seventh Amendment to the Credit Agreement and the Third Amendment to the Export Credit Agreement with its lender.

The Seventh Amendment amends the Credit Agreement to, among other things, (i) reduce the Revolving Credit Agreement to $23.0 million, thereby reducing the total revolving commitment to $30.0 million;

(ii) modifies the loan maturity date to December 31, 2023;

(iii) provides waiver of Existing Defaults and concludes the forbearance period as described under the Forbearance Agreement dated April 28, 2023;

(iv) 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 Revolving Commitment, less the Availability Block, if applicable, the Borrowing Base, and in combination with the Export Revolving Loan under the Export Credit Agreement $19.0 million.

The Second Amendment amends the Export Credit Agreement to (i) modify the loan maturity date to December 31, 2023 and (ii) provides waiver of Existing Defaults and concludes the forbearance period as described under the Forbearance Agreement dated April 28, 2023.

As noted in Note 7, Debt and Subsequent Event, the Company provided to its lender one or more proposed term sheets which provide for the refinancing of all of the Obligations and a CIM on or before the requisite due dates as required under the terms of the Seventh Amendment.

Cash provided by financing activities was $5.5 million in the first three months of fiscal 2024, compared with $0.1 million in the first three months of fiscal 2023.

As discussed in Note 7, Debt, the Company's Maniago location obtained borrowings from two separate lending sources during the first three months of fiscal 2024.

The first was a bond for approximately $2.2 million with a seven year term.

The proceeds from this loan are shown within cash and cash equivalents on the consolidated condensed balance sheets and will be used for capital investment.

A second loan for approximately $1.1 million with a term of eighteen months, will be for working capital purposes, of which only $0.8 million has been received.

The Company had $1.2 million of net short-term debt borrowings in the first three months of fiscal 2024 compared with nominal net short-term debt repayments in the first three months of fiscal 2023.

The Company had net repayments to the revolver under the Credit Agreement of $0.2 million in the first three months of fiscal 2024 compared with net borrowings of $0.4 million in the first three months of fiscal 2023.

Under the Company's Credit Agreement, the Company is subject to certain customary loan covenants regarding availability.

The availability at December 31, 2023 was $5.0 million, which exceeds reserve minimum threshold as of December 31, 2023, as such, no covenant calculations were required.

As noted in Note 7, Debt, on November 8, 2023, the Company entered into the Eighth Amendment to the Credit Agreement with its Lender.

The Eighth Amendment, among other things, reduced the Reserves under the Borrowing Base in the Credit Agreement to $1.5 million, or such lesser amount, if any, as may be agreed upon in writing by the Lender in its sole discretion.

As noted in Note 7, Debt, on December 21, 2023, the Company entered into the Ninth Amendment to the Credit Agreement and the Fourth Amendment to the Export Credit Agreement with its lender.

The Ninth Amendment amends the Credit Agreement to, among other things, to:

(i) reflect the incurrence by borrowers of the Subordinated Loan and the execution and delivery by borrowers, the Lender and Silk (Mr.

Silk is a member of the Board of Directors of the Company and considered a related party) of the Subordinated Loan Documents, and the receipt by borrowers of $3.0 million in immediately available funds on the Ninth Amendment Effective Date;

(ii) delay the maturity date from December 31, 2023 to October 4, 2024, or any earlier date on which the Revolving Commitment is reduced to zero or otherwise terminated pursuant to the terms of the Credit Agreement;

(iii) reduce the Revolving Commitment to $19.0 million from $23.0 million;

(iv) modify the definition of Borrowing Base to mean, at any time, the sum of (a) 85% of Eligible Accounts at such time, plus (b) the lesser of (1) 70% of Eligible Inventory,

valued at the lower of cost or market value, determined on a first-in-first-out basis, at such time and (2) the product of 85% multiplied by the NOLV Percentage identified in the most recent inventory appraisal ordered by the Lender multiplied by Eligible Inventory, valued at the lower of cost or market value, determined on a first-in-first-out basis, at such time, minus (c) Reserves of $1.5 million, increasing on the first day of each month by $0.3 million, commencing on May 1, 2024 and continuing until (and including) August 1, 2024, or such lesser amount, if any, as may be agreed upon in writing by the Lender in its sole discretion (which may be by email from the Lender), plus (d) the PP&E Component;

(v) modify the Applicable Margin schedule to reflect the following applicable rates:

2.75% (CBFR REVSOFR30), 0.25% (CBFR Spread (CB Floating Rate)), 2.75% (SOFR Spread), and 0.50% (Commitment Fee Rate);

and (vi) amend and restate subsection (l) of the Reporting Schedule to require, by the 17th day of every month, the delivery of a rolling 13 week cash flow forecast in form acceptable to Lender, which must include a projected to actual results comparison for the week then ended and on a cumulative basis from the beginning of the cash flow forecast.

The Fourth Amendment of the Export Credit Agreement, to, among other things, to:

(i) reflect the incurrence by borrowers of the Subordinated Loan and the execution and delivery by borrowers, the Lender and Silk of the Subordinated Loan Documents, and the receipt by borrowers of $3.0 million in immediately available funds on the Ninth Amendment Effective Date;

and (ii) delay the maturity date to October 4, 2024, or any earlier date on which the Revolving Commitment is reduced to zero or otherwise terminated pursuant to the terms thereof.

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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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.

Tightening of the credit market and standards, as well as capital market volatility, could negatively impact our ability to obtain additional debt financing on terms equivalent to our existing Credit Agreement.

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.

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.

Recent Accounting Standards

For recent accounting standards adopted and not yet adopted refer to Note 1, Summary of Significant Accounting Policies - Recent Accounting Standards Adopted and 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, 2023.

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