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Item 2. Management’s Discussion and Analysis

2022-12-13 compared with 2022-09-02 · 193 added, 95 removed, 143 unchanged (67% of the section changed)

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This section entitled "Management’s Discussion and Analysis of Financial Condition and Results of Operations" (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results.

The MD&A provides a narrative analysis explaining the reasons for material changes in the Company’s (i) financial condition during the period from the most recent fiscal year-end, April 30, 2022, to and including July 30, 2022 and (ii) results of operations during the current fiscal period(s) as compared to the corresponding period(s) of the preceding fiscal year.

The MD&A provides a narrative analysis explaining the reasons for material changes in the Company’s (i) financial condition during the period from the most recent fiscal year-end, April 30, 2022, to and including October 29, 2022 and (ii) results of operations during the current fiscal period(s) as compared to the corresponding period(s) of the preceding fiscal year.

This Quarterly Report on Form 10-Q, including the MD&A, contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995.

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From time to time, we may also provide oral and written forward-looking statements in other materials we release to the public, such as press releases, presentations to securities analysts or investors, or other communications by us.

Any or all of our forward-looking statements in this report and in any public statements we make could be materially different from actual results.

Any or all forward-looking statements in this report and in any public statements we make could be materially different from actual results.

Accordingly, we wish to caution investors that any forward-looking statements made by or on behalf of us are subject to uncertainties and other factors that could cause actual results to differ materially from such statements.

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New factors emerge from time to time;

it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

it is not possible for management to predict all such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 1 of Part 1 of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended April 30, 2022 (including the information presented therein under Risk Factors), as well other publicly available information about our Company.

Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 1 of Part 1 of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended April 30, 2022 (including the information presented therein under Risk Factors), as well as other publicly available information about our Company.

We are engaged principally in the design, marketing, and manufacture of a wide range of integrated electronic display systems and related products which are sold in a variety of markets throughout the world and the rendering of related maintenance and professional services.

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CURRENT CONDITIONS

Supply chain disruptions continue as a result of several factors, including the pandemic lockdowns, shipping container shortages, labor shortages, war and other conflicts, and changes in global demand.

Although supply chain disruptions have started to ease, supply chain disruptions continue as a result of several factors, including the pandemic lockdowns, shipping container shortages, labor shortages, war and other conflicts, and changes in global demand.

We are specifically impacted by the global shortage of semiconductors and related electronic components.

Over the past months, our capacity was constrained due to significant and unusual part shortages, a challenging labor environment, and operating disruptions from COVID-19 related absences, and shutdown of our facilities in Shanghai, China due to a government mandated COVID-19 zero tolerance policy.

Through this time, we also have experienced increased input costs for materials, commodities, personnel,

freight, and tariffs.

In addition, recent disputes by railroad workers regarding the terms of labor agreements have increased the likelihood of a potential strike or work stoppage by certain railroad workers.

In response to these increased tensions, President Biden recently took an executive action to temporarily prevent approximately 115,000 U.S.

railroad workers from going on strike for sixty days.

It is uncertain at this time whether negotiations will be successful in preventing a strike or work stoppage by railroad workers.

The International Longshore and Warehouse Union (ILWU) contract with the Pacific Maritime Association expired July 1st.

Over the past year, our capacity was constrained due to significant and unusual part shortages, a challenging labor environment, and operating disruptions from COVID-19 related absences, and the shutdown of our facilities in Shanghai,

China due to a government mandated COVID-19 zero tolerance policy.

Through this time, we also experienced increased input costs for materials, commodities, personnel, freight, and tariffs.

In addition, the International Longshore and Warehouse Union (ILWU) contract with the Pacific Maritime Association expired on July 1, 2022.

While negotiations are in process, a strike or work slow-down mandate is possible.

This would have a negative impact on the movement of material through west coast ports.

We are monitoring these situations but it is difficult and uncertain to predict the level of impact this may have on our organization or our supply chain.

We have responded to input cost increases by increasing pricing through the last half of fiscal 2022 and implemented additional increases at the beginning of fiscal 2023.

Due to this volatility in supply chains, longer planning horizons, and high backlog, we have carried higher quantities of inventory.

We also anticipate changes in the timing of payments from our customers as we work through disruptions and fulfill our backlog, likely creating an increased consumption of cash.

We cannot predict the length or severity of these conditions.

We expect our inventory levels to peak in the current quarter and continue to decline to more normalized levels through production and reductions in purchases, however, we cannot be certain we will not experience future disruptions or need additional liquidity to fund inventory levels, operations, and capital expenditures.

