DAKTRONICS INC /SD/ 10-Q

Item 1. FINANCIAL STATEMENTS DAKTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) (unaudited) July 29, 2023 April 29, 2023 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 45,775 $ 23,982 Restricted cash 8,575 708 Marketable securities 539 534 Accounts receivable, net 125,613 109,979 Inventories 144,794 149,448 Contract assets 50,539 46,789 Current maturities of long-term receivables 970 1,215 Prepaid expenses and other current assets 9,848 9,676 Income tax receivables 5 326 Total current assets 386,658 342,657 Property and equipment, net 72,080 72,147 Long-term receivables, less current maturities 153 264 Goodwill 3,332 3,239 Intangibles, net 1,090 1,136 Debt issuance costs — 3,866 Investment in affiliates and other assets 27,866 27,928 Deferred income taxes 16,839 16,867 TOTAL ASSETS $ 508,018 $ 468,104 1 Table of Contents DAKTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (in thousands, except per share data) (unaudited) July 29, 2023 April 29, 2023 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 1,500 $ — Accounts payable 62,449 67,522 Contract liabilities 89,318 91,549 Accrued expenses 31,992 36,005 Warranty obligations 13,644 12,228 Income taxes payable 5,514 2,859 Total current liabilities 204,417 210,163 Long-term warranty obligations 20,926 20,313 Long-term contract liabilities 14,541 13,096 Other long-term obligations 5,463 5,709 Long-term debt, net 41,422 17,750 Deferred income taxes 202 195 Total long-term liabilities 82,554 57,063 SHAREHOLDERS' EQUITY: Preferred Shares, no par value, authorized 50,000 shares; no shares issued and outstanding — — Common Stock, no par value, authorized 115,000,000 shares; 45,644,800 and 45,488,595 shares issued at July 29, 2023 and April 29, 2023, respectively 63,684 63,023 Additional paid-in capital 50,816 50,259 Retained earnings 122,606 103,410 Treasury Stock, at cost, 1,907,445 shares at July 29, 2023 and April 29, 2023, respectively ( 10,285 ) ( 10,285 ) Accumulated other comprehensive loss ( 5,774 ) ( 5,529 ) TOTAL SHAREHOLDERS' EQUITY 221,047 200,878 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 508,018 $ 468,104 See notes to condensed consolidated financial statements. 2 Table of Contents DAKTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data) (unaudited) Three Months Ended July 29, 2023 July 30, 2022 Net sales $ 232,531 $ 171,920 Cost of sales 161,384 146,126 Gross profit 71,147 25,794 Operating expenses: Selling 12,929 14,433 General and administrative 9,599 9,441 Product design and development 8,403 7,439 30,931 31,313 Operating income (loss) 40,216 ( 5,519 ) Nonoperating (expense) income: Interest (expense) income, net ( 881 ) ( 60 ) Change in fair value of convertible note ( 7,260 ) — Other expense and debt issuance costs write-off, net ( 3,979 ) ( 747 ) Income (loss) before income taxes 28,096 ( 6,326 ) Income tax expense (benefit) 8,900 ( 1,000 ) Net income (loss) $ 19,196 $ ( 5,326 ) Weighted average shares outstanding: Basic 45,645 45,097 Diluted 46,198 45,097 Earnings (loss) per share: Basic $ 0.42 $ ( 0.12 ) Diluted $ 0.42 $ ( 0.12 ) See notes to condensed consolidated financial statements. 3 Table of Contents DAKTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands) (unaudited) Three Months Ended July 29, 2023 July 30, 2022 Net income (loss) $ 19,196 $ ( 5,326 ) Other comprehensive (loss): Cumulative translation adjustments ( 252 ) ( 642 ) Unrealized gain on available-for-sale securities, net of tax 7 1 Total other comprehensive income (loss), net of tax ( 245 ) ( 641 ) Comprehensive income (loss) $ 18,951 $ ( 5,967 ) See notes to condensed consolidated financial statements. 4 Table of Contents DAKTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (in thousands) (unaudited) Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total Balance as of April 29, 2023 $ 63,023 $ 50,259 $ 103,410 $ ( 10,285 ) $ ( 5,529 ) $ 200,878 Net income — — 19,196 — — 19,196 Cumulative translation adjustments — — — — ( 252 ) ( 252 ) Unrealized gain on available-for-sale securities, net of tax — — — — 7 7 Share-based compensation — 557 — — — 557 Exercise of stock options 46 — — — — 46 Employee savings plan activity 615 — — — — 615 Balance as of July 29, 2023 $ 63,684 $ 50,816 $ 122,606 $ ( 10,285 ) $ ( 5,774 ) $ 221,047 See notes to condensed consolidated financial statements. 5 Table of Contents DAKTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (continued) (in thousands) (unaudited) Common Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total Balance as of April 30, 2022 $ 61,794 $ 48,372 $ 96,608 $ ( 10,285 ) $ ( 4,925 ) $ 191,564 Net loss — — ( 5,326 ) — — ( 5,326 ) Cumulative translation adjustments — — — — ( 642 ) ( 642 ) Unrealized gain (loss) on available-for-sale securities, net of tax — — — — 1 1 Share-based compensation — 511 — — — 511 Employee savings plan activity 594 — — — — 594 Balance as of July 30, 2022 $ 62,388 $ 48,883 $ 91,282 $ ( 10,285 ) $ ( 5,566 ) $ 186,702 See notes to condensed consolidated financial statements . 6 Table of Contents DAKTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited) Three Months Ended July 29, 2023 July 30, 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 19,196 $ ( 5,326 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 4,669 4,025 Loss (gain) on sale of property, equipment and other assets 11 ( 361 ) Share-based compensation 557 511 Equity in loss of affiliates 690 890 Provision (recovery) for doubtful accounts, net ( 65 ) 177 Deferred income taxes, net 12 12 Non-cash impairment changes 442 — Change in fair value of convertible note 7,260 — Debt issuance costs write-off 3,353 — Change in operating assets and liabilities ( 16,875 ) ( 22,743 ) Net cash provided by (used in) operating activities 19,250 ( 22,815 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ( 4,547 ) ( 10,655 ) Proceeds from sales of property, equipment and other assets 27 365 Proceeds from sales or maturities of marketable securities — 999 Purchases of equity and loans to equity investees ( 1,186 ) ( 1,081 ) Net cash used in investing activities ( 5,706 ) ( 10,372 ) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on notes payable 40,000 92,098 Payments on notes payable ( 17,750 ) ( 67,970 ) Principal payments on long-term obligations ( 102 ) — Debt issuance cost ( 5,838 ) — Proceed from exercise of stock options 46 — Net cash provided by financing activities 16,356 24,128 EFFECT OF EXCHANGE RATE CHANGES ON CASH ( 240 ) 80 NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 29,660 ( 8,979 ) CASH, CASH EQUIVALENTS AND RESTRICTED CASH: Beginning of period 24,690 18,008 End of period $ 54,350 $ 9,029 Supplemental disclosures of cash flow information: Cash paid for: Interest $ 97 $ 75 Income taxes, net of refunds 5,771 685 Supplemental schedule of non-cash investing and financing activities: Purchases of property and equipment included in accounts payable 839 3,326 Contributions of common stock under the ESPP 614 594 See notes to condensed consolidated financial statements. 7 Table of Contents NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollar amounts in thousands, except per share data) (unaudited) Note 1. Basis of Presentation Daktronics, Inc. and its subsidiaries (the “Company”, “Daktronics”, “we”, “our”, or “us”) are industry leaders in designing and manufacturing electronic scoreboards, programmable display systems and large screen video displays for sporting, commercial and transportation applications. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present our financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent liabilities. Estimates used in the preparation of the unaudited consolidated financial statements include, among others, revenue recognition, future warranty expenses, the fair value of long-term debt, the fair value of investments in affiliates, income tax expenses, and stock-based compensation. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates. Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The balance sheet at April 29, 2023 has been derived from the audited financial statements at that date, but it does not include all the information and disclosures required by GAAP for complete financial statements. These financial statements should be read in conjunction with our financial statements and notes thereto for the fiscal year ended April 29, 2023, which are contained in our Annual Report on Form 10-K previously filed with the Securities and Exchange Commission ("SEC"). The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year. Daktronics, Inc. operates on a 52- or 53-week fiscal year, with our fiscal year ending on the Saturday closest to April 30 of each year. When April 30 falls on a Wednesday, the fiscal year ends on the preceding Saturday. Within each fiscal year, each quarter is comprised of 13-week periods following the beginning of each fiscal year. In each 53-week fiscal year, an additional week is added to the first quarter, and each of the last three quarters is comprised of a 13-week period. The three months ended July 29, 2023 and July 30, 2022 contained operating results for 13 weeks. Cash and cash equivalents and restricted cash The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the totals of the same amounts shown in the condensed consolidated statements of cash flows. Restricted cash consists of cash and cash equivalents held in bank deposit accounts to secure issuances of foreign bank guarantees and letters of credit outstanding under a previous credit agreement. July 29, 2023 July 30, 2022 Cash and cash equivalents $ 45,775 $ 8,279 Restricted cash 8,575 750 Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows $ 54,350 $ 9,029 The increase in the restricted cash balance is due to bank guarantees or other financial instruments for display installations issued by other banks and secured by restricted cash deposits. We have foreign currency cash accounts to operate our global business. These accounts are impacted by changes in foreign currency rates. Of our $ 45,775 in cash and cash equivalent balances as of July 29, 2023, $ 36,426 were denominated in United States dollars, of which $ 941 were held by our foreign subsidiaries. As of July 29, 2023, we had an additional $ 9,349 in cash balances denominated in foreign currencies, of which $ 8,513 were maintained in accounts of our foreign subsidiaries. 8 Table of Contents Recent Accounting Pronouncements There have been no material changes to our significant accounting policies and estimates as described in our Annual Report on Form 10-K for the fiscal year ended April 29, 2023. Accounting Standards Adopted In July 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement - Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), and Compensation - Stock Compensation (Topic 718) : A mendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 120, SEC Staff Announcement at the March 24, 2022 EITF Meeting, and Staff Accounting Bulletin Topic 6.B, Accounting Series Release 280 - General Revision of Regulation S-X: Income or Loss Applicable to Common Stock” (“ASU 2023-03”). This ASU amends various paragraphs in the accounting codification pursuant to the issuance of Commission Staff Bulletin ("SAB") number 120. ASU 2023-03 does not provide any new guidance, so there is no transition or effective date. ASU 2023-03 did not have a material impact on our condensed consolidated financial statements. In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 simplified the accounting for certain financial instruments with characteristics of liabilities and equity. This ASU (1) simplified the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance in ASC 470-20, Debt: Debt with Conversion and Other Options , that required entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock; (2) revised the scope exception from derivative accounting in ASC 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification; and (3) revised the guidance in ASC 260, Earnings Per Share, to require entities to calculate diluted earnings per share ("EPS") for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. For SEC filers, excluding smaller reporting companies, ASU 2020-06 was effective for fiscal years beginning after December 15, 2021 including interim periods within those fiscal years. Early adoption was permitted, but no earlier than fiscal years beginning after December 15, 2020. For all other entities, ASU 2020-06 was effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. In the first quarter of fiscal 2024, we adopted ASU 2020-06. Upon adoption, we prospectively utilized the if-converted method to calculate the dilutive impact of our convertible note issued on May 11, 2023 (the "Convertible Note"). See "Note 7. Financing Agreements" of the Notes to our Condensed Consolidated Financial Statements included in this Form 10-Q for further information on the Convertible Note. Accounting Standards Not Yet Adopted There are no significant ASU's issued that the Company has not yet adopted as of July 29, 2023 Note 2. Investments in Affiliates We evaluated the nature of our investment in affiliates of Xdisplay TM , which is developing micro-LED mass transfer expertise and technologies, and Miortech (dba Etulipa), which is developing low power outdoor electrowetting technology. We determined that Miortech is a variable interest entity (VIE), and based on management's analysis, we determined that Daktronics is not the primary beneficiary; therefore, the investment in Miortech is accounted for under the equity method. The aggregate amount of our investments accounted for under the equity method was $ 10,804 and $ 11,934 as of July 29, 2023 and April 29, 2023, respectively. Our proportional share of the respective affiliates' earnings or losses is included in the "Other expense and debt issuance costs write-off, net" line item in our condensed consolidated statements of operations. For the three months ended July 29, 2023, our share of the losses of our affiliates was $ 690 as compared to $ 890 for the three months ended July 30, 2022. We purchased services for research and development activities from our equity method investees. The total of these related party transactions for the three months ended July 29, 2023 and July 30, 2022 was $ 78 and $ 0 , respectively, which is included in the "Product design and development" line item in our condensed consolidated statements of operations, and 9 Table of Contents for the three months ended July 29, 2023, $ 2 remains unpaid and is included in the "Accounts payable" line item in our condensed consolidated balance sheets. During the three months ended July 29, 2023, we invested $ 750 in convertible notes and $ 436 in promissory notes (collectively, "Notes") of our affiliates, which is included in the "Investment in affiliates and other assets" line item in our condensed consolidated balance sheets. During the three months ended July 29, 2023, we did not convert any Notes to stock ownership. Our ownership in Miortech was 55.9 percent and in Xdisplay TM was 16.4 percent as of July 29, 2023. The total amount of Notes as of July 29, 2023 was $ 9,993 and is included in the "Investments in affiliates and other assets" line item in our condensed consolidated balance sheets. The Notes balance combined with the investment in affiliates balance totaled $ 20,797 and $ 24,414 as of July 29, 2023 and July 30, 2022, respectively. Note 3. Earnings Per Share ("EPS") In the first quarter of fiscal 2024, we adopted ASU 2020-06. Upon adoption, we prospectively utilized the if-converted method to calculate the dilutive impact of our convertible note issued on May 11, 2023 (the "Convertible Note"). See "Note 7. Financing Agreements" of the Notes to our Condensed Consolidated Financial Statements included in this Form 10-Q for further information on the Convertible Note. Under the if-converted method, the Convertible Note is assumed to be converted into common stock at the beginning of the reporting period, and the resulting shares are included in the denominator of the calculation. In addition, interest charges, net of any income tax effects, are added back to the numerator of the calculation. The following is a reconciliation of the net income (loss) and common share amounts used in the calculation of basic and diluted EPS for the three months ended July 29, 2023 and July 30, 2022: Three Months Ended July 29, 2023 July 30, 2022 Earnings per share - basic Net income (loss) $ 19,196 $ ( 5,326 ) Weighted average shares outstanding 45,645 45,097 Basic earnings (loss) per share $ 0.42 $ ( 0.12 ) Earnings per share - diluted Net income (loss) $ 19,196 $ ( 5,326 ) Diluted net income (loss) $ 19,196 $ ( 5,326 ) Weighted average common shares outstanding 45,645 45,097 Dilution associated with stock compensation plans 553 — Weighted average common shares outstanding, assuming dilution 46,198 45,097 Diluted earnings (loss) per share $ 0.42 $ ( 0.12 ) Options outstanding to purchase 1,326 shares of common stock with a weighted average exercise price of $ 8.97 for the three months ended July 29, 2023 and 2,102 shares of common stock with a weighted average exercise price of $ 8.12 for the three months ended July 30, 2022 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive. Note 4. Revenue Recognition Disaggregation of revenue In accordance with Accounting Standards Codification ("ASC") 606-10-50, we disaggregate revenue from contracts with customers by the type of performance obligation and the timing of revenue recognition. We determine that disaggregating revenue in these categories achieves the disclosure objective to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors and to enable users of financial statements to understand the relationship to each reportable segment. 10 Table of Contents The following table presents our disaggregation of revenue by segments: Three Months Ended July 29, 2023 Commercial Live Events High School Park and Recreation Transportation International Total Type of performance obligation Unique configuration $ 12,918 $ 76,547 $ 15,119 $ 12,584 $ 8,790 $ 125,958 Limited configuration 29,913 9,961 40,337 8,067 5,239 93,517 Service and other 4,052 5,491 778 718 2,017 13,056 $ 46,883 $ 91,999 $ 56,234 $ 21,369 $ 16,046 $ 232,531 Timing of revenue recognition Goods/services transferred at a point in time $ 31,018 $ 10,777 $ 39,081 $ 8,267 $ 5,843 $ 94,986 Goods/services transferred over time 15,865 81,222 17,153 13,102 10,203 137,545 $ 46,883 $ 91,999 $ 56,234 $ 21,369 $ 16,046 $ 232,531 Three Months Ended July 30, 2022 Commercial Live Events High School Park and Recreation Transportation International Total Type of performance obligation Unique configuration $ 4,687 $ 42,168 $ 6,592 $ 12,486 $ 6,501 $ 72,434 Limited configuration 31,776 8,480 28,283 6,099 11,501 86,139 Service and other 3,655 5,735 934 955 2,068 13,347 $ 40,118 $ 56,383 $ 35,809 $ 19,540 $ 20,070 $ 171,920 Timing of revenue recognition Goods/services transferred at a point in time $ 32,557 $ 9,222 $ 27,090 $ 6,382 $ 11,876 $ 87,127 Goods/services transferred over time 7,561 47,161 8,719 13,158 8,194 84,793 $ 40,118 $ 56,383 $ 35,809 $ 19,540 $ 20,070 $ 171,920 See "Note 5. Segment Reporting" for a disaggregation of revenue by geography. Contract balances Contract assets represent revenue recognized in excess of amounts billed and include unbilled receivables. Unbilled receivables, which represent an unconditional right to payment subject only to the passage of time, are reclassified to 11 Table of Contents accounts receivable when they are billed according to the contract terms. Contract liabilities represent amounts billed to the customers in excess of revenue recognized to date. The following table reflects the changes in our contract assets and liabilities: July 29, 2023 April 29, 2023 Dollar Change Percent Change Contract assets $ 50,539 $ 46,789 $ 3,750 8.0 % Contract liabilities - current 89,318 91,549 ( 2,231 ) ( 2.4 ) Contract liabilities - noncurrent 14,541 13,096 1,445 11.0 The changes in our contract assets and contract liabilities from April 29, 2023 to July 29, 2023 were due to the timing of billing schedules and revenue recognition, which can vary significantly depending on the contractual payment terms and the seasonality of the sports markets. We had no impairments of contract assets for the three months ended July 29, 2023. For service-type warranty contracts, we allocate revenue to this performance obligation, recognize the revenue over time, and recognize costs as incurred. Earned and unearned revenues for these contracts are included in the "Contract assets" and "Contract liabilities". Changes in unearned service-type warranty contracts, net were as follows: July 29, 2023 Balance as of April 29, 2023 $ 28,338 New contracts sold 13,218 Less: reductions for revenue recognized ( 9,785 ) Foreign currency translation and other ( 1,044 ) Balance as of July 29, 2023 $ 30,727 Contracts in progress identified as loss contracts as of July 29, 2023 and as of April 29, 2023 were immaterial. Loss provisions are recorded in the "Accrued expenses" line item in our condensed consolidated balance sheets. During the three months ended July 29, 2023, we recognized revenue of $ 59,506 related to our contract liabilities as of April 29, 2023. Remaining performance obligations As of July 29, 2023, the aggregate amount of the transaction price allocated to the remaining performance obligations was $ 386,622 . Remaining performance obligations related to product and service agreements as of July 29, 2023 were $ 323,725 and $ 62,897 , respectively. We expect approximately $ 320,898 of our remaining performance obligations to be recognized over the next 12 months, with the remainder recognized thereafter. Although remaining performance obligations reflect business that is considered to be legally binding, cancellations, deferrals or scope adjustments may occur. Any known project cancellations, revisions to project scope and cost, foreign currency exchange fluctuations, and project deferrals are reflected or excluded in the remaining performance obligation balance, as appropriate. The amount of revenue recognized associated with performance obligations satisfied in prior years during the three months ended July 29, 2023 and July 30, 2022 was immaterial. 12 Table of Contents Note 5. Segment Reporting The following table sets forth certain financial information for each of our five reporting segments for the periods indicated: Three Months Ended July 29, 2023 July 30, 2022 Net sales: Commercial $ 46,883 $ 40,118 Live Events 91,999 56,383 High School Park and Recreation 56,234 35,809 Transportation 21,369 19,540 International 16,046 20,070 232,531 171,920 Gross profit: Commercial 12,769 4,821 Live Events 27,940 3,786 High School Park and Recreation 20,825 9,977 Transportation 7,089 5,838 International 2,524 1,372 71,147 25,794 Operating expenses: Selling 12,929 14,433 General and administrative 9,599 9,441 Product design and development 8,403 7,439 30,931 31,313 Operating income (loss) 40,216 ( 5,519 ) Nonoperating (expense) income: Interest (expense) income, net ( 881 ) ( 60 ) Change in fair value of convertible note ( 7,260 ) — Other expense and debt issuance costs write-off, net ( 3,979 ) ( 747 ) Income (loss) before income taxes $ 28,096 $ ( 6,326 ) Depreciation and amortization: Commercial $ 1,042 $ 803 Live Events 1,613 1,566 High School Park and Recreation 462 339 Transportation 168 125 International 566 545 Unallocated corporate depreciation and amortization 818 647 $ 4,669 $ 4,025 No single geographic area comprises a material amount of our net sales or property and equipment, net of accumulated depreciation, other than the United States. The following table presents information about net sales and property and equipment, net of accumulated depreciation, in the United States and elsewhere: 13 Table of Contents Three Months Ended July 29, 2023 July 30, 2022 Net sales: United States $ 214,593 $ 149,438 Outside United States 17,938 22,482 $ 232,531 $ 171,920 July 29, 2023 April 29, 2023 Property and equipment, net of accumulated depreciation: United States $ 64,251 $ 63,786 Outside United States 7,829 8,361 $ 72,080 $ 72,147 We have numerous customers worldwide for sales of our products and services, and no customer accounted for 10 percent or more of net sales; therefore, we are not economically dependent on a limited number of customers for the sale of our products and services. We have numerous raw material and component suppliers, and no supplier accounts for 10 percent or more of our cost of sales; however, we have a complex global supply chain subject to geopolitical and transportation risks and a number of single-source suppliers that could limit our supply or cause delays in obtaining raw materials and components needed in manufacturing. Note 6. Goodwill The changes in the carrying amount of goodwill related to each reportable segment for the three months ended July 29, 2023 were as follows: Commercial Transportation Total Balance as of April 29, 2023 $ 3,198 $ 41 $ 3,239 Foreign currency translation 72 21 93 Balance as of July 29, 2023 $ 3,270 $ 62 $ 3,332 We perform an analysis of goodwill on an annual basis and test for impairment more frequently if events or changes in circumstances indicate that an asset might be impaired. Our annual analysis is performed during our third quarter of each fiscal year based on the goodwill amount as of the first business day of our third fiscal quarter. Note 7. Financing Agreements Long-term debt consists of the following: 14 Table of Contents July 29, 2023 April 29, 2023 ABL credit facility $ — $ — Prior line of credit — 17,750 Mortgage 15,000 — Convertible note 25,000 — Long-term debt, gross 40,000 17,750 Debt issuance costs ( 4,338 ) — Change in fair value of convertible note 7,260 — Current portion ( 1,500 ) — Long-term debt, net $ 41,422 $ 17,750 Credit Agreements On May 11, 2023, we closed on a $ 75,000 senior credit facility (the "Credit Facility"). The Credit Facility consists of a $ 60,000 asset-based revolving credit facility (the "ABL") maturing on May 11. 2026, secured by first priority lien on the Company's assets and which is subject to certain factors which can impact our borrowing capacity, and a $ 15,000 delayed draw loan (the "Delayed Draw Loan") secured by a first priority mortgage on our Brookings, South Dakota real estate (the "Mortgage"). The ABL and Delayed Draw Loan are evidenced by a Credit Agreement dated as of May 11, 2023 (the "Credit Agreement") between the Company and JPMorgan Chase Bank, N.A., as the lender. On May 11, 2023 the Company paid all amounts outstanding on the prior credit agreement and this prior credit agreement was terminated as of this date. No gain or loss was recognized upon termination and the Company incurred no early termination penalties in connection with such termination. Under the ABL, certain factors can impact our borrowing capacity. As of July 29, 2023, our borrowing capacity was $ 47,596 , and there were no borrowings outstanding and $ 1,460 used to secure letters of credit outstanding. The interest rate on the ABL is set on a sliding scale based on the trailing 12 month fixed charge coverage and ranges from 2.5 percent to 3.5 percent over the standard overnight financing rate (SOFR). The ABL is secured by a first priority lien on the Company's assets described in the Credit Agreement and the Pledge and Security Agreement dated as of May 11, 2023 by and among the Company, Daktronics Installation, Inc. and JPMorgan Chase Bank, N.A. The $ 15,000 Delayed Draw Loan was funded on July 7, 2023 and is secured the Mortgage on the Company's Brookings, South Dakota real estate. It amortizes over 10 years and has monthly payments of $ 125 . The Delayed Draw Loan is subject to the terms of the Credit Agreement and matures on May 11, 2026. The interest rate on the Delayed Draw Loan is set on a sliding scale based on the trailing 12 month fixed charge coverage ratio and ranges between 1.0 percent and 2.0 percent over the Commercial Bank Floating Rate (CBFR). Convertible Note On May 11, 2023, we issued $ 25,000 in aggregate principal amount evidenced by the secured Convertible Note due May 11, 2027. The Convertible Note holder has a second priority lien on assets securing the ABL facility and a first priority lien on substantially all of the other assets of the Company, excluding all real property, subject to the Intercreditor Agreement dated as of May 11, 2023 by and among the Company, JPMorgan Chase Bank N.A., and the holder of the Convertible Note. Conversion Features • The Convertible Note allows the Investor and any of the Investor’s permitted transferees, donees, pledgees, assignees or successors-in-interest (collectively, the “Selling Shareholders”) to convert all or any portion of the principal amount of the Convertible Note, together with any accrued and unpaid interest and any other unpaid amounts, including late charges, if any (together, the “Conversion Amount”), into shares of the Company’s common stock at an initial conversion price of $ 6.31 per share, subject to adjustment in accordance with the terms of the Convertible Note (the “Conversion Price”). 15 Table of Contents • The Company also has a forced conversion right, which is exercisable on the occurrence of certain conditions set forth in the Convertible Note, pursuant to which it can cause all or any portion of the outstanding and unpaid Conversion Amount to be converted into shares of common stock at the Conversion Price. Additionally, if the Company fails other than by reason of a failure by the Holder to comply with its obligations, the Holder is permitted to cash payments from the Company until the Conversion Failure is cured. Redemption Features • If the Company were to have an Event of Default, as defined by the Convertible Note, then the Holder may require the Company to redeem all or any portion of the Note. • If the Company has a Change of Control, as defined by the Convertible Note, then the Holder is entitled to the outstanding amount of the Note at the Change in Control Redemption Price as defined in the Note. Interest Interest is payable in either (i) cash or (ii) in a combination of cash interest and capitalized interest at the option of the Company; provided, however, that at least fifty percent (50%) of the interest paid on each interest date must be paid as cash interest. The Convertible Note accrues interest quarterly at an annual rate of 9.0 percent when interest is paid in cash or an annual rate of 10.0 percent if interest is paid in kind. Upon an event of default under the Convertible Note, the annual interest rate will increase to 12.0 percent. The annual rate of 9.0 percent was used to calculate the interest accrued as of July 29, 2023. We elected the fair value option to account for the Convertible Note as described in "Note 10. Fair Value Measurement" of the Notes to our Condensed Consolidated Financial Statements included in this Form 10-Q for further information. The financial liability was initially measured at its issue-date fair value and is subsequently remeasured at fair value on a recurring basis at each reporting period date. We have elected to present the fair value and the accrued interest component separately in the income statement. Therefore, interest will be recognized and accrued separately in interest expense, with changes in fair value of the Note presented in the "Change in fair value of convertible note" line item in our condensed consolidated statements of operations. The changes in fair value of the Convertible Note during the quarter ended July 29, 2023 is as follows: Liability Component (in thousands) As of May 11, 2023 $ 25,000 Redemption of convertible promissory note — Fair Value Change Recognized 7,260 As of July 29, 2023 $ 32,260 The estimated fair value of the Convertible Note upon issuance date May 11, 2023 and as of July 29, 2023 was computed using a Binomial Lattice Model which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement. We determined the fair value by using the following key assumptions in the Binomial Lattice Model: Risk-Free Rate (Annual) 4.34 % Implied Yield 18.54 % Volatility (Annual) 55.00 % Dividend Yield (Annual) — % The Credit Agreement and the Convertible Note require a fixed charge coverage ratio of greater than 1.1 and include other customary non-financial covenants. As of July 29, 2023, we were in compliance with our financial covenants under the Credit Agreement and the Convertible Note. 16 Table of Contents Debt Issuance Costs Debt issuance costs incurred and capitalized are amortized on a straight-line basis over the term of the associated debt agreement. If early principal payments or conversions occur, a proportional amount of unamortized debt issuance costs is expensed. As part of these financings, we capitalized $ 8,019 in debt issuance costs. During the first quarter, due to the Convertible Note being accounted for at fair value, we expensed $ 3,353 of the related debt issuance costs which is included in the "Other expense and debt issuance costs write-off, net" line item in our condensed consolidated statements of operations. During the first quarter, we have amortized $ 328 of debt issuance costs. The remaining debt issuance costs of $ 4,338 is being amortized over the four-year term of the Credit Facility agreement. Fair Value and Future Maturities As of July 29, 2023 and April 29, 2023, the fair value of long-term debt, gross was $ 47,260 and $ 17,750 , respectively. The fair value of the Convertible Notes was $ 32,260 as of July 29, 2023. Aggregate contractual maturities of debt in future fiscal years are as follows: Fiscal years ending Amount Remainder of 2024 $ 1,125 2025 1,500 2026 1,500 2027 10,875 2028 25,000 2029 and beyond — Total senior secured notes and convertible notes $ 40,000 As of July 29, 2023, we had $ 6,114 of bank guarantees or other financial instruments for display installations issued by other banks and secured by restricted cash deposits. If we are unable to meet the terms of the arrangement, the bank would subrogate its loss by drawing on the secured cash deposit. Note 8. Commitments and Contingencies Litigation: We are a party to legal proceedings and claims which arise during the ordinary course of business. We review our legal proceedings and claims, regulatory reviews and inspections, and other legal matters on an ongoing basis and follow appropriate accounting guidance when making accrual and disclosure decisions. We establish accruals for those contingencies when the incurrence of a loss is probable and can be reasonably estimated, and we disclose the amount accrued and the amount of a reasonably possible loss in excess of the amount accrued if such disclosure is necessary for our financial statements to not be misleading. We do not record an accrual when the likelihood of loss being incurred is probable, but the amount cannot be reasonably estimated, or when the loss is believed to be only reasonably possible or remote, although disclosures will be made for material matters as required by ASC 450-20, Contingencies - Loss Contingencies. Our assessment of whether a loss is reasonably possible or probable is based on our assessment and consultation with legal counsel regarding the ultimate outcome of the matter following all appeals. For other unresolved legal proceedings or claims, we do not believe there is a reasonable probability that any material loss would be incurred. Accordingly, no material accrual or disclosure of a potential range of loss has been made related to these matters. We do not expect the ultimate liability of these unresolved legal proceedings or claims to have a material effect on our financial position, liquidity, or capital resources. 17 Table of Contents Warranties: Changes in our warranty obligation for the three months ended July 29, 2023 consisted of the following: July 29, 2023 Beginning accrued warranty obligations $ 32,541 Warranties issued during the period 4,375 Settlements made during the period ( 2,744 ) Changes in accrued warranty obligations for pre-existing warranties during the period, including expirations 398 Ending accrued warranty obligations $ 34,570 Performance guarantees: We have entered into standby letters of credit, bank guarantees and surety bonds with financial institutions relating to the guarantee of our future performance on contracts, primarily construction-type contracts. As of July 29, 2023, we had outstanding letters of credit, bank guarantees and surety bonds in the amount of $ 1,460 , $ 6,114 and $ 40,394 , respectively. Performance guarantees are issued to certain customers to guarantee the operation and installation of the equipment and our ability to complete a contract. These performance guarantees have various terms but generally have a term of one year. We enter into written agreements with our customers, and those agreements often contain indemnification provisions that require us to make the customer whole if certain acts or omissions by us cause the customer financial loss. We make efforts to negotiate reasonable caps and limitations on the recovery of such damages. As of July 29, 2023, we were not aware of any material indemnification claims. Note 9. Income Taxes Our effective tax rate for the three months ended July 29, 2023 was a tax rate of 31.7 percent, as compared to an effective tax rate of 15.8 percent for the three months ended July 30, 2022. The higher tax rate is caused by the fair value adjustment to income that is not taxable. We operate both domestically and internationally and, as of July 29, 2023, undistributed earnings of our foreign subsidiaries were considered to be reinvested indefinitely. Additionally, as of July 29, 2023, we had $ 521 of unrecognized tax benefits which would reduce our effective tax rate if recognized. 18 Table of Contents Note 10. Fair Value Measurement The following table sets forth by level within the fair value hierarchy our financial assets and liabilities that were accounted for at fair value on a recurring basis as of July 29, 2023 and April 29, 2023 according to the valuation techniques we used to determine their fair values. There have been no transfers of assets or liabilities among the fair value hierarchies presented. Fair Value Measurements Level 1 Level 2 Level 3 Total Balance as of July 29, 2023 Cash and cash equivalents $ 45,775 $ — $ — $ 45,775 Restricted cash 8,575 — — 8,575 Convertible Note Payable — — 32,260 32,260 Available-for-sale securities: — US Government sponsored entities — 539 — 539 Derivatives - liability position — ( 542 ) — ( 542 ) $ 54,350 $ ( 3 ) $ 32,260 $ 86,607 Balance as of April 29, 2023 Cash and cash equivalents $ 23,982 $ — $ — $ 23,982 Restricted cash 708 — — 708 Available-for-sale securities: US Government sponsored entities — 534 — 534 Derivatives - liability position — ( 579 ) — ( 579 ) $ 24,690 $ ( 45 ) $ — $ 24,645 We elected to value the Convertible Note at fair value in accordance with ASC 825-10-15-4(a) because of the embedded derivatives contained in the note. The fair value of the Convertible Note was estimated using a binomial lattice model. Binomial lattice allows for the examination of the value to a holder and understanding the investment decision that would occur at each node. The fair value of the Convertible Note entered into during the first quarter of fiscal 2024 was classified as Level 3 because it does not have readily determinable or observable inputs for the valuation. There have been no other changes in the valuation techniques used by us to value our financial instruments since the end of fiscal 2023. For additional information, see our Annual Report on Form 10-K for the fiscal year ended April 29, 2023 for the methods and assumptions used to estimate the fair value of each class of financial instrument. Note 11. Related Party Transactions The Board has adopted a written policy and procedures with respect to related party transactions, which the Audit Committee oversees. Under the policy, a "related party transaction" is generally defined as a transaction, arrangement, or relationship in which the Company was, is or will be a participant; the amount involved exceeds $ 120 ; and in which any "related person" had, has or will have a direct or indirect material interest. The policy generally defines a "related person" as a Director, executive officer or beneficial owner of more than five percent of any class of our voting securities and any immediate family member of any of the foregoing persons. The Audit Committee reviews and, if appropriate, approves related party transactions, including certain transactions which are deemed to be pre-approved under the policy. On an annual basis, the Audit Committee reviews any previously approved related party transaction that is ongoing. As reported in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the section entitled “Liquidity and Capital Resources” of Form 10-K, effective on May 11, 2023, the Company entered into the Securities Purchase Agreement with Alta Fox Opportunities Fund, LP (the “Investor”). Under the Securities Purchase Agreement, the Company sold and issued to the Investor the Convertible Note in exchange for the payment by the Investor to the Company of $ 25,000 . As of May 11, 2023, and based on Amendment No. 3 to the Schedule 13D filed 19 Table of Contents by the Investor and its affiliates named therein on May 15, 2023 with the SEC, the Investor and its affiliates beneficially owned 4,768 shares of common stock of the Company, representing 9.99 percent of the Company’s common stock, causing the Investor to be a “related party” of the Company under the Company’s written policy and procedures and the applicable definitions under the Securities Act of 1933. The Securities Purchase Agreement, the Convertible Note, the Pledge and Security Agreement dated as of May 11, 2023 by and between the Investor and the Company, and the Registration Rights Agreement were approved in advance of their execution by the Company’s Strategy and Financing Review Committee, the members of which include all members of the Company’s Audit Committee. Since May 11, 2023 the largest aggregate amount outstanding under the Convertible Note was $ 25,475 , consisting of $ 25,000 of principal and $ 475 of interest; a total of $ 25,475 outstanding; and, since May 11, 2023; no payments of principal or interest had been made on the amounts due under the Convertible Note. The description of the Securities Purchase Agreement, the Convertible Note, the Pledge and Security Agreement dated as of May 11, 2023 by and between the Investor and the Company, the Registration Rights Agreement, and their respective terms set forth in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the section entitled “Liquidity and Capital Resources” was hereby incorporated by reference into this Item 13 of the form 10-K. In addition, the Company is a party to the Standstill and Voting Agreement dated as of March 19, 2023 with Alta Fox Management, LLC and Connor Haley (the “Standstill Agreement”). The Standstill Agreement is filed as Exhibit 10.13 to Form 10-K. As described in Amendment No. 3 (“Amendment No. 3”) to the Schedule 13D filed by the Investor and its affiliates named therein on June 9, 2023 with the SEC and based on other information provided by the Investor, the following persons may be deemed to be beneficial owners of the shares of the Company’s common stock owned by the Investor: Alta Fox GenPar, LP, as the general partner of Alta Fox Opportunities Fund, LP; Alta Fox Equity, LLC, as the general partner of Alta Fox GenPar, LP; Alta Fox Capital Management, LLC, as the investment manager of Alta Fox Opportunities Fund, LP; and P. Connor Haley, as the sole owner, member and manager of each of Alta Fox Capital Management, LLC and Alta Fox Equity LLC. On June 7, 2023, the Company received from the Investor written notice of a decrease in the “Percentage Cap” (as such term is defined in the Convertible Note) from 9.99 percent to 4.99 percent which decrease became effective immediately upon the Company’s receipt of such written notice. The Percentage Cap generally represents the maximum percentage of shares of the Company’s common stock the Investor may own. Based on Amendment No. 3, the Investor and its affiliates identified in Amendment No. 3 owned 2,293 shares of common stock on June 9, 2023, representing 4.99 percent of the common stock of the Company, meaning the Investor and its affiliates are no longer “related parties” of the Company under the Company’s written policy and procedures and the applicable definitions under the Securities Act of 1933. During the first quarter of fiscal 2024, the Company and South Dakota Board of Regents entered into a contract for video display systems for Dakota State University. The amount of the contract was $ 150 . A member of the Company's Board of Directors is the President of Dakota State University. See Note 2 for further details of related party transactions with our Investments in affiliates. 20 Table of Contents