What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-09-08 compared with 2023-03-13 · 79 added, 234 removed, 127 unchanged (71% of the section changed)

2 unchanged sentences

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 January 28, 2023 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 29, 2023, to and including July 29, 2023 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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any future goodwill impairment charges;

and the other risk factors described more fully in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2022 and the Company’s Quarterly Reports on Form 10-Q for the quarters ended July 30, 2022 and October 29, 2022 filed with the Securities and Exchange Commission, as well as other publicly available information about the Company.

and the other risk factors described more fully in the Company’s Annual Report on Form 10-K for the fiscal year ended April 29, 2023 filed with the Securities and Exchange Commission, as well as other publicly available information about the Company.

We also wish to caution investors that other factors might in the future prove to be important in affecting our results of operations.

New factors emerge from time to time;

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.

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.

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

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CURRENT CONDITIONS

Over much of the past calendar year, demand for our products and services increased significantly while at the same time 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.

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

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.

In addition, there continues to be certain risk related to the movement of materials globally.

Geopolitical events and pandemic related risks remain high and could cause disruptions in our globally dispersed supplier base.

Also, the movement of materials is impacted throughout the United States because of a number of factors including:

the expiration of the International Longshore and Warehouse Union (ILWU) contract with the Pacific Maritime Association 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 continue to monitor the dispute between the country’s Class 1 railroads and twelve rail unions.

administration signed a tentative agreement into law on Dec 2, 2022, effectively forcing the unions back to work.

Rank and file workers are threatening an illegal, but not unprecedented wildcat strike.

And finally, the UPS contract with its driver’s union expires in July 2023.

While a strike is not expected at this time, the driver’s union did strike for two weeks in 1997.

UPS is our largest small package carrier.

To alleviate risks, we are actively working to move business to other small package carriers, to hopefully minimize any negative impact if a UPS driver's union strike occurs.

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 in Ukraine and the current geopolitical environment.

These conditions could impact the growth rate of our business and availability of our parts supply.

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 the remainder of fiscal 2023 and into fiscal 2024.

We cannot predict the length or severity of these conditions.

Due to this volatility and risks, we have taken a number of actions.

To support our high backlog and expectation of continued order demand and manage through the uncertainties in the supply chain, we increased our inventory planning horizons and have purchased and carried higher quantities of inventory.

While we have added more inventory for fulfillment, our production and schedules have been disrupted over the past year, creating changes in the timing of payments from our customers.

These conditions created an increased consumption of cash.

As supply chain conditions ease, we expect our inventory levels to 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.

We will continue to monitor our supply chains and our marketplaces and adapt our pricing methodologies as we see appropriate to remain profitable and competitive.

We have also allocated resources to redesigns of certain products to provide the ability to source available components which increases the robustness of our fulfillment.

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.

The Board of Directors formed an independent Strategy and Financing Review Committee in December 2022 to address the Company's near-term credit needs and to examine alternatives for strengthening the Company's longer-term financial structure and liquidity profile.

The Committee retained financial and legal advisors to assist it with its activities.

We are pursuing additional liquidity through various means from potential financing sources, including but not limited to obtaining financing secured by a mortgage on our facilities, a sales-leaseback transaction, leasing property and equipment, longer term asset based lending structures, and junior capital.

Because these plans are not finalized and are subject to market conditions and restrictions from our existing financing agreements that are not within our control, they cannot be deemed probable.

As a result, we have concluded that our plans do not alleviate substantial doubt about our ability to continue as a going concern.

We are monitoring these situations, but it is difficult and uncertain to predict the level of impact they 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.

Our past investments in people and plant capacity and the continued stable supply chain environment have allowed for efficient production and fulfillment of orders.

Although the post-pandemic geopolitical situation and global trade patterns continue to evolve, we believe that the levels of uncertainty and volatility in supply chain and demand will not be as great in the coming months as it was through the pandemic and will continue to stabilize during this fiscal year.

We believe the audiovisual industry fundamentals of increased use of LED display systems across industries and our development of new technologies, services, and sales channels will drive long-term growth for our company.

Orders and revenue levels are expected to be impacted by the timing of multi-million dollar projects and the impacts of global economic conditions, war and geopolitical situations, or other factors outside of our control.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTHS ENDED JANUARY 28, 2023 AND JANUARY 29, 2022

COMPARISON OF THE THREE MONTHS ENDED JULY 29, 2023 AND JULY 30, 2022

Product Order Backlog

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

Order and backlog levels provide management and investors additional details surrounding the results of our business activities in the marketplace and highlight fluctuations caused by seasonality and our large project business.