We have responded to input cost increases by increasing pricing through the last half of fiscal 2022 and implementing additional increases at the beginning of fiscal 2023.

We also use pricing policies and opportunity evaluations across markets to manage price levels.

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We have also allocated resources to redesigns of certain products to provide the ability to source available components.

Macroeconomic events including the possibility of sustained high inflation and tightening financials conditions, including the potential for higher interest rates, could increase the likelihood of deteriorating global economic conditions.

We also expect impacts to the global economic conditions in reaction to the evolving war and geopolitical environment.

Although we cannot predict the length or severity of these conditions, we expect continued disruptions in obtaining materials, commodities, labor, and freight availability and an increase in inflation.

Due to longer planning horizons and volatility in supply chains, we plan to carry higher quantities of inventory and anticipate changes in the timing of payments from our customers as we work through different disruptions and fulfill our backlog, likely creating an increased consumption of cash.

We are also planning additional cash use for capital spending to grow our manufacturing capacity.

All of these conditions have and will continue to cause volatility in our cash flow, pricing, order volumes, lead-times, competitiveness, revenue cycles, and production costs, and it is likely these conditions will continue to have negative impact in fiscal 2023.

Macroeconomic events, including the possibility of sustained high inflation, tightening financial conditions, and the potential for higher interest rates, could increase the likelihood of deteriorating global economic conditions.

We also expect impacts to global economic conditions in reaction to the evolving war and geopolitical environment.

Conditions and disruptions have and will likely continue to cause volatility in our cash flow, pricing, order volumes, lead-times, competitiveness, revenue cycles, and production costs, and it is likely these conditions will have a negative impact in fiscal 2023.

Our teams are focused on improving our cash flow and liquidity enhancement program, which includes:

Cash management focus through working capital reductions, including reductions in inventory and accounts receivables;

productivity improvements from factory capacity expansion and investments in capital equipment and hiring critical manufacturing and service employees to increase output;

operating margin improvement through pricing actions, product mix adjustments, and prudent management of operating expenses;

selective reduction in future capital asset spending;

and obtaining additional sources of liquidity, which requires the consent of our current lender.

We are monitoring these situations, but it is difficult and uncertain to predict the level of impact this may have on our supply chain, our costs, our liquidity, and our financial condition and results of operations.

For additional information, refer to the COVID-19 and raw material and component related risk factors disclosed in Item 1A of Part I in our Annual Report on Form 10-K for the fiscal year ended April 30, 2022.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTHS ENDED JULY 30, 2022 AND JULY 31, 2021

COMPARISON OF THE THREE MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021

Product Order Backlog

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We believe order information is useful to investors because it provides an indication of our market share and future revenues.

Our product order backlog as of July 30, 2022 was $469.1 million as compared to $285.3 million as of July 31, 2021 and $471.6 million at April 30, 2022, which was the end of our fiscal 2022.

We expect to fulfill the backlog as of July 30, 2022 within the next 24 months.

The timing of backlog may be impacted by project delays resulting from parts availability and other constraints stemming from the supply chain disruptions.

The following table shows information regarding net sales for the three months ended July 30, 2022 and July 31, 2021:

Our product order backlog as of October 29, 2022 was $463.1 million as compared to $281.6 million as of October 30, 2021 and $471.6 million at April 30, 2022.

The increase $181.5 million between October 29, 2022 and October 30, 2021 was driven by record order volume and softer conversions to sales due to supply challenges.

We expect to fulfill the backlog as of October 29, 2022 within the next 24 months.

The timing of backlog fulfillment may be impacted by project delays resulting from parts availability and other constraints stemming from the supply chain disruptions.

The following table shows information regarding net sales for the three months ended October 29, 2022 and October 30, 2021:

Three Months Ended

(in thousands) July 30, 2022 July 31, 2021 Dollar Change Percent Change

(in thousands) October 29, 2022 October 30, 2021 Dollar Change Percent Change

Commercial $ 37,047 $ 34,463 $ 2,584 7.5 %

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$ 182,807 $ 163,707 $ 19,100 11.7 %

For the fiscal 2023 first quarter, net sales were $171.9 million, an increase of $27.2 million from the prior year's first quarter.

The year-over-year growth was driven by fulfilling orders in the backlog and continued strong orders.

Material supply shortages and labor challenges are creating an increase in lead times and extending the timing of converting some orders to sales in the near-term.

(1) Orders are not measures defined by accounting principles generally accepted in the United States of America ("GAAP"), and our methodology for determining orders may vary from the methodology used by other companies in determining their orders and amounts.

