AVIAT NETWORKS, INC. 10-Q

Item 1. Financial Statements AVIAT NETWORKS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (In thousands, except share and par value amounts) December 31, 2021 July 2, 2021 ASSETS Current Assets: Cash and cash equivalents $ 42,326 $ 47,942 Accounts receivable, net 69,074 48,135 Unbilled receivables 42,919 37,521 Inventories 25,615 23,436 Customer service inventories 1,771 1,431 Assets held for sale 2,218 2,218 Other current assets 11,124 9,556 Total current assets 195,047 170,239 Property, plant and equipment, net 10,010 11,701 Deferred income taxes 99,913 103,467 Right of use assets 3,371 3,816 Other assets 8,782 8,430 TOTAL ASSETS $ 317,123 $ 297,653 LIABILITIES AND EQUITY Current Liabilities: Accounts payable $ 43,515 $ 32,405 Accrued expenses 25,445 28,154 Short-term lease liabilities 595 769 Advance payments and unearned revenue 35,753 32,304 Restructuring liabilities 1,787 2,737 Total current liabilities 107,095 96,369 Unearned revenue 7,959 8,592 Long-term lease liabilities 2,924 3,223 Other long-term liabilities 352 356 Reserve for uncertain tax positions 5,293 5,164 Deferred income taxes 608 614 Total liabilities 124,231 114,318 Commitments and contingencies (Note 12) Equity: Preferred stock, $ 0.01 par value, 50,000,000 shares authorized, none issued — — Common stock, $ 0.01 par value, 300,000,000 shares authorized, 11,195,542 shares issued and outstanding at December 31, 2021; 11,153,445 shares issued and outstanding at July 2, 2021 (see Note 1 Stock Split) 112 112 Treasury stock ( 3,408 ) ( 787 ) Additional paid-in-capital 820,791 818,939 Accumulated deficit ( 610,004 ) ( 620,602 ) Accumulated other comprehensive loss ( 14,599 ) ( 14,327 ) Total equity 192,892 183,335 TOTAL LIABILITIES AND EQUITY $ 317,123 $ 297,653 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 5 AVIAT NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Six Months Ended (In thousands, except per share amounts) December 31, 2021 January 1, 2021 December 31, 2021 January 1, 2021 Revenues: Revenue from product sales $ 53,467 $ 46,691 $ 104,314 $ 91,155 Revenue from services 24,397 23,840 46,708 45,666 Total revenues 77,864 70,531 151,022 136,821 Cost of revenues: Cost of product sales 34,014 27,458 65,939 55,367 Cost of services 15,694 16,164 30,846 30,296 Total cost of revenues 49,708 43,622 96,785 85,663 Gross margin 28,156 26,909 54,237 51,158 Operating expenses: Research and development expenses 6,169 5,419 12,079 10,266 Selling and administrative expenses 13,739 13,612 26,437 26,449 Restructuring (recovery) charges ( 960 ) — ( 301 ) — Total operating expenses 18,948 19,031 38,215 36,715 Operating income 9,208 7,878 16,022 14,443 Other expense (income), net 240 ( 38 ) 212 ( 73 ) Income before income taxes 8,968 7,916 15,810 14,516 Provision for income taxes 3,052 1,275 5,212 1,939 Net income $ 5,916 $ 6,641 $ 10,598 $ 12,577 Net income per share of common stock outstanding: Basic $ 0.52 $ 0.60 $ 0.95 $ 1.15 Diluted $ 0.49 $ 0.58 $ 0.89 $ 1.12 Weighted-average shares outstanding (see Note 1 Stock Split): Basic 11,309 11,008 11,172 10,914 Diluted 11,960 11,420 11,895 11,278 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 6 AVIAT NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended Six Months Ended (In thousands) December 31, 2021 January 1, 2021 December 31, 2021 January 1, 2021 Net income $ 5,916 $ 6,641 $ 10,598 $ 12,577 Other comprehensive (loss) income: Net change in cumulative translation adjustments ( 108 ) 184 ( 272 ) 598 Other comprehensive (loss) income ( 108 ) 184 ( 272 ) 598 Comprehensive income $ 5,808 $ 6,825 $ 10,326 $ 13,175 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 7 AVIAT NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Six Months Ended (In thousands) December 31, 2021 January 1, 2021 Operating Activities Net income $ 10,598 $ 12,577 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization of property, plant and equipment 2,393 2,661 (Recoveries) Provision for uncollectible receivables ( 3 ) 30 Share-based compensation 1,624 1,389 Deferred tax assets, net 3,548 676 Charges for inventory and customer service inventory write-downs 658 585 Loss on disposition of property, plant and equipment, net — 24 Noncash lease expense 445 327 Restructuring recoveries ( 301 ) — Changes in operating assets and liabilities: Accounts receivable ( 21,063 ) ( 4,666 ) Unbilled receivables ( 5,570 ) ( 3,499 ) Inventories ( 2,393 ) ( 3,815 ) Customer service inventories ( 745 ) ( 370 ) Accounts payable 11,159 5,276 Accrued expenses ( 605 ) ( 646 ) Advance payments and unearned revenue 2,843 3,798 Income taxes payable or receivable ( 1,550 ) ( 39 ) Other assets and liabilities ( 2,729 ) ( 3,746 ) Change in lease liabilities ( 472 ) ( 342 ) Net cash (used in) provided by operating activities ( 2,163 ) 10,220 Investing Activities Payments for acquisition of property, plant and equipment ( 798 ) ( 1,376 ) Net cash used in investing activities ( 798 ) ( 1,376 ) Financing Activities Repayments of borrowings — ( 9,000 ) Payments for repurchase of common stock - treasury shares ( 2,621 ) — Payments for taxes related to net settlement of equity awards ( 358 ) ( 168 ) Proceeds from issuance of common stock under employee stock plans 586 1,486 Net cash used in financing activities ( 2,393 ) ( 7,682 ) Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 291 ) 266 Net (decrease) increase in cash, cash equivalents, and restricted cash ( 5,645 ) 1,428 Cash, cash equivalents, and restricted cash, beginning of period 48,198 41,872 Cash, cash equivalents, and restricted cash, end of period $ 42,553 $ 43,300 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 8 AVIAT NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (1) (Unaudited) Three Months Ended December 31, 2021 Common Stock Treasury Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Equity (In thousands, except share amounts) Shares $ Amount Balance as of October 1, 2021 11,187,003 $ 112 $ ( 1,500 ) $ 819,711 $ ( 615,920 ) $ ( 14,491 ) $ 187,912 Net income — — — — 5,916 — 5,916 Other comprehensive loss, net of tax — — — — — ( 108 ) ( 108 ) Issuance of common stock under employee stock plans 69,434 1 — 319 — — 320 Shares withheld for taxes related to vesting of equity awards — — — — — — — Stock repurchase ( 60,895 ) ( 1 ) ( 1,908 ) — — — ( 1,909 ) Share-based compensation — — — 761 — — 761 Balance as of December 31, 2021 11,195,542 $ 112 $ ( 3,408 ) $ 820,791 $ ( 610,004 ) $ ( 14,599 ) $ 192,892 Three Months Ended January 1, 2021 Common Stock Treasury Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Equity (In thousands, except share amounts) Shares $ Amount Balance as of October 2, 2020 10,886,724 $ 