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 27, 2024 April 27, 2024 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 96,809 $ 81,299 Restricted cash 379 379 Accounts receivable, net 132,021 117,186 Inventories 134,949 138,008 Contract assets 54,129 55,800 Current maturities of long-term receivables 436 298 Prepaid expenses and other current assets 8,579 8,531 Income tax receivables 110 448 Total current assets 427,412 401,949 Property and equipment, net 73,613 71,752 Long-term receivables, less current maturities 119 562 Goodwill 3,197 3,226 Intangibles, net 767 840 Debt issuance costs, net 2,220 2,530 Investment in affiliates and other assets 20,708 21,163 Deferred income taxes 25,850 25,862 TOTAL ASSETS $ 553,886 $ 527,884 1 Table of Contents DAKTRONICS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (continued) (in thousands, except per share data) (unaudited) July 27, 2024 April 27, 2024 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt $ 1,500 $ 1,500 Accounts payable 67,265 60,757 Contract liabilities 71,782 65,524 Accrued expenses 39,448 43,028 Warranty obligations 16,408 16,540 Income taxes payable 543 4,947 Total current liabilities 196,946 192,296 Long-term warranty obligations 22,467 21,388 Long-term contract liabilities 17,378 16,342 Other long-term obligations 4,270 5,759 Long-term debt, net 74,472 53,164 Deferred income taxes 142 143 Total long-term liabilities 118,729 96,796 SHAREHOLDERS' EQUITY: Preferred Shares, no par value, authorized 50 shares; no shares issued and outstanding — — Common Stock, no par value, authorized 115,000 shares; 48,523 and 48,121 shares issued as of July 27, 2024 and April 27, 2024, respectively 69,242 65,525 Additional paid-in capital 52,566 52,046 Retained earnings 133,085 138,031 Treasury Stock, at cost, 1,907 shares as of July 27, 2024 and April 27, 2024, respectively ( 10,285 ) ( 10,285 ) Accumulated other comprehensive loss ( 6,397 ) ( 6,525 ) TOTAL SHAREHOLDERS' EQUITY 238,211 238,792 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 553,886 $ 527,884 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 27, 2024 July 29, 2023 Net sales $ 226,088 $ 232,531 Cost of sales 166,390 161,384 Gross profit 59,698 71,147 Operating expenses: Selling 15,636 12,929 General and administrative 11,723 9,599 Product design and development 9,623 8,403 36,982 30,931 Operating income 22,716 40,216 Nonoperating (expense) income: Interest (expense) income, net ( 71 ) ( 881 ) Change in fair value of convertible note ( 21,590 ) ( 7,260 ) Other expense and debt issuance costs write-off, net ( 835 ) ( 3,979 ) Income before income taxes 220 28,096 Income tax expense 5,166 8,900 Net (loss) income $ ( 4,946 ) $ 19,196 Weighted average shares outstanding: Basic 46,311 45,645 Diluted 46,311 46,198 Earnings (loss) per share: Basic $ ( 0.11 ) $ 0.42 Diluted $ ( 0.11 ) $ 0.42 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 27, 2024 July 29, 2023 Net (loss) income $ ( 4,946 ) $ 19,196 Other comprehensive income (loss): Cumulative translation adjustments 128 ( 252 ) Unrealized gain on available-for-sale securities, net of tax — 7 Total other comprehensive income (loss), net of tax 128 ( 245 ) Comprehensive (loss) income $ ( 4,818 ) $ 18,951 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 Treasury Stock Number Amount Additional Paid-In Capital Retained Earnings Number Amount Accumulated Other Comprehensive Loss Total Balance as of April 27, 2024 48,121 $ 65,525 $ 52,046 $ 138,031 ( 1,907 ) $ ( 10,285 ) $ ( 6,525 ) $ 238,792 Net loss — — — ( 4,946 ) — — — ( 4,946 ) Cumulative translation adjustments — — — — — — 128 128 Share-based compensation — — 520 — — — — 520 Exercise of stock options 331 3,148 — — — — — 3,148 Employee savings plan activity 71 569 — — — — — 569 Balance as of July 27, 2024 48,523 $ 69,242 $ 52,566 $ 133,085 ( 1,907 ) $ ( 10,285 ) $ ( 6,397 ) $ 238,211 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 Treasury Stock Number Amount Additional Paid-In Capital Retained Earnings Number Amount Accumulated Other Comprehensive Loss Total Balance as of April 29, 2023 47,396 $ 63,023 $ 50,259 $ 103,410 ( 1,907 ) $ ( 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 11 46 — — — — — 46 Employee savings plan activity 211 615 — — — — — 615 Balance as of July 29, 2023 47,618 $ 63,684 $ 50,816 $ 122,606 ( 1,907 ) $ ( 10,285 ) $ ( 5,774 ) $ 221,047 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 27, 2024 July 29, 2023 CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ ( 4,946 ) $ 19,196 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 4,893 4,669 (Gain) loss on sale of property, equipment and other assets ( 20 ) 11 Share-based compensation 520 557 Equity in loss of affiliates 931 690 Provision for doubtful accounts, net 265 ( 65 ) Deferred income taxes, net 13 12 Non-cash impairment charges — 442 Change in fair value of convertible note 21,590 7,260 Debt issuance costs write-off — 3,353 Change in operating assets and liabilities ( 3,765 ) ( 16,875 ) Net cash provided by operating activities 19,481 19,250 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment ( 5,081 ) ( 4,547 ) Proceeds from sales of property, equipment and other assets 45 27 Proceeds from sales or maturities of marketable securities — — Purchases of equity and loans to equity investees ( 933 ) ( 1,186 ) Net cash used in investing activities ( 5,969 ) ( 5,706 ) CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings on notes payable — 40,000 Payments on notes payable ( 983 ) ( 17,750 ) Principal payments on long-term obligations ( 103 ) ( 102 ) Debt issuance costs — ( 5,838 ) Proceeds from exercise of stock options 3,148 46 Net cash provided by financing activities 2,062 16,356 EFFECT OF EXCHANGE RATE CHANGES ON CASH ( 64 ) ( 240 ) NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 15,510 29,660 CASH, CASH EQUIVALENTS AND RESTRICTED CASH: Beginning of period 81,678 24,690 End of period $ 97,188 $ 54,350 Supplemental disclosures of cash flow information: Cash paid for: Interest $ 889 $ 97 Income taxes, net of refunds 9,081 5,771 Supplemental schedule of non-cash investing and financing activities: Purchases of property and equipment included in accounts payable 2,909 839 Contributions of common stock under the ESPP 569 614 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 as of April 27, 2024 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 27, 2024, 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 27, 2024 and July 29, 2023 contained operating results for 13 weeks. 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 27, 2024. 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 certain issuances of foreign bank guarantees. July 27, 2024 July 29, 2023 April 27, 2024 Cash and cash equivalents $ 96,809 $ 45,775 $ 81,299 Restricted cash 379 8,575 379 Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows $ 97,188 $ 54,350 $ 81,678 We have foreign currency cash accounts to operate our global business. These accounts are impacted by changes in foreign currency rates. Of our $ 96,809 in cash and cash equivalent balances as of July 27, 2024, $ 81,246 were denominated in United States dollars, of which $ 1,649 were held by our foreign subsidiaries. As of July 27, 2024, we had an additional $ 15,563 in cash balances denominated in foreign currencies, of which $ 10,922 were maintained in accounts of our foreign subsidiaries. 8 Table of Contents Recent Accounting Pronouncements Accounting Standards Adopted There are no significant Accounting Standard Updates ("ASU") issued that were adopted in the three months ended July 27, 2024. Accounting Standards Not Yet Adopted In November 2023, the Financial Accounting Standards Board ("FASB") issued ASU 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures ("ASU 2023-07"). ASU 2023-07 requires enhanced disclosures about significant segment expenses. The Company is required to adopt ASU 2023-07 for its annual reporting in fiscal year 2025 and for interim period reporting beginning in the first quarter of fiscal year 2026 on a retrospective basis. Early adoption is permitted. We are currently evaluating the impact of ASU 2023-07 on our segment disclosures. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) Improvements to Income Tax Disclosures ("ASU 2023-09"). ASU 2023-09 requires the disclosure of specified additional information in its income tax rate reconciliation and to provide additional information for reconciling items that meet a quantitative threshold. ASU 2023-09 will also require disaggregation of income taxes paid disclosure by federal, state and foreign taxes, with further disaggregation required for significant individual jurisdictions. The Company is required to adopt this guidance for its annual reporting in fiscal year 2026 on a prospective basis. Early adoption and retroactive application are permitted. We are currently evaluating the impact of ASU 2023-09 on our income tax disclosures. Note 2. Investments in Affiliates We use the equity method to account for investments in companies if our investment provides us with the ability to exercise significant influence over operating and financial policies of the investee. Our consolidated net (loss) income includes our Company's proportionate share of the net income or loss of these companies. Our judgment regarding the level of influence over each equity method investee includes considering key factors such as our ownership interest, representation on the board of directors, participation