For the fiscal 2023 second quarter, net sales were $187.4 million, an increase of $23.0 million from net sales in the prior year's second quarter.

Sales growth was driven by fulfilling orders in backlog even while we experienced multiple material supply chain disruptions and labor shortages.

Supply chain disruptions are creating an increase in lead times by extending the timing of converting orders to sales.

We expect supply chain conditions to persist through the 2023 fiscal year.

Order volume decreased in the first quarter of fiscal 2023 from the prior year's first quarter.

Fiscal 2022 saw a record number of orders from pent up demand during the COVID-19 pandemic and orders for fiscal 2023 continue to be strong.

Order bookings in the first quarter of fiscal 2023 were strong for shopping centers, casinos, and out of home advertising display systems in the Commercial business unit and in multiple sports venues in the Live Events unit.

International markets have seen some softening in demand through the first quarter of fiscal 2023 due to the inflationary environment and geopolitical events.

We are investing in automated machinery and equipment and in labor capacity to increase the rate of conversion of orders into sales.

Order volume increased in the second quarter of fiscal 2023 from the prior year's second quarter.

These order increases were driven by Live Events bookings for replacements and upgrades and offset in part by order volume declines in our Commercial business which are normalizing after a record number of orders in fiscal 2022 driven by pent up demand from the COVID-19 pandemic.

Orders decreased in International in the second quarter of fiscal 2023 compared to the second quarter of fiscal 2022 due to a weakening economic outlook relating to inflationary pressures, geopolitical events, and currency headwinds.

Gross Profit and Contribution Margin

Three Months Ended

July 30, 2022 July 31, 2021

October 29, 2022 October 30, 2021

(in thousands) Amount As a Percent of Net Sales Amount As a Percent of Net Sales

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$ 31,704 16.9 % $ 32,264 19.6 %

The decline in gross profit percentage was primarily impacted by inflationary challenges in materials, freight, and personnel related costs.

In addition, extraordinary supply chain disruptions, including the Shanghai factory closure, created intermittent work stoppages and factory inefficiencies, adding additional costs to meet customer commitments, especially

in the Live Events business unit.

We also recorded a $0.8 million provision for estimated losses on contracts in progress during the three months ended July 30, 2022 .

Total warranty costs as a percent of sales for the three months ended July 30, 2022 compared to the same period one year ago increased to 1.6 percent from 1.2 percent.

The decline in gross profit percentage for the second quarter of fiscal 2023 was primarily due to inflationary challenges in materials, freight, and personnel related costs.

In addition, extraordinary supply chain disruptions created intermittent work stoppages and factory inefficiencies, resulting in additional costs to meet customer commitments.

We increased prices beginning in late calendar 2022 and throughout fiscal 2023.

These price changes are just beginning to be realized through sales.

We expect sales price increases to continue to be realized through the remainder of fiscal year 2023.

Total warranty costs as a percent of sales for the three months ended October 29, 2022 compared to the same period one year ago increased to 2.7 percent from 1.4 percent.

We recognized warranty expense of $1.0 million for probable and reasonable estimated costs to remediate a component and manufacturing quality issue discovered during the second quarter of fiscal 2023 .

Three Months Ended

July 30, 2022 July 31, 2021

October 29, 2022 October 30, 2021

(in thousands) Amount As a Percent of Net Sales Dollar Change Percent Change Amount As a Percent of Net Sales

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Selling expenses consist primarily of personnel related costs, travel and entertainment expenses, marketing related expenses (show rooms, product demonstration, depreciation and maintenance, conventions and trade show expenses), the cost of customer relationship management/marketing systems, bad debt expenses, third-party commissions, and other expenses.

Contribution margin was impacted by the previously discussed sales levels and impacts on gross profit, as well as a 22.3 percent increase in selling expenses in the first three months of fiscal 2023 compared to the prior year three-month period.

Contribution margin for the fiscal quarter ended October 29, 2022 was impacted by the previously discussed sales levels and impacts on gross profit, as well as a 16.4 percent increase in selling expenses in the second quarter of fiscal 2023 compared to the prior year three-month period.

We have adjusted our sales and marketing activities and staffing levels to achieve current and expected future sales levels.

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Three Months Ended

July 30, 2022 July 31, 2021

October 29, 2022 October 30, 2021

(in thousands) Amount As a Percent of Net Sales Dollar Change Percent Change Amount As a Percent of Net Sales

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Product design and development 6,966 3.7 (230) (3.2) 7,196 4.4

Operating (loss) income $ (5,519) (3.2) % $ (11,179) (197.5) % $ 5,660 3.9 %

General and administrative expenses in the first quarter of fiscal 2023 increased as compared to the same period one year ago primarily due to increases in personnel expense and approximately $1.0 million in professional fees related to shareholder engagement.