Management uses orders to evaluate market share and performance in the competitive environment.

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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 January 28, 2023 was $429.1 million as compared to $353.3 million as of January 29, 2022 and $471.6 million at April 30, 2022.

The increase of $75.8 million between January 28, 2023 and January 29, 2022 was driven by record order volume and softer conversions to sales due to supply challenges.

We expect to fulfill the backlog as of January 28, 2023 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 January 28, 2023 and January 29, 2022:

Our product order backlog as of July 29, 2023 was $323.7 million as compared to $469.1 million as of July 30, 2022 and $400.7 million at April 29, 2023.

The decrease in backlog is driven by fulfilling orders at a greater pace as supply chain conditions stabilized, we utilized our increased capacity, and the order pace returned to more normalized rates.

We expect to fulfill the backlog as of July 29, 2023 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 or by customer site conditions which are outside our control.

The following table shows information regarding net sales for the three months ended July 29, 2023 and July 30, 2022:

Three Months Ended

(in thousands) January 28, 2023 January 29, 2022 Dollar Change Percent Change

(in thousands) July 29, 2023 July 30, 2022 Dollar Change Percent Change

Commercial $ 46,883 $ 40,118 $ 6,765 16.9 %

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(1) Orders are not measures defined by 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 third quarter, net sales were $185.0 million, an increase of $45.4 million from net sales in the prior year's third quarter.

Sales growth was driven by strong market demand, increased capacity, and realization of price increases implemented in late fiscal year 2022 and beginning of fiscal year 2023.

We have seen stabilizing and improving supply chain conditions and have invested in automated machinery and equipment and in labor capacity to increase the rate of conversion of orders into sales, creating more throughput in our factories.

Order volume decreased in the third quarter of fiscal 2023 from the prior year's third quarter as orders in the year-earlier were driven by pent-up demand after COVID, which was unusual and was not expected to be repeated in fiscal 2023.

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

For the fiscal 2024 first quarter, net sales were $232.5 million, an increase of $60.6 million from net sales in the prior year's first quarter and a quarterly record.

This increase was primarily due to higher throughput from our past investments in capacity and the more stable operating environment.

Last year during the first quarter, we faced material supply shortages which extended lead times and delayed the conversion of orders into sales.

Order volume decreased in the first quarter of fiscal 2024 from the prior year's first quarter.

The change is primarily related to a decrease in the Commercial business unit caused by volatility in bookings of larger sized Spectacular LED video displays projects.

Gross Profit and Contribution Margin

Three Months Ended

January 28, 2023 January 29, 2022

July 29, 2023 July 30, 2022

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

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$ 71,147 30.6 % $ 25,794 15.0 %

The increase in gross profit percentage for the third quarter of fiscal 2023 was primarily due to our strategic pricing changes made in the 2022 calendar year and continuing throughout fiscal year 2023, and because of fewer supply chain and operational disruptions during the third quarter of fiscal 2023.

These price changes are just beginning to be realized through sales during the third quarter of fiscal 2023.

We continue to intensely monitor our production capabilities, inflation's impact on material prices and labor, and supply conditions in the ever-evolving geopolitical and global economic environment to ensure we quickly adjust our resources and product pricing to protect our margins and grow our profitability.

Total warranty costs as a percent of sales for the three months ended January 28, 2023 compared to the same period one year ago decreased to 1.7 percent from 2.4 percent.

The increase in gross profit percentage for the first quarter of fiscal 2024 is attributable to the record sales volume over our fixed manufacturing cost structure, past strategic pricing actions, stabilization of input costs, and fewer supply chain and operational disruptions during the first quarter of fiscal 2024 as compared to a year earlier.

Total warranty costs as a percent of sales for the three months ended July 29, 2023 compared to the same period one year ago increased to 2.1 percent from 1.6 percent.

Three Months Ended

January 28, 2023 January 29, 2022

July 29, 2023 July 30, 2022

(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 for the fiscal quarter ended January 28, 2023 was positively impacted by the previously discussed sales levels and impacts on gross profit.

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 income (loss):

Contribution margin for the fiscal quarter ended July 29, 2023 was positively impacted by the previously discussed sales levels and impacts on gross profit.

Reconciliation from non-GAAP contribution margin to the operating income GAAP measure is as follows:

Three Months Ended

January 28, 2023 January 29, 2022

July 29, 2023 July 30, 2022

(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 8,403 3.6 964 13.0 7,439 4.3

Goodwill impairment 4,576 2.5 4,576 — — —

Operating income (loss) $ 40,216 17.3 % $ 45,735 828.7 % $ (5,519) (3.2) %

General and administrative expenses in the third quarter of fiscal 2023 increased as compared to the same period one year ago primarily due to increases in professional fees related to legal fees and accounting and auditing services.

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

As described within "Note 6.

Goodwill" to the Condensed Consolidated Financial Statements included in this Report, we performed our annual goodwill impairment test and concluded that the carrying value of the International and Live Events reporting units exceeded their respective fair values.

Consequently, we recorded a $4.6 million non-cash goodwill impairment charge, which contributed to the increase in operating expenses.

General and administrative expenses in the first quarter of fiscal 2024 remained relatively flat as compared to the same period one year ago.

Product design and development expenses in the first quarter of fiscal 2024 increased as compared to the first quarter of fiscal 2023 primarily due to an increase in personnel-related expenses.

Other Income and Expenses

Three Months Ended

January 28, 2023 January 29, 2022

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

Interest (expense) income, net $ (398) (0.2) % $ (454) (810.7) % $ 56 — %

Other expense, net $ (1,380) (0.7) % $ (587) 74.0 % $ (793) (0.6) %

Interest (expense) income, net:

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

Other expense, net:

The change in other expense, net for the third 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.

Our effective tax rate for the third quarter of fiscal 2023 was 30.5 percent as compared to an effective tax rate of 32.2 percent for the third quarter of fiscal 2022.

RESULTS OF OPERATIONS

COMPARISON OF THE NINE MONTHS ENDED JANUARY 28, 2023 AND JANUARY 29, 2022

The following table shows information regarding net sales for the nine months ended January 28, 2023 and January 29, 2022:

Nine Months Ended

(in thousands) January 28, 2023 January 29, 2022 Dollar Change Percent Change

Commercial $ 127,132 $ 107,339 $ 19,793 18.4 %

Live Events 193,370 150,840 42,530 28.2

High School Park and Recreation 106,127 84,362 21,765 25.8

Transportation 53,797 42,434 11,363 26.8

International 63,908 63,792 116 0.2

$ 544,334 $ 448,767 $ 95,567 21.3 %

Commercial $ 119,126 $ 143,699 $ (24,573) (17.1) %

Live Events 193,763 169,665 24,098 14.2

High School Park and Recreation 97,574 107,246 (9,672) (9.0)

Transportation 45,812 56,854 (11,042) (19.4)

International 45,130 82,778 (37,648) (45.5)

$ 501,405 $ 560,242 $ (58,837) (10.5) %

(1) Orders are not measures defined by GAAP, and our methodology for determining orders may vary from the methodology used by other companies in determining their orders and amounts.

For the first nine months of fiscal 2023, net sales were $544.3 million, an increase of $95.6 million from the prior year's first nine-month period.

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

Sales growth was driven by strong market demand, increased capacity, and realization of price increases implemented in late fiscal year 2022 and beginning of fiscal year 2023.

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

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

Order bookings in the first nine 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 nine months of fiscal 2023 due to the inflationary environment and geopolitical events.

Gross Profit and Contribution Margin

Nine Months Ended

January 28, 2023 January 29, 2022

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

Gross Profit:

Commercial $ 21,565 17.0 % $ 22,862 21.3 %

Live Events 26,174 13.5 17,261 11.4

High School Park and Recreation 29,343 27.6 27,216 32.3

Transportation 15,456 28.7 12,263 28.9

International 6,673 10.4 7,158 11.2

$ 99,211 18.2 % $ 86,760 19.3 %

The decline in overall gross profit percentage in the nine months ended January 28, 2023 was primarily impacted by inflationary challenges in materials, freight, and personnel related costs, partially offset by the realization of pricing increases beginning in the third quarter of fiscal 2023.

In addition, extraordinary supply chain disruptions in the first half of the year, including the mandated 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 $0.3 million provision for estimated losses on contracts in progress during the nine months ended January 28, 2023 .

Total warranty costs as a percent of sales for the nine months ended January 28, 2023 compared to the same period one year ago increased to 2.0 percent from 1.6 percent.

We recognized warranty expense of $1.0 million in the second quarter of fiscal 2023 for probable and reasonable estimated costs to remediate a component and manufacturing quality issue discovered during the nine months ended January 28, 2023 .

Nine Months Ended

January 28, 2023 January 29, 2022

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

Contribution Margin:

Commercial $ 8,803 6.9 % $ (2,444) (21.7) % $ 11,247 10.5 %

Live Events 18,297 9.5 8,098 79.4 10,199 6.8

High School Park and Recreation 19,392 18.3 853 4.6 18,539 22.0

Transportation 12,412 23.1 2,811 29.3 9,601 22.6

International (1,559) (2.4) (1,721) (1062.3) 162 0.3

$ 57,345 10.5 % $ 7,597 15.3 % $ 49,748 11.1 %

Contribution margin in the nine months ended January 28, 2023 was impacted negatively primarily by the previously discussed increases in input costs and labor costs and supply chain disruptions on productivity as noted in the impacts on gross profit.

Selling expenses have increased as we have adjusted our sales and marketing activities and staffing levels to achieve current and expected future sales levels.

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

Nine Months Ended

January 28, 2023 January 29, 2022

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

Contribution margin $ 57,345 10.5 % $ 7,597 15.3 % $ 49,748 11.1 %

General and administrative 27,989 5.1 3,889 16.1 24,100 5.4

Product design and development 21,655 4.0 372 1.7 21,283 4.7

Goodwill impairment 4,576 0.8 4,576 — — —

Operating income $ 3,125 0.6 % $ (1,240) (28.4) % $ 4,365 1.0 %

General and administrative expenses in the first nine months of fiscal 2023 increased as compared to the same period one year ago primarily due to $2.1 million professional fees relating to legal, accounting and auditing services, and for other personnel related expenses.

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

Increased revenue offset by lower margins led to higher operating income for the first nine months of fiscal 2023 compared to the prior year nine-month period.

We performed our annual goodwill impairment test and concluded that the carrying value of the International and Live Events reporting units exceeded their respective fair values.

Consequently, we recorded a $4.6 million non-cash goodwill impairment charge, which contributed to the increase in operating expenses.

Other Income and Expenses

Nine Months Ended

January 28, 2023 January 29, 2022

July 29, 2023 July 30, 2022

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

Interest (expense) income, net $ (881) (0.4) % $ (821) 1368.3 % $ (60) — %

Other expense, net $ (2,335) (0.4) % $ 278 (10.6) % $ (2,613) (0.6) %

Change in fair value of convertible note $ (7,260) (3.1) % $ (7,260) — % $ — — %

Other expense and debt issuance costs write-off, net $ (3,979) (1.7) % $ (3,232) 432.7 % $ (747) (0.4) %

Interest (expense) income, net :

The change in interest income and expense, net for the first nine 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 nine months for our strategic investments in inventory.

The increase in interest income and expense, net for the first quarter of fiscal 2024 compared to the same period one year ago was primarily due to closing in May 2023 on the convertible debt, asset-based and mortgage financings at higher values and interest rates than the utilization of our previous line of credit during the 2023 first quarter.

Change in fair value of convertible note:

For the three months ended July 29, 2023, we recorded an expense of $7.3 million related to the change in fair value of the convertible note payable which is accounted for under the fair value option.

The fair value change was primarily caused by the increase in our stock price over the conversion price and decline in market interest rates making the value of potentially converted shares higher than at the debt issuance.

Other expense, net:

The change in other expense, net for the first nine 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.

For the nine months ended January 28, 2023, our effective tax rate was significantly impacted by the recording of a full valuation allowance on deferred tax assets during the second quarter of fiscal 2023 related to GAAP accounting for income taxes and related information.

For the nine months ended January 29, 2022, our effective tax was 9.4 percent.

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

The change in other expense, net for the first quarter of fiscal 2024 as compared to the same period one year ago was primarily due to losses recorded for equity method affiliates and foreign currency volatility and write-off of $3.4 million debt issuance costs related to convertible debt carried at fair value.

Our effective tax rate for the first quarter of fiscal 2024 was 31.7 percent as compared to an effective tax rate of 15.8 percent for the first quarter of fiscal 2023.

The higher tax rate is caused by the fair value adjustment to income that is not taxable.

Absent any major tax changes, we expect our full year effective tax rate to be in the mid-twenties, before the impacts of fair value accounting for the convertible debt.

LIQUIDITY AND CAPITAL RESOURCES

Nine Months Ended

(in thousands) January 28,

2023 January 29,

Three Months Ended

(in thousands) July 29,

2023 July 30,

2022 Dollar Change

Net cash (used in) provided by:

Net cash provided by (used in):

Operating activities $ 19,250 $ (22,815) $ 42,065

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Effect of exchange rate changes on cash (240) 80 (320)

Net decrease in cash, cash equivalents and restricted cash $ (7,278) $ (48,683) $ 41,405

Cash decreased by $7.3 million for the first nine months of fiscal 2023 compared to a decrease of $48.7 million in the first nine months of fiscal 2022.

The use of cash in the first nine 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 financing to support these uses of cash.

Net cash used in operating activities:

Net cash used in operating activities was $9.5 million for the first nine months of fiscal 2023 compared to net cash used in operating activities of $25.5 million in the first nine months of fiscal 2022.

The difference between net cash used in operating activities in the first nine months of fiscal 2023 compared to net cash used in operating activities in the first nine 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 nine months of 2023 compared to net income in the first nine months of 2022.

Net increase (decrease) in cash, cash equivalents and restricted cash $ 29,660 $ (8,979) $ 38,639

Net cash provided by (used in) operating activities:

Net cash provided by operating activities was $19.3 million for the first three months of fiscal 2024 compared to net cash used in operating activities of $22.8 million in the first three months of fiscal 2023.

The $42.1 million change in cash provided by (used in) operating activities was primarily the result of an

increase in net income of $24.5 million over the year time frame as strategic pricing actions and operating conditions improved.

The was also a $7.3 million of non-cash fair value change of our convertible debt.

We also had strategically invested in inventory through the first quarter of fiscal 2023 as a reaction to supply chain constraints and historic backlog which consumed cash.

Since last year at the end of July, we have reduced inventory and related payables for inventory as we reduced backlog and generated cash from inventory reduction.

Increases in accounts receivable and contract assets levels have used some cash for working capital because of business increases.

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

Nine Months Ended

2023 January 29,

Three Months Ended

2023 July 30,

(Increase) decrease:

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Net cash used in investing activities:

Net cash used in investing activities totaled $20.9 million in the first nine months of fiscal 2023 compared to net cash used in investing activities of $19.9 million in the first nine months of fiscal 2022.

Purchases of property and equipment totaled $21.8 million in the first nine months of fiscal 2023 compared to $10.0 million in the first nine months of fiscal 2022.

Purchases of equity and loans to affiliates accounted for by the equity investment method totaled $3.2 million in the first nine months of fiscal 2023 as compared to $6.7 m illion in the first nine months of fiscal 2022.

Net cash provided by (used in) financing activities:

Net cash provided by financing activities was $23.5 million for the nine months ended January 28, 2023 due to draws on our line of credit compared to cash used by financing activities of $3.4 million for other investing activities in the first nine months of fiscal 2022.

Other Liquidity and Capital Resources Discussion:

The timing and amounts of working capital changes, dividend payments, stock repurchases, capital spending, profitability, and investments in affiliates impact our liquidity.

Our cash needs are funded through a combination of cash flow from operations and borrowings under bank credit agreements.

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

however, our customers may reduce their spend on audiovisual systems and related services because of the impacts of global economic conditions, business implications of COVID-19, supply chain challenges, and war and geopolitical situations.

Resulting supply chain disruptions and inflationary challenges in materials, freight and personnel related costs are also likely to continue, yet have eased during this past quarter.

These conditions likely will continue to cause volatility in our cash flow, pricing, order volumes, lead-times, competitiveness, revenue cycles, and production costs.

We are proactively monitoring and adjusting our business operations for these factors.

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 we are focused on reducing 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.

$35.0 million of our credit facility expires in April 2025 and $10.0 million expires in May 2023, 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 plan to obtain 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 $129.4 million and $103.9 million as of January 28, 2023 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 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 have $35.0 million line of credit of which expires in April 2025.

On January 23, 2023, we entered into the seventh amendment (the "Amendment") to the credit facility to, among other things, increases the maturity of a $10.0 million portion of the line of credit through May 1, 2023.

We had $23.6 million advanced on our line of credit and $7.5 million used to secure letters of credit as of January 28, 2023.

As of January 28, 2023, there was $13.9 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 4.0 for the fiscal quarter ending January 28, 2023, 3.50 for the fiscal quarter ending April 29, 2023, and 3.00 for each fiscal quarter thereafter.

A minimum fixed charge coverage ratio must be met of at least 1.50 to 1 for the fiscal quarter ending January 28, 2023, and at 1.25 for any fiscal quarter thereafter.

On January 23, 2023, we entered into the Amendment to our credit agreement.

The Amendment, among other things, extended the maturity of $10.0 million of the $45.0 million of the credit facility through May 1, 2023, increased the rate of interest to 3.35% plus the secured overnight financial rate, and revised certain definitions and covenants (refer to "Note 7.

Financing Agreements" to the Condensed Consolidated Financial Statements included in this Report).

As of January 28, 2023, we were in compliance with these covenants.

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

however, with the uncertainty and volatility in the supply chain, the sensitivity of the covenants in the credit agreement, as amended, and our current going concern condition, we cannot be certain we will remain in compliance with the covenants.

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

We had $10.1 million of retainage on long-term contracts included in receivables and contract assets as of January 28, 2023, which has an impact on our liquidity.

Net cash used in investing activities totaled $5.7 million in the first three months of fiscal 2024 compared to net cash used in investing activities of $10.4 million in the first three months of fiscal 2023.

Purchases of property and equipment totaled $4.5 million in the first three months of fiscal 2024 compared to $10.7 million in the first three months of fiscal 2023.

Fiscal 2023 purchases were higher because of initiatives to upgrade or increase manufacturing equipment for capacity and automation.

Purchases of equity and loans to affiliates accounted for by the equity investment method totaled $1.2 million in the first three months of fiscal 2024 as compared to $1.1 m illion in the first three months of fiscal 2023.

Net cash provided by financing activities:

Net cash provided by financing activities was $16.4 million for the three months ended July 29, 2023 due to cash provided by the closing of a $25.0 million convertible note financing and a $15.0 million mortgage financing offset by the payoff of our previous credit line of $17.8 million and $5.8 million of debt issuance costs as compared to $24.1 million of cash provided from financing due to draws on our line of credit in the first three months of fiscal 2023.

Debt and cash

We maintain a $60.0 million asset-based revolving credit facility ("ABL") with a maturity date of May 11, 2027 subject to customary covenants and conditions.

As of July 29, 2023, we had no borrowings against the ABL and $1.5 million used to secure letters of credit outstanding.

We also have a delayed draw loan of $15.0 million secured by a first priority mortgage on our Brookings, South Dakota real estate and $25.0 million of convertible debt secured by a second priority lien on assets securing the ABL facility and a first priority lien on substantially all the other assets of the Company, excluding all real property.

As of July 29, 2023, we had $45.8 million in cash and cash equivalents and $47.6 million in borrowing capacity under our ABL.

We believe cash flow from operations, existing lines of credit, and access to debt and capital markets will be sufficient to meet our current liquidity needs, and we have committed liquidity and cash reserves in excess of our anticipated funding requirements.

Our cash and cash equivalent balances consist of high-quality, short-term money market instruments.

Working Capital

Working capital was $182.2 million and $132.5 million as of July 29, 2023 and April 29, 2023, respectively.

We had $12.5 million of retainage on long-term contracts included in receivables and contract assets as of July 29, 2023, which has an impact on our liquidity.

We expect to collect these amounts within one year.

Other Liquidity and Capital Uses

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 January 28, 2023, we had $0.6 million of such instruments outstanding.

As of July 29, 2023, we had $0.6 million of such instruments outstanding.

We are sometimes required to obtain performance bonds for display installations;

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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 January 28, 2023, we had $63.3 million of bonded work outstanding.

As of July 29, 2023, we had $40.4 million of bonded work outstanding.

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 $28.8 million for fiscal 2023.

We are projecting total capital expenditures to be less than $19 million for all of fiscal 2024.

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

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

We are committed to invest an additional $1.3 million over the next fiscal year in our current affiliates, which required approval 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.

During the three months ended January 28, 2023, we repurchased no shares of common stock.

We are committed to invest an additional $1.5 million for the remainder of fiscal 2024 in our current affiliates.

Contractual Obligations and Commercial Commitments

During the quarter, we entered into a new credit facility, mortgage, and convertible debt as disclosed within this report, there have been no other material changes in our contractual obligations since the end of fiscal 2023.

See our Annual Report on Form 10-K for the fiscal year ended April 28, 2023 for additional information regarding our contractual obligations and commercial commitments.

Significant Accounting Policies and Estimates

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Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended April 29, 2023.

There have been no material changes in our significant accounting policies or critical accounting estimates since the end of fiscal 2022.

New Accounting Pronouncements

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Basis of Presentation" of the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Report.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 nine 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