SIFCO INDUSTRIES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain various forward-looking statements and includes assumptions concerning the Company’s operations, future results and prospects. The words "will," "may," "designed to," "outlook," "believes," "should," "anticipates," "plans," "expects," "intends," "estimates," "forecasts" and similar expressions identify certain of these forward-looking statements. These forward-looking statements are based on current expectations and are subject to risk and uncertainties. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company provides this cautionary statement identifying important economic, political and technological factors, among others, the absence or effect of which could cause the actual results or events to differ materially from those set forth in or implied by the forward-looking statements and related assumptions. Such factors include the following: (1) the impact on business conditions in general, and on the demand for product in the aerospace and energy (or 19 "A&E") industries in particular, of the global economic outlook, including the continuation of military spending at or near current levels and the availability of capital and liquidity from banks, the financial markets and other providers of credit; (2) the future business environment, including capital and consumer spending; (3) competitive factors, including the ability to replace business that may be lost at comparable margins; (4) metals and commodities price increases and the Company’s ability to recover such price increases; (5) successful development and market introduction of new products and services; (6) continued reliance on consumer acceptance of regional and business aircraft powered by more fuel efficient turboprop engines; (7) continued reliance on military spending, in general, and/or several major customers, in particular, for revenues; (8) the impact on future contributions to the Company’s defined benefit pension plans due to changes in actuarial assumptions, government regulations and the market value of plan assets; (9) stable governments, business conditions, laws, regulations and taxes in economies where business is conducted; (10) the ability to successfully integrate businesses that may be acquired into the Company’s operations; (11) cyber and other security threats or disruptions faced by us, our customers or our suppliers and other partners; (12) our exposure to additional risks as a result of our international business, including risks related to geopolitical and economic factors, suppliers, laws and regulations; (13) our ability to maintain a qualified workforce; (14) the adequacy and availability of our insurance coverage; (15) our ability to develop new products and technologies and maintain technologies, facilities, and equipment to win new competitions and meet the needs of our customers; (16) our ability to realize future sales from amounts in our backlog; (17) investigations, claims, disputes, enforcement actions, litigation and/or other legal proceedings; (18) extraordinary or force majeure events affecting the business or operations of our business; and (19) the Company's ability to restructure existing debt obligations prior to their stated maturity date through the execution of a strategic alternative transaction or obtaining acceptable alternative financing. The Company engages in the production of forgings and machined components primarily for the A&E and commercial space markets. The processes and services provided by the Company include forging, heat-treating, machining, subassembly, and test. The Company operates under one business segment. 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; (ii) the projected maintenance, repair and overhaul schedules for commercial, business and military aircraft, as well as the engines that power such aircraft; (iii) the projected build rate and repair for industrial turbines; and (iv) the market for commercial space. 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. Conversely, the opposite effect is expected to occur at lower net sales and related production volumes. A. Results of Operations Overview The Company produces forged components for (i) turbine engines that power commercial, business and regional aircraft as well as military aircraft and other military applications; (ii) airframe applications for a variety of aircraft; (iii) industrial gas and steam turbine engines for power generation units; and (iv) commercial space, semiconductor and other commercial applications. Backlog of Orders SIFCO’s total backlog at June 30, 2024 was $139.2 million, of which $108.1 million are anticipated to be complete within the next 12 months, compared with total backlog of $122.8 million as of June 30, 2023. Orders may be subject to modification or cancellation by the customer with limited charges. Recovery in the A&E markets has resulted in increased bookings. Backlog information may not be indicative of future sales. 20 Nine Months Ended June 30, 2024 compared with Nine Months Ended June 30, 2023 Net Sales Net sales comparative information for the first nine months of fiscal 2024 and 2023 is as follows: (Dollars in millions) Nine Months Ended June 30, Increase/ (Decrease) Net Sales 2024 2023 Aerospace components for: Fixed wing aircraft $ 30.7 $ 28.3 $ 2.4 Rotorcraft 12.8 12.0 0.8 Energy components for power generation units 20.5 16.7 3.8 Commercial product and other revenue 12.9 5.4 7.5 Total $ 76.9 $ 62.4 $ 14.5 Net sales for the first nine months of fiscal 2024 increased $14.5 million to $76.9 million, compared with $62.4 million in the comparable period of fiscal 2023. In general, the production of the Company's products have lead times of varying lengths. Fixed wing sales increased $2.4 million due to 737, 787, F15 and F16 programs. Rotorcraft sales increased $0.8 million due to H60 program partially offset by V22 demand reduction. The energy components for power generation sales increased by $3.8 million due to growth in the steam turbine markets. Commercial products and other revenue increased by $7.5 million due to commercial space and M1 tank program. Commercial net sales were 64.7% of total net sales and military net sales were 35.3% of total net sales in the first nine months of fiscal 2024, compared with 55.5% and 44.5%, respectively, in the comparable period in fiscal 2023. Military net sales decreased by $0.6 million to $27.1 million in the first nine months of fiscal 2024, compared with $27.8 million in the comparable period of fiscal 2023, primarily due to F35 program and V22 demand reduction. Co mmercial net sales increased $15.1 million to $49.7 million in the first nine months of fiscal 2024, compared with $34.6 million in the comparable period of fiscal 2023, primarily due to an increase in the power generation steam turbine market, commercial space and 737 and 787 programs. Cost of Goods Sold Cost of goods sold increased by $12.9 million, or 23.1%, to $68.8 million, or 89.6% of net sales, during the first nine months of fiscal 2024, compared with $55.9 million or 89.7% of net sales, in the comparable period of fiscal 2023. The increase is primarily due to higher sales volume, higher labor costs of $1.7 million, higher utility cost of $0.4 million and $0.1 million of hiring costs as the Company increased production to meet customer demands, partially offset by lower idle expense of $1.0 million. Prior year results included $1.5 million of ERC benefit and reduction of NRV reserve of $1.4 million. Gross Profit Gross profit increased $1.5 million to $8.0 million in the first nine months of fiscal 2024, compared with $6.5 million gross profit in the comparable period of fiscal 2023. Gross profit percent of sales was 10.4% during the first nine months of fiscal 2024 compared with 10.3% in fiscal 2023. The increase in gross profit compared to prior fiscal year was primarily due to higher volume, lower idle expense and lower outside services of $0.3 million, partially offset by higher labor costs of $1.7 million, utility costs of $0.4 million and hiring costs. Prior year results included $1.5 million of ERC benefit and reduction of NRV reserve of $1.4 million. Selling, General and Administrative Expenses Selling, general and administrative expenses were $9.9 million, or 12.9%, of net sales during the first nine months of fiscal 2024, compared with $10.5 million, or 16.9%, of net sales in the comparable period of fiscal 2023. The decrease in selling, general and administrative expenses is primarily due to benefit of $0.6 million for reversal of third party restoration fees related to the cybersecurity incident and lower commissions of $0.2 million, partially offset by higher wages, benefits and severance costs of $0.4 million and higher expenses related to the evaluation of strategic alternatives of $0.5 million. Prior year results included $1.2 million of costs related the cybersecurity incident and ERC net expense of $0.2 million. Amortization of Intangibles Amortization of intangibles was $0.1 million in the first nine months of fiscal 2024 compared with $0.2 million in fiscal 2023. 21 Other/General 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 2024 and 2023: Weighted Average Interest Rate Nine Months Ended June 30, Weighted Average Outstanding Balance Nine Months Ended June 30, 2024 2023 2024 2023 Revolving credit agreement 8.0 % 6.6 % $ 16.8 million $ 12.6 million Foreign term debt 5.7 % 4.4 % $ 9.6 million $ 7.3 million Promissory note - related party 8.9 % — % $ 3.3 million $ 0.0 million Other debt 0.6 % 1.6 % $ 0.3 million $ 0.5 million Income Taxes The Company’s effective tax rate through the first nine months of fiscal 2024 was (3.2)%, compared with (2.3)% 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. 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 Net loss was $4.9 million during the first nine months of fiscal 2024 compared with net loss of $5.6 million in the comparable period of fiscal 2023. The decrease in net loss is due to higher sales volume and gross margin, offset by higher labor and interest expense as the Company invests to meet increased demand. Three Months Ended June 30, 2024 compared with Three Months Ended June 30, 2023 Net Sales Net sales comparative information for the third quarter of fiscal 2024 and 2023 is as follows: (Dollars in millions) Three Months Ended June 30, Increase/ (Decrease) Net Sales 2024 2023 Aerospace components for: Fixed wing aircraft $ 10.7 $ 8.7 $ 2.0 Rotorcraft 5.5 4.1 1.4 Energy components for power generation units 7.8 7.0 0.8 Commercial product and other revenue 5.3 2.1 3.2 Total $ 29.3 $ 21.9 $ 7.4 Net sales for the third quarter of fiscal 2024 increased $7.4 million to $29.3 million, compared with $21.9 million in the comparable period of fiscal 2023. Fixed wing sales increased $2.0 million compared with the same period last year primarily due to 767, 787 A320, F15, F16, F18 and other programs. Rotorcraft sales increased $1.4 million compared with the same period last year primarily due to the H60 program. Net sales of the energy components for power generation units increased by $0.8 million due to growth in the steam turbine markets. Commercial products and other revenue increased $3.2 million compared with the same period last year primarily due to commercial space. Commercial net sales were 65.3% of total net sales and military net sales were 34.7% of total net sales in the third quarter of fiscal 2024, compared with 59.9% and 40.1%, respectively, in the comparable period in fiscal 2023. Military net sales increased by $1.4 million to $10.1 million in the third quarter of fiscal 2024, compared with $8.8 million in the comparable period of fiscal 2023, primarily due to the H60, F15, F16 and F18 programs partially offset by V22 demand reduction. Co mmercial net sales increased $6.0 million to $19.1 million in the third quarter of fiscal 2024, compared with $13.1 million in the comparable period of fiscal 2023, primarily due to an increase in the power generation steam turbine market, commercial space and 767, 787 and A320 programs. 22 Cost of Goods Sold Cost of goods sold increased by $6.4 million, or 34.6%, to $24.7 million, or 84.5% of net sales, during the third quarter of fiscal 2024, compared with $18.4 million or 84.1% of net sales, in the comparable period of fiscal 2023. The increase is primarily due to higher volume, higher labor costs of $0.7 million and utility costs of $0.4 million as the Company increased production to meet customer demands partially offset by lower idle expense $0.4 million. Prior year results included $1.5 million of ERC benefit. Gross Profit Gross profit increased $1.0 million to $4.5 million in the third quarter of fiscal 2024, compared with $3.5 million gross profit in the comparable period of fiscal 2023. Gross profit percent of sales was 15.5% during the third quarter of fiscal 2024, compared with 15.9% in the comparable period in fiscal 2023. The increase in gross profit compared to the prior fiscal year was primarily due to higher volume and reduction of idle expense. Prior year results included $1.5 million of ERC benefit. Selling, General and Administrative Expenses Selling, general and administrative expenses were $3.2 million, or 10.8%, of net sales, during the third quarter of fiscal 2024, compared with $3.4 million, or 15.5%, of net sales, in the comparable period of fiscal 2023. The decrease in selling, general and administrative expenses is primarily due to a credit due to last years cybersecurity incident of $0.6 million compared with expense of $0.2 million in 2023. The benefit was partially offset by $0.4 million of severance charges and higher costs related to the evaluation of strategic alternatives of $0.1 million. Amortization of Intangibles Amortization of intangibles were negligible in the third quarter of fiscal 2024 and fiscal 2023. Other/General The following table sets forth the weighted average interest rates and weighted average outstanding balances under the Company’s debt agreement in the third quarter of both fiscal 2024 and 2023: Weighted Average Interest Rate Three Months Ended June 30, Weighted Average Outstanding Balance Three Months Ended June 30, 2024 2023 2024 2023 Revolving credit agreement 8.1 % 7.2 % $ 18.0 million $ 14.2 million Foreign term debt 7.1 % 4.8 % $ 10.1 million $ 7.5 million Promissory note - related party 13.3 % — % $ 3.3 million $ 0.0 million Other debt — % 1.6 % $ 0.3 million $ 0.4 million Income Taxes The Company’s effective tax rate through the third quarter of fiscal 2024 was 43.8%, compared with (5.8)% for the same period of fiscal 2023. The increase 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. 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 Income (Loss) Net income was $0.1 million during the third quarter of fiscal 2024, compared with net loss of $0.6 million in the comparable period of fiscal 2023. Increase in net income is primarily due to higher sales volume and gross margin, including reduction of Cyber incident costs and idle expense of $0.8 million and $0.4 million, respectively, partially offset by higher severance, interest expense, and labor costs as the Company increased production to meet customer demands. Non-GAAP Financial Measures Presented below is certain financial information based on the Company's EBITDA and Adjusted EBITDA. References to "EBITDA" mean earnings (losses) from continuing operations before interest, taxes, depreciation and amortization, and references to "Adjusted EBITDA" mean EBITDA plus, as applicable for each relevant period, certain adjustments as set forth in the reconciliations of net income to EBITDA and Adjusted EBITDA. 23 Neither EBITDA nor Adjusted EBITDA is a measurement of financial performance under generally accepted accounting principles in the United States of America ("GAAP"). The Company presents EBITDA and Adjusted EBITDA because management believes that they are useful indicators for evaluating operating performance and liquidity, including the Company’s ability to incur and service debt and it uses EBITDA to evaluate prospective acquisitions. 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. Some of these limitations include: • Neither EBITDA nor Adjusted EBITDA reflects the interest expense, or the cash requirements necessary to service interest payments on indebtedness; • Although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and neither EBITDA nor Adjusted EBITDA reflects any cash requirements for such replacements; • The omission of the amortization expense associated with the Company’s intangible assets further limits the usefulness of EBITDA and Adjusted EBITDA; and • Neither EBITDA nor Adjusted EBITDA includes the payment of taxes, which is a necessary element of operations. Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to the Company to invest in the growth of its businesses. Management compensates for these limitations by not viewing EBITDA or Adjusted EBITDA in isolation and specifically by using other GAAP measures, such as net income (loss), net sales, and operating income (loss), to measure operating performance. Neither EBITDA nor Adjusted EBITDA is a measurement of financial performance under GAAP, and neither should be considered as an alternative to net income (loss) or cash flow from operations determined in accordance with GAAP. The Company’s calculation of EBITDA and Adjusted EBITDA may not be comparable to the calculation of similarly titled measures reported by other companies. 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, 2024 2023 2024 2023 Net income (loss) $ 72 $ (634) $ (4,940) $ (5,590) Adjustments: Depreciation and amortization expense 1,499 1,623 4,567 4,820 Interest expense, net 1,078 305 2,471 919 Income tax expense 56 35 153 128 EBITDA 2,705 1,329 2,251 277 Adjustments: Foreign currency exchange loss, net (1) (1) 1 6 11 Other expense (income), net (2) 78 295 184 149 Gain (loss) on disposal of assets (3) — (3) 3 — Equity compensation (4) 72 85 243 292 Pension settlement expense (5) 60 78 60 78 Severance expense (6) 435 — 435 — LIFO impact (7) 475 (73) 826 (272) IT incident (benefit) cost, net (8) (627) 182 (605) 1,269 Strategic alternative expense (9) 169 29 490 29 Adjusted EBITDA $ 3,366 $ 1,923 $ 3,893 $ 1,833 (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 (prior year included $0.1 million in loss on insurance recovery, separately reclassed to IT incident costs, net line). 24 (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. (5) Represents expense incurred by its defined benefit pension plans related to settlement of pension obligations. (6) Represents expense incurred for executive severance. (7) 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. (9) Represents expense related to evaluation of strategic alternatives. B. Liquidity and Capital Resources 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 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 Note 7 , Debt . Cash and cash equivalents was $1.7 million at June 30, 2024 and $0.4 million at September 30, 2023. At June 30, 2024, the majority of the Company’s cash and cash equivalents were in possession of its domestic subsidiaries. Short-term investments was $1.7 million at June 30, 2024 and zero at September 30, 2023. At June 30, 2024, the Company’s short-term investments 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. subsidiaries to the Company may be subject to adverse tax consequences. Operating Activities The Company’s operating activities used $5.0 million of cash in the first nine months of fiscal 2024, primarily due to net loss of $4.9 million partially offset by non-cash adjustments for depreciation and amortization of $4.6 million, amortization of debt issuance costs of $0.8 million and change in inventory valuation accounts of $0.5 million and LIFO effect of $0.8 million. The uses of cash for working capital of $7.2 million was primarily due to increases in inventory of $5.6 million and accounts receivable of $6.6 million, partially offset by increases in contract liabilities of $2.7 million and accounts payable of $1.4 million. The increase in inventory is primarily due to increase in raw material and work in process to meet heightened customer demand. The increase in accounts receivable is due to increases in customer shipments. The increase in contract liabilities is due to advance raw material payments from customers. The increase in accounts payable is due to increases in raw material purchases and outside processing fees related to inventory build. The Company’s operating activities for the first nine months of fiscal 2023 used $2.3 million 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. Investing Activities Cash used for investing activities was $3.8 million in the first nine months of fiscal 2024 primarily due to purchase of short-term investments, net of maturities, of $1.7 million and capital expenditures of $2.0 million. Cash used for investing activities was $1.9 million in the first nine months of fiscal 2023 due to capital expenditures. Capital commitments as of June 30, 2024 were $0.4 million. The Company anticipates that the remaining total fiscal 2024 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 $10.1 million in the first nine months of fiscal 2024, compared with $3.5 million in the first nine months of fiscal 2023. As discussed in Note 7, Debt, the Company's Maniago location obtained borrowings from two separate lending sources and increased during the first nine 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 and short-term investments on the consolidated 25 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. Additionally, the Company increased three of its credit and factoring lines with existing lenders to support working capital needs. The Company had $2.6 million of net short-term debt borrowings in the first nine months of fiscal 2024 compared with $0.5 million in the first nine months of fiscal 2023. The Company had net borrowings from the revolver under the Credit Agreement of $1.2 million in the first nine months of fiscal 2024 compared with net borrowings of $3.4 million in the first nine months of fiscal 2023. Under the Company's Credit Agreement, the Company is subject to certain customary loan covenants regarding availability. The availability at June 30, 2024 was $2.9 million, which exceeds reserve minimum threshold as of June 30, 2024, 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. As noted in Note 7, Debt, on May 21, 2024, the Company entered into the Tenth Amendment to the Credit Agreement and the Fifth Amendment to the Export Credit Agreement with its lender. The Tenth and Fifth Amendments amend the Credit Agreement and the Export Credit Agreement to, among other things, to: (i) increase the Revolving Commitment, less the Availability Block, if applicable, to (y) the Borrowing Base, and (z) in combination with the Export Revolving Loans under the Export Credit Agreement, (i) $18.0 million through September 30, 2023, (ii) $19.0 million from and including October 1, 2023 through May 14, 2024, and (iii) $22.0 million thereafter until, and reducing to zero and terminating on, the Maturity Date; (ii) modify the definition of Borrowing Base Reserves to $1.5 million or such other amount, if any, as may be determined in writing by the Lender in its Permitted Discretion (which may be by email from the Lender); and (iii) the execution of the First Amendment of the Silk Guaranty. Future cash flows from the Company’s operations may be used to pay down amounts outstanding under the Credit Agreement, the Export Credit Agreement and its foreign related debts. The Company believes it has adequate cash/liquidity available to finance its operations from the combination of (i) the Company’s expected cash flows from operations and (ii) funds available under the Credit Agreement for its domestic locations. In fiscal year 2024, the Company was able to obtain new financing at its Maniago location to provide Maniago with sufficient liquidity. 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, 26 together with the Company’s market capitalization and status as a smaller reporting company, could also negatively impact our ability to obtain equity financing. C. 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.