Product design and development expenses in the first quarter of fiscal 2023 increased slightly as compared to the same period one year ago primarily due to an increase in personnel related expenses partially offset by a decrease in consulting expenses.

Decreased contribution margin and increased spend in general and administrative and product development led to an operating loss for the first quarter of fiscal 2023 compared to the prior year first quarter.

Operating income $ 1,526 0.8 % $ (2,859) (65.2) % $ 4,385 2.7 %

General and administrative expenses in the second quarter of fiscal 2023 increased as compared to the same period one year ago primarily due to increases in personnel expense.

Product design and development expenses in the second quarter of fiscal 2023 decreased slightly as compared to the same period one year ago primarily due to an increase in personnel related expenses offset by a decrease in consulting expenses and material costs.

Decreased contribution margin and increased spend in general and administrative led to a lower operating income for the second quarter of fiscal 2023 compared to the prior year second quarter.

Other Income and Expenses

Three Months Ended

July 30, 2022 July 31, 2021

October 29, 2022 October 30, 2021

(in thousands) Amount As a Percent of Net Sales Dollar Change Percent Change Amount As a Percent of Net Sales

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Interest (expense) income, net:

The change in interest income and expense, net for the first quarter of fiscal 2023 compared to the same period one year ago was primarily due to utilizing our line of credit during the 2023 first quarter for our strategic investments in inventory.

Other (expense) income, net:

The change in other income and expense, net for the first quarter of fiscal 2023 as compared to the same period one year ago was primarily due to losses recorded for equity method affiliates and foreign currency volatility.

We have recorded an effective tax rate of 15.8 percent for the first quarter of fiscal 2023 as compared to 25.2 percent for the first quarter of fiscal 2022.

The decrease in tax rate is primarily driven by an increase in estimated tax credits and other permanent tax items less valuation allowances as a percentage of estimated pre-tax earnings for fiscal 2023 compared to the estimated value of tax credits and other permanent items less valuation allowances as a percentage of the estimated pre-tax earnings in the first quarter of fiscal 2022.

The change in interest income and expense, net for the second quarter of fiscal 2023 compared to the same period one year ago was primarily due to utilizing our line of credit during the 2023 second quarter for our strategic investments in inventory.

Other expense, net:

The change in other expense, net for the second quarter of fiscal 2023 as compared to the same period one year ago was primarily due to losses recorded for equity method affiliates and foreign currency volatility.

We have recorded an effective tax rate of 1330.7 percent for the second quarter of fiscal 2023 as compared to a tax rate of 29.6 percent for the second quarter of fiscal 2022.

The increase in tax rate for the quarter is primarily driven by the requirement to record a full valuation allowance on net deferred tax assets during the second quarter of fiscal 2023 related to GAAP accounting for income taxes and related information.

Basis of Presentation - Liquidity and Going Concern" of the Notes to our Condensed Consolidated Financial Statements included in this Report.

RESULTS OF OPERATIONS

COMPARISON OF THE SIX MONTHS ENDED OCTOBER 29, 2022 AND OCTOBER 30, 2021

The following table shows information regarding net sales for the six months ended October 29, 2022 and October 30, 2021:

Six Months Ended

(in thousands) October 29, 2022 October 30, 2021 Dollar Change Percent Change

Commercial $ 77,165 $ 67,244 $ 9,921 14.8 %

Live Events 125,622 111,783 13,839 12.4

High School Park and Recreation 77,815 60,641 17,174 28.3

Transportation 36,219 26,611 9,608 36.1

International 42,538 42,930 (392) (0.9)

$ 359,359 $ 309,209 $ 50,150 16.2 %

Commercial $ 90,389 $ 96,687 $ (6,298) (6.5) %

Live Events 132,752 90,187 42,565 47.2

High School Park and Recreation 69,477 71,362 (1,885) (2.6)

Transportation 32,287 36,044 (3,757) (10.4)

International 28,125 51,173 (23,048) (45.0)

$ 353,030 $ 345,453 $ 7,577 2.2 %

For the first six months of fiscal 2023, net sales were $359.4 million, an increase of $50.2 million from the prior year's first six-month period.

The year-over-year growth was driven by fulfilling orders in backlog and continued strong order bookings.

Material supply chain shortages and labor challenges are creating an increase in lead times and extending the timing of converting some orders to sales in the near-term.

We expect supply chain conditions to persist through the 2023 fiscal year.

Order volume increased in the first six months of fiscal 2023 from the prior year's six-month period.

Fiscal 2022 saw a record number of orders from pent up demand during the COVID-19 pandemic, and orders for fiscal 2023 continue to be strong.

Order bookings in the first six months of fiscal 2023 were strong in multiple sports venues in the Live Events unit.

International markets have seen some softening in demand through the first two quarters of fiscal 2023 due to the inflationary environment and geopolitical events.

Gross Profit and Contribution Margin

Six Months Ended

October 29, 2022 October 30, 2021

(in thousands) Amount As a Percent of Net Sales Amount As a Percent of Net Sales

Gross Profit:

Commercial $ 11,018 14.3 % $ 14,623 21.7 %

Live Events 11,769 9.4 14,167 12.7

High School Park and Recreation 21,788 28.0 20,258 33.4

Transportation 9,922 27.4 8,155 30.6

International 3,001 7.1 7,249 16.9

$ 57,498 16.0 % $ 64,452 20.8 %

The decline in gross profit percentage in the six months ended October 29, 2022 was primarily impacted by inflationary challenges in materials, freight, and personnel related costs.

We also recorded a $0.5 million provision for estimated losses on contracts in progress during the six months ended October 29, 2022 .

Total warranty costs as a percent of sales for the six months ended October 29, 2022 compared to the same period one year ago increased to 2.2 percent from 1.3 percent.

We recognized warranty expense of $1.0 million for probable and reasonable estimated costs to remediate a component and manufacturing quality issue discovered during the six months ended October 29, 2022 .

Six Months Ended

October 29, 2022 October 30, 2021

(in thousands) Amount As a Percent of Net Sales Dollar Change Percent Change Amount As a Percent of Net Sales

Contribution Margin:

Commercial $ 2,119 2.7 % $ (4,807) (69.4) % $ 6,926 10.3 %

Live Events 6,188 4.9 (3,464) (35.9) 9,652 8.6

High School Park and Recreation 15,019 19.3 418 2.9 14,601 24.1

Transportation 7,969 22.0 1,605 25.2 6,364 23.9

International (2,755) (6.5) (5,387) (204.7) 2,632 6.1

$ 28,540 7.9 % $ (11,635) (29.0) % $ 40,175 13.0 %

Contribution margin in the six months ended October 29, 2022 was impacted negatively by the previously discussed sales levels and impacts on gross profit, as well as a 19.3 percent increase in selling expenses in the first six months of fiscal 2023 compared to the prior year six-month period.

We have adjusted our sales and marketing activities and staffing levels to achieve current and expected future sales levels.

Our order volume is directly associated with our marketing and sales expenses.

The following table reconciles non-GAAP contribution margin to GAAP operating loss:

Six Months Ended

October 29, 2022 October 30, 2021

(in thousands) Amount As a Percent of Net Sales Dollar Change Percent Change Amount As a Percent of Net Sales

Contribution margin $ 28,540 7.9 % $ (11,635) (29.0) % $ 40,175 13.0 %

General and administrative 18,128 5.0 2,356 14.9 15,772 5.1

Product design and development 14,405 4.0 47 0.3 14,358 4.6

Operating (loss) income $ (3,993) (1.1) % $ (14,038) (139.7) % $ 10,045 3.2 %

General and administrative expenses in the first six months of fiscal 2023 increased as compared to the same period one year ago primarily due to increases in personnel expense and approximately $1.0 million in professional fees related to shareholder engagement.

Product design and development expenses in the first six months of fiscal 2023 remained relatively flat as compared to the same period one year ago.

Decreased contribution margin and increased spend in general and administrative led to an operating loss for the first six months of fiscal 2023 compared to the prior year six-month period.

Other Income and Expenses

Six Months Ended

October 29, 2022 October 30, 2021

(in thousands) Amount As a Percent of Net Sales Dollar Change Percent Change Amount As a Percent of Net Sales

Interest (expense) income, net $ (323) (0.1) % $ (401) (514.1) % $ 78 — %

Other expense, net $ (955) (0.3) % $ 865 (47.5) % $ (1,820) (0.6) %

Interest (expense) income, net:

The change in interest income and expense, net for the first six months of fiscal 2023 compared to the same period one year ago was primarily due to utilizing our line of credit during the 2023 first six months for our strategic investments in inventory.

Other expense, net:

The change in other expense, net for the first six months quarter of fiscal 2023 as compared to the same period one year ago was primarily due to losses recorded for equity method affiliates and foreign currency volatility.

We have recorded an effective tax rate of (247.3) percent for the six months ended October 29, 2022 as compared to 27.0 percent for the six months ended October 30, 2021.

The difference in tax rates is primarily driven by the requirement to record a full valuation allowance on net deferred tax assets during the quarter related to GAAP accounting for income taxes and related information.

Basis of Presentation - Liquidity and Going Concern" of the Notes to our Condensed Consolidated Financial Statements included in this Report.

LIQUIDITY AND CAPITAL RESOURCES

Three Months Ended

(in thousands) July 30,

2022 July 31,

Six Months Ended

(in thousands) October 29,

2022 October 30,

2021 Dollar Change

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Net decrease in cash, cash equivalents and restricted cash $ (10,865) $ (18,798) $ 7,933

Cash decreased by $9.0 million for the first three months of fiscal 2023 compared to a decrease of $3.2 million in the first three months of fiscal 2022.

The decrease in the first quarter of fiscal 2023 is primarily due to the use of cash for investments in inventory required to support the conversion of increased backlog and strong orders into sales and as a strategy during this time of supply chain disruptions.

The decrease in cash was also due to investing in capital assets for increased capacity and automation and loans to affiliates.

Cash decreased by $10.9 million for the first six months of fiscal 2023 compared to a decrease of $18.8 million in the first six months of fiscal 2022.

The use of cash in the first six months of fiscal 2023 is primarily due to investments in inventory required to support the conversion of increased backlog and strong order bookings into sales and as a strategy to add stability to our manufacturing processes during this time of supply chain disruptions.

The decrease in cash was also due to investing in capital assets for increased capacity and automation and loans to affiliated entities.

We utilized our line of credit to support these uses of cash.

Net cash used in operating activities:

Net cash used in operating activities was $22.8 million for the first three months of fiscal 2023 compared to net cash used in operating activities of $1.0 million in the first three months of fiscal 2022.

The $21.8 million difference between net cash used in operating activities in the first quarter of fiscal 2023 compared to net cash used in operating activities in the first quarter of fiscal 2022 was primarily the result of changes in net operating assets and liabilities and the result of having a net loss in the first quarter of 2023 compared to net income in the first quarter of 2022.

Net cash used in operating activities was $21.9 million for the first six months of fiscal 2023 compared to net cash used in operating activities of $8.5 million in the first six months of fiscal 2022.

The difference between net cash used in operating activities in the first six months of fiscal 2023 compared to net cash used in operating activities in the first six months of fiscal 2022 was primarily the result of changes in net operating assets and liabilities and the result of having a net loss in the first six months of 2023 compared to net income in the first six months of 2022.

The changes in net operating assets and liabilities consisted of the following:

Three Months Ended

2022 July 31,

Six Months Ended

2022 October 30,

(Increase) decrease:

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Net cash used in investing activities:

Net cash used in investing activities totaled $10.4 million in the first three months of fiscal 2023 compared to net cash used in investing activities of $1.9 million in the first three months of fiscal 2022.

Purchases of property and equipment totaled $10.7 million in the first three months of fiscal 2023 compared to $1.3 million in the first three months of fiscal 2022.

Purchases of and loans to affiliates accounted for by the equity investment method totaled $1.1 million in the first three months of fiscal 2023 as compared to $0.7 m illion in the first three months of fiscal 2022.

Net cash used in investing activities totaled $15.2 million in the first six months of fiscal 2023 compared to net cash used in investing activities of $9.9 million in the first six months of fiscal 2022.

Purchases of property and equipment totaled $16.2 million in the first six months of fiscal 2023 compared to $4.5 million in the first six months of fiscal 2022.

Purchases of and loans to affiliates accounted for by the equity investment method totaled $2.9 million in the first six months of fiscal 2023 as compared to $6.1 m illion in the first six months of fiscal 2022.

Net cash provided by (used in) financing activities:

Net cash provided by financing activities was $24.1 million for the three months ended July 30, 2022 due to draws on our line of credit compared to a payment of $0.2 million in the same period one year ago primarily due to payments for shares repurchased.

Net cash provided by financing activities was $26.3 million for the six months ended October 29, 2022 due to draws on our line of credit compared to cash use of $0.4 million for other investing activities in the first six months of fiscal 2022.

Other Liquidity and Capital Resources Discussion:

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We believe the audiovisual industry fundamentals will drive long-term growth for our business;

however, for the near-term outlook, we expect our customers may continue to have disruptions and may continue to reduce or increase their spend on audiovisual systems and related services as they work through the economic and business implications of COVID-19, supply chain challenges, and emerging war and geopolitical situations.

Ongoing supply chain disruptions and inflationary challenges in materials, freight and personnel related costs also impact our profitability and cash flows.

We have increased pricing when we are able in an effort to offset the increase in input costs.

In addition, we are planning additional capital spending to grow our manufacturing capacity.

We anticipate needing to utilize a portion of our line of credit through fiscal 2023 for these conditions and investments.

Working capital was $118.5 million and $103.9 million as of July 30, 2022 and April 30, 2022, respectively.

The changes in working capital, particularly changes in inventory, accounts payable, accounts receivable, contract assets and liabilities, and the sports market and construction seasonality, can have a significant impact on the amount of net cash provided by operating activities largely due to the timing of payments and receipts.

however, for at least the remainder of fiscal 2023, we expect our customers will continue to have disruptions and may continue to reduce their spend on audiovisual systems and related services as they work through the economic and business implications of COVID-19, supply chain challenges, and emerging war and geopolitical situations.

Ongoing supply chain disruptions and inflationary challenges in materials, freight and personnel related costs have and will continue to cause volatility in our cash flow, pricing, order volumes, lead-times, competitiveness, revenue cycles, and production costs.

We believe it is likely these conditions will continue to have negative impacts in fiscal 2023.

To improve operations and cash flows, we have increased prices of our goods and services.

We have also increased investment in inventory levels to add production stability to our production processes to fulfill backlog, and are focused to reduce these levels as supply chains stabilize.

We also continue to selectively invest in property and equipment to expand our capacity and add automation.

Our ability to fund inventory levels, operations and capital expenditures in the future will be dependent on our ability to generate cash flow from operations in these conditions, to maintain or improve margins, and to use funds from our credit facility.

Our credit facility expires in April 2025, and it requires us to comply with certain covenants.

Although supply chain disruptions have started to ease and we expect our inventory levels to decline, we cannot be certain we will not experience future disruptions or need additional liquidity to fund inventory levels, operations, and capital expenditures.

We will need additional liquidity to meet our obligations as they come due in the 12 months following the date of this Report, and we cannot be assured that such liquidity will be available or the form of such liquidity, such as equity raises or debt financing.

Although we are in the process of obtaining additional liquidity through various means, including but not limited to obtaining financing secured by a mortgage on our facilities, a sales-leaseback transaction, leasing property and equipment, and continued focus on reducing working capital, these plans are not finalized and are subject to market conditions that are not within our control.

Basis of Presentation - Liquidity and Going Concern" of the Notes to our Condensed Consolidated Financial Statements included in this Report.

Working capital was $118.6 million and $103.9 million as of October 29, 2022 and April 30, 2022, respectively.

The changes in working capital, particularly changes in inventory, accounts payable, accounts receivable, contract assets and liabilities are impacted by the sports market and construction seasonality.

These changes can have a significant impact on the amount of net cash provided or used by operating activities largely due to the timing of payments for inventory and subcontractors and receipts from our customers.

On multimillion-dollar orders, the time between order acceptance and project completion may extend up to or exceed 12 months depending on the amount of custom work and a customer’s delivery needs.

We often receive down payments or progress payments on these orders.

We expect to use

cash in operations as our business returns and exceeds pre-pandemic levels and due to longer planning horizons and volatility in supply chains.

We use cash to purchase inventory and services at the beginning of these orders and often receive down payments or progress payments on these orders to balance cashflows.

We expect to use cash in operations as our business returns and exceeds pre-pandemic levels and due to longer planning horizons and volatility in supply chains.

While these conditions continue, we plan to carry higher quantities of inventory and anticipate changes in the timing of payments from our customers as we work through different disruptions and fulfill our backlog.

We had $24.1 million advanced on our line of credit as of July 30, 2022.

On August 16, 2022, we entered into an agreement to temporarily expand the line of credit by $10 million through October 31, 2022.

In addition, certain financial covenants were modified.

Our line of credit expires in April 2025.

The credit agreement and amendments require us to be in compliance with certain financial ratios, including a covenant to maintain the ratio of interest-bearing debt to earnings before income taxes, depreciation, and amortization of less than 6.0 for the quarter ending October 29, 2022 and beginning with the fiscal quarter ending January 28, 2023 to be less than 2.5.

We have a $35.0 million line of credit which expires in April 2025.

On October 31, 2022, we entered into an agreement to temporarily expand the line of credit by $10.0 million through January 31, 2023.

We had $26.4 million advanced on our line of credit and $6.9 million used to secure letters of credit as of October 29, 2022.

As of October 29, 2022, there was $11.7 million available to advance on the line of credit.

The credit agreement and amendments require us to be in compliance with certain financial ratios, including a covenant to maintain the ratio of interest-bearing debt to earnings before income taxes, depreciation, and amortization at less than 6.0 for the quarter ending October 29, 2022 and, beginning with the fiscal quarter ending January 28, 2023, to be less than 2.5.

A minimum fixed charge coverage ratio must be met of at least 2 to 1 at the end of any quarter during fiscal year 2023 and a ratio of at least 1.25 to 1 for the year end of fiscal 2023.

As of July 30, 2022, we were not in compliance with these covenants, and our bank provided waivers for the first quarter of fiscal 2023 for such covenants.

On December 09, 2022, we entered into the sixth amendment to our credit agreement.

The Amendment clarifies certain definitions related to the deferred tax asset valuation allowance and adds additional financial reporting requirements and negative covenants (refer to Note 7 to the Condensed Consolidated Financial Statements).

As of October 29, 2022, we were in compliance with these covenants.

Based on future projections, we expect to be in compliance with these covenants through the next year;

however, with the uncertainty and volatility in the supply chain and the sensitivity of the covenants, we cannot be certain.

however, with the uncertainty and volatility in the supply chain and the sensitivity of the covenants, and current going concern condition, we cannot be certain.

If we violate a covenant and cannot obtain a waiver from the bank, we may need to seek additional debt or equity financing.

We had $7.8 million of retainage on long-term contracts included in receivables and contract assets as of July 30, 2022, which has an impact on our liquidity.

We had $7.1 million of retainage on long-term contracts included in receivables and contract assets as of October 29, 2022, which has an impact on our liquidity.

We expect to collect these amounts within one year.

We are sometimes required to obtain bank guarantees or other financial instruments for display installations and utilize a global bank to provide such instruments.

We are sometimes required to obtain bank guarantees or other financial instruments for display installations, and we utilize a global bank to provide such instruments.

If we are unable to complete the installation work, our customer would draw on the banking arrangement, and the bank would subrogate its loss to Daktronics' restricted cash accounts.

As of July 30, 2022, we had $0.6 million of such instruments outstanding.

As of October 29, 2022, we had $0.6 million of such instruments outstanding.

We are sometimes required to obtain performance bonds for display installations, and we have a bonding line available through a surety company for an aggregate of $150.0 million in bonded work outstanding.

If we were unable to complete the installation work, and our customer would call upon the bond for payment, the surety company would subrogate its loss to Daktronics.

As of July 30, 2022, we had $82.5 million of bonded work outstanding against this line.

As of October 29, 2022, we had $72.8 million of bonded work outstanding against this line.

Our business growth and profitability improvement strategies depend on investments in capital expenditures and strategic investments.

We are projecting total capital expenditures to be approximately $30 million for fiscal 2023.

Projected capital expenditures include purchasing manufacturing equipment for new or enhanced product production and expanded capacity, increasing automation of processes, investments in quality and reliability equipment, demonstration and showroom assets, and continued information infrastructure investments.

Projected capital expenditures include purchasing manufacturing equipment for new or enhanced product production and expanded capacity and increased automation of processes;

investments in quality and reliability equipment and demonstration and showroom assets;

and continued information infrastructure investments.

We also evaluate and may make strategic investments in new technologies or in our affiliates or acquire companies aligned with our business strategy.

We committed to invest an additional $2.0 million over the next year in our current affiliates.

We committed to invest an additional $0.8 million over the next year in our current affiliates, which requires approvals under our credit agreement.

We may repurchase shares of our common stock from time to time in open market purchases, private transactions or other transactions.

The timing, volume and nature of share repurchases will be at the sole discretion of management, will be dependent on market conditions, applicable securities laws and other factors, and may be suspended or discontinued at any time.

The Board of Directors suspended share repurchases during fiscal 2020 as part of our cash conservation measures through the pandemic.

The share repurchase program was reinstated on December 2, 2021.

During the three months ended July 30, 2022, we repurchased no shares of common stock.

The timing, volume and nature of share repurchases will be at the sole discretion of management;

will be dependent on market conditions, applicable securities laws and other factors;

and may be suspended or discontinued at any time.

During the three months ended October 29, 2022, we repurchased no shares of common stock.

Significant Accounting Policies and Estimates

9 unchanged sentences

We are exposed to certain interest rate, foreign currency, and commodity risks as disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2022.

There have been no material changes in our exposure to these risks during the first three months of fiscal 2023.

There have been no material changes in our exposure to these risks during the first six months of fiscal 2023.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis