What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-09-06 compared with 2023-03-06 · 101 added, 178 removed, 133 unchanged (68% of the section changed)

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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.

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

Contract services revenue is composed of revenue recognized on contracts for the provision of services, including repairs and maintenance, training, engineering design, development and prototyping activities, and technical support services.

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We elected the right to invoice practical expedient in which if an entity has a right to consideration from a customer in an amount that corresponds directly with the value to the customer of the entity’s performance completed to date, such as flight hours for ISR services, the entity may recognize revenue in the amount to which the entity has a right to invoice.

During the year ended April 30, 2023, all of our MUAS COCO sites were closed.

Training services are recognized over time using an output method based on days of training completed.

For performance obligations satisfied over time, revenue is generally recognized using costs incurred to date relative to total estimated costs at completion to measure progress.

Incurred costs represent work performed, which correspond with, and thereby best depict, transfer of control to the customer.

Incurred costs represent work performed, which correspond with, and thereby best depict, transfer of

control to the customer.

Contract costs include labor, materials, subcontractors’ costs, other direct costs, and indirect costs applicable on government and commercial contracts.

For performance obligations which are not satisfied over time per the aforementioned criteria above, revenue is recognized at the point in time in which each performance obligation is fully satisfied.

Our small UAS, MUAS and UGV product sales revenue is composed of revenue recognized on contracts for the delivery of small UAS, MUAS and UGV systems and spare parts, respectively.

Our Unmanned Systems product sales revenue is composed of revenue recognized on contracts for the delivery of SUAS, MUAS and UGV systems and spare parts, respectively.

Revenue is recognized at the point in time when control transfers to the customer, which generally occurs when title and risk of loss have passed to the customer.

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Changes in variable consideration associated with the finalization of undefinitized contract actions could result in cumulative catch up adjustments to revenue that could be material.

During the three months ended

January 28, 2023 and January 29, 2022, changes in accounting estimates on contracts recognized over time are presented below.

For the three months ended January 28, 2023 and January 29, 2022, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):

During the three months ended July 29, 2023 and July 30, 2022, changes in accounting estimates on contracts recognized over time are presented below.

For the three months ended July 29, 2023 and July 30, 2022, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):

Three Months Ended

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Net favorable (unfavorable) adjustments

For the three months ended January 28, 2023, favorable cumulative catch-up adjustments of $1.7 million were primarily due to final cost adjustments on 11 contracts, which individually were not material.

For the three months ended July 29, 2023, favorable cumulative catch-up adjustments of $2.7 million were primarily due to final cost adjustments on 11 contracts, which individually were not material.

For the same period, unfavorable cumulative catch-up adjustments of $1.1 million were primarily related to higher than expected costs on seven contracts, which individually were not material.

Also during the three months ended January 28, 2023, we recognized a decrease in the forward loss reserves on two MUAS ISR contracts for $2.4 million and an increase in the forward loss reserve of an MUAS products contract for $1.6 million.

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 nine months ended January 28, 2023 and January 29, 2022, 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 adjustments

For the nine months ended January 28, 2023, favorable cumulative catch-up adjustments of $2.3 million were primarily due to final cost adjustments on 22 contracts, which individually were not material.

For the same period, unfavorable cumulative catch-up adjustments of $3.7 million were primarily related to higher than expected costs on six contracts.

During the nine months ended January 28, 2023, we revised our estimates of the total expected costs to complete two TMS variant contracts.

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 an LMS 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 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.

Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets.

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Our evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value.

For the impairment test, we first assess qualitative factors, macroeconomic conditions, industry and market considerations, triggering events, cost factors, and overall financial performance, to determine whether it is necessary to perform a quantitative goodwill impairment test.

perform a quantitative goodwill impairment test.

Alternatively, we may bypass the qualitative assessment for some or all of its reporting units and apply the quantitative impairment test.

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These valuation approaches consider a number of factors that include, but are not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry and require us to make certain assumptions and estimates regarding industry economic factors and future profitability of its business.

Our MUAS reporting unit is considered at an increased risk of failing future quantitative goodwill impairment tests as the estimated fair value exceeded its carrying value by approximately 10% during the most recent annual goodwill impairment test performed during the fourth quarter ended April 30, 2022.

The termination of the COCO flight services at our remaining MUAS COCO services site location will be evaluated as part of the annual goodwill and intangible asset impairment test.

We perform our annual impairment tests during the fourth quarter of each fiscal year.

The intangibles included in the MUAS reporting unit of $56.0 million as of January 28, 2023 will also be evaluated for potential impairment during the fourth quarter.

Subsequent to the performance of our annual goodwill impairment test for fiscal year 2023, in May 2023 a trigger event was identified that indicated that the carrying value of the MUAS reporting unit exceeded its fair value.

Specifically, we received notification that we were not down selected for a U.S.

DoD program of record which resulted in a significant decrease in the projected future cash flows of the MUAS reporting unit.

As a result, we updated our estimates of long-term future cash flows to reflect lower revenue and EBITDA growth rate expectations used in the valuation of the MUAS reporting unit.

These changes in estimates, resulted in the recognition of a goodwill impairment charge of $156.0 million in the MUAS reporting unit during the fiscal year ended April 30, 2023.

Our MUAS reporting unit is considered at an increased risk of failing future quantitative goodwill impairment tests as an impairment was recorded during the most recent annual goodwill impairment test performed during the fourth quarter ended April 30, 2023.

The intangibles included in the MUAS reporting unit of $16.7 million as of July 29, 2023 will also be evaluated for potential impairment during the fourth quarter goodwill impairment test.

The estimates and assumptions used to determine the fair value of our reporting units are highly subjective in nature.

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

Three Months Ended January 28, 2023 Compared to Three Months Ended January 29, 2022

Three Months Ended July 29, 2023 Compared to Three Months Ended July 30, 2022

Three Months Ended

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Income (loss) from operations

Other (loss) income:

Interest expense, net

Other (expense) income, net

Loss before income taxes

Benefit from income taxes

Equity method investment (loss) income, 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 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.

Other expense, net

Income (loss) before income taxes

Provision for income taxes

Equity method investment loss, net of tax

Net income (loss)

We have identified three reportable segments, Unmanned Systems (“UMS”), Loitering Munitions Systems (“LMS”) and MacCready Works (“MW”).

The UMS segment consists of our small UAS, medium UAS and UGV product lines.

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

The MW segment consists of the Company’s MacCready Works products and services and the development of High Altitude Pseudo-Satellite systems (“HAPS”).

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.

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

Three Months Ended January 28, 2023

Three Months Ended July 29, 2023

Income (loss) from operations

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Amortization of acquired intangible assets and other purchase accounting adjustments

Adjusted income (loss) from operations

Three Months Ended January 29, 2022

Income (loss) from operations

Adjusted income from operations

Three Months Ended July 30, 2022

(Loss) income from operations

Acquisition-related expenses

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Three Months Ended

Nine Months Ended

Cost of sales:

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Selling, general and administrative

Revenue for the three months ended January 28, 2023 was $134.4 million, as compared to $90.1 million for the three months ended January 29, 2022, representing an increase of $44.3 million, or 49%.

Revenue for the three months ended July 29, 2023 was $152.3 million, as compared to $108.5 million for the three months ended July 30, 2022, representing an increase of $43.8 million, or 40%.

The increase in revenue was due to an increase in product revenue of $61.5 million, partially offset by a decrease in service revenue of $17.7 million.

The increase in product revenue was primarily due to increases in small UAS and TMS product revenue, partially offset by a decrease in All other product revenue.

The decrease in service revenue was primarily due to a decrease in MUAS service revenue, partially offset by increases in customer-funded research and development revenue.

We expect the lower levels of MUAS service revenues to continue into fiscal 2024 due to the completion of certain MUAS site locations.

Due to the higher backlog, the increase in the small UAS product revenues as compared to the prior year period is expected to continue for the fourth quarter of the fiscal year ended April 30, 2023.

The increase in product revenue was primarily due to increases in UMS and LMS product revenue.

The decrease in service revenue was primarily due to a decrease in UMS and LMS service revenue, partially offset by an increase in MW service revenue.

We expect the lower levels of UMS service revenues to continue through fiscal 2024 due to the closure of all COCO site locations.

With the higher backlog, the increase in the UMS product revenues as compared to the prior year period is expected to continue for the remainder of the fiscal year ending April 30, 2024.

Cost of Sales.

Cost of sales for the three months ended January 28, 2023 was $88.9 million, as compared to $68.7 million for the three months ended January 29, 2022, representing an increase of $20.2 million, or 29%.

Cost of sales for the three months ended July 29, 2023 was $86.7 million, as compared to $74.8 million for the three months ended July 30, 2022, representing an increase of $11.9 million, or 16%.

The increase in cost of sales was a result of an increase in product cost of sales of $28.7 million, partially offset by a decrease in service costs of sales of $16.8 million.

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

The decrease in service cost of sales was primarily due a decrease in service revenue.

Cost of sales for the three months ended January 28, 2023 included $3.3 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $5.1 million for the three months ended January 29, 2022.

As a percentage of revenue, cost of sales decreased from 76% to 66%, primarily due to a favorable product mix, a decrease in intangible amortization and other related non-cash purchase accounting expenses, and an increase in revenue resulting in higher overhead cost absorption, partially offset by accelerated depreciation charges of certain deployed fixed assets related to the anticipated completion of certain MUAS site locations of $4.3 million.

The decrease in service cost of sales was primarily due to a decrease in service revenue.

Cost of sales for the three months ended July 29, 2023 included $2.4 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $3.0 million for the three months ended July 30, 2022.

Cost of sales for the three months ended July 30, 2022 also included $4.0 million of depreciation of in-service ISR assets.

As a percentage of revenue, cost of sales decreased from 69% to 57%, primarily due to an increase in the proportion of product revenue to total revenue and a favorable product mix.

Gross Margin.

Gross margin for the three months ended January 28, 2023 was $45.5 million, as compared to $21.4 million for the three months ended January 29, 2022, representing an increase of $24.1 million, or 112%.

The increase in gross margin was due primarily to an increase in product margin of $23.0 million and an increase in service margin of $1.0 million.

Gross margin for the three months ended July 29, 2023 was $65.7 million, as compared to $33.7 million for the three months ended July 30, 2022, representing an increase of $31.9 million, or 95%.

The increase in gross margin was primarily due to an increase in product margin of $32.8 million, partially offset by a decrease in service margin of $0.8 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 a favorable service mix and higher overhead cost absorption.

As a percentage of revenue, gross margin increased from 24% to 34%, primarily due to a favorable product mix, a decrease in intangible amortization and other related non-cash purchase accounting expenses, and an increase in revenue

resulting in higher overhead cost absorption, partially offset by accelerated depreciation charges of certain deployed fixed assets related to the anticipated completion of certain MUAS site locations of $4.3 million.

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

Selling, General and Administrative .

SG&A expense for the three months ended January 28, 2023 was $24.7 million, or 18% of revenue, as compared to SG&A expense of $22.5 million, or 25% of revenue, for the three months ended January 29, 2022.

The increase in SG&A expense was primarily due to an increase in employee related expenses, partially offset by a decrease in intangible amortization and other related non-cash purchase accounting expenses.

Research and Development.

R&D expense for the three months ended January 28, 2023 was $16.2 million, or 12% of revenue, as compared to R&D expense of $13.0 million, or 14% of revenue, for the three 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 support for our acquired businesses.

Interest Expense, net.

Interest expense, net for the three months ended January 28, 2023 was $2.8 million compared to interest expense, net of $1.5 million for the three months ended January 29, 2022.

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) Income, net.

Other expense, net, for the three months ended January 28, 2023 was $(2.6) million compared to other income, net of $34 thousand for the three months ended January 29, 2022.

Other expense, net for the three months ended January 28, 2023 includes unrealized losses associated with decreases in the fair market value for equity security investments.

Benefit from Income Taxes.

Our effective income tax rate was 67.2% for the three months ended January 28, 2023, as compared to 98.7% for the three months ended January 29, 2022.

Historically, we calculated the provision for income taxes during interim reporting periods by applying an estimate of our annual effective tax rate (“AETR”) for the full fiscal year to the pretax income or loss for the interim reporting period.

For the three months ended January 28, 2023, we calculated the provision for income taxes using a discrete effective tax rate (“ETR”) method.

We determined that since small changes in estimated pretax income or loss would result in significant changes in the estimated AETR, the historical method would not provide a reliable estimate for the three months ended January 28, 2023.

The decrease in our effective income tax rate was in part due to the change to the ETR method.

The effective income tax rate for the three months ended January 28, 2023 was primarily impacted by expected federal R&D tax credits, foreign-derived intangible income deductions and excess tax benefits on equity awards.

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

Equity method investment loss, net of tax for the three months ended January 28, 2023 was $(0.4) million as compared to equity method investment income, net of tax of $0.2 million for the three months ended January 29, 2022.

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.

Nine Months Ended January 28, 2023 Compared to Nine Months Ended January 29, 2022

The following tables (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.

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

Nine Months Ended

Cost of sales

Selling, general and administrative

Research and development

Loss from operations

Interest expense, net

Other expense, net

Loss before income taxes

Benefit from income taxes

Equity method investment (loss) income, net of tax

Nine Months Ended January 28, 2023

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 29, 2022

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 28, 2023 was $354.5 million, as compared to $313.1 million for the nine months ended January 29, 2022, representing an increase of $41.4 million, or 13%.

The increase in revenue was due to an increase in product revenue of $44.8 million, partially offset by a decrease in service revenue of $3.4 million.

The increase in product revenue was primarily due to increases in small UAS, TMS and MUAS product revenue.

decrease in service revenue was primarily due to decreases in MUAS, small UAS and HAPS service revenue, partially offset by increases in revenue from customer-funded research and development efforts primarily in our All Other and TMS segments.

We expect the lower levels of MUAS service revenues to continue into fiscal 2024 related to the completion of certain MUAS site locations.

Due to the higher backlog, we expect the Small UAS product revenues to be significantly higher in the fourth quarter of fiscal 2023 and during the first half of fiscal 2024 as compared to the first half of fiscal 2023.

Cost of Sales.

Cost of sales for the nine months ended January 28, 2023 was $249.4 million, as compared to $220.5 million for the nine months ended January 29, 2022, representing an increase of $28.9 million, or 13%.

The increase in cost of sales was a result of an increase in product cost of sales of $26.4 million and an increase in service costs of sales of $2.5 million.

The increase in product costs of sales was primarily due to an increase in product revenue.

The increase in service cost of sales was primarily due to accelerated depreciation charges of certain deployed fixed assets related to the anticipated completion of certain MUAS site locations of $8.1 million, partially offset by a decrease in service revenue and a decrease in intangible amortization and other related non-cash purchase accounting expenses.

Cost of sales for the nine months ended January 28, 2023 included $10.4 million of intangible amortization and other related non-cash purchase accounting expenses as compared to $14.6 million for the nine months ended January 29, 2022.

As a percentage of revenue, cost of sales remained consistent at 70%.

Gross Margin.

Gross margin for the nine months ended January 28, 2023 was $105.1 million, as compared to $92.6 million for the nine months ended January 29, 2022, representing an increase of $12.5 million, or 13%.

The increase in gross margin was due to an increase in product margin of $18.4 million, partially offset by a decrease in service margin of $5.9 million.

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

The decrease in service margin was primarily due to accelerated depreciation charges of certain deployed fixed assets related to the anticipated completion of certain MUAS site locations of $8.1 million and a decrease in service revenue.

As a percentage of revenue, gross margin remained consistent at 30%.

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

The decrease in service margin was primarily due to the decrease in service revenue.

As a percentage of revenue, gross margin increased from 31% to 43%, primarily due to an increase in the proportion of product revenue to total revenue and a favorable product mix.

Selling, General and Administrative .

SG&A expense for the nine months ended January 28, 2023 was $70.3 million, or 20% of revenue, as compared to SG&A expense of $74.5 million, or 24% of revenue, for the nine months ended January 29, 2022.

The decrease in SG&A expense was primarily due to a decrease in acquisition-related expenses of $3.9 million and a decrease in intangible amortization and other related non-cash purchase accounting expenses of $2.7 million, partially offset by an increase in employee related costs.

SG&A expense for the three months ended July 29, 2023 was $23.8 million, or 16% of revenue, as compared to SG&A expense of $21.9 million, or 20% of revenue, for the three months ended July 30, 2022.

The increase in SG&A expense was primarily due to an increase in employee related expenses, partially offset by a decrease in intangible amortization and other non-cash purchase accounting expenses largely driven by the accelerated amortization of COCO customer relationships recorded during the three months ended April 30, 2023.

Research and Development.

R&D expense for the nine months ended January 28, 2023 was $47.8 million, or 13% of revenue, as compared to R&D expense of $41.0 million, or 13% of revenue, 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 acquired businesses.

R&D expense for the three months ended July 29, 2023 was $15.5 million, or 10% of revenue, as compared to R&D expense of $15.0 million, or 14% of revenue, for the three months ended July 30, 2022, primarily due to an increase in development activities regarding enhanced capabilities for our products, development of new product lines and support for our acquired businesses.

Interest Expense, net.

Interest expense, net for the nine months ended January 28, 2023 was $6.7 million compared to interest expense, net of $4.2 million for the nine months ended January 29, 2022.

Interest expense, net for the three months ended July 29, 2023 was $2.0 million compared to interest expense, net of $1.6 million for the three months ended June 30, 2022.

Other Expense, net.

Other expense, net, for the nine months ended January 28, 2023 was $2.2 million compared to other expense, net of $10.4 million for the nine months ended January 29, 2022.

The decrease in other expense, net is primarily due to a legal accrual of $10.0 million for the settlement of all claims made by the buyers of our former EES business recorded during the nine months ended January 29, 2022.

Other expense, net for the nine months ended January 28, 2023 includes unrealized losses associated with decreases in fair market value for equity security investments.

Benefit from Income Taxes.

Our effective income tax rate was 38.3% for the nine months ended January 28, 2023, as compared to 69.1% for the nine months ended January 29, 2022.

Historically, we calculate the provision for income taxes during interim reporting periods by applying an estimate of our annual effective tax rate (“AETR”) for the full fiscal year to the pretax income or loss for the interim reporting period.

For the nine months ended January 28, 2023, we

calculated the provision for income taxes using a discrete effective tax rate (“ETR”) method.

The decrease in our effective income tax rate was primarily due to the change to the ETR method.

The effective income tax rate for the nine months ended January 28, 2023 was primarily impacted by expected federal R&D tax credits and foreign-derived intangible income deductions.

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

Equity method investment loss, net of tax for the nine months ended January 28, 2023 was $2.2 million as compared to equity method investment income, net of tax of $0.2 million for the nine months ended January 29, 2022.

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

Other expense, net, for the three months ended July 29, 2023 was $1.1 million compared to other expense, net of $0.4 million for the three months ended July 30, 2022.

Other expense, net for the three months ended July 29, 2023 includes unrealized losses associated with decreases in the fair market value for equity security investments.

Provision for Income Taxes.

Our effective income tax rate was 5.7% for the three months ended July 29, 2023, as compared to (49.3)% for the three months ended June 30, 2022.

The increase in our effective income tax rate was in part due to an increase in projected full year income before income taxes combined with increases in expected foreign-derived intangible income deductions and federal R&D tax credits.

The effective income tax rate for the three months ended July 29, 2023 was primarily impacted by expected federal R&D tax credits, foreign-derived intangible income deductions and excess tax benefits on equity awards.

Equity Method Investment Loss, net of Tax.

Equity method investment loss, net of tax for the three months ended July 29, 2023 was $21 thousand as compared to equity method investment loss, net of tax of $0.5 million for the three months ended July 30, 2022.

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 28, 2023, our funded backlog was approximately $413.9 million, as compared to $210.8 million as of April 30, 2022.

In addition to our funded backlog, we also had unfunded backlog of $387.0 million as of January 28, 2023.

As of July 29, 2023, our funded backlog was approximately $539.7 million, as compared to $424.1 million as of April 30, 2023.

In addition to our funded backlog, we also had unfunded backlog of $174.9 million as of July 29, 2023.

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

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

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 U.S.

Special Operations Command (“SOCOM”) Mid-Endurance Unmanned Aircraft Systems (“MEUAS”) contract reflects only those sites which have been awarded to Arcturus and does not include the remaining potential value associated with the entire SOCOM MEUAS III/IV contract.

Army IDIQ-type contract for SUAS 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.

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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On September 8, 2022 we filed an S-3 shelf registration statement to offer and sell shares of our common stock, including a prospectus supplement in relation to an Open Market Sale Agreement SM , also dated September 8, 2022, with Jefferies LLC relating to the proposed offer and sale of shares of our common stock having an aggregate offering price of up to $200.0 million from time to time through Jefferies LLC as our sales agent.

As of January 28, 2023, we have sold 221,971 of our shares for total gross proceeds of $21.4 million, and we have $178.6 million aggregate offering price remaining available under the registration.

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.

As of July 29, 2023, we have sold 1,109,730 of our shares for total gross proceeds of $108.7 million and $105.4 million proceeds received, net of commission expense and $104.6 million net of equity issuance costs.

We have $91.3 million aggregate offering price remaining available under the registration statement.

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 $4.7 million as of January 28, 2023.

As of January 28, 2023, approximately $95.3 million was available under the Revolving Facility.

Our ability to borrow under the Revolving Facility is reduced by outstanding letters of credit of $11.3 million as of July 29, 2023.

As of July 29, 2023, approximately $88.7 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 9—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 ($6.0 million) available for issuing letters of credit of which €2.8 million ($3.0 million) was outstanding as of January 28, 2023.

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, Telerob and Planck.

In addition, Telerob has a line of credit of €5.5 million ($6.1 million) available for issuing letters of credit of which €1.9 million ($2.1 million) was outstanding as of July 29, 2023.

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

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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, 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.

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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 ongoing COVID-19 pandemic, we continue to hold significant cash and cash equivalents.

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 a 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 January 28, 2023.

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

As of January 28, 2023, $5.0 million remains of the obligation under the legal settlement with Webasto.

The final $5.0 million was paid on February 2, 2023.

The following table provides our cash flow data for the nine months ended January 28, 2023 and January 29, 2022 (in thousands):

Nine Months Ended

Net cash provided by (used in) operating activities

Net cash provided by (used in) investing activities

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

The UGV second year earnout of €2.0 million (approximately $2.2 million) is expected to be paid during the three months ended October 28, 2023.

The recently announced acquisition of Tomahawk Robotics, Inc.

is expected to close during the three months ended October 28, 2023 and a total purchase price of $120.0 million will be paid with a mix of cash and stock.

Due to the new internal revenue service tax capitalization rules, Section 174, we expect an increase in cash paid for U.S.

federal income taxes during the fiscal year ended April 30, 2024 relative to prior periods.

The following table provides our cash flow data for the three months ended July 29, 2023 and July 30, 2022 (in thousands):

Three Months Ended

Net cash (used in) provided by operating activities

Net cash (used in) provided by investing activities

Net cash used in financing activities

Cash Provided by (Used in) Operating Activities.

Net cash provided by operating activities for the nine months ended January 28, 2023 increased by $32.0 million to $8.8 million, as compared to net cash used in operating activities of $23.2 million for the nine months ended January 29, 2022.

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 $29.8 million, largely related to unbilled receivables and retentions, income taxes receivable and other liabilities, partially offset by a decrease in inventories, accounts receivable and prepaid expenses and other assets due to year over year timing differences, and an increase in non-cash expenses of $6.5 million primarily due to an increase in loss from equity investments of and stock-based compensation, partially offset by an increase in net loss of $4.3 million.

Cash Provided by (Used in) Investing Activities.

Net cash provided by investing activities increased by $37.9 million to $0.9 million for the nine months ended January 28, 2023, as compared to net cash used in investing activities of $37.0 million for the nine months ended January 29, 2022.

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, a decrease in acquisition of property and equipment of $6.9 million and a decrease in equity method investments of $4.1 million, partially offset by a decrease in redemptions of available-for-sale investments of $9.9 million and equity securities investments of $5.1 million.

Cash (Used in) Provided by Operating Activities.

Net cash used in operating activities for the three months ended July 29, 2023 increased by $32.9 million to $17.1 million, as compared to net cash provided by operating activities of $15.9 million for the three months ended July 30, 2022.

The increase in net cash used in operating activities was primarily due to a decrease in cash as a result of changes in operating assets and liabilities of $61.0 million, largely related to inventories, unbilled receivables and retentions, prepaid expenses and other assets and accounts payable due to year over year timing differences as well as a decrease in non-cash expenses of $2.2 million primarily due to a decrease in depreciation and amortization, partially offset by an increase in net income of $30.3 million.

Cash (Used in) Provided by Investing Activities.

Net cash used in investing activities increased by $7.4 million to $3.6 million for the three months ended July 29, 2023, as compared to net cash provided by investing activities of $3.8 million for the three months ended July 30, 2022.

The increase in net cash used in investing activities was primarily due to a decrease in net redemptions of available-for-sale investments of $12.0 million, partially offset by a decrease in equity securities investments of $2.8 million and a decrease in acquisitions of property and equipment of $1.8 million.

Cash Used in Financing Activities.

Net cash used in financing activities decreased by $9.5 million to $2.4 million for the nine months ended January 28, 2023, as compared to net cash used by financing activities of $11.9 million for the nine months ended January 29, 2022.

The decrease in net cash used by financing activities was primarily due to proceeds from share issuance net of issuance costs of $20.1 million and a decrease in holdback and retention payments related to business acquisitions of $6.0 million, partially offset by an increase in principal payment of the term loan of $15.0 million.

Net cash used in financing activities increased by $3.0 million to $6.3 million for the three months ended July 29, 2023, as compared to net cash used in financing activities of $3.3 million for the three months ended July 30, 2022.

The increase in net cash used in financing activities was primarily due to an increase in principal payment of the term loan of $2.5 million.

New Accounting Standards

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 nine months ended January 28, 2023.

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 the conclusion that we did not adopt any accounting standards during the three months ended July 29, 2023.

Recent Developments

On August 22, 2023 we announced our anticipated acquisition of Tomahawk Robotics, Inc.

(“Tomahawk Robotics”), a leader in AI-enabled robotic control systems.

Under the definitive agreement under we entered into with Tomahawk Robotics, we will acquire 100% of Tomahawk Robotics equity for a total purchase price of $120.0 million to be paid in a mix of cash and stock.

Refer to Note 19—Subsequent Events to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details.

QUANTITATIVE AND QUALITATIV E DISCLOSURES ABOUT MARKET RISK

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On February 19, 2021 in connection with the consummation of the Arcturus Acquisition, we entered into the Credit Facilities.

The current outstanding balance of the Credit Facilities is $167.5 million and bears a variable interest rate.

The current outstanding balance of

the Credit Facilities is $130.0 million and bears a variable interest rate.

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

An increase or decrease in the variable interest rate of 100 basis points would result in an increase or decrease to our interest expense for the fiscal year ending April 30, 2024 of approximately $1.0 million.

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