in policy-making decisions, other commercial arrangements, and material intercompany transactions. We evaluated the nature of our investment in affiliates of Xdisplay TM ("XDC"), which is developing micro-LED mass transfer expertise and technologies, and Miortech (dba Etulipa), which is developing low power outdoor electrowetting technology. Our ownership in Miortech was 55.9 percent and in XDC was 16.4 percent as of July 27, 2024. The aggregate amount of our investments accounted for under the equity method was $ 893 and $ 1,813 as of July 27, 2024 and April 27, 2024, respectively. We determined both entities are variable interest entities, and based on management's analysis, we determined that Daktronics is not the primary beneficiary because the power criterion was not met; therefore, the investments in Miortech and XDC are accounted for under the equity method. Our consolidated net (loss) income includes our Company's proportionate share of the net income or loss of each affiliates. 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 27, 2024, our share of the losses of our affiliates was $ 931 as compared to $ 690 for the three months ended July 29, 2023. We review our investments in affiliates for impairment indicators. There were no impairments recorded during three months ended July 27, 2024 compared to an impairment of $ 442 the first quarter of fiscal 2024. 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 27, 2024 and July 29, 2023 was $ 223 and $ 78 , respectively, which is included in the "Product design and development" line item in our condensed consolidated statements of operations, and for the three months ended July 27, 2024 and July 29, 2023, $ 123 and $ 2 , respectively, remains unpaid and is included in the "Accounts payable" line item in our condensed consolidated balance sheets. We also have advanced our affiliates convertible and promissory notes (collectively, the "Affiliate Notes"). We advanced $ 958 in the three months ended July 27, 2024 and $ 5,050 in fiscal year 2024 under the Affiliate Notes. The total outstanding amount of the Affiliate Notes was $ 15,371 and $ 14,241 as of July 27, 2024 and April 27, 2024, respectively. The balances of Affiliate Notes are included in the "Investments in affiliates and other assets" line item in our condensed consolidated balance sheets. We evaluate the Affiliate Notes for impairment and credit losses. As of July 27, 2024 and 9 Table of Contents April 27, 2024, no provision for losses was recorded as management's analysis concluded the Affiliate Notes were collectable or realizable based on the rights of these instruments and related valuation of each affiliate. The Affiliate Notes balance combined with the investment in affiliates balance totaled $ 16,264 and $ 16,054 as of July 27, 2024 and April 27, 2024, respectively. Note 3. Earnings Per Share ("EPS") We follow the provisions of Accounting Standards Codification ("ASC 260"), Earnings Per Share , where basic earnings per share ("EPS") is computed by dividing income attributable to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution which may occur if securities or other obligations to issue common stock were exercised or converted into shares of common stock or resulted in the issuance of shares of common stock which share in our earnings. The following is a reconciliation of the net (loss) income and common share amounts used in the calculation of basic and diluted EPS for the three months ended July 27, 2024 and July 29, 2023: Three Months Ended July 27, 2024 July 29, 2023 Earnings per share - basic Net (loss) income $ ( 4,946 ) $ 19,196 Weighted average shares outstanding 46,311 45,645 Basic earnings (loss) per share $ ( 0.11 ) $ 0.42 Earnings per share - diluted Net (loss) income $ ( 4,946 ) $ 19,196 Diluted net (loss) income $ ( 4,946 ) $ 19,196 Weighted average common shares outstanding 46,311 45,645 Dilution associated with stock compensation plans — 553 Dilution associated with convertible note — — Weighted average common shares outstanding, assuming dilution 46,311 46,198 Diluted earnings (loss) per share $ ( 0.11 ) $ 0.42 Options outstanding to purchase 161 and 1,326 shares of common stock with a weighted average exercise price of $ 12.52 and $ 8.97 for the three months ended July 27, 2024 and July 29, 2023, respectively, were not included in the computation of diluted earnings per share because the effects would be anti-dilutive. During the three months ended July 27, 2024 and July 29, 2023, shares of common stock issuable upon conversion of the secured convertible note in the original principal payment of $ 25,000 due on May 11, 2027 (the "Convertible Note") were not included in the computation of diluted EPS, as the effect would be anti-dilutive. For the three months ended July 27, 2024 and July 29, 2023, 4,037 and 3,549 , respectively, potential common shares related to the convertible note issued by the Company to Alta Fox Opportunities Fund, LP, were excluded from the calculation of diluted EPS. Note 4. Revenue Recognition Disaggregation of revenue In accordance with 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 10 Table of Contents 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. The following table presents our disaggregation of revenue by segments: Three Months Ended July 27, 2024 Commercial Live Events High School Park and Recreation Transportation International Total Type of performance obligation Unique configuration $ 2,262 $ 94,318 $ 10,634 $ 14,536 $ 2,614 $ 124,364 Limited configuration 26,300 8,294 35,148 6,609 8,072 84,423 Service and other 5,637 5,996 2,224 1,345 2,099 17,301 $ 34,199 $ 108,608 $ 48,006 $ 22,490 $ 12,785 $ 226,088 Timing of revenue recognition Goods/services transferred at a point in time $ 29,513 $ 10,750 $ 35,379 $ 7,561 $ 9,141 $ 92,344 Goods/services transferred over time 4,686 97,858 12,627 14,929 3,644 133,744 $ 34,199 $ 108,608 $ 48,006 $ 22,490 $ 12,785 $ 226,088 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 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 accounts receivable when they are billed according to the contract terms. Contract liabilities represent amounts billed to customers in excess of revenue recognized to date. 11 Table of Contents The following table reflects the changes in our contract assets and liabilities: July 27, 2024 April 27, 2024 Dollar Change Percent Change Contract assets $ 54,129 $ 55,800 $ ( 1,671 ) ( 3.0 ) % Contract liabilities - current 71,782 65,524 6,258 9.6 Contract liabilities - noncurrent 17,378 16,342 1,036 6.3 The changes in our contract assets and contract liabilities from April 27, 2024 to July 27, 2024 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 significant impairments of contract assets for the three months ended July 27, 2024. 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" line items of our condensed consolidated balance sheets. Changes in unearned service-type warranty contracts, net were as follows: July 27, 2024 Balance as of April 27, 2024 $ 32,159 New contracts sold 12,269 Less: reductions for revenue recognized ( 10,188 ) Foreign currency translation and other ( 485 ) Balance as of July 27, 2024 $ 33,755 Contracts in progress identified as loss contracts as of July 27, 2024 and April 27, 2024 were immaterial. Loss provisions are recorded in the "Accrued expenses" line item in our condensed consolidated balance sheets. During the three months ended July 27, 2024, we recognized revenue of $ 39,918 related to our contract liabilities as of April 27, 2024. Remaining performance obligations As of July 27, 2024, the aggregate amount of the transaction price allocated to the remaining performance obligations was $ 332,665 . Remaining performance obligations related to product and service agreements as of July 27, 2024 were $ 267,207 and $ 65,458 , respectively. We expect approximately $ 268,362 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 27, 2024 and July 29, 2023 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 27, 2024 July 29, 2023 Net sales: Commercial $ 34,199 $ 46,883 Live Events 108,608 91,999 High School Park and Recreation 48,006 56,234 Transportation 22,490 21,369 International 12,785 16,046 226,088 232,531 Gross profit: Commercial 7,595 12,769 Live Events 26,028 27,940 High School Park and Recreation 17,316 20,825 Transportation 7,749 7,089 International 1,010 2,524 59,698 71,147 Operating expenses: Selling 15,636 12,929 General and administrative 11,723 9,599 Product design and development 9,623 8,403 36,982 30,931 Operating income 22,716 40,216 Nonoperating (expense) income: Interest (expense) income, net ( 71 ) ( 881 ) Change in fair value of convertible note ( 21,590 ) ( 7,260 ) Other expense and debt issuance costs write-off, net ( 835 ) ( 3,979 ) Income before income taxes $ 220 $ 28,096 Depreciation and amortization: Commercial $ 1,082 $ 1,042 Live Events 1,429 1,613 High School Park and Recreation 533 462 Transportation 202 168 International 562 566 Unallocated corporate depreciation and amortization 1,085 818 $ 4,893 $ 4,669 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 27, 2024 July 29, 2023 Net sales: United States $ 207,219 $ 214,593 Outside United States 18,869 17,938 $ 226,088 $ 232,531 July 27, 2024 April 27, 2024 Property and equipment, net of accumulated depreciation: United States $ 66,168 $ 64,332 Outside United States 7,445 7,420 $ 73,613 $ 71,752 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 segment with a goodwill balance for the three months ended July 27, 2024 were as follows: Commercial Transportation Total Balance as of April 27, 2024 $ 3,188 $ 38 $ 3,226 Foreign currency translation ( 23 ) ( 6 ) ( 29 ) Balance as of July 27, 2024 $ 3,165 $ 32 $ 3,197 We perform an analysis of goodwill on an annual basis, and it is tested 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. Accumulated impairments to goodwill as of July 27, 2024 were $ 4,576 . Note 7. Financing Agreements Long-term debt consists of the following: 14 Table of Contents July 27, 2024 April 27, 2024 Mortgage 13,500 13,875 Convertible note 25,000 25,000 Long-term debt, gross 38,500 38,875 Debt issuance costs, net ( 668 ) ( 761 ) Change in fair value of convertible note 38,140 16,550 Current portion ( 1,500 ) ( 1,500 ) Long-term debt, net $ 74,472 $ 53,164 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, which is secured by a first priority lien on the Company's assets, 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"). Under the ABL, certain factors can impact our borrowing capacity. As of July 27, 2024, our borrowing capacity was $ 38,568 , there were no borrowings outstanding, and there was $ 5,343 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 to 3.5 percent over the standard overnight financing rate (SOFR). The $ 15,000 Delayed Draw Loan was funded on July 7, 2023. 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 and 2.0 percent over the Commercial Bank Floating Rate (CBFR). The interest rate as of July 27, 2024 for Delayed Draw Loan was 9.5 percent. Convertible Note On May 11, 2023, we borrowed $ 25,000 in aggregate principal amount evidenced by the secured convertible note (the "Convertible Note") due May 11, 2027. Alta Fox Opportunities Fund, LP, as the holder (the "Holder") of the Convertible Note 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. Conversion Features • The Convertible Note allows the Holder and any of the Holder’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”). • 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 such 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 Convertible Note. 15 Table of Contents • If the Company has a "Change of Control", as defined by the Convertible Note, then the Holder is entitled to payment of the outstanding amount of the Convertible Note at the "Change in Control Redemption Price," as defined in the Convertible Note. Interest Interest accruing under the Convertible Note is payable, at the option of the Company, in either (i) cash or (ii) a combination of cash interest and capitalized interest; 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 27, 2024, as interest will be paid in cash. 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. 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 condensed consolidated statements of operations. Therefore, interest will be recognized and accrued separately in interest expense, with changes in fair value of the Convertible 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 three months ended July 27, 2024 are as follows: Liability Component (in thousands) Balance as of April 27, 2024 $ 41,550 Redemption of convertible promissory note — Fair value change recognized 21,590 Balance as of July 27, 2024 $ 63,140 The estimated fair value of the Convertible Note upon its issuance date of May 11, 2023 and as of July 27, 2024 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) 4.19 % Implied Yield 15.98 % Volatility (Annual) 45.00 % 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 27, 2024, we were in compliance with our financial covenants under the Credit Agreement and the Convertible Note. 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 $ 8,195 in debt issuance costs. During the three months ended July 29, 2023, 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 three months ended July 27, 2024 and July 29, 2023, we amortized $ 403 and $ 328 , respectively, of debt issuance costs. The remaining debt issuance costs of $ 2,888 are being amortized over the remaining two-year term of the Credit Facility. 16 Table of Contents Future Maturities Aggregate contractual maturities of debt in future fiscal years are as follows: Fiscal years ending Amount Remainder of 2025 $ 1,125 2026 1,500 2027 10,875 2028 25,000 2029 — Total debt $ 38,500 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. Warranties: Changes in our warranty obligation for the three months ended July 27, 2024 consisted of the following: July 27, 2024 Balance as of April 27, 2024 $ 37,928 Warranties issued during the period 4,017 Settlements made during the period ( 3,519 ) Changes in accrued warranty obligations for pre-existing warranties during the period, including expirations 449 Balance as of July 27, 2024 $ 38,875 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 27, 2024, we had outstanding letters of credit and surety bonds in the amount of $ 5,343 and $ 15,729 , 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 27, 2024, we were not aware of any material indemnification claims. 17 Table of Contents Note 9. Income Taxes Our effective tax rate for the first quarter of fiscal 2025 was skewed due to the impact of the fair value in the Convertible Note in proportion to the period's small pre-tax income. The effective tax rate was 31.7 percent for the three months ended July 29, 2023. Both periods' income before taxes included the impacts of the change in the Convertible Note fair value adjustment. These changes are not deductible or taxable, which is the primary driver for each period's effective tax rate. We operate both domestically and internationally and, as of July 27, 2024, the undistributed earnings of our foreign subsidiaries were considered to be reinvested indefinitely. Additionally, as of July 27, 2024, we had $ 495 of unrecognized tax benefits which would reduce our effective tax rate if recognized. 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 27, 2024 and April 27, 2024 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 27, 2024 Cash and cash equivalents $ 96,809 $ — $ — $ 96,809 Restricted cash 379 — — 379 Convertible note — — ( 63,140 ) ( 63,140 ) $ 97,188 $ — $ ( 63,140 ) $ 34,048 Balance as of April 27, 2024 Cash and cash equivalents $ 81,299 $ — $ — $ 81,299 Restricted cash 379 — — 379 Convertible note — — ( 41,550 ) ( 41,550 ) $ 81,678 $ — $ ( 41,550 ) $ 40,128 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 Convertible 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 certain inputs for the valuation were not readily determinable or observable. There have been no other changes in the valuation techniques used by us to value our financial instruments since the end of fiscal 2024. For additional information, see our Annual Report on Form 10-K for the fiscal year ended April 27, 2024 for the methods and assumptions used to estimate the fair value of each class of financial instrument. Note 11. Related Party Transactions The Company's Board of Directors 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. 18 Table of Contents 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 our Annual Report on Form 10-K for the fiscal year ended April 27, 2024, effective on May 11, 2023, the Company entered into the Securities Purchase Agreement with the Holder of the Convertible Note. Under the Securities Purchase Agreement, the Company sold and issued to the Holder the Convertible Note in exchange for the payment by the Holder to the Company of $ 25,000 . As of May 11, 2023, and based on Amendment No. 2 to the Schedule 13D filed by the Holder and its affiliates named therein on May 15, 2023 with the SEC, the Holder 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 Holder 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 Holder 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 $ 25,563 , consisting of $ 25,000 of principal and $ 563 of interest. In the first three months of fiscal 2025, we have made interest payments of $ 375 under the Convertible Note. The description of the Securities Purchase Agreement, the Convertible Note, the Pledge and Security Agreement, and the Registration Rights Agreement dated as of May 11, 2023 by and between the Holder and the Company 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” of the Company's Annual Report on Form 10-K for the fiscal year ended April 27, 2024 is hereby incorporated by reference into this Report. 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”), who are affiliates of the Holder. As described in Amendment No. 3 (“Amendment No. 3”) to the Schedule 13D filed by the Holder and its affiliates named therein on June 9, 2023 with the SEC, and based on other information provided by the Holder, the following persons may be deemed to be beneficial owners of the shares of the Company’s common stock beneficially owned by the Holder: 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 Holder a 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 Holder may own. In Amendment No. 3, the Holder 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 Holder 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 three months of fiscal 2024, the Company and the South Dakota Board of Regents entered into a contract for a video display system 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. Investments in Affiliates" for further details of related party transactions with our investments in the Affiliate Notes issued by our affiliates. 19 Table of Contents