109 $ — $ 815,148 $ ( 724,805 ) $ ( 14,555 ) $ 75,897 Net income — — — — 6,641 — 6,641 Other comprehensive income, net of tax — — — — — 184 184 Issuance of common stock under employee stock plans 242,048 4 — 1,059 — — 1,063 Shares withheld for taxes related to vesting of equity awards — — — — — — — Stock repurchase ( 936 ) — — ( 40 ) — — ( 40 ) Share-based compensation — — — 818 — — 818 Balance as of January 1, 2021 11,127,836 $ 113 $ — $ 816,985 $ ( 718,164 ) $ ( 14,371 ) $ 84,563 9 Six Months Ended December 31, 2021 Common Stock Treasury Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Equity (In thousands, except share amounts) Shares $ Amount Balance as of July 2, 2021 11,153,445 $ 112 $ ( 787 ) $ 818,939 $ ( 620,602 ) $ ( 14,327 ) $ 183,335 Net income — — — — 10,598 — 10,598 Other comprehensive income, net of tax — — — — — ( 272 ) ( 272 ) Issuance of common stock under employee stock plans 135,669 1 — 586 — — 587 Shares withheld for taxes related to vesting of equity awards ( 10,134 ) — — ( 358 ) — — ( 358 ) Stock repurchase ( 83,438 ) ( 1 ) ( 2,621 ) — — — ( 2,622 ) Share-based compensation — — — 1,624 — — 1,624 Balance as of December 31, 2021 11,195,542 $ 112 $ ( 3,408 ) $ 820,791 $ ( 610,004 ) $ ( 14,599 ) $ 192,892 Six Months Ended January 1, 2021 Common Stock Treasury Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Equity (In thousands, except share amounts) Shares $ Amount Balance as of July 3, 2020 10,800,974 $ 108 $ — $ 814,283 $ ( 730,741 ) $ ( 14,969 ) $ 68,681 Net income — — — — 12,577 — 12,577 Other comprehensive loss, net of tax — — — — — 598 598 Issuance of common stock under employee stock plans 339,030 5 — 1,481 — — 1,486 Shares withheld for taxes related to vesting of equity awards ( 11,232 ) — — ( 128 ) — — ( 128 ) Stock repurchase ( 936 ) — — ( 40 ) — — ( 40 ) Share-based compensation — — — 1,389 — — 1,389 Balance as of January 1, 2021 11,127,836 $ 113 $ — $ 816,985 $ ( 718,164 ) $ ( 14,371 ) $ 84,563 (1) See Note 1 Stock Split. See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 10 AVIAT NETWORKS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. The Company and Basis of Presentation The Company Aviat Networks, Inc. (the “Company,” “we,” “us,” and “our”) designs, manufactures, and sells a range of wireless networking solutions and services to mobile and fixed telephone service providers, private network operators, government agencies, transportation and utility companies, public safety agencies, and broadcast system operators across the globe. Our products include broadband wireless access base stations and customer premises equipment for fixed and mobile, point-to-point digital microwave radio systems for access, backhaul, trunking, license-exempt applications, supporting new network deployments, network expansion, and capacity upgrades. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”) and with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information, and we have made estimates, assumptions and judgments affecting the amounts reported in our unaudited condensed consolidated financial statements and the accompanying notes, as discussed in greater detail below. Accordingly, the statements do not include all information and footnotes required by U.S. GAAP for annual consolidated financial statements. In the opinion of our management, such interim financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows for such periods. The results for the three and six months ended December 31, 2021 are not necessarily indicative of the results that may be expected for the full fiscal year or future operating periods. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the fiscal year ended July 2, 2021. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned and majority-owned subsidiaries. All intercompany transactions and accounts have been eliminated. We operate on a 52-week or 53-week year ending on the Friday closest to June 30. The three months ended December 31, 2021 consisted of 13 weeks and the three months ended January 1, 2021 consisted of 13 weeks. Fiscal year 2022 will be comprised of 52 weeks and will end on July 1, 2022. Fiscal year 2021 was comprised of 52 weeks and ended on July 2, 2021. Stock Split On April 7, 2021 we effected a two -for-one split in the form of a stock dividend to shareholders of record as of April 1, 2021. Common stock, Additional paid-in-capital, per share and equity award amounts for all periods presented have been retrospectively reclassified to reflect the two -for-one stock split in the form of a stock dividend. Use of Estimates The preparation of unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires us to make estimates, assumptions and judgments affecting the amounts reported and related disclosures. Estimates are based upon historical factors, current circumstances and the experience and judgment of our management. We evaluate our estimates and assumptions on an ongoing basis and may employ outside experts to assist us in making these evaluations. Changes in such estimates, based on more accurate information, or different assumptions or conditions, may affect amounts reported in future periods. Such estimates affect significant items, including revenue recognition, provision for uncollectible receivables, inventory valuation, valuation allowances for deferred tax assets, uncertainties in income taxes, contingencies and recoverability of long-lived assets. The actual results that we experience may differ materially from our estimates. 11 Summary of Significant Accounting Policies There have been no material changes in our significant accounting policies as of December 31, 2021 and for the six months ended December 31, 2021, as compared to the significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended July 2, 2021. Accounting Standards Adopted In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740). This guidance simplifies the accounting for income taxes by removing certain exceptions to the general principles and also simplifies areas such as franchise taxes, step-up in tax basis of goodwill, separate entity financial statements and interim recognition of enactment of tax laws and rate changes. ASU 2019-12 became effective for us in our first quarter of fiscal 2022. The adoption had no material impact on our unaudited condensed consolidated financial statements. Accounting Standards Not Yet Adopted In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) . This guidance provides optional guidance related to reference rate reform, which provides practical expedients for contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. This guidance is applicable for our borrowing instruments, which use LIBOR as a reference rate, and was effective March 12, 2020 through December 31, 2022. We are currently evaluating the potential impact ASU 2020-04 will have on our unaudited condensed consolidated financial statements. In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13) and also issued subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04, and ASU 2019-05 (collectively, Topic 326). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. Topic 326 will be effective for us in our first quarter of fiscal 2024 and earlier adoption is permitted. We are evaluating the impact adopting Topic 326 will have on our unaudited condensed consolidated financial statements. Note 2. Balance Sheet Components Cash, Cash Equivalents, and Restricted Cash The following table provides a summary of our cash, cash equivalents, and restricted cash reported within our unaudited condensed consolidated balance sheets that reconciles to the corresponding amount in our unaudited condensed consolidated statement of cash flows: (In thousands) December 31, 2021 July 2, 2021 Cash and cash equivalents $ 42,326 $ 47,942 Restricted cash included in other assets 227 256 Total cash, cash equivalents, and restricted cash in the Statement of Cash Flows $ 42,553 $ 48,198 Accounts Receivable, net Our net accounts receivable are summarized below: (In thousands) December 31, 2021 July 2, 2021 Accounts receivable $ 70,903 $ 50,276 Less: Allowances for collection losses ( 1,829 ) ( 2,141 ) Total accounts receivable, net $ 69,074 $ 48,135 12 Inventories Our inventories are summarized below: (In thousands) December 31, 2021 July 2, 2021 Finished products $ 15,578 $ 15,409 Raw materials and supplies 10,037 8,027 Total inventories $ 25,615 $ 23,436 Consigned inventories included within raw materials and supplies $ 8,534 $ 6,570 We increased certain levels of inventory during the three and six months ended December 31, 2021 primarily to mitigate supply chain constraints. We currently rely on a few vendors for substantially all of our inventory purchases. We record charges to adjust our inventory and customer service inventory due to excess and obsolete inventory resulting from lower sales forecasts, product transitioning, or discontinuance. The charges during the three and six months ended December 31, 2021 and January 1, 2021 were classified in cost of product sales as follows: Three Months Ended Six Months Ended (In thousands) December 31, 2021 January 1, 2021 December 31, 2021 January 1, 2021 Excess and obsolete inventory $ 107 $ 134 $ 240 $ 197 Customer service inventory write-downs 170 266 418 388 Total inventory charges $ 277 $ 400 $ 658 $ 585 Assets Held for Sale We consider properties to be Assets held for sale when management approves and commits to a plan to dispose of a property or group of properties. The property held for sale prior to the sale date is separately presented on the balance sheet as Assets held for sale. During the second quarter of fiscal 2021 management initiated the sale of our facility located in the United Kingdom. We expect to complete the sale by the end of third quarter of fiscal 2022. The carrying value of this asset held for sale as of December 31, 2021 of $ 2.2 million which represents the lower of 1) the carrying value or 2) fair value of the assets, less estimated costs to sell the assets. We performed an analysis and determined the estimated fair value of the assets, less estimated selling costs, is higher than the carrying value of the assets. As a result, no impairment charge was recorded in our statement of operations. Property, Plant and Equipment, net Our property, plant and equipment, net are summarized below: (In thousands) December 31, 2021 July 2, 2021 Land $ 210 $ 210 Buildings and leasehold improvements 5,912 6,914 Software 21,376 21,370 Machinery and equipment 51,624 51,244 Total property, plant and equipment, gross 79,122 79,738 Less: Accumulated depreciation and amortization ( 69,112 ) ( 68,037 ) Total property, plant and equipment, net $ 10,010 $ 11,701 13 Included in the total plant, property and equipment above there were no assets in progress which have not been placed in service as of December 31, 2021 and $ 0.3 million as of July 2, 2021. Depreciation and amortization expense related to property, plant and equipment, including amortization of software developed for internal use, was as follows: Three Months Ended Six Months Ended (In thousands) December 31, 2021 January 1, 2021 December 31, 2021 January 1, 2021 Depreciation and amortization $ 1,129 $ 1,407 $ 2,393 $ 2,661 Accrued Expenses Our accrued expenses are summarized below: (In thousands) December 31, 2021 July 2, 2021 Accrued compensation and benefits $ 7,945 $ 13,455 Accrued agent commissions 2,055 2,348 Accrued warranties 3,198 3,228 Other 12,247 9,123 Total accrued expenses $ 25,445 $ 28,154 Accrued Warranties We accrue for the estimated cost to repair or replace products under warranty. Changes in our warranty liability, which are included as a component of accrued expenses in our unaudited condensed consolidated balance sheets were as follows: Three Months Ended Six Months Ended (In thousands) December 31, 2021 January 1, 2021 December 31, 2021 January 1, 2021 Balance as of the beginning of the period $ 3,318 $ 3,107 $ 3,228 $ 3,196 Warranty provision recorded during the period 341 488 839 772 Consumption during the period ( 461 ) ( 280 ) ( 869 ) ( 653 ) Balance as of the end of the period $ 3,198 $ 3,315 $ 3,198 $ 3,315 Advance Payments and Unearned Revenue Our advance payments and unearned revenue are summarized below: (In thousands) December 31, 2021 July 2, 2021 Advance payments $ 1,536 $ 2,445 Unearned revenue 34,217 29,859 Total advance payments and unearned revenue $ 35,753 $ 32,304 Excluded from the balances above are $ 8.0 million and $ 8.6 million in long-term unearned revenue as of December 31, 2021 and July 2, 2021, respectively. Note 3. Fair Value Measurements of Assets and Liabilities Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal market (or most advantageous market in the absence of a principal market) for the asset or liability in an orderly transaction between market participants as of the measurement date. We maximize the use of observable inputs and minimize the use of unobservable inputs in measuring fair value and establish a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of inputs used to measure fair value are as follows: 14 • Level 1 — Observable inputs such as quoted prices in active markets for identical assets or liabilities; • Level 2 — Observable market-based inputs or observable inputs that are corroborated by market data; and • Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The carrying amounts, estimated fair values, and valuation input levels of our assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2021 and July 2, 2021 were as follows: December 31, 2021 July 2, 2021 Valuation Inputs (In thousands) Carrying Amount Fair Value Carrying Amount Fair Value Assets: Cash and cash equivalents: Money market funds $ 15,844 $ 15,844 $ 26,847 $ 26,847 Level 1 Bank certificates of deposit $ 3,426 $ 3,426 $ 3,288 $ 3,288 Level 2 We classify items within Level 1 if quoted prices are available in active markets. Our Level 1 items mainly are money market funds. As of December 31, 2021 and July 2, 2021, these money market funds were valued at $1.00 net asset value per share. We classify items in Level 2 if the observable inputs to quoted market prices, benchmark yields, reported trades, broker/dealer quotes, or alternative pricing sources are available with reasonable levels of price transparency. Our bank certificates of deposit and foreign exchange forward contracts are classified within Level 2. As of December 31, 2021 and July 2, 2021, we did not have any recurring assets or liabilities that were valued using significant unobservable inputs. Our policy is to recognize asset or liability transfers among Level 1, Level 2, and Level 3 as of the actual date of the events or change in circumstances that caused the transfer. During the first six months of fiscal 2022 and 2021, we had no transfers between levels of the fair value hierarchy of our assets or liabilities measured at fair value. Note 4. Leases The Company has facilities under non-cancelable operating lease agreements. These leases have varying terms that range from one to 20 years and contain leasehold improvement incentives, rent holidays and escalation clauses. We determine if an arrangement contains a lease at inception. These operating leases are included in "Right of use assets" on our unaudited condensed consolidated balance sheets and represent our right to use the underlying asset for the lease term. Our obligations to make lease payments are included in "Short-term lease liabilities" and "Long-term lease liabilities" on our unaudited condensed consolidated balance sheets. We did not enter into any finance leases during the six months ended December 31, 2021. The following summarizes our lease costs (in thousands): Three Months Ended Six Months Ended December 31, 2021 January 1, 2021 December 31, 2021 January 1, 2021 (In thousands) (In thousands) Operating lease costs $ 245 $ 301 $ 562 $ 614 Short-term lease costs $ 513 359 1,200 817 Variable lease costs $ 47 94 74 162 Total lease costs $ 805 $ 754 $ 1,836 $ 1,593 The following summarizes our lease term and discount rate for the six months ended December 31, 2021: 15 Weighted average remaining lease term 7.9 years Weighted average discount rate 5.7 % As of December 31, 2021, our future minimum lease payments under all non-cancelable operating leases with an initial term in excess of one year were as follows (in thousands): Amount (In thousands) Remainder of 2022 $ 491 2023 709 2024 594 2025 614 2026 553 Thereafter 1,703 Total lease payments 4,664 Less: interest ( 1,145 ) Present value of lease liabilities $ 3,519 Note 5. Credit Facility and Debt On May 17, 2021, we entered into Amendment No. 4 to Third Amended and Restated Loan and Security Agreement with Silicon Valley Bank (the “SVB Credit Facility”) which extended the expiration date to June 28, 2024. The SVB Credit Facility provides for a $ 25.0 million accounts receivable formula-based revolving credit facility that can be borrowed by our U.S. company, with a $ 25.0 million sublimit that can be borrowed by our U.S. and Singapore entities. Loans may be advanced under the SVB Credit Facility based on a borrowing base equal to a specified percentage of the value of eligible accounts of the borrowers under the SVB Credit Facility. The borrowing base is subject to certain eligibility criteria. Availability under the accounts receivable formula based revolving credit facility can also be utilized to issue letters of credit with a $ 12.0 million sublimit. We may prepay loans under the SVB Credit Facility in whole or in part at any time without premium or penalty. As of December 31, 2021, available credit under the SVB Credit Facility was $ 22.5 million, reflecting the lower available limit of $ 25.0 million less outstanding letters of credit of $ 2.5 million. As of July 3, 2020, our outstanding debt balance under the SVB Credit Facility, classified as a current liability, was $ 9.0 million, and the interest rate was 3.75 %. We repaid the outstanding debt balance in July 2020. We have not borrowed against the SVB Credit Facility during the six months ended December 31, 2021 and there were no borrowing outstanding as of December 31, 2021 or July 2, 2021. The SVB Credit Facility carries an interest rate computed, at our option, based on either (i) at the prime rate reported in the Wall Street Journal plus a spread of 0.50 % to 1.50 %, with such spread determined based on our adjusted quick ratio; or (ii) if we satisfy a minimum adjusted quick ratio, a LIBOR rate determined in accordance with the SVB Credit Facility, plus a spread of 2.75 %. Any outstanding Singapore subsidiary borrowed loans shall bear interest at an additional 2.00 % above the applicable prime or LIBOR rate. The SVB Credit Facility contains quarterly financial covenants including minimum adjusted quick ratio and minimum profitability (EBITDA) requirements. In the event our adjusted quick ratio falls below a certain level, cash received in our accounts with Silicon Valley Bank may be directly applied to reduce outstanding obligations under the SVB Credit Facility. The SVB Credit Facility also imposes certain restrictions on our ability to dispose of assets, permit a change in control, merge or consolidate, make acquisitions, incur indebtedness, grant liens, make investments, make certain restricted payments, and enter into transactions with affiliates under certain circumstances. Certain of our assets, including accounts receivable, inventory, and equipment, are pledged as collateral for the SVB Credit Facility. Upon an event of default, outstanding obligations would be immediately due and payable. Under certain circumstances, a default interest rate will apply on all obligations during the existence of an event of default at a per annum rate of interest equal to 5.00 % above the applicable interest rate. As of December 31, 2021, we were in compliance with the quarterly financial covenants contained in the SVB Credit Facility, as amended. 16 We also obtained an uncommitted short-term line of credit of $ 0.4 million from a bank in New Zealand to support the operations of our New Zealand subsidiary. This line of credit provides for up to $ 0.4 million in short-term advances at various interest rates, all of which was available as of December 31, 2021 and July 2, 2021. The line of credit also provides for the issuance of standby letters of credit and company credit cards, of which none was outstanding as of December 31, 2021 and July 2, 2021. This line of credit may be terminated upon notice, is reviewed annually for renewal or modification, and is supported by a corporate guarantee. Note 6. Revenue Recognition Contract Balances, Performance Obligations, and Backlog The following table provides information about receivables and liabilities from contracts with customers (in thousands): December 31, 2021 July 2, 2021 Contract Assets Accounts receivable, net $ 69,074 $ 48,135 Unbilled receivables $ 42,919 $ 37,521 Capitalized commissions $ 1,423 $ 1,720 Contract Liabilities Advance payments and unearned revenue $ 35,753 $ 32,304 Unearned revenue, long-term $ 7,959 $ 8,592 Significant changes in contract balances may arise as a result of recognition over time for services, transfer of control for equipment, and periodic payments (both in arrears and in advance). From time to time, we may experience unforeseen events that could result in a change to the scope or price associated with an arrangement. When such events occur, we update the transaction price and measure of progress for the performance obligation and recognize the change as a cumulative catch-up to revenue. Because of the nature and type of contracts we engage in, the timeframe to completion and satisfaction of current and future performance obligations can shift; however, this will have no impact on our future obligation to bill and collect. As of December 31, 2021, we had $ 43.7 million in advance payments and unearned revenue and long-term unearned revenue, of which approximately 34 % is expected to be recognized as revenue in the remainder of fiscal 2022 and the balance thereafter. During the three and six months ended December 31, 2021 we recognized $ 6.6 million and $ 13.5 million, respectively, of revenue which was included in advance payments and unearned revenue at July 2, 2021. Remaining Performance Obligations The aggregate amount of transaction price allocated to our unsatisfied (or partially unsatisfied) performance obligations was approximately $ 75 million at December 31, 2021. Of this amount, we expect to recognize approximately 70 % as revenue during the next 12 months, with the remaining amount to be recognized as revenue within two to five years . Note 7. Segment and Geographic Information We operate in one reportable business segment: the design, manufacturing, and sale of a range of wireless networking products, solutions, and services. Our financial performance is regularly reviewed by our chief operating decision maker who is our Chief Executive Officer (“CEO”). 17 We report revenue by region and country based on the location where our customers accept delivery of our products and services. Revenue by region for the three and six months ended December 31, 2021 and January 1, 2021 was as follows: Three Months Ended Six Months Ended (In thousands) December 31, 2021 January 1, 2021 December 31, 2021 January 1, 2021 North America $ 51,046 $ 49,158 $ 101,983 $ 94,657 Africa and the Middle East 13,535 10,663 24,237 21,234 Europe and Russia 2,908 1,511 5,611 3,773 Latin America and Asia Pacific 10,375 9,199 19,191 17,157 Total revenue $ 77,864 $ 70,531 $ 151,022 $ 136,821 The loss of a significant portion of business from any significant customers could adversely affect our unaudited condensed consolidated financial statements. Customers accounting for 10% or more of our total revenue were as follows: Three Months Ended Six Months Ended December 31, 2021 January 1, 2021 December 31, 2021 January 1, 2021 Motorola Solutions, Inc. 11.0 % * 13.0 % * A U.S. State Government Customer * 12.5 % * * * Less than 10.0% Customer accounting for 10% or more of our accounts receivable were as follows: December 31, 2021 July 2, 2021 Mobile Telephone Networks Group (MTN Group) 16.0 % 14.0 % * Less than 10.0% Note 8. Equity Stock Repurchase Program During the second quarter of fiscal 2022 we completed the $ 7.5 million stock repurchase program approved by our board of directors in May 2018 by purchasing 60,895 shares of our common stock in the open market for an aggregate purchase price, including commissions, of $ 1.9 million. During the first quarter of fiscal 2022, we repurchased 22,543 shares of our common stock in the open market for an aggregate purchase price, including commissions, of $ 0.7 million. These shares were recorded as treasury stock and we do not anticipate retiring them. The repurchase program was suspended temporarily from February 2020 to February 2021. During the third quarter of fiscal 2021, our Board of Directors voted to re-instate our stock repurchase program. In November 2021 our board of directors approved a stock repurchase program to purchase up to $ 10.0 million of our common stock. As of December 31, 2021, $ 10.0 million remains available and we may choose to suspend or discontinue the repurchase program at any time. Stock Incentive Programs As of December 31, 2021, we had one stock incentive plan for our employees and non-employee directors, the 2018 Incentive Plan (the “2018 Plan”). The 2018 Plan provides for the issuance of share-based awards in the form of stock options, stock appreciation rights, restricted stock awards and units, and performance share awards and units. Under the 2018 Plan, option exercise prices are equal to the fair market value of our common stock on the date the options are granted using our closing stock price. After vesting, options generally may be exercised within seven years after the date of grant. 18 Restricted stock units are not transferable until vested and the restrictions lapse upon the achievement of continued employment or service over a specified time period. Restricted stock units issued to employees generally vest three years from the date of grant ( three-year cliff or annually over three years ). Restricted stock units issued to non-executive board members annually generally vest on the day before the annual stockholders’ meeting. Vesting of performance share awards and units is subject to the achievement of predetermined financial performance criteria and continued employment through the end of the applicable period. Market-based stock units vest upon meeting certain predetermined share price performance criteria and continued employment through the end of the applicable period. During the six months ended December 31, 2021, we granted 69,196 restricted stock units, 46,533 market-based stock units and 114,012 stock options to purchase shares of our common stock. Total compensation expense for share-based awards included in our unaudited condensed consolidated statements of operations was as follows: Three Months Ended Six Months Ended (In thousands) December 31, 2021 January 1, 2021 December 31, 2021 January 1, 2021 By Expense Category: Cost of revenues $ 102 $ 93 $ 170 $ 165 Research and development 22 57 98 97 Selling and administrative 637 668 1,356 1,127 Total share-based compensation expense $ 761 $ 818 $ 1,624 $ 1,389 By Types of Award: Options $ 120 $ 223 $ 295 $ 390 Restricted and performance stock awards and units 641 595 1,329 999 Total share-based compensation expense $ 761 $ 818 $ 1,624 $ 1,389 As of December 31, 2021, there was approximately $ 1.3 million of total unrecognized compensation expense related to non-vested stock options granted which is expected to be recognized over a weighted-average period of 1.6 years. As of December 31, 2021, there was $ 5.6 million of total unrecognized compensation expense related to non-vested stock awards which is expected to be recognized over a weighted-average period of 1.6 years. Note 9. Restructuring Activities The following table summarizes our restructuring-related activities: Severance and Benefits Facilities and Other Total (In thousands) Fiscal 2021 Plan Q4 2020 Plan Prior Years' Plan Fiscal 2015-2016 Plan Accrual balance, July 2, 2021 2,209 $ 216 $ 64 $ 248 $ 2,737 Charges, net 628 31 — — 659 Cash payments ( 326 ) ( 49 ) — — ( 375 ) Foreign exchange impact ( 7 ) — — ( 6 ) ( 13 ) Accrual balance, October 1, 2021 2,504 198 64 242 3,008 Charges (recovery), net ( 526 ) ( 198 ) — ( 236 ) ( 960 ) Cash payments ( 253 ) — — — ( 253 ) Foreign exchange impact ( 2 ) — — ( 6 ) ( 8 ) Accrual balance, December 31, 2021 $ 1,723 $ — $ 64 $ — $ 1,787 As of December 31, 2021, the accrual balance of $ 1.8 million was in short-term restructuring liabilities on our unaudited condensed consolidated balance sheets. Included in the above plans for which we were carrying a provision were positions identified for termination that have not been executed from a restructuring perspective. Due to transition of leadership in the finance function it was concluded that we would not make several of the planned headcount reductions, and 19 the likelihood of future restructuring for these positions is presently deemed remote. Therefore, we decided it was prudent to reverse the associated provision. Fiscal 2021 Plan During the third quarter of fiscal 2021, our Board of Directors approved a restructuring plan (the “Fiscal 2021 Plan”) in order to continue to reduce operating costs and improve profitability as part of our transformational initiative to optimize our business model and increase efficiencies. The Fiscal 2021 Plan was anticipated to entail a reduction in force of approximately 30 employees to be implemented through the second quarter of fiscal year 2022, with a certain number of positions being consolidated and/or relocated. Q4 2020 Plan During the fourth quarter of fiscal 2020, our Board of Directors approved a restructuring plan (the “Q4 2020 Plan”) in order to continue to reduce our operating costs and improve profitability to optimize our business model and increase efficiencies. The Q4 2020 Plan was implemented starting with our fourth fiscal quarter of 2020 through the second fiscal quarter of 2021. This plan has been fully paid. Prior Years’ Plan In January 2018, we reached a settlement with a certain foreign government for grant liabilities which allowed us to reduce our estimated payments relating to prior years’ restructuring plan by $ 0.3 million. During the third quarter of fiscal 2015, with the intent to bring our operational cost structure in line with the changing dynamics of the microwave radio and telecommunications markets, we initiated a restructuring plan (the “Fiscal 2015-2016 Plan”) to lower fixed overhead costs and operating expenses and to preserve cash flow. Activities under the Fiscal 2015-2016 Plan primarily included reductions in workforce across the Company, but primarily in operations outside the United States. Payments related to the accrued restructuring liability balance for this plan are expected to be paid in fiscal 2022. Note 10. Income Taxes Our effective tax rate varies from the U.S. federal statutory rate of 21% primarily due to results of foreign operations that are subject to income taxes at different statutory rates and certain jurisdictions where we cannot recognize tax benefit on current losses. During interim periods, we accrue tax expenses for jurisdictions that are anticipated to be profitable for fiscal 2022. The determination of our income taxes for the six months ended December 31, 2021 and January 1, 2021 was based on our estimated annual effective tax rate adjusted for losses in certain jurisdictions for which no tax benefit can be recognized. Our tax expense for the six months ended December 31, 2021 was primarily due to tax expense related to U.S. and profitable subsidiaries. The tax expense for the six months ended January 1, 2021 was primarily due to tax expense related to profitable subsidiaries and $ 0.4 million of tax expense related to an audit settlement with the Financial Administration of the Republic of Slovenia. We entered into a tax sharing agreement with Harris Corporation (“Harris”) effective on January 26, 2007, the acquisition date of Stratex Networks, Inc. The tax sharing agreement addresses, among other things, the settlement process associated with pre-merger tax liabilities and tax attributes that were attributable to the Microwave Communication Division when it was a division of Harris. There have been no settlement payments recorded since the acquisition date. To the extent we become more profitable in the U.S. in the future and utilize these tax attributes, we may be required to make certain payments to Harris which are currently not estimable. We have a number of open income tax audits covering various tax years, which vary from jurisdiction to jurisdiction. Our major tax jurisdictions that are open and subject to potential audits include the U.S., Singapore, Nigeria, Saudi Arabia and the Ivory Coast. The earliest years for these jurisdictions are as follows: U.S. - 2003; Singapore - 2015; Nigeria - 2006; Saudi Arabia - 2019, and Ivory Coast - 2017. We account for interest and penalties related to unrecognized tax benefits as part of our provision for federal, foreign, and state income taxes. Such interest expense was not material for the six months ended December 31, 2021 and January 1, 2021. 20 On December 27, 2020, the U.S. enacted the Consolidated Appropriations Act of 2021 (“CAA”) which extended and expanded certain tax relief measures created by the CARES Act, including, but not limited to, (1) second round of Payroll Protection Program loans, and (2) the Employer Retention Credit for 2021. On March 11, 2021, the U.S. enacted the American Rescue Plan Act of 2021 (“ARPA”) which expands Section 162(m) to cover the next five most highly compensated employees for the taxable year, in addition to the “covered employees” effective for taxable years beginning after December 31, 2026. We continue to examine the elements of the CAA and ARPA and the impact they may have on our future business. Note 11. Net Income Per Share of Common Stock Net income per share is computed using the two-class method, by dividing net income attributable to us by the weighted-average number of shares of our outstanding common stock and participating securities outstanding. Our restricted shares contain rights to receive non-forfeitable dividends and therefore are considered to be participating securities and included in the calculations of net income per basic and diluted common share. Undistributed losses are not allocated to unvested restricted shares as the unvested restricted shares are not contractually obligated to share our losses. The impact on earnings per share of the participating securities under the two-class method was immaterial. On April 7, 2021 we effected a two -for-one split in the form of a stock dividend to shareholders of record as of April 1, 2021. Common stock, Additional paid-in-capital, per share and equity award amounts for all periods presented have been retrospectively reclassified to reflect the two -for-one stock split in the form of a stock dividend. The following table presents the computation of basic and diluted net income per share: Three Months Ended Six Months Ended (In thousands, except per share amounts) December 31, 2021 January 1, 2021 December 31, 2021 January 1, 2021 Numerator: Net income $ 5,916 $ 6,641 $ 10,598 $ 12,577 Denominator: Weighted-average shares outstanding, basic 11,309 11,008 11,172 10,914 Effect of potentially dilutive equivalent shares 651 412 723 364 Weighted-average shares outstanding, diluted 11,960 11,420 11,895 11,278 Net income per share of common stock outstanding: Basic $ 0.52 $ 0.60 $ 0.95 $ 1.15 Diluted $ 0.49 $ 0.58 $ 0.89 $ 1.12 The following table summarizes the weighted-average equity awards that were excluded from the diluted net income per share calculations since they were anti-dilutive: Three Months Ended Six Months Ended (In thousands) December 31, 2021 January 1, 2021 December 31, 2021 January 1, 2021 Stock options 123 107 48 94 Restricted stock units and performance stock units 54 — 41 — Total shares of common stock excluded 177 107 89 94 Note 12. Commitments and Contingencies Purchase Orders and Other Commitments From time to time in the normal course of business, we may enter into purchasing agreements with our suppliers that require us to accept delivery of, and remit full payment for, finished products that we have ordered, finished products that we requested be held as safety stock, and work in process started on our behalf, in the event we cancel or terminate the 21 purchasing agreement. Because these agreements do not specify fixed or minimum quantities, do not specify minimum or variable price provisions, and do not specify the approximate timing of the transaction, and we have no present intention to cancel or terminate any of these agreements, we currently do not believe that we have any future liability under these agreements. As of December 31, 2021, we had outstanding purchase obligations with our suppliers or contract manufacturers of $ 36.8 million. In addition, we had contractual obligations of approximately $ 3.7 million associated with software licenses as of December 31, 2021. Financial Guarantees and Commercial Commitments Guarantees issued by banks, insurance companies, or other financial institutions are contingent commitments issued to guarantee our performance under borrowing arrangements, such as bank overdraft facilities, tax and customs obligations, and similar transactions, or to ensure our performance under customer or vendor contracts. The terms of the guarantees are generally equal to the remaining term of the related debt or other obligations and are generally limited to two years or less. As of December 31, 2021, we had no guarantees applicable to our debt arrangements. We have entered into commercial commitments in the normal course of business including surety bonds, standby letters of credit agreements, and other arrangements with financial institutions primarily relating to the guarantee of future performance on certain contracts to provide products and services to customers. As of December 31, 2021, we had commercial commitments of $ 64.2 million outstanding that were not recorded on our unaudited condensed consolidated balance sheets. We do not believe, based on historical experience and information currently available, that it is probable that any significant amounts will be required to be paid on these performance guarantees in the future. Indemnifications Under the terms of substantially all of our license agreements, we have agreed to defend and pay any final judgment against our customers arising from claims against such customers that our products infringe the intellectual property rights of a third party. As of December 31, 2021, we have not received any notice that any customer is subject to an infringement claim arising from the use of our products; we have not received any request to defend any customers from infringement claims arising from the use of our products; and we have not paid any final judgment on behalf of any customer related to an infringement claim arising from the use of our products. Because the outcome of infringement disputes is related to the specific facts of each case and given the lack of previous or current indemnification claims, we cannot estimate the maximum amount of potential future payments, if any, related to our indemnification provisions. As of December 31, 2021, we had not recorded any liabilities related to these indemnifications. Legal Proceedings We are subject from time to time to disputes with customers concerning our products and services. In May 2016, we received notification of a claim for damages from a customer alleging that certain of our products were defective which we settled with an immaterial amount during the third quarter of 2021. From time to time, we may be involved in various other legal claims and litigation that arise in the normal course of our operations. We are aggressively defending all current litigation matters. Although there can be no assurances and the outcome of these matters is currently not determinable, we currently believe that none of these claims or proceedings are likely to have a material adverse effect on our financial position. We expect to defend each of these disputes vigorously. There are many uncertainties associated with any litigation and these actions or other third-party claims against us may cause us to incur costly litigation and/or substantial settlement charges. As a result, our business, financial condition, results of operations, and cash flows could be adversely affected. The actual liability in any such matters may be materially different from our estimates, if any. We record accruals for our outstanding legal proceedings, investigations or claims when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. We evaluate, at least on a quarterly basis, developments in legal proceedings, investigations or claims that could affect the amount of any accrual, as well as any developments that would result in a loss contingency to become both probable and reasonably estimable. We have not recorded any accrual for loss contingencies associated with such legal claims or litigation discussed above. 22 Contingent Liabilities We record a loss contingency as a charge to operations when (i) it is probable that an asset has been impaired or a liability has been incurred at the date of the unaudited condensed consolidated financial statements; and (ii) the amount of the loss can be reasonably estimated. Disclosure in the Notes to the unaudited condensed consolidated financial statements is required for loss contingencies that do not meet both those conditions if there is a reasonable possibility that a loss may have been incurred. Gain contingencies are not recorded until realized. We expense all legal costs incurred to resolve regulatory, legal, and tax matters as incurred. In March 2016, an enforcement action by the Indian Department of Revenue, Ministry of Finance was brought against our subsidiary Aviat Networks (India) Private Limited (“Aviat India”) relating to the non-realization of intercompany receivables and non-payment of intercompany payables, which originated from 1999 to 2012, within the time frames dictated by the Indian regulations under the Foreign Exchange Management Act. In November 2017, the Indian Department of Revenue, Ministry of Finance also initiated a similar action against Telsima Communications Private Limited (“Telsima India”), a subsidiary of the Company, relating to the non-realization of intercompany receivables and non-payment of intercompany payables which originated from the period prior to our acquisition of Telsima India in February 2009. In September 2019, our directors of Aviat India appeared before the Ministry of Finance Enforcement Directorate. No settlement offers were discussed at the meeting and the matter is still ongoing with no subsequent hearing date currently scheduled. We have accrued an immaterial amount representing the estimated probable loss for which we would settle the matter. We currently cannot form an estimate of the range of loss in excess of our amounts already accrued. If the outcome of this matter is greater than the current immaterial amount accrued, we intend to dispute it vigorously. Periodically, we review the status of each significant matter to assess the potential financial exposure. If a potential loss is considered probable and the amount can be reasonably estimated, we reflect the estimated loss in our unaudited condensed consolidated statement of operations. Significant judgment is required to determine the probability that a liability has been incurred or an asset impaired and whether such loss is reasonably estimable. Further, estimates of this nature are highly subjective, and the final outcome of these matters could vary significantly from the amounts that have been included in our unaudited condensed consolidated financial statements. As additional information becomes available, we reassess the potential liability related to our pending claims and litigation and may revise estimates accordingly. Such revisions in the estimates of the potential liabilities could have a material impact on our results of operations and financial position. COVID-19 In March 2020, the World Health Organization characterized a recent pandemic of respiratory illness caused by novel coronavirus disease, known as COVID-19, as a pandemic. The pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place or stay-at-home orders, and business shutdowns. Our global operations expose us to risks associated with public health crises and epidemics/pandemics, such as the COVID-19 pandemic. The COVID-19 pandemic may have an impact on our operations, supply chains and distribution systems and increase our expenses, including as a result of impacts associated with preventive and precautionary measures that we, other businesses and governments are taking or requiring. The extent to which the COVID-19 pandemic impacts our business, prospects and results of operations will depend on future developments, which are highly uncertain and cannot be predicted with certainty, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating activities can resume. Management is actively monitoring the impact of the COVID-19 pandemic on our financial condition, liquidity, operations, suppliers, industry, and workforce. Additionally we have undertaken measures to protect our employees, suppliers, and customers, including encouraging, and in many cases requiring employees to work remotely as appropriate. We have also modified some of our controls procedures but those changes have not been significant. Our first priority remains the health and safety of our employees and their families. Employees whose tasks can be done off-site have been instructed to work from home. Our manufacturing sites support essential businesses and remain operational. We are maintaining social distancing for workers on-site and have enhanced cleaning protocols and usage of personal protective equipment, where appropriate. Our gross margin in the current quarter was negatively impacted by inflationary pressures incurred to overcome supply chain and logistical bottlenecks. These were partially offset by price increases and surcharges. We continue to monitor, assess and adapt to the situation and prepare for implications to our business, supply chain and customer demand. We expect these challenges to continue until business and economic activities return to more normal levels. 23 24