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Item 2. Management’s Discussion and Analysis

2022-09-08 compared with 2022-03-04 · 98 added, 185 removed, 108 unchanged (72% of the section changed)

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The following is a discussion and analysis of our financial condition and the results of operations as of and for the periods presented below.

The following discussion and analysis should be read in conjunction with the “Consolidated Financial Statements” and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

The following discussion and analysis should be read in conjunction with the “Condensed Consolidated Financial Statements” and notes thereto included elsewhere in this Quarterly Report on Form 10-Q.

This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties.

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The following should be read in conjunction with the critical accounting estimates presented in our Annual Report on Form 10-K for the fiscal year ended April 30, 2022.

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.

When we prepare these condensed consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

Some of our accounting policies require that we make subjective judgments, including estimates that involve matters that are inherently uncertain.

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Our actual results may differ from these estimates under different assumptions or conditions.

We recognize revenue in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606).

Topic 606 requires revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which we expect to be entitled in exchange for those goods or services.

We recognize revenue in accordance with ASU 2014-09, Revenue from Contracts with Customers (ASC 606).

ASC 606 requires revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which we expect to be entitled in exchange for those goods or services.

Revenue for TMS product deliveries and customer-funded research and development contracts is recognized over time as costs are incurred.

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The impact of revisions in estimate of completion for all types of contracts are recognized on a cumulative catch-up basis in the period in which the revisions are made.

During the three and nine months ended January 29, 2022 and January 30, 2021, changes in accounting estimates on contracts recognized over time are presented below.

For the three months ended January 29, 2022 and January 30, 2021, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):

During the three months ended July 30, 2022 and July 31, 2021, changes in accounting estimates on contracts recognized over time are presented below.

For the three months ended July 30, 2022 and July 31, 2021, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):

Three Months Ended

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Net (unfavorable) favorable adjustments

For the three months ended January 29, 2022, favorable cumulative catch-up adjustments of $1.1 million were primarily due to final cost adjustments on six contracts, which individually were not material.

For the same period, unfavorable cumulative catch-up adjustments of $1.7 million were primarily related to higher than expected costs on 10 contracts, which individually were not material.

For the three months ended January 30, 2021, favorable cumulative catch-up adjustments of $0.4 million were primarily due to final cost adjustments on nine contracts, which individually were not material.

For the same period, unfavorable cumulative catch-up adjustments of $0.2 million were primarily related to higher than expected costs on 12 contracts, which individually were not material.

For the nine months ended January 29, 2022 and January 30, 2021, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):

Nine Months Ended

Gross favorable adjustments

Gross unfavorable adjustments

Net (unfavorable) favorable adjustments

For the nine months ended January 29, 2022, favorable cumulative catch-up adjustments of $1.2 million were primarily due to final cost adjustments on 18 contracts, which individually were not material.

For the same period, unfavorable cumulative catch-up adjustments of $2.2 million were primarily related to higher than expected costs on 15 contracts, which individually were not material.

For the nine months ended January 30, 2021, favorable cumulative catch-up adjustments of $1.9 million were primarily due to final cost adjustments on 15 contracts, which individually were not material.

For the three months ended July 30, 2022, favorable cumulative catch-up adjustments of $1.3 million were primarily due to final cost adjustments on 14 contracts, which individually were not material.

For the same period, unfavorable cumulative catch-up adjustments of $2.1 million were primarily related to higher than expected costs on four contracts.

During the three months ended July 30, 2022, we revised our estimates of the total expected costs to complete a TMS variant contract.

The aggregate impact of these adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was a decrease to revenue of approximately $1.1 million.

For the three months ended July 31, 2021, favorable cumulative catch-up adjustments of $0.6 million were primarily due to final cost adjustments on 17 contracts, which individually were not material.

For the same period, unfavorable cumulative catch-up adjustments of $0.8 million were primarily related to higher than expected costs on 10 contracts, which individually were not material.

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The following tables set forth our results of operations for the periods indicated (in thousands):

Three Months Ended January 29, 2022 Compared to Three Months Ended January 30, 2021

Three Months Ended July 30, 2022 Compared to Three Months Ended July 31, 2021

Three Months Ended

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Loss from operations

Other (loss) income:

Interest (expense) income, net

Other income (expense), net

Interest expense, net

Other expense, net

Loss before income taxes

Benefit from income taxes

Equity method investment income (loss), net of tax

Net (loss) income

We operate the business as three reportable segments, Small Unmanned Aircraft Systems (“Small UAS”), Tactical Missile Systems (“TMS”) and Medium Unmanned Aircraft Systems (“MUAS”).

Provision for (benefit from) income taxes

Equity method investment loss, net of tax

We have identified four reportable segments, Small Unmanned Aircraft Systems (“Small UAS”), Tactical Missile Systems (“TMS”), Medium Unmanned Aircraft Systems (“MUAS”) and High Altitude Pseudo-Satellite Unmanned Aircraft Systems (“HAPS”).

The Small UAS segment consists of our existing small UAS product lines.

The TMS segment consists of our existing tactical missile systems product lines.

The MUAS segment consists of our recently acquired Arcturus business.

All other includes HAPS, MacCready Works, which includes the recently acquired ISG and Telerob businesses.

The MUAS segment consists of our acquired Arcturus business.

The HAPS segment consists of the Company’s existing development of High Altitude Pseudo-Satellite systems in conjunction with SoftBank.

The category entitled “All other” includes MacCready Works, which includes the recently acquired ISG, and Telerob businesses.

The following table (in thousands) sets forth our revenue, gross margin and adjusted operating income (loss) from operations generated by each reporting segment for the periods indicated.

Adjusted operating income is defined as operating income before intangible amortization, amortization of purchase accounting adjustments, and acquisition related expenses.

Three Months Ended January 29, 2022

All corporate and headquarter expenses are allocated to the reportable segments.

Three Months Ended July 30, 2022

Income (loss) from operations

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Adjusted income (loss) from operations

Three Months Ended January 30, 2021

Three Months Ended July 31, 2021

Income (loss) from operations

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Adjusted income (loss) from operations

The Company recorded intangible amortization expense and other purchase accounting adjustments in the following categories on the accompanying unaudited consolidated statements of operations:

The Company recorded intangible amortization expense and other purchase accounting adjustments in the following categories on the accompanying unaudited condensed consolidated statements of operations:

Three Months Ended

Nine Months Ended

Cost of sales:

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Selling, general and administrative

Revenue for the three months ended January 29, 2022 was $90.1 million, as compared to $78.8 million for the three months ended January 30, 2021, representing an increase of $11.3 million, or 14%.

The increase in revenue was due to an increase in service revenue of $27.1 million, partially offset by a decrease in product revenue of $15.7 million.

The increase in service revenue was primarily due to an increase in MUAS service revenue, resulting from our acquisition of Arcturus in February 2021 and increases in revenue from customer-funded research and development efforts, partially offset by a decrease in TMS service revenue.

The decrease in product revenue was primarily due to a decrease in small UAS product revenue, partially offset by an increases in UGV product revenue, resulting from our acquisitions of Telerob.

Cost of Sales.

Cost of sales for the three months ended January 29, 2022 was $68.7 million, as compared to $50.1 million for the three months ended January 30, 2021, representing an increase of $18.5 million, or 37%.

The increase in cost of sales was a result of an increase in service cost of sales of $25.0 million, partially offset by a decrease in product costs of sales of $6.5 million.

The increase in service cost of sales was primarily due to the increase in service revenues resulting from the acquisitions of Arcturus and ISG, and an increase in intangible amortization expense and other purchase accounting adjustments.

The decrease in product costs of sales was primarily due to a decrease in product revenue and an unfavorable product mix, partially offset by an increase in intangible amortization expense and other purchase accounting adjustments.

Cost of sales for the three months ended January 29, 2022 included $5.1 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $0.6 million for the three months ended January 30, 2021.

As a percentage of revenue, cost of sales increased from 64% to 76%, primarily due to an increase in the proportion of service revenue to total revenues largely resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting adjustments, and an unfavorable product mix.

Gross Margin.

Gross margin for the three months ended January 29, 2022 was $21.4 million, as compared to $28.6 million for the three months ended January 30, 2021, representing a decrease of $7.2 million, or 25%.

The decrease in gross margin was due to a decrease in product margin of $9.3 million, partially offset by an increase in service margin of $2.1 million.

The decrease in product margin was primarily due to the decrease in product sales, an increase in intangible amortization expense and other purchase accounting adjustments and an unfavorable product mix.

The increase in service margin was primarily due to an increase in service revenue, partially offset by an increase in intangible amortization expense and other purchase accounting adjustments.

As a percentage of revenue, gross margin decreased

from 36% to 24%, primarily due to an increase in the proportion of service revenue to total revenues largely resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting adjustments, and an unfavorable product mix.

With the acquisitions of Arcturus and ISG we expect that we will continue to experience a higher proportion of service revenue, which generally has lower gross margins than our product sales, in future quarters as compared to our historical trends.

Selling, General and Administrative .

SG&A expense for the three months ended January 29, 2022 was $22.5 million, or 25% of revenue, as compared to SG&A expense of $15.7 million, or 20% of revenue, for the three months ended January 30, 2021.

The increase in SG&A expense was primarily due to an increase in intangible amortization and acquisition related expenses and an increase in headcount and related costs associated with our Arcturus, ISG and Telerob acquisitions, partially offset by a decrease in bonus and equity based compensation expense.

SG&A included $4.8 million and $3.5 million of acquisition-related expenses and intangible amortization expenses for the three months ended January 29, 2022 and January 30, 2021, respectively.

Research and Development.

R&D expense for the three months ended January 29, 2022 was $13.0 million, or 14% of revenue, as compared to R&D expense of $13.6 million, or 17% of revenue, for the three months ended January 30, 2021.

R&D expense decreased by $0.6 million, or 5%, for the three months ended January 29, 2022, primarily due to a decrease in development activities regarding enhanced capabilities for our products, development of new product lines and to support our recently acquired businesses.

Interest (Expense) Income, net.

Interest expense, net for the three months ended January 29, 2022 was $1.5 million compared to interest income, net of $0.1 million for the three months ended January 30, 2021.

The increase in interest expense was primarily due to an increase in interest expense resulting from the term debt issued concurrent with the acquisition of Arcturus.

Other Income (Expense), net.

Other income, net, for the three months ended January 29, 2022 was $34 thousand compared to other expense, net of $37 thousand for the three months ended January 30, 2021.

Benefit from Income Taxes.

Our effective income tax rate was 98.7% for the three months ended January 29, 2022, as compared to 157.9% for the three months ended January 30, 2021.

The decrease in the effective income tax rate was primarily due to a change in estimate during the current quarter to reduce projected annual income (loss) before income taxes, combined with the year over year decrease in projected annual income (loss) before income taxes.

Equity Method Investment Income (Loss), net of Tax.

Equity method investment income, net of tax for the three months ended January 29, 2022 was $0.2 million compared to a loss of $(0.1) million for the three months ended January 30, 2021.

The equity method investment income during the current quarter was due to an increase in income from our limited partnership investment.

Nine Months Ended January 29, 2022 Compared to Nine Months Ended January 30, 2021

Nine Months Ended

Cost of sales

Selling, general and administrative

Research and development

(Loss) income from operations

Other (loss) income:

Interest (expense) income, net

Other (expense) income, net

(Loss) income before income taxes

(Benefit from) provision for income taxes

Equity method investment income (loss), net of tax

Net (loss) income

The following table (in thousands) sets forth our revenue, gross margin and adjusted operating income (loss) from operations generated by each reporting segment for the periods indicated.

Adjusted operating income is defined as operating income before intangible amortization, amortization of purchase accounting adjustments, and acquisition related expenses.

Nine Months Ended January 29, 2022

Income (loss) from operations

Acquisition-related expenses

Amortization of acquired intangible assets and other purchase accounting adjustments

Adjusted income (loss) from operations

Nine Months Ended January 30, 2021

Income (loss) from operations

Acquisition-related expenses

Amortization of acquired intangible assets and other purchase accounting adjustments

Adjusted income (loss) from operations

Revenue for the nine months ended January 29, 2022 was $313.1 million, as compared to $258.9 million for the nine months ended January 30, 2021, representing an increase of $54.2 million, or 21%.

The increase in revenue was due to an increase in service revenue of $69.7 million, partially offset by a decrease in product revenue of $15.5 million.

The increase in service revenue was primarily due to an increase in MUAS service revenue, resulting from our acquisition of Arcturus in February 2021, and small UAS service revenue, partially offset by a decrease in TMS service revenue.

The decrease in product revenue was primarily due to a decrease in small UAS product revenue, partially offset

by an increase in TMS revenue, an increase in UGV and MUAS product revenue, resulting from our acquisitions of Telerob and Arcturus, respectively.

Revenue for the three months ended July 30, 2022 was $108.5 million, as compared to $101.0 million for the three months ended July 31, 2021, representing an increase of $7.5 million, or 7%.

The increase in revenue was due to an increase in product revenue of $4.9 million and service revenue of $2.6 million.

The increase in product revenue was primarily due to an increase in small UAS and UGV product revenue.

The increase in service revenue was primarily due to an increase in revenue from customer-funded research and development efforts, partially offset by a decrease in TMS service revenue and a decrease in MUAS service revenue.

Cost of Sales.

Cost of sales for the nine months ended January 29, 2022 was $220.5 million, as compared to $154.0 million for the nine months ended January 30, 2021, representing an increase of $66.5 million, or 43%.

The increase in cost of sales was a result of an increase in service cost of sales of $67.7 million, partially offset by a decrease in product costs of sales of $1.2 million.

The decrease in product costs of sales was primarily due to an unfavorable product mix and an increase in intangible amortization expense and other purchase accounting adjustments.

Cost of sales for the nine months ended January 29, 2022 included $14.6 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $1.9 million for the nine months ended January 30, 2021.

As a percentage of revenue, cost of sales increased from 59% to 70%, primarily due to an increase in the proportion of service revenue to total revenues resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting adjustments, and an unfavorable product mix.

Cost of sales for the three months ended July 30, 2022 was $74.8 million, as compared to $72.3 million for the three months ended July 31, 2021, representing an increase of $2.5 million, or 3%.

The increase in cost of sales was a result of an increase in service cost of sales of $2.2 million and an increase in product costs of sales of $0.3 million.

The increase in service cost of sales was primarily due to the increase in service revenues.

The increase in product costs of sales was primarily due to an increase in product revenue, partially offset by a favorable product mix.

Cost of sales for the three months ended July 30, 2022 included $3.0 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $4.0 million for the three months ended July 31, 2021.

As a percentage of revenue, cost of sales decreased from 72% to 69%, primarily due to a favorable product mix.

Gross Margin.

Gross margin for the nine months ended January 29, 2022 was $92.6 million, as compared to $104.9 million for the nine months ended January 30, 2021, representing a decrease of $12.3 million, or 12%.

The decrease in gross margin was due to a decrease in product margin of $14.3 million, partially offset by an increase in service margin of $2.0 million.

The decrease in product margin was primarily due to an unfavorable product mix and an increase in intangible amortization expense and other purchase accounting adjustments.

The increase in service margin was primarily due to the increase in service revenue, partially offset by an increase in intangible amortization expense and other purchase accounting adjustments.

As a percentage of revenue, gross margin decreased from 41% to 30%, primarily due to an increase in the proportion of service revenue to total revenues resulting from the acquisitions of Arcturus and ISG, an increase in intangible amortization expense and other purchase accounting adjustments, and an unfavorable product mix.

Gross margin for the three months ended July 30, 2022 was $33.7 million, as compared to $28.7 million for the three months ended July 31, 2021, representing an increase of $5.0 million, or 17%.

The increase in gross margin was due to an increase in product margin of $4.5 million and an increase in service margin of $0.4 million.

The increase in product margin was primarily due to the increase in product sales and a favorable product mix.

The increase in service margin was primarily due to an increase in service revenue.

As a percentage of revenue, gross margin increased from 28% to 31%, primarily due to a favorable product mix.

Additionally, we expect inflationary and supply chain constraint trends to continue throughout our fiscal year 2023, which will negatively impact our gross margin across all our segments.

Selling, General and Administrative .

SG&A expense for the nine months ended January 29, 2022 was $74.5 million, or 24% of revenue, as compared to SG&A expense of $42.6 million, or 16% of revenue, for the nine months ended January 30, 2021.

The increase in SG&A expense was primarily due to an increase in headcount and related costs associated with our Arcturus, ISG and Telerob acquisitions and an increase in intangible amortization and acquisition related expenses.

SG&A included $19.3 million and $3.9 million of acquisition-related expenses and intangible amortization expenses for the nine months ended January 29, 2022 and January 30, 2021, respectively.

SG&A expense for the three months ended July 30, 2022 was $21.9 million, or 20% of revenue, as compared to SG&A expense of $27.1 million, or 27% of revenue, for the three months ended July 31, 2021.

The decrease in SG&A expense was primarily due to a decrease in acquisition-related expenses of $2.9

million, a decrease in intangible amortization and other related non-cash purchase accounting expenses of $1.2 million, and a decrease in employee related expenses.

Research and Development.

R&D expense for the nine months ended January 29, 2022 was $41.0 million, or 13% of revenue, as compared to R&D expense of $36.7 million, or 14% of revenue, for the nine months ended January 30, 2021.

R&D expense increased by $4.3 million, or 12%, for the nine months ended January 29, 2022, primarily due to an increase in development activities regarding enhanced capabilities for our products, development of new product lines and to support our recently acquired businesses.

Interest (Expense) Income, net.

Interest expense, net for the nine months ended January 29, 2022 was $4.2 million compared to interest income, net of $0.4 million for the nine months ended January 30, 2021.

The increase in interest expense was primarily due to an increase in interest expense resulting from the term debt issued concurrent with the acquisition of Arcturus.

Other (Expense) Income, net.

Other expense, net, for the nine months ended January 29, 2022 was $10.4 million compared to other income, net of $0.1 million for the nine months ended January 30, 2021.

The increase was due to an additional legal accrual of $10.0 million associated with the settlement of all claims made by the buyers of our former EES business.

(Benefit from) Provision for Income Taxes.

Our effective income tax rate was 69.1% for the nine months ended January 29, 2022, as compared to a provision for 10.7% for the nine months ended January 30, 2021.

The increase in the

effective income tax rate was primarily due to lower projected annual income (loss) before income taxes in the current fiscal year as compared to the prior fiscal year.

Equity Method Investment Income (Loss), net of Tax.

Equity method investment income, net of tax for the nine months ended January 29, 2022 was $0.2 million compared to equity method investment loss, net of tax of $10.9 million for the nine months ended January 30, 2021.

The increase was primarily due to a loss of $8.4 million for our proportion of HAPSMobile impairment of its investment in Loon LLC during the three months ended October 31, 2020.

During the nine months ended January 29, 2022 equity method income from our limited partnership investment were largely offset by equity method losses from HAPSMobile.

R&D expense for the three months ended July 30, 2022 was $15.0 million, or 14% of revenue, as compared to R&D expense of $13.7 million, or 14% of revenue, for the three months ended July 31, 2021, primarily due to an increase in development activities regarding enhanced capabilities for our products, development of new product lines and to support our acquired businesses.

Interest Expense, net.

Interest expense, net for the three months ended July 30, 2022 was $1.6 million compared to interest expense, net of $1.3 million for the three months ended July 31, 2021.

The increase in interest expense, net was primarily due to an increase in interest expense resulting from higher interest rates on our debt facility, partially offset by lower average outstanding balances.

Other Expense, net.

Other expense, net, for the three months ended July 30, 2022 was $0.4 million compared to other expense, net of $0.3 million for the three months ended July 31, 2021.

Provision for (Benefit from) Income Taxes.

Our effective income tax rate was (49.3)% for the three months ended July 30, 2022, as compared to 7.0% for the three months ended July 31, 2021.

The decrease in our effective income tax rate was primarily due to the projected negative full fiscal year 2023 effective tax rate which was primarily driven by our projected pre-tax income combined with federal R&D tax credits and foreign-derived intangible income deductions.

Equity Method Investment Loss, net of Tax.

Equity method investment loss, net of tax for the three months ended July 30, 2022 was $0.5 million as compared to $1.1 million for the three months ended July 31, 2021.

In March 2022, the Company sold its 7% equity interest in HAPSMobile to SoftBank.

Subsequent to the equity interest sale in HAPSMobile during the three months ended April 30, 2022, equity method investment loss, net of tax relates to activity related to investments in limited partnership funds.

Consistent with ASC 606, we define funded backlog as remaining performance obligations under firm orders for which funding is currently appropriated to us under a customer contract.

As of January 29, 2022, our funded backlog was approximately $226.3 million.

In addition to our funded backlog, we also had unfunded backlog of $143.4 million as of January 29, 2022.

Unfunded backlog does not meet the definition of a performance obligation under ASC Topic 606.

As of July 30, 2022, our funded backlog was approximately $203.9 million.

In addition to our funded backlog, we also had unfunded backlog of $327.9 million as of July 30, 2022.

Unfunded backlog does not meet the definition of a performance obligation under ASC 606.

We define unfunded backlog as the total remaining potential order amounts under cost reimbursable and fixed price contracts with (i) multiple one-year options and indefinite delivery, indefinite quantity (“IDIQ”) contracts, or (ii) incremental funding.

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Management believes that unfunded backlog does not provide a reliable measure of future estimated revenue under our contracts.

Unfunded backlog, with the exception of the remaining potential value of the Flight Control Systems (“FCS”) domain, does not include the remaining potential value associated with a U.S.

Unfunded backlog includes a $235.2 million contract with a third party that is pending export license approval prior to the funding of the contract.

Unfunded backlog does not include the remaining potential value associated with a U.S.

Army IDIQ-type contract for small UAS because values for each of the other domains within the contract have not been disclosed by the customer, and we cannot be certain that we will secure all task orders issued against the contract.

Additionally, unfunded backlog on the SOCOM MEUAS contract reflects only those sites which have been awarded to Arcturus UAV, Inc.

(“Arcturus”) and does not include the remaining potential value associated with the entire SOCOM MEUAV III/IV contract.

Because of possible future changes in delivery schedules and/or cancellations of orders, backlog at any particular date is not necessarily representative of actual sales to be expected for any succeeding period, and actual sales for the year may not meet or exceed the backlog represented.

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Liquidity and Capital Resources

On February 19, 2021, in connection with the consummation of the Arcturus Acquisition, we entered into a Credit Agreement for (i) a five-year $100 million revolving credit facility, which includes a $10 million sublimit for the issuance of standby and commercial letters of credit, and (ii) a five-year amortized $200 million term A loan (together the “Credit Facilities”).

On February 19, 2021 in connection with the consummation of the Arcturus acquisition, we entered into the Credit Agreement for (i) the Revolving Facility, and (ii) the Term Loan Facility, and together with the Revolving Credit Facility, the “Credit Facilities”.

The Term Loan Facility requires payment of 5% of the outstanding obligations in each of the first four loan years, with the remaining 80.0% payable in loan year five, consisting of three quarterly payments of 1.25% each, with the remaining outstanding principal amount of the Term Loan Facility due and payable on the final maturity date.

Proceeds from the Term Loan Facility were used in part to finance a portion of the cash consideration for the Arcturus acquisition.

Our ability to borrow under the Revolving Facility is reduced by outstanding letters of credit of $3.8 million as of July 30, 2022.

As of July 30, 2022, approximately $96.2 million was available under the Revolving Facility.

Borrowings under the Revolving Facility may be used for working capital and other general corporate purposes.

Refer to Note 10—Debt to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details.

In addition, Telerob has a line of credit of €5.5 million available for issuing letters of credit of which €1.6 million ($1.8 million) was outstanding as of January 29, 2022.

The Credit Agreement contains certain customary representations and warranties and affirmative and negative covenants.

On February 4, 2022, the Company entered into a First Amendment to Credit Agreement and Waiver relating to its existing Credit Agreement (the “First Amendment to Credit Agreement”).

The First Amendment to Credit Agreement waives any event of default that may have occurred as a result of the potential failure by the Company to comply with the consolidated leverage ratio covenant set forth in the agreement for the Credit Facilities for the fiscal quarter ended January 29, 2022.

In addition, the parties amended the maximum permitted Consolidated Leverage Ratio, such that such ratio may not exceed 4.00 to 1.00 for the Company’s fiscal quarters ended January 29, 2022 and April 30, 2022;

3.50 to 1.00 for any of the Company’s fiscal quarters ending during the period from May 1, 2022 to October 31, 2022;

and 3.00 to 1.00 for any fiscal quarter ending thereafter, and adjusted various supporting definitions for clarity.

The First Amendment to Credit Agreement also implemented certain secured overnight financing rate (SOFR) interest rate mechanics and interest rate reference benchmark replacement provisions in order to effectuate the transition from LIBOR as a reference interest rate.

We expect to be in compliance with all financial covenants under the terms of our Credit Agreement, including the First Amendment, during the quarter ending April 30, 2022.

We anticipate funding our normal recurring trade payables, accrued expenses, ongoing R&D costs and obligations under the Credit Facilities through our existing working capital and funds provided by operating activities, including those provided by our recent acquisitions of Arcturus UAV, ISG and Telerob.

Refer to Note 10—Debt to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details.

In addition, Telerob has a line of credit of €5.5 million ($5.6 million) available for issuing letters of credit of which €1.7 million ($1.7 million) was outstanding as of July 30, 2022.

We anticipate funding our normal recurring trade payables, accrued expenses, ongoing R&D costs and obligations under the Credit Facilities through our existing working capital and funds provided by operating activities including those provided by our recent acquisitions of Arcturus, ISG and Telerob.

The majority of our purchase obligations are pursuant to funded contractual arrangements with our customers.

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There can be no assurance, however, that our business will continue to generate cash flow at current levels.

If we are unable to generate sufficient cash flow from operations, then we may be required to sell assets, reduce capital expenditures and/or draw on our Credit Facilities.

If we are unable to generate sufficient cash flow from operations, then we may be required to sell assets, reduce capital expenditures or draw on our Credit Facilities.

We anticipate that existing sources of liquidity, Credit Facilities, and cash flows from operations will be sufficient to satisfy our cash needs for the foreseeable future.

Our primary liquidity needs are for financing working capital, investing in capital expenditures, supporting product development efforts, introducing new products and enhancing existing products, and marketing acceptance and adoption of our products and services.

Our primary liquidity needs are for financing working capital, investing in capital expenditures, supporting product development efforts, introducing new products and enhancing existing products, marketing acceptance and adoption of our products and services.

Our future capital requirements, to a certain extent, are also subject to general conditions in or affecting the defense industry and are subject to general economic, political, financial, competitive, legislative and regulatory factors that are beyond our control.

Moreover, to the extent that existing cash, cash equivalents, cash from operations, and cash from our Credit Facilities are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing, subject to the limitations specified in our Credit Facility agreement.

Moreover, to the extent that existing cash, cash equivalents, cash from operations, and cash from our Credit Agreement are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing, subject to the limitations specified in our Credit Facility agreement.

In addition, we may also need to seek additional equity funding or debt financing if we become a party to any agreement or letter of intent for potential investments in, or acquisitions of, businesses, services or technologies.

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On cost-plus-fee programs, we typically bill our incurred costs and fees monthly as work progresses, and therefore working capital investment is minimal.

On fixed-price contracts, we

typically are paid as we deliver products, and working capital is needed to fund labor and expenses incurred during the lead time from contract award until contract deliveries begin.

On fixed-price contracts, we typically are paid as we deliver products, and working capital is needed to fund labor and expenses incurred during the lead time from contract award until contract deliveries begin.

To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources.

However, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future.

In consideration of the impact of the COVID-19 pandemic, we continue to hold a significant portion of our investments in cash and cash equivalents.

In December 2021, we agreed in principle subject to formal written documentation with Webasto to settle all existing claims related to the sale of our former EES business for $20 million and allowing Webasto to keep the $6.5 million holdback amount.

Under the terms of the settlement agreement entered into effective December 16, 2021, payment of the settlement amount will occur over a 24 month period from the date of execution of the settlement agreement.

As of January 29, 2022, $5 million of the settlement has been paid.

Although not material in value alone or in aggregate, we made certain commitments outside of the ordinary course of business.

We made commitments for capital contributions to a limited partnership fund.

Under the terms of the limited partnership agreement, we have made all of the committed contributions totaling $10.0 million to the fund at January 29, 2022.

We also made commitments to lend HAPSMobile funds to continue the development of Solar HAPS.

The Company committed to and lent 500 million yen ($4.6 million) as of January 29, 2022.

As of January 29, 2022, there are no further lending commitments to HAPSMobile.

On March 1, 2022, HAPSMobile repaid the loan in full plus accrued interest in the amount of 503.8 million yen ($4.3 million).

The following table provides our cash flow data for the nine months ended January 29, 2022 and January 30, 2021 (in thousands):

Nine Months Ended

Net cash (used in) provided by operating activities

Net cash used in investing activities

In consideration of the impact of the ongoing COVID-19 pandemic, we continue to hold a significant portion of our investments in U.S.

government and U.S.

government agency securities.

During the fiscal year ended April 30, 2022, we made certain commitments outside of the ordinary course of business, including capital contribution commitments to a second limited partnership fund.

Under the terms of the new limited partnership agreement, we have committed to make capital contributions to such fund totaling $20.0 million, inclusive of the expected reinvestment of distributions from our existing limited partnership fund, of which $17.2 million was remaining at July 30, 2022.

The contributions are anticipated to be paid over the next five fiscal years.

As of July 30,

2022, $10 million remains of the obligation under the legal settlement with Webasto which will be paid during the fiscal year ending April 30, 2023.

On August 17, 2022 the Company acquired certain assets of Planck Aerosystems, Inc.

(“Planck”), for $5.1 million plus a $0.5 million holdback, which was financed entirely from existing cash on hand.

