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(Parentheticals)
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Income (Loss)
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Equity
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(Address
of Principal Executive Offices) (Zip Code)
(i605) i692-0200
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon Stock, No Par Value
iDAKT
iNasdaq
Global Select Market
iPreferred Stock Purchase Rights
iDAKT
iNasdaq Global Select Market
Indicate
by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesx No o
Indicate by check mark whether the
registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesx No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company,
or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
o
iAccelerated
filer
x
Non-accelerated filer
o
Smaller reporting company
io
Emerging growth company
io
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ioNo x
Preferred Shares, no par value, authorized ii50,000/
shares; iiiino///
shares issued and outstanding
i—
i—
Common Stock, no
par value, authorized ii115,000,000/ shares; i46,189,311
and i45,488,595 shares issued at January 27, 2024 and April 29, 2023, respectively
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share data)
(unaudited)
Note 1. iBasis
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.
i
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 nine months ended January 27, 2024 and January 28, 2023 contained operating results for 39 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 29, 2023.
Cash
and cash equivalents and restricted cash
ii
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.
Total
cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows
$
i77,193
$
i10,730
$
i24,690
//
We
have foreign currency cash accounts to operate our global business. These accounts are impacted by changes in foreign currency rates. Of our $i76,764 in cash and cash equivalent balances as of January 27, 2024, $i63,179
were denominated in United States dollars, of which $i1,568 were held by our foreign subsidiaries. As of January 27, 2024, we had an additional $i13,585
in cash balances denominated in foreign currencies, of which $i9,761 were maintained in accounts of our foreign subsidiaries.
In August 2020, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("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. ASU 2020-06 (1) simplified the accounting for convertible
debt instruments and convertible preferred stock by removing the existing guidance in Accounting Standards Codification ("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 with no material impact to the Condensed Consolidated Financial Statements. On May 11, 2023, we borrowed $25,000 in aggregate principal amount evidenced by a secured convertible note due May
11, 2027 (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
In November 2023, the 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 2025 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. iInvestments in Affiliates
We evaluated the nature of our investment in affiliates of XdisplayTM, 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 $i8,513 and $i11,934 as of January 27,
2024 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 and nine months ended January 27, 2024, our share of the losses of our affiliates was $i869 and $i2,330
as compared to $i895 and $i2,596 for the three and nine months ended January 28, 2023.
We purchased services for research
and development activities from our equity method investees. The total of these related party transactions for the nine months ended January 27, 2024 and January 28, 2023 was $i162 and $i672,
respectively, which is included in the "Product design and development" line item in our condensed consolidated statements of
operations, and for the nine months ended January 27, 2024, $i2 remains unpaid and is included in the "Accounts payable" line item in our
condensed consolidated balance sheets.
During the nine months ended January 27, 2024, we invested $i3,000 in convertible notes and $i1,084
in promissory notes (collectively, the "Affiliate Notes") issued by our affiliates, which is included in the "Investment in affiliates and other assets" line item in our condensed consolidated balance sheets. During the nine months ended January 27, 2024, we did not convert any Affiliate Notes to stock ownership. Our ownership in Miortech was i55.9 percent and in XdisplayTM was i16.4
percent as of January 27, 2024. The total amount of Affiliate Notes as of January 27, 2024 was $i13,134 and is included in the "Investments in affiliates and other assets" line item in our condensed consolidated balance sheets. The Affiliate Notes balance combined with the investment in affiliates balance totaled $i21,647
and $i24,836 as of January 27, 2024 and January 28, 2023, respectively.
Note 3. iEarnings
Per Share ("EPS")
Under the if-converted method, the Convertible Note is assumed to be converted into common stock at the beginning of the reporting period or at time of issuance, if later, and the resulting shares are included in the denominator of the calculation. In addition, interest charges, net of any income tax effects, and the change in fair value of Convertible Note are added back to the numerator of the calculation. 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.
i
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 and nine months ended January 27, 2024 and January 28, 2023:
Weighted
average common shares outstanding, assuming dilution
i50,837
i45,448
i46,608
i45,320
Diluted
earnings (loss) per share
$
i0.09
$
i0.08
$
i0.69
$
(i0.32)
/
Options
outstanding to purchase i484 shares of common stock with a weighted average exercise price of $i10.73
for the three months ended January 27, 2024 and i2,102 shares of common stock with a weighted average exercise price of $i7.13
for the three months ended January 28, 2023 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
Options outstanding to purchase i695 shares of common stock with a weighted average exercise price of $i10.30
for the nine months ended January 27, 2024 and i2,089 shares of common stock with a weighted average exercise price of $i7.59
for the nine months ended January 28, 2023 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
During the nine months ended January 27, 2024, shares of common stock issuable upon conversion of the Convertible Note were not included in the computation of diluted earnings per share, as the effect would be anti-dilutive. For the nine months ended January 27, 2024, i3,875
potential common shares related to the Convertible Note were excluded from the calculation of diluted earnings per share. The debt evidenced by the Convertible Note was not outstanding during fiscal year 2023.
Note 4. iRevenue 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 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.
i
The following table presents our disaggregation of revenue by segments:
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 the customers in excess of revenue recognized to date.
i
The
following table reflects the changes in our contract assets and liabilities:
The
changes in our contract assets and contract liabilities from April 29, 2023 to January 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 immaterial impairments of contract assets for the nine months ended January 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:
Contracts in progress identified as loss contracts as of January 27, 2024 and as of April 29, 2023 were immaterial. Loss provisions are recorded in the "Accrued expenses" line item in our Condensed Consolidated Balance Sheets.
As of January 27, 2024, the aggregate amount of the transaction price allocated to the remaining performance obligations was $i393,203. Remaining performance obligations related to product and service agreements as of January 27,
2024 were $i328,279 and $i64,924, respectively. We expect approximately $i328,491
of our remaining performance obligations to be recognized over the next i12 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 nine months ended January 27, 2024 and January 28, 2023 was immaterial.
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. iThe following table presents information about net sales and property and equipment, net of accumulated depreciation, in the United States and elsewhere:
Property and equipment, net of accumulated depreciation:
United States
$
i64,496
$
i63,786
Outside
United States
i7,910
i8,361
$
i72,406
$
i72,147
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. iGoodwill
i
The
changes in the carrying amount of goodwill related to each segment with a goodwill balance for the nine months ended January 27, 2024 were as follows:
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. We performed our annual impairment test as of October 29, 2023 and concluded ino goodwill impairment existed.
On May 11, 2023, we closed on a $i75,000 senior credit facility (the "Credit Facility"). The Credit Facility consists of a $i60,000
asset-based revolving credit facility (the "ABL") maturing on May 11. 2026, which is secured by first priority lien on the Company's assets and is subject to certain factors that can impact our borrowing capacity, and a $i15,000 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. iNo gain or loss was recognized upon termination, and the Company
incurred ino early termination penalties in connection with such termination.
Under the ABL, certain factors can impact our borrowing capacity. As of January 27, 2024, our borrowing capacity was $i32,907,
there were ino borrowings outstanding, and there was $i5,426 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 i2.5
to i3.5 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
$i15,000 Delayed Draw Loan was funded on July 7, 2023 and is secured by the Mortgage on the Company's Brookings, South Dakota real estate. It amortizes over i10 years and has monthly payments of $i125.
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 i1.0 and i2.0
percent over the Commercial Bank Floating Rate (CBFR). The interest rate as of January 27, 2024 for Delayed Draw Loan was i9.5 percent.
Convertible Note
On May 11, 2023, we borrowed $i25,000
in aggregate principal amount evidenced by the secured Convertible Note due May 11, 2027. The Convertible Note holder (the "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 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 $i6.31 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.
•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 i9.0 percent when interest is paid in cash or an annual rate of i10.0
percent if interest is paid in kind. Upon an event of default under the Convertible Note, the annual interest rate will increase to i12.0 percent. The annual rate of i9.0 percent was
used to calculate the interest accrued as of January 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 nine months ended January 27, 2024 are as follows:
The estimated fair value of the Convertible Note upon its issuance date of May 11, 2023 and as of January 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.
i
We determined the fair value by using the following key assumptions in the binomial lattice model:
Risk-Free Rate (Annual)
i4.09
%
Implied
Yield
i17.24
%
Volatility (Annual)
i60.00
%
Dividend
Yield (Annual)
i—
%
/
The Credit Agreement and the Convertible Note require a fixed charge coverage ratio of greater than i1.1
and include other customary non-financial covenants. As of January 27, 2024, we were in compliance with our financial covenants under the Credit Agreement and the Convertible Note.
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 $i8,195
in debt issuance costs. During the nine months ended January 27, 2024, due to the Convertible Note being accounted for at fair value, we expensed $i3,353 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 nine months ended January 27, 2024, we amortized $i1,148
of debt issuance costs. The remaining debt issuance costs of $i3,694 are being amortized over the ithree-year term of the Credit Facility.
Future Maturities
i
Aggregate
contractual maturities of debt in future fiscal years are as follows:
Fiscal years ending
Amount
Remainder of 2024
$
i375
2025
i1,500
2026
i1,500
2027
i10,875
2028
i25,000
2029
and beyond
i—
Total debt
$
i39,250
/
Note
8. iCommitments 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.
i
Warranties: Changes in our warranty obligation for the nine months ended January 27, 2024 consisted of the following:
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 January 27, 2024, we had outstanding letters of credit, bank guarantees and surety bonds in the amount of $i5,426, $i163
and $i45,746, 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 ione
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 January 27, 2024, we were not aware of any material indemnification claims.
Note 9. iIncome Taxes
Our
effective tax rate for the three and nine months ended January 27, 2024 was a tax rate of i15.0 and i31.5 percent, respectively. Income before tax includes the impacts of the
change in the Convertible Note fair value; however, these changes are not deductible or taxable, which impacts the effective tax rate. Our effective tax rate for the three months ended January 28, 2023 was a tax rate of i30.5 percent. The rate for the nine months ended January 28, 2023 was skewed by the valuation allowance placed on deferred taxes during the second quarter of fiscal 2023.
We operate both domestically and internationally
and, as of January 27, 2024, the undistributed earnings of our foreign subsidiaries were considered to be reinvested indefinitely. Additionally, as of January 27, 2024, we had $i352 of unrecognized tax benefits which would reduce our effective tax rate if recognized.
Note
10. iFair Value Measurement
i
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 January 27,
2024 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.
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 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.
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 $i120; 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 our Annual Report on Form 10-K for the fiscal year ended April 29, 2023, effective on May 11,
2023, the Company entered into the Securities Purchase Agreement with Alta Fox Opportunities Fund, LP, as the holder (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 $i25,000. 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 i4,768 shares of common stock of the Company, representing i9.99
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 $i25,563, consisting of $i25,000
of principal and $i563 of interest. In the first nine months of fiscal 2024, we have made interest payments of $i1,125 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 29, 2023 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. The Standstill Agreement is filed as Exhibit 10.13 to Company's Annual Report on Form 10-K for the fiscal year ended April 29, 2023.
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 i9.99
percent to i4.99 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 i2,293
shares of common stock on June 9, 2023, representing i4.99 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 nine months of fiscal 2024, the Company and the South Dakota Board of Regents entered into contracts for video display systems for Dakota State University. The amount of the contracts was $i1,178.
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.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
This section entitled "Management’s Discussion and Analysis of Financial Condition and Results of Operations" (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. The MD&A provides a narrative analysis explaining the reasons for material changes in the Company’s (i) financial condition during the period from the most recent fiscal year-end, April 29, 2023, to and including January 27, 2024 and (ii) results of operations during the current fiscal period(s) as compared to the corresponding period(s) of the preceding fiscal year.
This Quarterly Report on Form 10-Q, including the MD&A, contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements reflect our current views with respect to future events and financial performance. The words "may,""would,""could,""should,""will,""expect,""estimate,""anticipate,""believe,""intend,""plan,""forecast,""project" and similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any and all forecasts and projections in this document are “forward-looking statements” and are based on management’s current expectations or beliefs. From time to time, we may also provide oral and written forward-looking statements in other materials we release to
the public, such as press releases, presentations to securities analysts or investors, or other communications by us. Any or all forward-looking statements in this report and in any public statements we make could be materially different from actual results. Accordingly, we wish to caution investors that any forward-looking statements made by or on behalf of us are subject to uncertainties and other factors that could cause actual results to differ materially from such statements. Important factors that may cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, the uncertainties related to market conditions and entry into a financing transaction; the Company’s potential need to seek additional strategic alternatives, including seeking
additional debt or equity capital or other strategic transactions and/or measures; the Company’s ability to finalize or fully execute actions and steps that would be probable of mitigating the existence of any “substantial doubt” regarding the Company’s ability to continue as a going concern; the Company’s ability to increase cash flow to support the Company’s operating activities and fund its obligations and working capital needs; our ability to obtain additional financing on terms favorable to us, or at all; any future goodwill impairment charges; and the other risk factors described more fully in the
Company’s Annual Report on Form 10-K for the fiscal year ended April 29, 2023 filed with the Securities and Exchange Commission, as well as other publicly available information about the Company.
We also wish to caution investors that other factors might in the future prove to be important in affecting our results of operations. New factors emerge from time to time; it is not possible for management to predict all of such factors, nor can it assess the impact of each such factor on the business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
We undertake no obligation to update publicly or revise any forward-looking statements, whether
as a result of new information, future events or otherwise.
Our MD&A should be read in conjunction with the Consolidated Financial Statements and related Notes included in Item 1 of Part 1 of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the fiscal year ended April 29, 2023 (including the information presented therein under Risk Factors), as well as other publicly available information about our Company.
OVERVIEW
We are engaged principally in the design, marketing, and manufacture of a wide range of integrated electronic display systems and related products which
are sold in a variety of markets throughout the world and the rendering of related maintenance and professional services. We focus our sales and marketing efforts on markets, geographical regions and products. Our five business segments consist of four domestic business units and the International business unit. The four domestic business units consist of Commercial, Live Events, High School Park and Recreation, and Transportation, all of which include the geographic territories of the United States and Canada.
The following selected financial data should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended April 29,
2023 and the consolidated financial statements set forth in that Annual Report on Form 10-K, including the notes to consolidated financial statements included therein.
CURRENT CONDITIONS
Our past investments in people and plant capacity and the continued stable supply chain environment have allowed for efficient production and fulfillment of orders. Although the post-pandemic geopolitical situation and global trade patterns continue to evolve, we believe that the levels of uncertainty and volatility in supply chain and demand will not be as great as it was through the pandemic and will continue to stabilize during this fiscal year.
We believe the audiovisual industry fundamentals of increased use of LED display systems across
industries and our development of new technologies, services, and sales channels will drive long-term growth for our Company. Orders and revenue levels are expected to be impacted by the timing of multi-million dollar projects and the impacts of global economic conditions, war and geopolitical situations, or other factors outside of our control.
Backlog represents the dollar value of
orders for integrated electronic display systems and related products and services which are expected to be recognized in net sales in the future. Orders are contractually binding purchase commitments from customers. Orders are included in backlog when we are in receipt of an executed contract and any required deposits or security and have not yet been recognized into net sales. Certain orders for which we have received binding letters of intent or contracts will not be included in backlog until all required contractual documents and deposits are received. Orders and backlog are not measures defined by accounting principles generally accepted in the United States of America ("GAAP"), and our methodology for determining orders and backlog may vary from the methodology used by other
companies in determining their orders and backlog amounts.
Order and backlog levels provide management and investors additional details surrounding the results of our business activities in the marketplace and highlight fluctuations caused by seasonality and multi-million dollar projects. Management uses orders to evaluate market share and performance in the competitive environment. Management uses backlog information for capacity and resource planning. Order fulfillment timing is dependent on customer schedules, supply chain conditions, and our capacity availability. We believe order information is useful to investors because it provides an indication of our market share and future revenues.
Our product order backlog as of January 27, 2024 was $328.3 million as compared to $429.1 million as of January 28,
2023 and $400.7 million at April 29, 2023. The decrease in backlog is trending down to more historical levels as a result of fulfilling orders at a greater pace as supply chain conditions stabilized and production lead times improved, utilizing our increased capacity, and order pace returning to more normalized rates.
We expect to fulfill the backlog as of January 27, 2024 within the next 24 months. The timing of backlog fulfillment may be impacted by project delays resulting from parts availability and other constraints stemming from the supply chain disruptions or by customer site conditions, which are outside our control.
(1)
Orders are not measures defined by GAAP, and our methodology for determining orders may vary from the methodology used by other companies in determining their orders and amounts.
For the fiscal 2024 third quarter, net sales were $170.3 million, a decrease of $14.7 million from net sales in the prior year's third quarter. The third quarter of every year is characterized by seasonally lower volume, and the decrease is attributable to the year-ago period’s unseasonably record revenue driven by high backorder fulfillment resulting from recovery of pandemic-related supply chain challenges and labor availability. The sales decrease was driven by comparatively lower volumes in the Commercial and International business units, partially offset by order fulfillments in the Live Events, High School Park and Recreation, and Transportation business units.
Orders for the third quarter of fiscal
2024 increased by 29.4 percent from the third quarter of fiscal 2023 driven by strong demand in the Live Events business unit, rebounding demand in the Spectacular and Out-of-Home markets in our Commercial business unit, and solid growth in the High School Parks and Recreation and Transportation business units. These higher orders offset an order decrease in the International business unit.
The
gross profit improvement for the third quarter of fiscal 2024 as compared to the same period in fiscal 2023 is due to strategic pricing, greater efficiency of sales volume generation over the cost structure, and a more stable operating environment.
Total warranty costs as a percent of sales for the three months ended January 27, 2024 compared to the same period one year ago increased to 1.9 percent from 1.7 percent.
Contribution
margin is a non-GAAP measure and consists of gross profit less selling expenses. Selling expenses consist primarily of personnel-related costs, travel and entertainment expenses, marketing related expenses (show rooms, product demonstration, depreciation and maintenance, conventions and trade show expenses), the cost of customer relationship management/marketing systems, bad debt expenses, third-party commissions, and other expenses.
Contribution margin as a percent of net sales for the fiscal quarter ended January 27, 2024was positively impacted by the previously discussed impacts on gross profit.
General
and administrative expenses in the third quarter of fiscal 2024 increased as compared to the third quarter of fiscal 2023 primarily due to an increase in personnel-related expenses.
Product design and development expensesin the third quarter of fiscal 2024 increased as compared to the third quarter of fiscal 2023 primarily due to an increase in personnel-related expenses.
We recorded a $4.6 million non-cash goodwill impairment charge during the third quarter of fiscal 2023 that was not repeated in the third quarter of fiscal 2024.
Other expense and debt issuance costs write-off, net
$
(1,000)
(0.6)
%
$
380
(27.5)
%
$
(1,380)
(0.7)
%
Interest
(expense) income, net: The increase in interest income and expense, net for the third quarter of fiscal 2024 compared to the same period one year ago was primarily due to closing in May 2023 on the convertible note (the "Convertible Note") and asset-based and mortgage financings at higher values and interest rates than were in effect under our previous line of credit during the 2023 third quarter.
Change in fair value of Convertible Note: For the three months ended January 27, 2024, we recorded income of $6.3 million related to the change in fair value of the Convertible Note payable, which is accounted for under the fair value option. The fair value change was primarily caused by the decrease in our stock price during the third quarter of fiscal year 2024 compared to the second quarter of fiscal year 2024.
Other
expense, net: The change in other expense, net for the third quarter of fiscal 2024 as compared to the same period one year ago was primarily due to losses recorded for equity method affiliates and foreign currency volatility.
Our effective tax rate for the third quarter of fiscal 2024 was 15.0 percent as compared to an effective tax rate of 30.5 percent for the third quarter of fiscal 2023. The lower tax rate for the third quarter of fiscal 2024 is caused by the reduction in fair value adjustment to income that is not taxable.
(1)
Orders are not measures defined by GAAP, and our methodology for determining orders may vary from the methodology used by other companies in determining their orders and amounts.
For the first nine months of fiscal 2024, net sales were $602.2 million, an increase of $57.9 million from the prior year's first nine-month period. This increase was primarily due to higher throughput from our past investments in capacity and the more stable operating environment. During the nine-month period ended January 28, 2023, we faced material supply and labor shortages which extended lead times and delayed the conversion of orders into sales.
Order volume increased in the first nine months of fiscal 2024 from the prior year's nine-month period. Higher orders from customers in the Live Events, High School Park and Recreation, and Transportation business
units offset decreases in the Spectacular and Out-of-Home markets in our Commercial business unit. The change in the Commercial business unit was caused by volatility in bookings of larger sized Spectacular LED video displays projects and a contraction in advertising spend. Orders in the International business unit in the first nine months of fiscal 2024 were lower due to a weakening economic outlook relating to inflationary pressures, geopolitical events, and currency headwinds.
The
increase in gross profit percentage in the nine months ended January 27, 2024 as compared to the same nine-month period in fiscal 2023 is attributable to the record sales volume over our fixed manufacturing cost structure, past strategic pricing actions, stabilization of input costs, and fewer supply chain and operational disruptions during the first nine months of fiscal 2024 as compared to a year earlier. The effect of employee benefit programs activation in fiscal year 2024 reduced gross profit by $2.8 million in the nine months ended January 27, 2024.
Total warranty costs as a percent of sales for the nine months ended January 27, 2024
compared to the same period one year ago increased to 2.1 percent from 2.0 percent.
Contribution
margin is a non-GAAP measure and consists of gross profit less selling expenses. Selling expenses consist primarily of personnel-related costs, travel and entertainment expenses, marketing related expenses (show rooms, product demonstration, depreciation and maintenance, conventions and trade show expenses), the cost of customer relationship management/marketing systems, bad debt expenses, third-party commissions, and other expenses.
Contribution margin for the first nine months of fiscal 2024 was positively impacted by the previously discussed sales levels and impacts on gross profit. Employee benefit programs activation reduced contribution margin by $1.0 million in the nine months ended January 27, 2024.
Reconciliation from non-GAAP contribution margin to the operating
income GAAP measure is as follows:
General and administrative expenses in the first nine months of fiscal 2024 increased primarily due to an increase in personnel-related
expenses.
Product design and development expensesin the first nine months of fiscal 2024 increased as compared to the first nine months of fiscal 2023 primarily due to an increase in personnel-related expenses.
We recorded a $4.6 million non-cash goodwill impairment charge during the third quarter of fiscal 2023 that was not repeated in the third quarter of fiscal 2024.
Other expense and debt issuance costs write-off, net
$
(6,282)
(1.0)
%
$
(3,947)
169.0
%
$
(2,335)
(0.4)
%
Interest
(expense) income, net: The increase in interest income and expense, net in the first nine months of fiscal 2024 compared to the same period one year ago was primarily due to closing in May 2023 on the Convertible Note and asset-based and mortgage financings at higher values and interest rates than the utilization of our previous line of credit during the first nine months of fiscal 2023.
Change in fair value of Convertible Note: For the nine months ended January 27, 2024, we recorded an expense of $11.6 million related to the change in fair value of the Convertible Note payable which is accounted for under the fair value option. The fair value change was primarily caused by the increase in our stock price over the conversion price and the decline in market interest rates making the value of potentially converted shares higher than
at the debt issuance.
Other expense, net: The change in other expense, net for the first nine months of fiscal 2024 as compared to the same period one year ago was primarily due to losses recorded for equity method affiliates and foreign currency volatility and expensing of $3.4 million of debt issuance costs related to the Convertible Note carried at fair value.
Income Tax
We have recorded an effective tax rate of 31.5 percent for the nine months ended January 27, 2024. The tax rate for the first nine months of fiscal 2024 is caused by the fair value adjustment to expense that is not deductible for tax purposes. The effective tax rate for the first nine months of fiscal 2023 was skewed due a full valuation allowance placed on deferred
taxes. Absent any major tax changes, we expect our full year effective tax rate to be in the mid-twenties, before the impacts of fair value accounting for the Convertible Note.
Net
increase (decrease) in cash, cash equivalents and restricted cash
$
52,503
$
(7,278)
$
59,781
Net cash provided by (used in) operating activities: Net cash provided by operating activities was $53.8 million for the first nine months of fiscal 2024 compared to net cash used in operating activities of $9.5 million in the first nine months of fiscal 2023. The $63.3 million change in cash provided by (used in) operating activities was primarily the result of an increase in net income of $46.7 million in the first nine months of fiscal
2024 compared to the same period in fiscal 2023 as strategic pricing actions and operating conditions improved, the $11.6 million of non-cash fair value change of our Convertible Note impacting net income, and improved working capital positions. We also had strategically invested in inventory through the first nine months of fiscal 2023 as a reaction to supply chain constraints and historic backlog, which consumed cash. Since January 28, 2023, we have reduced inventory and related payables for inventory as we reduced backlog and generated cash from inventory reduction. Increases in contract asset levels have used some cash for working capital because of business increases.
The changes in net operating assets and liabilities consisted of the following:
Net cash used in investing activities: Net cash used in investing activities totaled $17.1 million in the first nine months of fiscal 2024 compared to net cash used in investing activities of $20.9 million in the first nine months of fiscal 2023. Purchases of property and equipment totaled $13.6 million in the first nine months of fiscal 2024 compared to $21.8 million in the first nine months of fiscal 2023. Fiscal 2023 purchases were higher because of initiatives to upgrade existing or purchase new manufacturing equipment for capacity and automation.
Net cash provided by financing activities: Net cash provided by financing activities was $15.7 million for the nine months ended January 27, 2024 due to cash provided by the closing of a $25.0 million Convertible Note
financing and the $15.0 million mortgage financing offset by the payoff of our previous credit line of $17.8 million, expending $6.8 million of debt issuance costs, and principal payments on the mortgage, as compared to $23.5 million of cash provided by financing due to draws on our line of credit in the first nine months of fiscal 2023.
Debt and cash
We maintain a $60.0 million asset-based revolving credit facility ("ABL") with a maturity date of May 11, 2027 subject to customary covenants and conditions. As of January 27, 2024, we had no borrowings against the ABL and $5.4 million used to secure letters of credit outstanding. We also have a mortgage of $14.3 million secured by a first priority lien on our Brookings, South Dakota real estate and $25.0
million evidenced by the Convertible Note secured by a second priority lien on assets securing the ABL facility and a first priority lien on substantially all the other assets of the Company, excluding all real property.
As of January 27, 2024, we had $76.8 million in cash and cash equivalents and $32.9 million in borrowing capacity under our ABL. We believe cash flow from operations, existing lines of credit, and access to debt and capital markets will be sufficient to meet our current liquidity needs, and we have committed liquidity and cash reserves in excess of our anticipated funding requirements.
Our cash and cash equivalent balances consist of high-quality, short-term money market instruments.
Working
Capital
Working capital was $205.3 million and $132.5 million as of January 27, 2024 and April 29, 2023, respectively. We had $10.4 million of retainage on long-term contracts included in receivables and contract assets as of January 27, 2024 which we expect to collect within one year and which are included in the short-term asset portion of working capital.
Other Liquidity and Capital Uses
We are sometimes required to obtain performance bonds for display installations; we have a bonding line available through surety
companies for an aggregate of $190.0 million in bonded work outstanding. If we were unable to complete the installation work, and our customer would call upon the bond for payment, the surety company would subrogate its loss to Daktronics. As of January 27, 2024, we had $45.7 million of bonded work outstanding.
Our business growth and profitability improvement strategies depend on investments in capital expenditures and strategic investments. We are projecting total fiscal 2024 capital expenditures to be approximately $19 million, of which we have incurred $13.6 million for the first nine months of the fiscal 2024. Projected capital expenditures include purchasing manufacturing equipment for new or enhanced product production and expanded capacity and increased automation of processes; investments in quality and reliability equipment and demonstration and showroom assets; and
continued information infrastructure investments.
We also evaluate and may make strategic investments in new technologies or in our affiliates or acquire companies aligned with our business strategy. We are committed to invest an additional $0.8 million for the remainder of fiscal 2024 in our current affiliates. We may make additional investments beyond our commitments.
Contractual Obligations and Commercial Commitments
During the first nine months of fiscal 2024, we entered into a new credit facility and mortgage and the Convertible Note as disclosed herein. There have been no other material changes in our contractual obligations since the end of fiscal 2023. See our Annual Report on Form 10-K for the fiscal year ended April 29, 2023 for additional information regarding our contractual
obligations and commercial commitments.
We describe our significant accounting policies in "Note 1. Nature of Business and Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended April 29, 2023. We discuss our critical accounting estimates in "Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K for the fiscal year ended
April 29, 2023.
New Accounting Pronouncements
For a summary of recently issued accounting pronouncements and the effects of those pronouncements on our financial results, refer to "Note 1. Basis of Presentation" of the Notes to the Condensed Consolidated Financial Statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain interest rate, foreign currency, and commodity risks as disclosed in our Annual Report on Form 10-K for the fiscal year ended April 29, 2023. During the first quarter of fiscal 2024, we entered into the ABL and the
$15.0 million delayed draw loan, which are subject to interest rate risks.
There have been no other material changes in our exposure to these risks during the first nine months of fiscal 2024.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Management of our Company is responsible for establishing and maintaining effective disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934. As of January 27, 2024, an evaluation was performed, under the supervision
and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of January 27, 2024, our disclosure controls and procedures were not effective due to the material weakness in internal control over financial reporting described below.
Notwithstanding this identified material weakness, our Chief Executive Officer and Chief Financial Officer believe the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly represent, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United
States of America. We are in the process of remediating the material weakness in our internal control, as described below under the section entitled "Remediation Plan".
Material Weakness in Internal Control Over Financial Reporting
In Part 2, Item 9A of our Annual Report on Form 10-K for the fiscal year ended April 29, 2023, which was filed with the Securities and Exchange Commission on July 12, 2023, management concluded that our internal control over financial reporting was not effective as of April 29, 2023. Management identified a material weakness related to the ineffective operation of certain transactional level controls related to revenue contracts
recognized over time. These controls operated ineffectively due to insufficient training of the control operators as to the level of precision expected when executing the revenue controls in accordance with the Company's policy.
Remediation Plan
Our remediation plan includes providing training to the revenue control operators relating to the level of precision expected when executing these controls in accordance with the Company's policy. During the first nine months of fiscal 2024, we conducted additional training of our control operators. In conjunction with the training, management made enhancements to improve and ensure operation of certain transactional level controls.
Changes
in Internal Control Over Financial Reporting
During the quarter ended January 27, 2024, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item
1. LEGAL PROCEEDINGS
We are involved in a variety of legal actions relating to various matters during the normal course of business. Although we are unable to predict the ultimate outcome of these legal actions, it is the opinion of management that the disposition of these matters, taken as a whole, will not have a material adverse effect on our financial condition or results of operations. See "Note 8. Commitments and Contingencies" of the Notes to our Condensed Consolidated Financial Statements included in this Form 10-Q for further information on any legal proceedings and claims.
Item 1A. RISK FACTORS
The discussion of our business and operations included in this Quarterly Report on Form 10-Q should be read together
with the risk factors described in Item 1A. of Part I of our Annual Report on Form 10-K for the fiscal year ended April 29, 2023. They describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties, together with other factors described elsewhere in this Report, have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. New risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect our financial condition or financial results.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Share Repurchases
During
the three months ended January 27, 2024, we did not repurchase any shares of our common stock.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 5. OTHER INFORMATION
Not applicable.
Item
6. EXHIBITS
A list of exhibits filed as part of this Report is set forth in the following Index to Exhibits.
Certain of the following exhibits are incorporated by reference from prior filings. The form with which each exhibit was filed and the date of filing are as indicated below; the reports
described below are filed as Commission File No. 001-38747 unless otherwise indicated.
Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
