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) April 1, 2022 July 2, 2021 ASSETS Current Assets: Cash and cash equivalents $ 31,296 $ 47,942 Accounts receivable, net 76,150 48,135 Unbilled receivables 45,700 37,521 Inventories 28,669 23,436 Customer service inventories 1,807 1,431 Assets held for sale — 2,218 Other current assets 12,984 9,556 Total current assets 196,606 170,239 Property, plant and equipment, net 9,522 11,701 Deferred income taxes 98,002 103,467 Right of use assets 3,196 3,816 Marketable securities 2,515 — Other assets 9,841 8,430 TOTAL ASSETS $ 319,682 $ 297,653 LIABILITIES AND EQUITY Current Liabilities: Accounts payable $ 40,634 $ 32,405 Accrued expenses 25,392 28,154 Short-term lease liabilities 565 769 Advance payments and unearned revenue 38,066 32,304 Restructuring liabilities 999 2,737 Total current liabilities 105,656 96,369 Unearned revenue 7,604 8,592 Long-term lease liabilities 2,786 3,223 Other long-term liabilities 324 356 Reserve for uncertain tax positions 5,396 5,164 Deferred income taxes 586 614 Total liabilities 122,352 114,318 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, 11,166,918 shares issued and outstanding at April 1, 2022; 11,153,445 shares issued and outstanding at July 2, 2021 112 112 Treasury stock ( 5,398 ) ( 787 ) Additional paid-in-capital 821,976 818,939 Accumulated deficit ( 603,975 ) ( 620,602 ) Accumulated other comprehensive loss ( 15,385 ) ( 14,327 ) Total equity 197,330 183,335 TOTAL LIABILITIES AND EQUITY $ 319,682 $ 297,653 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 5 AVIAT NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended Nine Months Ended (In thousands, except per share amounts) April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021 Revenues: Revenue from product sales $ 52,047 $ 45,246 $ 156,361 $ 136,401 Revenue from services 22,469 21,158 69,177 66,824 Total revenues 74,516 66,404 225,538 203,225 Cost of revenues: Cost of product sales 31,850 26,456 97,789 81,823 Cost of services 15,130 14,370 45,976 44,666 Total cost of revenues 46,980 40,826 143,765 126,489 Gross margin 27,536 25,578 81,773 76,736 Operating expenses: Research and development expenses 5,259 5,275 17,338 15,541 Selling and administrative expenses 14,867 15,106 41,304 41,555 Restructuring (recovery) charges ( 72 ) 1,162 ( 373 ) 1,162 Total operating expenses 20,054 21,543 58,269 58,258 Operating income 7,482 4,035 23,504 18,478 Other expense (income), net 175 ( 128 ) 387 ( 201 ) Income before income taxes 7,307 4,163 23,117 18,679 Provision for (benefit from) income taxes 1,278 ( 90,568 ) 6,490 ( 88,629 ) Net income $ 6,029 $ 94,731 $ 16,627 $ 107,308 Net income per share of common stock outstanding: Basic $ 0.54 $ 8.49 $ 1.49 $ 9.76 Diluted $ 0.51 $ 8.00 $ 1.40 $ 9.31 Weighted-average shares outstanding: Basic 11,173 11,152 11,172 10,994 Diluted 11,761 11,842 11,848 11,532 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 6 AVIAT NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) Three Months Ended Nine Months Ended (In thousands) April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021 Net income $ 6,029 $ 94,731 $ 16,627 $ 107,308 Other comprehensive (loss) income: Net change in cumulative translation adjustments ( 786 ) ( 284 ) ( 1,058 ) 314 Other comprehensive (loss) income ( 786 ) ( 284 ) ( 1,058 ) 314 Comprehensive income $ 5,243 $ 94,447 $ 15,569 $ 107,622 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 7 AVIAT NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended (In thousands) April 1, 2022 April 2, 2021 Operating Activities Net income $ 16,627 $ 107,308 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation and amortization of property, plant and equipment 3,444 4,016 (Recoveries) Provision for uncollectible receivables ( 56 ) 46 Share-based compensation 2,464 2,154 Deferred tax assets, net 5,437 ( 89,732 ) Charges for inventory and customer service inventory write-downs 1,140 1,148 (Gain) loss on disposition of property, plant and equipment, net ( 66 ) 6 Noncash lease expense 620 581 Net gain on marketable securities ( 23 ) — Restructuring (recoveries) charges ( 373 ) 1,162 Changes in operating assets and liabilities: Accounts receivable ( 28,252 ) ( 3,507 ) Unbilled receivables ( 8,446 ) ( 15,389 ) Inventories ( 5,634 ) ( 8,365 ) Customer service inventories ( 1,061 ) ( 684 ) Accounts payable 7,934 5,400 Accrued expenses ( 569 ) ( 249 ) Advance payments and unearned revenue 4,719 12,077 Income taxes payable or receivable ( 1,400 ) ( 317 ) Other assets and liabilities ( 6,652 ) ( 818 ) Change in lease liabilities ( 641 ) ( 650 ) Net cash (used in) provided by operating activities ( 10,788 ) 14,187 Investing Activities Payments for acquisition of property, plant and equipment ( 1,028 ) ( 2,399 ) Purchase of marketable securities ( 2,492 ) — Proceeds from sale of asset held for sale 2,284 — Net cash used in investing activities ( 1,236 ) ( 2,399 ) Financing Activities Repayments of borrowings — ( 9,000 ) Payments for repurchase of common stock - treasury shares ( 4,611 ) ( 458 ) Payments for taxes related to net settlement of equity awards ( 358 ) ( 167 ) Proceeds from issuance of common stock under employee stock plans 931 1,889 Net cash used in financing activities ( 4,038 ) ( 7,736 ) Effect of exchange rate changes on cash, cash equivalents, and restricted cash ( 663 ) 140 Net (decrease) increase in cash, cash equivalents, and restricted cash ( 16,725 ) 4,192 Cash, cash equivalents, and restricted cash, beginning of period 48,198 41,872 Cash, cash equivalents, and restricted cash, end of period $ 31,473 $ 46,064 See accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 8 AVIAT NETWORKS, INC. CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (Unaudited) Three Months Ended April 1, 2022 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 December 31, 2021 11,195,542 $ 112 $ ( 3,408 ) $ 820,791 $ ( 610,004 ) $ ( 14,599 ) $ 192,892 Net income — — — — 6,029 — 6,029 Other comprehensive loss, net of tax — — — — — ( 786 ) ( 786 ) Issuance of common stock under employee stock plans 37,327 1 — 345 — — 346 Stock repurchase ( 65,951 ) ( 1 ) ( 1,990 ) — — — ( 1,991 ) Share-based compensation — — — 840 — — 840 Balance as of April 1, 2022 11,166,918 $ 112 $ ( 5,398 ) $ 821,976 $ ( 603,975 ) $ ( 15,385 ) $ 197,330 Three Months Ended April 2, 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 January 1, 2021 11,119,536 $ 111 $ — $ 816,988 $ ( 718,164 ) $ ( 14,371 ) $ 84,564 Net income — — — — 94,731 — 94,731 Other comprehensive loss, net of tax — — — — — ( 284 ) ( 284 ) Issuance of common stock under employee stock plans 54,324 1 — 401 — — 402 Shares withheld for taxes related to vesting of equity awards ( 1,366 ) — — 1 — — 1 Stock repurchase ( 8,300 ) — ( 458 ) — — — ( 458 ) Share-based compensation — — — 765 — — 765 Balance as of April 2, 2021 11,164,194 $ 112 $ ( 458 ) $ 818,155 $ ( 623,433 ) $ ( 14,655 ) $ 179,721 9 Nine Months Ended April 1, 2022 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 — — — — 16,627 — 16,627 Other comprehensive income, net of tax — — — — — ( 1,058 ) ( 1,058 ) Issuance of common stock under employee stock plans 172,996 2 — 931 — — 933 Shares withheld for taxes related to vesting of equity awards ( 10,134 ) — — ( 358 ) — — ( 358 ) Stock repurchase ( 149,389 ) ( 2 ) ( 4,611 ) — — — ( 4,613 ) Share-based compensation — — — 2,464 — — 2,464 Balance as of April 1, 2022 11,166,918 $ 112 $ ( 5,398 ) $ 821,976 $ ( 603,975 ) $ ( 15,385 ) $ 197,330 Nine Months Ended April 2, 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 10,792,674 $ 108 $ — $ 814,283 $ ( 730,741 ) $ ( 14,969 ) $ 68,681 Net income — — — — 107,308 — 107,308 Other comprehensive loss, net of tax — — — — — 314 314 Issuance of common stock under employee stock plans 393,354 4 — 1,885 — — 1,889 Shares withheld for taxes related to vesting of equity awards ( 13,534 ) — — ( 167 ) — — ( 167 ) Stock repurchase ( 8,300 ) ( 458 ) — — ( 458 ) Share-based compensation — — — 2,154 — — 2,154 Balance as of April 2, 2021 11,164,194 $ 112 $ ( 458 ) $ 818,155 $ ( 623,433 ) $ ( 14,655 ) $ 179,721 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 nine months ended April 1, 2022 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 April 1, 2022 and the three months ended April 2, 2021 both 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. 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. Summary of Significant Accounting Policies There have been no material changes in our significant accounting policies as of April 1, 2022 and for the nine months ended April 1, 2022, 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 11 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. The adoption of ASU 2020-04 will not have a material impact 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) April 1, 2022 July 2, 2021 Cash and cash equivalents $ 31,296 $ 47,942 Restricted cash included in other assets 177 256 Total cash, cash equivalents, and restricted cash in the Statement of Cash Flows $ 31,473 $ 48,198 Accounts Receivable, net Our net accounts receivable are summarized below: (In thousands) April 1, 2022 July 2, 2021 Accounts receivable $ 77,484 $ 50,276 Less: Allowances for collection losses ( 1,334 ) ( 2,141 ) Total accounts receivable, net $ 76,150 $ 48,135 Inventories Our inventories are summarized below (In thousands) April 1, 2022 July 2, 2021 Finished products $ 16,994 $ 15,409 Raw materials and supplies 11,675 8,027 Total inventories $ 28,669 $ 23,436 Consigned inventories included within raw materials and supplies $ 11,098 $ 6,570 12 We increased certain levels of inventory during the three and nine months ended April 1, 2022 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 nine months ended April 1, 2022 and April 2, 2021 were classified in cost of product sales as follows: Three Months Ended Nine Months Ended (In thousands) April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021 Excess and obsolete inventory $ 196 $ 270 $ 436 $ 467 Customer service inventory write-downs 286 293 704 681 Total inventory charges $ 482 $ 563 $ 1,140 $ 1,148 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 completed the sale during the third quarter of fiscal 2022 with proceeds of $ 2.3 million, reflecting a gain of $ 0.1 million. We have no additional assets held for sale. Property, Plant and Equipment, net Our property, plant and equipment, net are summarized below: (In thousands) April 1, 2022 July 2, 2021 Land $ 210 $ 210 Buildings and leasehold improvements 5,910 6,914 Software 21,375 21,370 Machinery and equipment 52,065 51,244 Total property, plant and equipment, gross 79,560 79,738 Less: Accumulated depreciation and amortization ( 70,038 ) ( 68,037 ) Total property, plant and equipment, net $ 9,522 $ 11,701 Included in the total plant, property and equipment above there were no assets in progress which have not been placed in service as of April 1, 2022 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 Nine Months Ended (In thousands) April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021 Depreciation and amortization $ 1,051 $ 1,355 $ 3,444 $ 4,016 13 Accrued Expenses Our accrued expenses are summarized below: (In thousands) April 1, 2022 July 2, 2021 Accrued compensation and benefits $ 8,885 $ 13,455 Accrued agent commissions 2,079 2,348 Accrued warranties 3,223 3,228 Other 11,205 9,123 Total accrued expenses $ 25,392 $ 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 Nine Months Ended (In thousands) April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021 Balance as of the beginning of the period $ 3,198 $ 3,315 $ 3,228 $ 3,196 Warranty provision recorded during the period 402 469 1,242 1,242 Consumption during the period ( 377 ) ( 491 ) ( 1,247 ) ( 1,145 ) Balance as of the end of the period $ 3,223 $ 3,293 $ 3,223 $ 3,293 Advance Payments and Unearned Revenue Our advance payments and unearned revenue are summarized below: (In thousands) April 1, 2022 July 2, 2021 Advance payments $ 2,906 $ 2,445 Unearned revenue 35,160 29,859 Total advance payments and unearned revenue $ 38,066 $ 32,304 Excluded from the balances above are $ 7.6 million and $ 8.6 million in long-term unearned revenue as of April 1, 2022 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: • 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. 14 The fair values, and valuation input levels of our assets and liabilities that are measured at fair value on a recurring basis as of April 1, 2022 and July 2, 2021 were as follows: April 1, 2022 July 2, 2021 Valuation Inputs (In thousands) Fair Value Fair Value Assets: Cash and cash equivalents: Money market funds $ 8,778 $ 26,847 Level 1 Bank certificates of deposit $ 3,475 $ 3,288 Level 2 Marketable securities $ 2,515 $ — Level 1 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 April 1, 2022 and July 2, 2021, these money market funds were valued at $1.00 net asset value per share. Our marketable securities are included in non-current assets on our balance sheet as we intend to hold for longer than 12 months. These marketable securities are publicly traded stock measured at fair value and classified within Level 1. 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 April 1, 2022 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 nine 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 nine months ended April 1, 2022. The following summarizes our lease costs (in thousands): Three Months Ended Nine Months Ended April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021 (In thousands) (In thousands) Operating lease costs $ 251 $ 295 $ 813 $ 909 Short-term lease costs $ 623 506 1,823 1,323 Variable lease costs $ 64 93 138 255 Total lease costs $ 938 $ 894 $ 2,774 $ 2,487 15 The following summarizes our lease term and discount rate for the nine months ended April 1, 2022: Weighted average remaining lease term 7.8 years Weighted average discount rate 5.8 % As of April 1, 2022, 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 $ 163 2023 711 2024 593 2025 612 2026 552 Thereafter 1,701 Total lease payments 4,332 Less: interest ( 981 ) Present value of lease liabilities $ 3,351 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 sub-limit 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 sub-limit. We may prepay loans under the SVB Credit Facility in whole or in part at any time without premium or penalty. As of April 1, 2022, available credit under the SVB Credit Facility was $ 21.7 million, reflecting the lower available limit of $ 25.0 million less outstanding letters of credit of $ 3.3 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 nine months ended April 1, 2022 and there were no borrowing outstanding as of April 1, 2022 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 April 1, 2022, 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 $ 0.3 million in short-term advances at various interest rates, all of which was available as of April 1, 2022 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 April 1, 2022 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): April 1, 2022 July 2, 2021 Contract Assets Accounts receivable, net $ 76,150 $ 48,135 Unbilled receivables $ 45,700 $ 37,521 Capitalized commissions $ 1,304 $ 1,720 Contract Liabilities Advance payments and unearned revenue $ 38,066 $ 32,304 Unearned revenue, long-term $ 7,604 $ 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 April 1, 2022, we had $ 45.7 million in advance payments and unearned revenue and long-term unearned revenue, of which approximately 18 % is expected to be recognized as revenue in the remainder of fiscal 2022 and the balance thereafter. During the three and nine months ended April 1, 2022 we recognized $ 5.3 million and $ 18.8 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 $ 82.8 million at April 1, 2022. 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 nine months ended April 1, 2022 and April 2, 2021 was as follows: Three Months Ended Nine Months Ended (In thousands) April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021 North America $ 49,042 $ 42,021 $ 151,025 $ 136,678 Africa and the Middle East 13,123 9,904 37,360 31,138 Europe 2,898 3,280 8,509 7,053 Latin America and Asia Pacific 9,453 11,199 28,644 28,356 Total revenue $ 74,516 $ 66,404 $ 225,538 $ 203,225 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 Nine Months Ended April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021 Motorola Solutions, Inc. 12.0 % * 13.0 % * A U.S. State Government Customer * 12.5 % * * Mobile Telephone Networks Group (MTN Group) 13.0 % * 10.0 % * * Less than 10.0% Customer accounting for 10% or more of our accounts receivable were as follows: April 1, 2022 July 2, 2021 Mobile Telephone Networks Group (MTN Group) 20.0 % 14.0 % Note 8. Equity Stock Repurchase Program During the third quarter of fiscal 2022, we repurchased 65,951 shares of our common stock in the open market for an aggregate purchase price, including commissions, of $ 2.0 million. During the nine months ended of fiscal 2022, we repurchased 149,389 shares of our common stock in the open market for an aggregate purchase price, including commission of $ 4.6 million. These shares were recorded as treasury stock, and we do not anticipate retiring them. 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 April 1, 2022, $ 8.0 million remains available and we may choose to suspend or discontinue the repurchase program at any time. Stock Incentive Programs As of April 1, 2022, 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 nine months ended April 1, 2022, we granted 70,531 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 Nine Months Ended (In thousands) April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021 By Expense Category: Cost of revenues $ 101 $ 114 $ 271 $ 279 Research and development 5 82 103 179 Selling and administrative 734 569 2,090 1,696 Total share-based compensation expense $ 840 $ 765 $ 2,464 $ 2,154 By Types of Award: Options $ 139 $ 179 $ 434 $ 569 Restricted and performance stock awards and units 701 586 2,030 1,585 Total share-based compensation expense $ 840 $ 765 $ 2,464 $ 2,154 As of April 1, 2022, there was approximately $ 1.1 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 1.3 years. As of April 1, 2022, there was $ 4.8 million of total unrecognized compensation expense related to non-vested stock awards which is expected to be recognized over a weighted-average period of 1.3 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 Prior Years' Plan Fiscal 2015-2016 Plan Accrual balance, July 2, 2021 $ 2,209 $ 280 $ 248 $ 2,737 Charges, net 628 31 — 659 Cash payments ( 326 ) ( 49 ) — ( 375 ) Foreign exchange impact ( 7 ) — ( 6 ) ( 13 ) Accrual balance, October 1, 2021 2,504 262 242 3,008 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 Recovery, net ( 72 ) — — ( 72 ) Cash payments ( 702 ) — — ( 702 ) Foreign exchange impact ( 14 ) — — ( 14 ) Accrual balance, April 1, 2022 $ 935 $ 64 $ — $ 999 19 As of April 1, 2022, the accrual balance of $ 1.0 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. 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 end of fiscal year 2022, with a certain number of positions being consolidated and/or relocated. Prior Years’ Plan 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 complete. The Q4 2020 Plan was completed in the second quarter of 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 nine months ended April 1, 2022 and April 2, 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 nine months ended April 1, 2022 was primarily due to tax expense related to U.S. and profitable subsidiaries. The tax benefit for the nine months ended April 2, 2021 was primarily due to the release of valuation allowance on our U.S. federal and state deferred tax assets 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 nine months ended April 1, 2022 and April 2, 2021. 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. 20 Note 11. Net Income Per Share of Common Stock The following table presents the computation of basic and diluted net income per share: Three Months Ended Nine Months Ended (In thousands, except per share amounts) April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021 Numerator: Net income $ 6,029 $ 94,731 $ 16,627 $ 107,308 Denominator: Weighted-average shares outstanding, basic 11,173 11,152 11,172 10,994 Effect of potentially dilutive equivalent shares 588 690 676 538 Weighted-average shares outstanding, diluted 11,761 11,842 11,848 11,532 Net income per share of common stock outstanding: Basic $ 0.54 $ 8.49 $ 1.49 $ 9.76 Diluted $ 0.51 $ 8.00 $ 1.40 $ 9.31 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 Nine Months Ended (In thousands) April 1, 2022 April 2, 2021 April 1, 2022 April 2, 2021 Stock options 121 8 112 4 Restricted stock units and performance stock units 53 — 45 2 Total shares of common stock excluded 174 8 157 6 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 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 April 1, 2022, we had outstanding purchase obligations with our suppliers or contract manufacturers of $ 40.1 million. In addition, we had contractual obligations of approximately $ 3.7 million associated with software licenses as of April 1, 2022. 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 April 1, 2022, 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 April 1, 2022, we had commercial commitments of $ 65.1 million outstanding that were not recorded on our unaudited condensed consolidated balance sheets. 21 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 April 1, 2022, 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 April 1, 2022, 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. 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. 22 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. Note 13. Subsequent Events We announced on April 13, 2022 that we have entered into an arrangement agreement under which we will acquire all outstanding shares of Redline Communications Group, Inc. (“Redline”) (TSX: RDL), for CAD$ 0.90 per common share (approximately USD$ 0.71 per share), in an all-cash transaction valued at approximately CAD $ 16.2 million (approximately USD $ 12.9 million). We expect to fully fund the acquisition from cash on hand. Subject to customary closing conditions and necessary regulatory approvals, the transaction is expected to close within four months . 23