The following table provides our cash flow data for the three months ended July 30, 2022 and July 31, 2021 (in thousands):

Three Months Ended

Net cash provided by (used in) operating activities

Net cash provided by (used in) investing activities

Net cash (used in) financing activities

Cash (Used in) Provided by Operating Activities.

Net cash used in operating activities for the nine months ended January 29, 2022 increased by $102.1 million to $23.1 million, as compared to net cash provided by operating activities of $79.0 million for the nine months ended January 30, 2021.

The increase in net cash used in operating activities was primarily due to a decrease in net income of $23.8 million and a decrease in cash as a result of changes in operating assets and liabilities of $112.5 million, largely related to accounts receivable, unbilled retentions and receivables, income taxes receivable and inventories due to year over year timing differences, partially offset by an increase in depreciation and amortization of $39.0 million.

Cash Used in Investing Activities.

Net cash used in investing activities increased by $30.8 million to $37.0 million for the nine months ended January 29, 2022, as compared to net cash used by investing activities of $6.2 million for the nine months ended January 30, 2021.

The increase in net cash used in investing activities was primarily due an increase in cash used for the acquisition of Telerob of $46.2 million and a decrease in redemptions of available-for-sale investments of $94.2 million, partially offset by a decrease in purchases of available-for-sale investments of $122.7 million.

Cash Provided by (Used in) Operating Activities.

Net cash provided by operating activities for the three months ended July 30, 2022 increased by $31.2 million to $15.9 million, as compared to net cash used in operating activities of $15.3 million for the three months ended July 31, 2021.

The increase in net cash provided by operating activities was primarily due to an increase in cash as a result of changes in operating assets and liabilities of $25.3 million, largely related to unbilled receivables and retentions and accounts payable, partially offset by a decrease in accounts receivable and inventories due to year over year timing differences and a decrease in net loss of $5.5 million.

Cash Provided by (Used in) Investing Activities.

Net cash provided by investing activities increased by $40.1 million to $3.8 million for the three months ended July 30, 2022, as compared to net cash used in investing activities of $36.3 million for the three months ended July 31, 2021.

The increase in net cash provided by investing activities was primarily due to the acquisition of Telerob for $46.2 million in the prior year quarter, partially offset by a decrease in redemptions of available-for-sale investments of $4.6 million.

Cash Used in Financing Activities.

Net cash used in financing activities increased by $8.6 million to $11.9 million for the nine months ended January 29, 2022, as compared to net cash used by financing activities of $3.4 million for the nine months ended January 30, 2021.

The increase in net cash used by financing activities was primarily due to an increase in payments of loan principal of $7.5 million and an increase in holdback and retention payments related to business acquisitions of $4.5 million.

Contractual Obligations

During the three and nine months ended January 29, 2022, there were no material changes in our contractual obligations and commercial commitments from those disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2021.

Off-Balance Sheet Arrangements

As of January 29, 2022, we had no off‑balance sheet arrangements as defined in Item 303(a)(4) of Regulation S‑K.

Our operations have not been materially affected by inflation.

Historically, we have been successful in adjusting prices to our customers to reflect changes in our material and labor costs.

As it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we cannot assure you that our results of operations and financial condition will not be materially impacted by inflation in the future.

See Part II, Item 1A “Risk Factors” below – “Significant inflation could adversely affect our business and financial results.”

Net cash used in financing activities decreased by $6.2 million to $3.3 million for the three months ended July 30, 2022, as compared to net cash used by financing activities of $9.6 million for the three months ended July 31, 2021.

The decrease in net cash used by financing activities was primarily due to a decrease in holdback and retention payments related to business acquisitions of $6.0 million.

New Accounting Standards

Please refer to Note 1—Organization and Significant Accounting Policies to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of new accounting pronouncements and accounting pronouncements adopted during the nine months ended January 29, 2022.

Please refer to Note 1—Organization and Significant Accounting Policies to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of new accounting pronouncements and accounting pronouncements adopted during the three months ended July 30, 2022.

QUANTITATIVE AND QUALITATIV E DISCLOSURES ABOUT MARKET RISK

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The current outstanding balance of the Credit Facilities is $187.5 million and bears a variable interest rate.

If market interest rates increase significantly, interest due on the Credit Facilities would increase.

The market interest rate has increased significantly, and if market interest rates continue to increase, interest due on the Credit Facilities would increase.

Foreign Currency Exchange Rate Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis