UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended October 28, 2023
or
For the transition period from ___ to ___.
Commission File Number: 0-23246
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||||||||
| (Address of Principal Executive Offices) (Zip Code) | |||||||||||
(605 ) 692-0200
(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 | ||||||
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. Yes x 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). Yes x 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 | ||||||||||
| x | |||||||||||
| Non-accelerated filer | o | ||||||||||
| Smaller reporting company | |||||||||||
| Emerging growth company | |||||||||||
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 o No x
The number of shares of the registrant’s common stock outstanding as of November 27, 2023 was 46,180,166 .
DAKTRONICS, INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended October 28, 2023
Table of Contents
| Page | ||||||||
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data) (unaudited)
| October 28, 2023 | April 29, 2023 | ||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Marketable securities | |||||||||||
| Accounts receivable, net | |||||||||||
| Inventories | |||||||||||
| Contract assets | |||||||||||
| Current maturities of long-term receivables | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Income tax receivables | |||||||||||
| Total current assets | |||||||||||
| Property and equipment, net | |||||||||||
| Long-term receivables, less current maturities | |||||||||||
| Goodwill | |||||||||||
| Intangibles, net | |||||||||||
| Debt issuance costs, net | |||||||||||
| Investment in affiliates and other assets | |||||||||||
| Deferred income taxes | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
1
DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(in thousands, except per share data) (unaudited)
| October 28, 2023 | April 29, 2023 | ||||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | |||||||||||
| CURRENT LIABILITIES: | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Contract liabilities | |||||||||||
| Accrued expenses | |||||||||||
| Warranty obligations | |||||||||||
| Income taxes payable | |||||||||||
| Total current liabilities | |||||||||||
| Long-term warranty obligations | |||||||||||
| Long-term contract liabilities | |||||||||||
| Other long-term obligations | |||||||||||
| Long-term debt, net | |||||||||||
| Deferred income taxes | |||||||||||
| Total long-term liabilities | |||||||||||
| SHAREHOLDERS' EQUITY: | |||||||||||
Preferred Shares, no par value, authorized | |||||||||||
Common Stock, no par value, authorized | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
Treasury Stock, at cost, | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| TOTAL SHAREHOLDERS' EQUITY | |||||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | $ | |||||||||
See notes to condensed consolidated financial statements.
2
DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| October 28, 2023 | October 29, 2022 | October 28, 2023 | October 29, 2022 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Product design and development | |||||||||||||||||||||||
| Operating income (loss) | ( | ||||||||||||||||||||||
| Nonoperating (expense) income: | |||||||||||||||||||||||
| Interest (expense) income, net | ( | ( | ( | ( | |||||||||||||||||||
| Change in fair value of convertible note | ( | ( | |||||||||||||||||||||
| Other expense and debt issuance costs write-off, net | ( | ( | ( | ( | |||||||||||||||||||
| Income (loss) before income taxes | ( | ||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Weighted average shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
| Earnings (loss) per share: | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
See notes to condensed consolidated financial statements.
3
DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| October 28, 2023 | October 29, 2022 | October 28, 2023 | October 29, 2022 | ||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Other comprehensive (loss): | |||||||||||||||||||||||
| Cumulative translation adjustments | ( | ( | ( | ( | |||||||||||||||||||
| Unrealized gain (loss) on available-for-sale securities, net of tax | ( | ||||||||||||||||||||||
| Total other comprehensive (loss), net of tax | ( | ( | ( | ( | |||||||||||||||||||
| Comprehensive income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
See notes to condensed consolidated financial statements.
4
DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
(unaudited)
| Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||||||||||
| Balance as of April 29, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Cumulative translation adjustments | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Unrealized gain on available-for-sale securities, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options | — | — | — | — | |||||||||||||||||||||||||||||||
| Employee savings plan activity | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance as of July 29, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||
| Cumulative translation adjustments | ( | ( | |||||||||||||||||||||||||||||||||
| Unrealized gain on available-for-sale securities, net of tax | |||||||||||||||||||||||||||||||||||
| Share-based compensation | |||||||||||||||||||||||||||||||||||
| Exercise of stock options | |||||||||||||||||||||||||||||||||||
| Tax payments related to RSU issuances | ( | ( | |||||||||||||||||||||||||||||||||
| Balance as of October 28, 2023 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
See notes to condensed consolidated financial statements.
5
DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(continued)
(in thousands)
(unaudited)
| Common Stock | Additional Paid-In Capital | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||||||||||||
| Balance as of April 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Cumulative translation adjustments | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Unrealized gain (loss) on available-for-sale securities, net of tax | — | — | — | — | |||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Employee savings plan activity | — | — | — | — | |||||||||||||||||||||||||||||||
| Balance as of July 30, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
| Net loss | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Cumulative translation adjustments | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Unrealized gain (loss) on available-for-sale securities, net of tax | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | |||||||||||||||||||||||||||||||
| Tax payments related to RSU issuances | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||
| Balance as of October 29, 2022 | $ | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||
See notes to condensed consolidated financial statements.
6
DAKTRONICS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
| Six Months Ended | |||||||||||
| October 28, 2023 | October 29, 2022 | ||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Loss (gain) on sale of property, equipment and other assets | ( | ||||||||||
| Share-based compensation | |||||||||||
| Equity in loss of affiliates | |||||||||||
| Provision for doubtful accounts, net | |||||||||||
| Deferred income taxes, net | |||||||||||
| Non-cash impairment charges | |||||||||||
| Change in fair value of convertible note | |||||||||||
| Debt issuance costs write-off | |||||||||||
| Change in operating assets and liabilities | ( | ( | |||||||||
| Net cash provided by (used in) operating activities | ( | ||||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Purchases of property and equipment | ( | ( | |||||||||
| Proceeds from sales of property, equipment and other assets | |||||||||||
| Proceeds from sales or maturities of marketable securities | |||||||||||
| Purchases of equity and loans to equity investees | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Borrowings on notes payable | |||||||||||
| Payments on notes payable | ( | ( | |||||||||
| Principal payments on long-term obligations | ( | ||||||||||
| Debt issuance costs | ( | ||||||||||
| Proceeds from exercise of stock options | |||||||||||
| Tax payments related to RSU issuances | ( | ( | |||||||||
| Net cash provided by financing activities | |||||||||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | ( | ||||||||||
| NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | ( | ||||||||||
| CASH, CASH EQUIVALENTS AND RESTRICTED CASH: | |||||||||||
| Beginning of period | |||||||||||
| End of period | $ | $ | |||||||||
| Supplemental disclosures of cash flow information: | |||||||||||
| Cash paid for: | |||||||||||
| Interest | $ | $ | |||||||||
| Income taxes, net of refunds | |||||||||||
| Supplemental schedule of non-cash investing and financing activities: | |||||||||||
| Purchases of property and equipment included in accounts payable | |||||||||||
| Contributions of common stock under the ESPP | |||||||||||
See notes to condensed consolidated financial statements.
7
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollar amounts in thousands, except per share data)
(unaudited)
Note 1. Basis of Presentation
Daktronics, Inc. and its subsidiaries (the “Company”, “Daktronics”, “we”, “our”, or “us”) are industry leaders in designing and manufacturing electronic scoreboards, programmable display systems and large screen video displays for sporting, commercial and transportation applications.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring adjustments) necessary to fairly present our financial position, results of operations and cash flows for the periods presented. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make estimates and assumptions affecting the reported amounts of assets and liabilities, revenues and expenses, and the disclosure of contingent liabilities. Estimates used in the preparation of the unaudited consolidated financial statements include, among others, revenue recognition, future warranty expenses, the fair value of long-term debt, the fair value of investments in affiliates, income tax expenses, and stock-based compensation. Due to the inherent uncertainty involved in making estimates, actual results in future periods may differ from those estimates.
Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The balance sheet at April 29, 2023 has been derived from the audited financial statements at that date, but it does not include all the information and disclosures required by GAAP for complete financial statements. These financial statements should be read in conjunction with our financial statements and notes thereto for the fiscal year ended April 29, 2023, which are contained in our Annual Report on Form 10-K previously filed with the Securities and Exchange Commission ("SEC"). The results of operations for the interim periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.
Daktronics, Inc. operates on a 52- or 53-week fiscal year, with our fiscal year ending on the Saturday closest to April 30 of each year. When April 30 falls on a Wednesday, the fiscal year ends on the preceding Saturday. Within each fiscal year, each quarter is comprised of 13-week periods following the beginning of each fiscal year. In each 53-week fiscal year, an additional week is added to the first quarter, and each of the last three quarters is comprised of a 13-week period. The six months ended October 28, 2023 and October 29, 2022 contained operating results for 26 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
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets that sum to the totals of the same amounts shown in the condensed consolidated statements of cash flows. Restricted cash consists of cash and cash equivalents held in bank deposit accounts to secure issuances of foreign bank guarantees and letters of credit outstanding under a previous credit agreement.
| October 28, 2023 | October 29, 2022 | ||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash | |||||||||||
| Total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows | $ | $ | |||||||||
The increase in the restricted cash balance is due to bank guarantees or other financial instruments for display installations issued by other banks and secured by restricted cash deposits.
We have foreign currency cash accounts to operate our global business. These accounts are impacted by changes in foreign currency rates. Of our $64,740 in cash and cash equivalent balances as of October 28, 2023, $54,245 were denominated in United States dollars, of which $737 were held by our foreign subsidiaries. As of October 28, 2023, we had an additional
8
$10,495 in cash balances denominated in foreign currencies, of which $8,466 were maintained in accounts of our foreign subsidiaries.
Recent Accounting Pronouncements
Accounting Standards Adopted
In August 2020, the Financial Accounting Standards Board 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. This ASU (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. Upon adoption, we prospectively utilized the if-converted method to calculate the dilutive impact of our convertible note issued on May 11, 2023 (the "Convertible Note"). See "Note 6. 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
Note 2. Investments 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 $9,819 and $11,934 as of October 28, 2023 and April 29, 2023, respectively. Our proportional share of the respective affiliates' earnings or losses is included in the "Other expense and debt issuance costs write-off, net" line item in our condensed consolidated statements of operations. For the three and six months ended October 28, 2023, our share of the losses of our affiliates was $771 and $1,461 as compared to $811 and $1,701 for the three and six months ended October 29, 2022.
We purchased services for research and development activities from our equity method investees. The total of these related party transactions for the six months ended October 28, 2023 and October 29, 2022 was $123 and $672 , respectively, which is included in the "Product design and development" line item in our condensed consolidated statements of operations, and for the six months ended October 28, 2023, $14 remains unpaid and is included in the "Accounts payable" line item in our condensed consolidated balance sheets.
During the six months ended October 28, 2023, we invested $2,250 in convertible notes and $649 in promissory notes (collectively, the "Affiliate Notes") of our affiliates, which is included in the "Investment in affiliates and other assets" line item in our condensed consolidated balance sheets. During the six months ended October 28, 2023, we did not convert any Affiliate Notes to stock ownership. Our ownership in Miortech was 55.9 percent and in XdisplayTM was 16.4 percent as of October 28, 2023. The total amount of Affiliate Notes as of October 28, 2023 was $11,663 and is included in the "Investments in affiliates and other assets" line item in our condensed consolidated balance sheets. The Affiliate Notes
9
balance combined with the investment in affiliates balance totaled $21,483 and $25,343 as of October 28, 2023 and October 29, 2022, respectively.
Note 3. Earnings Per Share ("EPS")
In the first quarter of fiscal 2024, we adopted ASU 2020-06. Upon adoption, we prospectively utilized the if-converted method to calculate the dilutive impact of our Convertible Note. See "Note 6. Financing Agreements" of the Notes to our Condensed Consolidated Financial Statements included in this Form 10-Q for further information on the Convertible Note.
Under the if-converted method, the Convertible Note is assumed to be converted into common stock at the beginning of the reporting period, and the resulting shares are included in the denominator of the calculation. In addition, interest charges, net of any income tax effects, are added back to the numerator of the calculation. The following is a reconciliation of the net income (loss) and common share amounts used in the calculation of basic and diluted EPS for the three and six months ended October 28, 2023 and October 29, 2022:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| October 28, 2023 | October 29, 2022 | October 28, 2023 | October 29, 2022 | ||||||||||||||||||||
| Earnings per share - basic | |||||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Weighted average shares outstanding | |||||||||||||||||||||||
| Basic earnings (loss) per share | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Earnings per share - diluted | |||||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Diluted net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Weighted average common shares outstanding | |||||||||||||||||||||||
| Dilution associated with stock compensation plans | |||||||||||||||||||||||
| Dilution associated with convertible note | |||||||||||||||||||||||
| Weighted average common shares outstanding, assuming dilution | |||||||||||||||||||||||
| Diluted earnings (loss) per share | $ | $ | ( | $ | $ | ( | |||||||||||||||||
Options outstanding to purchase 521 shares of common stock with a weighted average exercise price of $10.76 for the three months ended October 28, 2023 and 2,063 shares of common stock with a weighted average exercise price of $7.51 for the three months ended October 29, 2022 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
Options outstanding to purchase 1,039 shares of common stock with a weighted average exercise price of $9.53 for the six months ended October 28, 2023 and 2,082 shares of common stock with a weighted average exercise price of $7.82 for the six months ended October 29, 2022 were not included in the computation of diluted earnings per share because the effects would be anti-dilutive.
10
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 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 October 28, 2023 | |||||||||||||||||||||||||||||||||||
| Commercial | Live Events | High School Park and Recreation | Transportation | International | Total | ||||||||||||||||||||||||||||||
| Type of performance obligation | |||||||||||||||||||||||||||||||||||
| Unique configuration | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Limited configuration | |||||||||||||||||||||||||||||||||||
| Service and other | |||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Timing of revenue recognition | |||||||||||||||||||||||||||||||||||
| Goods/services transferred at a point in time | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Goods/services transferred over time | |||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Six Months Ended October 28, 2023 | |||||||||||||||||||||||||||||||||||
| Commercial | Live Events | High School Park and Recreation | Transportation | International | Total | ||||||||||||||||||||||||||||||
| Type of performance obligation | |||||||||||||||||||||||||||||||||||
| Unique configuration | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Limited configuration | |||||||||||||||||||||||||||||||||||
| Service and other | |||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Timing of revenue recognition | |||||||||||||||||||||||||||||||||||
| Goods/services transferred at a point in time | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Goods/services transferred over time | |||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
11
| Three Months Ended October 29, 2022 | |||||||||||||||||||||||||||||||||||
| Commercial | Live Events | High School Park and Recreation | Transportation | International | Total | ||||||||||||||||||||||||||||||
| Type of performance obligation | |||||||||||||||||||||||||||||||||||
| Unique configuration | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Limited configuration | |||||||||||||||||||||||||||||||||||
| Service and other | |||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Timing of revenue recognition | |||||||||||||||||||||||||||||||||||
| Goods/services transferred at a point in time | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Goods/services transferred over time | |||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Six Months Ended October 29, 2022 | |||||||||||||||||||||||||||||||||||
| Commercial | Live Events | High School Park and Recreation | Transportation | International | Total | ||||||||||||||||||||||||||||||
| Type of performance obligation | |||||||||||||||||||||||||||||||||||
| Unique configuration | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Limited configuration | |||||||||||||||||||||||||||||||||||
| Service and other | |||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
| Timing of revenue recognition | |||||||||||||||||||||||||||||||||||
| Goods/services transferred at a point in time | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||
| Goods/services transferred over time | |||||||||||||||||||||||||||||||||||
| $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||
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 the customers in excess of revenue recognized to date.
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The following table reflects the changes in our contract assets and liabilities:
| October 28, 2023 | April 29, 2023 | Dollar Change | Percent Change | ||||||||||||||||||||
| Contract assets | $ | $ | $ | ( | ( | % | |||||||||||||||||
| Contract liabilities - current | ( | ( | |||||||||||||||||||||
| Contract liabilities - noncurrent | |||||||||||||||||||||||
The changes in our contract assets and contract liabilities from April 29, 2023 to October 28, 2023 were due to the timing of billing schedules and revenue recognition, which can vary significantly depending on the contractual payment terms and the seasonality of the sports markets. We had no impairments of contract assets for the six months ended October 28, 2023.
For service-type warranty contracts, we allocate revenue to this performance obligation, recognize the revenue over time, and recognize costs as incurred. Earned and unearned revenues for these contracts are included in the "Contract assets" and "Contract liabilities". Changes in unearned service-type warranty contracts, net were as follows:
| October 28, 2023 | |||||
| Balance as of April 29, 2023 | $ | ||||
| New contracts sold | |||||
| Less: reductions for revenue recognized | ( | ||||
| Foreign currency translation and other | ( | ||||
| Balance as of October 28, 2023 | $ | ||||
Contracts in progress identified as loss contracts as of October 28, 2023 and as of April 29, 2023 were immaterial. Loss provisions are recorded in the "Accrued expenses" line item in our condensed consolidated balance sheets.
During the six months ended October 28, 2023, we recognized revenue of $77,788 related to our contract liabilities as of April 29, 2023.
Remaining performance obligations
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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 | Six Months Ended | ||||||||||||||||||||||
| October 28, 2023 | October 29, 2022 | October 28, 2023 | October 29, 2022 | ||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| Commercial | $ | $ | $ | $ | |||||||||||||||||||
| Live Events | |||||||||||||||||||||||
| High School Park and Recreation | |||||||||||||||||||||||
| Transportation | |||||||||||||||||||||||
| International | |||||||||||||||||||||||
| Gross profit: | |||||||||||||||||||||||
| Commercial | |||||||||||||||||||||||
| Live Events | |||||||||||||||||||||||
| High School Park and Recreation | |||||||||||||||||||||||
| Transportation | |||||||||||||||||||||||
| International | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Selling | |||||||||||||||||||||||
| General and administrative | |||||||||||||||||||||||
| Product design and development | |||||||||||||||||||||||
| Operating income (loss) | ( | ||||||||||||||||||||||
| Nonoperating (expense) income: | |||||||||||||||||||||||
| Interest (expense) income, net | ( | ( | ( | ( | |||||||||||||||||||
| Change in fair value of convertible note | ( | ( | |||||||||||||||||||||
| Other expense and debt issuance costs write-off, net | ( | ( | ( | ( | |||||||||||||||||||
| Income (loss) before income taxes | $ | $ | $ | $ | ( | ||||||||||||||||||
| Depreciation and amortization: | |||||||||||||||||||||||
| Commercial | $ | $ | $ | $ | |||||||||||||||||||
| Live Events | |||||||||||||||||||||||
| High School Park and Recreation | |||||||||||||||||||||||
| Transportation | |||||||||||||||||||||||
| International | |||||||||||||||||||||||
| Unallocated corporate depreciation and amortization | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
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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:
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| October 28, 2023 | October 29, 2022 | October 28, 2023 | October 29, 2022 | ||||||||||||||||||||
| Net sales: | |||||||||||||||||||||||
| United States | $ | $ | $ | $ | |||||||||||||||||||
| Outside United States | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| October 28, 2023 | April 29, 2023 | ||||||||||
| Property and equipment, net of accumulated depreciation: | |||||||||||
| United States | $ | $ | |||||||||
| Outside United States | |||||||||||
| $ | $ | ||||||||||
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. Financing Agreements
Long-term debt consists of the following:
| October 28, 2023 | April 29, 2023 | ||||||||||
| ABL credit facility/prior line of credit | $ | $ | |||||||||
| Mortgage | |||||||||||
| Convertible note | |||||||||||
| Long-term debt, gross | |||||||||||
| Debt issuance costs, net | ( | ||||||||||
| Change in fair value of convertible note | |||||||||||
| Current portion | ( | ||||||||||
| Long-term debt, net | $ | $ | |||||||||
Credit Agreements
On May 11, 2023, we closed on a $75,000 senior credit facility (the "Credit Facility"). The Credit Facility consists of a $60,000 asset-based revolving credit facility (the "ABL") maturing on May 11. 2026, secured by first priority lien on the Company's assets and which is subject to certain factors which can impact our borrowing capacity, and a $15,000 delayed draw loan (the "Delayed Draw Loan") secured by a first priority mortgage on our Brookings, South Dakota real estate (the "Mortgage"). The ABL and Delayed Draw Loan are evidenced by a Credit Agreement dated as of May 11, 2023 (the "Credit Agreement") between the Company and JPMorgan Chase Bank, N.A., as the lender. On May 11, 2023 the Company paid all amounts outstanding on the prior credit agreement, and this prior credit agreement was terminated as of
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this date. No gain or loss was recognized upon termination, and the Company incurred no early termination penalties in connection with such termination.
Under the ABL, certain factors can impact our borrowing capacity. As of October 28, 2023, our borrowing capacity was $50,611 , there were no borrowings outstanding and there was $5,875 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 ABL is secured by a first priority lien on the Company's assets described in the Credit Agreement and the Pledge and Security Agreement dated as of May 11, 2023 by and among the Company, Daktronics Installation, Inc. and JPMorgan Chase Bank, N.A.
The $15,000 Delayed Draw Loan was funded on July 7, 2023 and is secured by the Mortgage on the Company's Brookings, South Dakota real estate. It amortizes over 10 years and has monthly payments of $125 . The Delayed Draw Loan is subject to the terms of the Credit Agreement and matures on May 11, 2026. The interest rate on the Delayed Draw Loan is set on a sliding scale based on the trailing 12-month fixed charge coverage ratio and ranges between 1.0 and 2.0 percent over the Commercial Bank Floating Rate (CBFR).
Convertible Note
On May 11, 2023, we issued $25,000 in aggregate principal amount evidenced by the secured Convertible Note due May 11, 2027. The Convertible Note holder (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 $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.
•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 October 28, 2023, as interest will be paid in cash.
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We elected the fair value option to account for the Convertible Note as described in "Note 9. Fair Value Measurement" of the Notes to our Condensed Consolidated Financial Statements included in this Form 10-Q for further information. The financial liability was initially measured at its issue-date fair value and is subsequently remeasured at fair value on a recurring basis at each reporting period date. We have elected to present the fair value and the accrued interest component separately in the income statement. Therefore, interest will be recognized and accrued separately in interest expense, with changes in fair value of the 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 six months ended October 28, 2023 are as follows:
| Liability Component | |||||
| (in thousands) | |||||
| Balance as of May 11, 2023 | $ | ||||
| Redemption of convertible promissory note | |||||
| Fair Value Change Recognized | |||||
| Balance as of October 28, 2023 | $ | ||||
The estimated fair value of the Convertible Note upon its issuance date of May 11, 2023 and as of October 28, 2023 was computed using a binomial lattice model which incorporates significant inputs that are not observable in the market, and thus represents a Level 3 measurement.
We determined the fair value by using the following key assumptions in the binomial lattice model:
| Risk-Free Rate (Annual) | % | ||||
| Implied Yield | % | ||||
| Volatility (Annual) | % | ||||
| 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 October 28, 2023, 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 six months ended October 28, 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 six months ended October 28, 2023, we amortized $744 of debt issuance costs. The remaining debt issuance costs of $4,098 are being amortized over the three-year term of the Credit Facility agreement.
Fair Value and Future Maturities
As of October 28, 2023 and April 29, 2023, the fair value of long-term debt, gross was $57,535 and $17,750 , respectively. The fair value of the Convertible Note was $42,910 as of October 28, 2023.
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Aggregate contractual maturities of debt in future fiscal years are as follows:
| Fiscal years ending | Amount | ||||
| Remainder of 2024 | $ | ||||
| 2025 | |||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| 2029 and beyond | |||||
| Total senior secured notes and convertible notes | $ | ||||
Note 7. 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 six months ended October 28, 2023 consisted of the following:
| October 28, 2023 | |||||
| Balance as of April 29, 2023 | $ | ||||
| Warranties issued during the period | |||||
| Settlements made during the period | ( | ||||
| Changes in accrued warranty obligations for pre-existing warranties during the period, including expirations | |||||
| Balance as of October 28, 2023 | $ | ||||
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 October 28, 2023, we had outstanding letters of credit, bank guarantees and surety bonds in the amount of $5,875 , $558 and $40,633 , 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 October 28, 2023, we were not aware of any material indemnification claims.
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Note 8. Income Taxes
Our effective tax rate for the three and six months ended October 28, 2023 was a tax rate of 64.8 and 37.6 percent, respectively. Income before tax includes the impacts of the change in the Convertible Note fair value; however, these changes are not deductible, resulting in the high effective tax rate. The rates for the three and six months ended October 29, 2022 were skewed by the valuation allowance placed on deferred taxes.
We operate both domestically and internationally and, as of October 28, 2023, undistributed earnings of our foreign subsidiaries were considered to be reinvested indefinitely. Additionally, as of October 28, 2023, we had $527 of unrecognized tax benefits which would reduce our effective tax rate if recognized.
Note 9. 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 October 28, 2023 and April 29, 2023 according to the valuation techniques we used to determine their fair values. There have been no transfers of assets or liabilities among the fair value hierarchies presented.
| Fair Value Measurements | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||
| Balance as of October 28, 2023 | |||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Restricted cash | |||||||||||||||||||||||
| Convertible Note Payable | |||||||||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||
| US Government sponsored entities | |||||||||||||||||||||||
| $ | $ | $ | $ | ||||||||||||||||||||
| Balance as of April 29, 2023 | |||||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | $ | |||||||||||||||||||
| Restricted cash | |||||||||||||||||||||||
| Available-for-sale securities: | |||||||||||||||||||||||
| US Government sponsored entities | |||||||||||||||||||||||
| Derivatives - liability position | ( | ( | |||||||||||||||||||||
| $ | $ | ( | $ | $ | |||||||||||||||||||
We elected to value the Convertible Note at fair value in accordance with ASC 825-10-15-4(a) because of the embedded derivatives contained in the note. The fair value of the Convertible Note was estimated using a binomial lattice model. Binomial lattice allows for the examination of the value to a holder and understanding the investment decision that would occur at each node.
The fair value of the Convertible Note entered into during the first quarter of fiscal 2024 was classified as Level 3 because it does not have readily determinable or observable inputs for the valuation. There have been no other changes in the valuation techniques used by us to value our financial instruments since the end of fiscal 2023. For additional information, see our Annual Report on Form 10-K for the fiscal year ended April 29, 2023 for the methods and assumptions used to estimate the fair value of each class of financial instrument.
Note 10. Related Party Transactions
The Board has adopted a written policy and procedures with respect to related party transactions, which the Audit Committee oversees. Under the policy, a "related party transaction" is generally defined as a transaction, arrangement, or relationship in which the Company was, is or will be a participant; the amount involved exceeds $120 ; and in which any "related person" had, has or will have a direct or indirect material interest. The policy generally defines a "related person"
19
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 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. 3 to the Schedule 13D filed by the Investor 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 for a total of $25,563 outstanding. In the first six months of fiscal 2024, we have made interest payments of $563 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”). 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 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. Based on 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 quarter of fiscal 2024, the Company and South Dakota Board of Regents entered into a contract for video display systems for Dakota State University. The amount of the contract was $150 . A member of the Company's Board of Directors is the President of Dakota State University.
See Note 2 for further details of related party transactions with our investments in the affiliates Notes issued by our affiliates.
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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 October 28, 2023 and (ii) results of operations during the current fiscal period(s) as compared to the corresponding period(s) of the preceding fiscal year.
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.
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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 in the coming months as it was through the pandemic and will continue to stabilize during this fiscal year.
We believe the audiovisual industry fundamentals of increased use of LED display systems across industries and our development of new technologies, services, and sales channels will drive long-term growth for our Company. Orders and revenue levels are expected to be impacted by the timing of multi-million dollar projects and the impacts of global economic conditions, war and geopolitical situations, or other factors outside of our control.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED OCTOBER 28, 2023 AND OCTOBER 29, 2022
Product Order Backlog
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. 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 October 28, 2023 was $306.9 million as compared to $463.1 million as of October 29, 2022 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 October 28, 2023 within the next 24 months. The timing of backlog fulfillment may be impacted by project delays resulting from parts availability and other constraints stemming from the supply chain disruptions or by customer site conditions which are outside our control.
22
Net Sales
The following table shows information regarding net sales for the three months ended October 28, 2023 and October 29, 2022:
| Three Months Ended | |||||||||||||||||||||||
| (in thousands) | October 28, 2023 | October 29, 2022 | Dollar Change | Percent Change | |||||||||||||||||||
| Net Sales: | |||||||||||||||||||||||
| Commercial | $ | 42,453 | $ | 37,047 | $ | 5,406 | 14.6 | % | |||||||||||||||
| Live Events | 68,210 | 69,239 | (1,029) | (1.5) | |||||||||||||||||||
| High School Park and Recreation | 48,942 | 42,006 | 6,936 | 16.5 | |||||||||||||||||||
| Transportation | 20,243 | 16,679 | 3,564 | 21.4 | |||||||||||||||||||
| International | 19,521 | 22,468 | (2,947) | (13.1) | |||||||||||||||||||
| $ | 199,369 | $ | 187,439 | $ | 11,930 | 6.4 | % | ||||||||||||||||
Orders: (1) | |||||||||||||||||||||||
| Commercial | $ | 34,209 | $ | 42,711 | $ | (8,502) | (19.9) | % | |||||||||||||||
| Live Events | 79,016 | 80,999 | (1,983) | (2.4) | |||||||||||||||||||
| High School Park and Recreation | 32,800 | 31,898 | 902 | 2.8 | |||||||||||||||||||
| Transportation | 21,500 | 16,583 | 4,917 | 29.7 | |||||||||||||||||||
| International | 16,168 | 10,616 | 5,552 | 52.3 | |||||||||||||||||||
| $ | 183,693 | $ | 182,807 | $ | 886 | 0.5 | % | ||||||||||||||||
(1) Orders are not measures defined by GAAP, and our methodology for determining orders may vary from the methodology used by other companies in determining their orders and amounts.
For the fiscal 2024 second quarter, net sales were $199.4 million, an increase of $11.9 million from net sales in the prior year's second quarter. Sales growth was driven by fulfilling orders in backlog, especially in the High School Park and Recreation, Commercial and Transportation business units. The increase is attributable to a stable operating environment, increased manufacturing capacity and realization of price increases. Last year during the second quarter, we faced material supply and labor shortages which extended lead times and delayed the conversion of orders into sales. International net sales are down in the second quarter of fiscal 2024 compared to last year's second quarter due to shipments to Out-of-Home customers in our Asia Pacific Region.
Orders for the second quarter of fiscal 2024 were similar to the second quarter of fiscal 2023 although the order volume from our business units differed. Higher orders to customers in the International and Transportation business units offset decreases in the Spectacular and Out-of-Home markets in our Commercial business unit. Orders in the International business unit in the second quarter of fiscal 2023 were lower due to weakening economic outlook relating to inflationary pressures, geopolitical events, and currency headwinds.
23
Gross Profit and Contribution Margin
| Three Months Ended | |||||||||||||||||||||||
| October 28, 2023 | October 29, 2022 | ||||||||||||||||||||||
| (in thousands) | Amount | As a Percent of Net Sales | Amount | As a Percent of Net Sales | |||||||||||||||||||
| Gross Profit: | |||||||||||||||||||||||
| Commercial | $ | 7,231 | 17.0 | % | $ | 6,197 | 16.7 | % | |||||||||||||||
| Live Events | 19,234 | 28.2 | 7,983 | 11.5 | |||||||||||||||||||
| High School Park and Recreation | 16,420 | 33.5 | 11,811 | 28.1 | |||||||||||||||||||
| Transportation | 6,780 | 33.5 | 4,084 | 24.5 | |||||||||||||||||||
| International | 4,534 | 23.2 | 1,629 | 7.3 | |||||||||||||||||||
| $ | 54,199 | 27.2 | % | $ | 31,704 | 16.9 | % | ||||||||||||||||
The gross profit improvement is due to strategic pricing, our ability to efficiently generate more sales volume over our cost structure, and fewer supply chain and operational disruptions during the second quarter of fiscal 2024 as compared to a year earlier. During the second quarter of fiscal 2024, employee benefit programs reduced gross profit by $2.7 million, of which $1.9 million was attributed to the programs activation.
Total warranty costs as a percent of sales for the three months ended October 28, 2023 compared to the same period one year ago decreased to 2.2 percent from 2.7 percent.
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| October 28, 2023 | October 29, 2022 | ||||||||||||||||||||||||||||||||||
| (in thousands) | Amount | As a Percent of Net Sales | Dollar Change | Percent Change | Amount | As a Percent of Net Sales | |||||||||||||||||||||||||||||
| Contribution Margin: | |||||||||||||||||||||||||||||||||||
| Commercial | $ | 2,403 | 5.7 | % | $ | 484 | 25.2 | % | $ | 1,919 | 5.2 | % | |||||||||||||||||||||||
| Live Events | 16,572 | 24.3 | 11,358 | 217.8 | 5,214 | 7.5 | |||||||||||||||||||||||||||||
| High School Park and Recreation | 12,746 | 26.0 | 4,308 | 51.1 | 8,438 | 20.1 | |||||||||||||||||||||||||||||
| Transportation | 5,752 | 28.4 | 2,726 | 90.1 | 3,026 | 18.1 | |||||||||||||||||||||||||||||
| International | 2,073 | 10.6 | 3,491 | 246.2 | (1,418) | (6.3) | |||||||||||||||||||||||||||||
| $ | 39,546 | 19.8 | % | $ | 22,367 | 130.2 | % | $ | 17,179 | 9.2 | % | ||||||||||||||||||||||||
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 fiscal quarter ended October 28, 2023 was positively impacted by the previously discussed sales levels and impacts on gross profit. During the second quarter of fiscal 2024, employee benefit programs reduced contribution margin by $1.1 million, with $0.8 million attributed to the programs activation.
24
Reconciliation from non-GAAP contribution margin to the operating income GAAP measure is as follows:
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| October 28, 2023 | October 29, 2022 | ||||||||||||||||||||||||||||||||||
| (in thousands) | Amount | As a Percent of Net Sales | Dollar Change | Percent Change | Amount | As a Percent of Net Sales | |||||||||||||||||||||||||||||
| Contribution margin | $ | 39,546 | 19.8 | % | $ | 22,367 | 130.2 | % | $ | 17,179 | 9.2 | % | |||||||||||||||||||||||
| General and administrative | 10,889 | 5.5 | 2,202 | 25.3 | 8,687 | 4.6 | |||||||||||||||||||||||||||||
| Product design and development | 9,221 | 4.6 | 2,255 | 32.4 | 6,966 | 3.7 | |||||||||||||||||||||||||||||
| Operating income | $ | 19,436 | 9.7 | % | $ | 17,910 | 1173.7 | % | $ | 1,526 | 0.8 | % | |||||||||||||||||||||||
General and administrative expenses in the second quarter of fiscal 2024 increased as compared to the second quarter of fiscal 2023 primarily due to increase in personnel-related expenses and professional fees. During the second quarter of fiscal 2024, employee benefit programs expenses increased general and administrative expenses by $0.5 million, with $0.3 million attributed to the programs activation.
Product design and development expenses in the second quarter of fiscal 2024 increased as compared to the second quarter of fiscal 2023 primarily due to an increase in personnel-related expenses. During the second quarter of fiscal 2024, employee benefit programs increased product design and development expenses by $0.6 million, with $0.4 million attributed to the programs activation.
Other Income and Expenses
| Three Months Ended | |||||||||||||||||||||||||||||||||||
| October 28, 2023 | October 29, 2022 | ||||||||||||||||||||||||||||||||||
| (in thousands) | Amount | As a Percent of Net Sales | Dollar Change | Percent Change | Amount | As a Percent of Net Sales | |||||||||||||||||||||||||||||
| Interest (expense) income, net | $ | (1,326) | (0.7) | % | $ | (1,063) | 404.2 | % | $ | (263) | (0.1) | % | |||||||||||||||||||||||
| Change in fair value of convertible note | $ | (10,650) | (5.3) | % | $ | (10,650) | — | % | $ | — | — | % | |||||||||||||||||||||||
| Other expense and debt issuance costs write-off, net | $ | (1,303) | (0.7) | % | $ | (1,095) | 526.4 | % | $ | (208) | (0.1) | % | |||||||||||||||||||||||
Interest (expense) income, net: The increase in interest income and expense, net for the second 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 the utilization of our previous line of credit during the 2023 second quarter.
Change in fair value of Convertible Note: For the three months ended October 28, 2023, we recorded an expense of $10.7 million related to the change in fair value of the Convertible Note payable which is accounted for under the fair value option. The fair value change was primarily caused by the increase in our stock price over the conversion price and decline in market interest rates, making the value of potentially converted shares higher than at debt issuance.
Other expense, net: The change in other expense, net for the second 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.
25
Income Taxes
Our effective tax rate for the second quarter of fiscal 2024 was 64.8 percent as compared to an effective tax rate of 1330.7 percent for the second quarter of fiscal 2023. The lower tax rate for the second quarter of fiscal 2024 is caused by the fair value adjustment to income that is not deductible for tax purposes, whereas, the effective tax rate for the second quarter of fiscal 2023 was skewed due to a full valuation allowance placed on deferred taxes.
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDED OCTOBER 28, 2023 AND OCTOBER 29, 2022
Net Sales
The following table shows information regarding net sales for the six months ended October 28, 2023 and October 29, 2022:
| Six Months Ended | |||||||||||||||||||||||
| (in thousands) | October 28, 2023 | October 29, 2022 | Dollar Change | Percent Change | |||||||||||||||||||
| Net Sales: | |||||||||||||||||||||||
| Commercial | $ | 89,336 | $ | 77,165 | $ | 12,171 | 15.8 | % | |||||||||||||||
| Live Events | 160,209 | 125,622 | 34,587 | 27.5 | |||||||||||||||||||
| High School Park and Recreation | 105,176 | 77,815 | 27,361 | 35.2 | |||||||||||||||||||
| Transportation | 41,612 | 36,219 | 5,393 | 14.9 | |||||||||||||||||||
| International | 35,567 | 42,538 | (6,971) | (16.4) | |||||||||||||||||||
| $ | 431,900 | $ | 359,359 | $ | 72,541 | 20.2 | % | ||||||||||||||||
Orders: (1) | |||||||||||||||||||||||
| Commercial | $ | 66,643 | $ | 90,389 | $ | (23,746) | (26.3) | % | |||||||||||||||
| Live Events | 131,219 | 132,752 | (1,533) | (1.2) | |||||||||||||||||||
| High School Park and Recreation | 68,539 | 69,477 | (938) | (1.4) | |||||||||||||||||||
| Transportation | 40,485 | 32,287 | 8,198 | 25.4 | |||||||||||||||||||
| International | 35,437 | 28,125 | 7,312 | 26.0 | |||||||||||||||||||
| $ | 342,323 | $ | 353,030 | $ | (10,707) | (3.0) | % | ||||||||||||||||
(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 six months of fiscal 2024, net sales were $431.9 million, an increase of $72.5 million from the prior year's first six-month period. This increase was primarily due to higher throughput from our past investments in capacity and the more stable operating environment. During the six-month period ended October 29, 2022, we faced material supply and labor shortages which extended lead times and delayed the conversion of orders into sales.
Order volume decreased in the first six months of fiscal 2024 from the prior year's six-month period. Higher orders from customers in the International 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 contraction in advertising spend. Orders in the International business unit in the first six months of fiscal 2023 were lower due to weakening economic outlook relating to inflationary pressures, geopolitical events, and currency headwinds.
26
Gross Profit and Contribution Margin
| Six Months Ended | |||||||||||||||||||||||
| October 28, 2023 | October 29, 2022 | ||||||||||||||||||||||
| (in thousands) | Amount | As a Percent of Net Sales | Amount | As a Percent of Net Sales | |||||||||||||||||||
| Gross Profit: | |||||||||||||||||||||||
| Commercial | $ | 20,000 | 22.4 | % | $ | 11,018 | 14.3 | % | |||||||||||||||
| Live Events | 47,174 | 29.4 | 11,769 | 9.4 | |||||||||||||||||||
| High School Park and Recreation | 37,245 | 35.4 | 21,788 | 28.0 | |||||||||||||||||||
| Transportation | 13,869 | 33.3 | 9,922 | 27.4 | |||||||||||||||||||
| International | 7,058 | 19.8 | 3,001 | 7.1 | |||||||||||||||||||
| $ | 125,346 | 29.0 | % | $ | 57,498 | 16.0 | % | ||||||||||||||||
The increase in gross profit percentage in the six months ended October 28, 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 six months of fiscal 2024 as compared to a year earlier. The effect of employee benefit programs reduced gross profit by $2.7 million.
Total warranty costs as a percent of sales for the six months ended October 28, 2023 compared to the same period one year ago remained the same at 2.2 percent.
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| October 28, 2023 | October 29, 2022 | ||||||||||||||||||||||||||||||||||
| (in thousands) | Amount | As a Percent of Net Sales | Dollar Change | Percent Change | Amount | As a Percent of Net Sales | |||||||||||||||||||||||||||||
| Contribution Margin: | |||||||||||||||||||||||||||||||||||
| Commercial | $ | 11,124 | 12.5 | % | $ | 9,005 | 425.0 | % | $ | 2,119 | 2.7 | % | |||||||||||||||||||||||
| Live Events | 41,987 | 26.2 | 35,799 | 578.5 | 6,188 | 4.9 | |||||||||||||||||||||||||||||
| High School Park and Recreation | 30,209 | 28.7 | 15,190 | 101.1 | 15,019 | 19.3 | |||||||||||||||||||||||||||||
| Transportation | 11,942 | 28.7 | 3,973 | 49.9 | 7,969 | 22.0 | |||||||||||||||||||||||||||||
| International | 2,502 | 7.0 | 5,257 | (190.8) | (2,755) | (6.5) | |||||||||||||||||||||||||||||
| $ | 97,764 | 22.6 | % | $ | 69,224 | 242.6 | % | $ | 28,540 | 7.9 | % | ||||||||||||||||||||||||
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 six 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 $1.1 million.
Reconciliation from non-GAAP contribution margin to the operating income GAAP measure is as follows:
27
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| October 28, 2023 | October 29, 2022 | ||||||||||||||||||||||||||||||||||
| (in thousands) | Amount | As a Percent of Net Sales | Dollar Change | Percent Change | Amount | As a Percent of Net Sales | |||||||||||||||||||||||||||||
| Contribution margin | $ | 97,764 | 22.6 | % | $ | 69,224 | 242.6 | % | $ | 28,540 | 7.9 | % | |||||||||||||||||||||||
| General and administrative | 20,488 | 4.7 | 2,360 | 13.0 | 18,128 | 5.0 | |||||||||||||||||||||||||||||
| Product design and development | 17,624 | 4.1 | 3,219 | 22.3 | 14,405 | 4.0 | |||||||||||||||||||||||||||||
| Operating income (loss) | $ | 59,652 | 13.8 | % | $ | 63,645 | 1593.9 | % | $ | (3,993) | (1.1) | % | |||||||||||||||||||||||
General and administrative expenses in the first six months of fiscal 2024 increased primarily due to an increase in personnel-related expenses. Employee benefit programs activation increased general and administrative expenses by $0.5 million.
Product design and development expenses in the first six months of fiscal 2024 increased as compared to the first six months of fiscal 2023 primarily due to an increase in personnel-related expenses. Employee benefit programs activation increased product design and development expenses by $0.6 million.
Other Income and Expenses
| Six Months Ended | |||||||||||||||||||||||||||||||||||
| October 28, 2023 | October 29, 2022 | ||||||||||||||||||||||||||||||||||
| (in thousands) | Amount | As a Percent of Net Sales | Dollar Change | Percent Change | Amount | As a Percent of Net Sales | |||||||||||||||||||||||||||||
| Interest (expense) income, net | $ | (2,207) | (0.5) | % | $ | (1,884) | 583.3 | % | $ | (323) | (0.1) | % | |||||||||||||||||||||||
| Change in fair value of convertible note | $ | (17,910) | (4.1) | % | $ | (17,910) | — | % | $ | — | — | % | |||||||||||||||||||||||
| Other expense, net | $ | (5,282) | (1.2) | % | $ | (4,327) | 453.1 | % | $ | (955) | (0.3) | % | |||||||||||||||||||||||
Interest (expense) income, net: The increase in interest income and expense, net in the first six 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 six months of fiscal 2023.
Change in fair value of Convertible Note: For the six months ended October 28, 2023, we recorded an expense of $17.9 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 six 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 debt issuance costs related to the Convertible Note carried at fair value.
Income Tax
We have recorded an effective tax rate of 37.6 percent for the six months ended October 28, 2023 as compared to (247.4) percent for the six months ended October 29, 2022. The tax rate for the first six months of fiscal 2024 is caused by the fair value adjustment to income that is not deductible for tax purposes; whereas, the effective tax rate for the first six 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.
28
LIQUIDITY AND CAPITAL RESOURCES
| Six Months Ended | |||||||||||||||||
| (in thousands) | October 28, 2023 | October 29, 2022 | Dollar Change | ||||||||||||||
| Net cash provided by (used in): | |||||||||||||||||
| Operating activities | $ | 44,311 | $ | (21,938) | $ | 66,249 | |||||||||||
| Investing activities | (12,073) | (15,192) | 3,119 | ||||||||||||||
| Financing activities | 15,919 | 26,278 | (10,359) | ||||||||||||||
| Effect of exchange rate changes on cash | 139 | (13) | 152 | ||||||||||||||
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 48,296 | $ | (10,865) | $ | 59,161 | |||||||||||
Net cash provided by (used in) operating activities: Net cash provided by operating activities was $44.3 million for the first six months of fiscal 2024 compared to net cash used in operating activities of $21.9 million in the first six months of fiscal 2023. The $66.2 million change in cash provided by (used in) operating activities was primarily the result of an increase in net income of $39.7 million in the first six months of fiscal 2024 compared to the same period in fiscal 2023 as strategic pricing actions and operating conditions improved, the $17.9 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 six months of fiscal 2023 as a reaction to supply chain constraints and historic backlog, which consumed cash. Since October 29, 2022, we have reduced inventory and related payables for inventory as we reduced backlog and generated cash from inventory reduction. Increases in accounts receivable and contract 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:
| Six Months Ended | |||||||||||
| October 28, 2023 | October 29, 2022 | ||||||||||
| (Increase) decrease: | |||||||||||
| Accounts receivable | $ | (5,713) | $ | (15,512) | |||||||
| Long-term receivables | 553 | 884 | |||||||||
| Inventories | 7,056 | (34,659) | |||||||||
| Contract assets | 1,116 | 1,896 | |||||||||
| Prepaid expenses and other current assets | (570) | 3,703 | |||||||||
| Income tax receivables | 326 | (2,629) | |||||||||
| Investment in affiliates and other assets | 256 | (842) | |||||||||
| Increase (decrease): | |||||||||||
| Accounts payable | (14,734) | 11,371 | |||||||||
| Contract liabilities | (10,849) | 2,031 | |||||||||
| Accrued expenses | 7,480 | 4,096 | |||||||||
| Warranty obligations | 1,151 | (300) | |||||||||
| Long-term warranty obligations | 1,123 | 1,177 | |||||||||
| Income taxes payable | 649 | 183 | |||||||||
| Long-term marketing obligations and other payables | 782 | 864 | |||||||||
| $ | (11,374) | $ | (27,737) | ||||||||
Net cash used in investing activities: Net cash used in investing activities totaled $12.1 million in the first six months of fiscal 2024 compared to net cash used in investing activities of $15.2 million in the first six months of fiscal 2023. Purchases of property and equipment totaled $9.2 million in the first six months of fiscal 2024 compared to $16.2 million
29
in the first six 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 $15.9 million for the six months ended October 28, 2023 due to cash provided by the closing of a $25.0 million Convertible Note financing and a $15.0 million mortgage financing offset by the payoff of our previous credit line of $17.8 million, expending $6.5 million of debt issuance costs, and principal payments on the mortgage, as compared to $26.3 million of cash provided by financing due to draws on our line of credit in the first six 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 October 28, 2023, we had no borrowings against the ABL and $5.9 million used to secure letters of credit outstanding. We also have a mortgage of $15.0 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 October 28, 2023, we had $64.7 million in cash and cash equivalents and $50.6 million in borrowing capacity under our ABL. We believe cash flow from operations, existing lines of credit, and access to debt and capital markets will be sufficient to meet our current liquidity needs, and we have committed liquidity and cash reserves in excess of our anticipated funding requirements.
Our cash and cash equivalent balances consist of high-quality, short-term money market instruments.
Working Capital
Working capital was $196.4 million and $132.5 million as of October 28, 2023 and April 29, 2023, respectively. We had $10.7 million of retainage on long-term contracts included in receivables and contract assets as of October 28, 2023 which we expect to collect these amounts within one year.
Other Liquidity and Capital Uses
We are sometimes required to obtain bank guarantees or other financial instruments for display installations, and we utilize a global bank to provide such instruments. If we are unable to complete the installation work, our customer would draw on the banking arrangement, and the bank would subrogate its loss to Daktronics' restricted cash accounts. As of October 28, 2023, we had $0.2 million of such instruments outstanding.
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 October 28, 2023, we had $40.6 million of bonded work outstanding.
Our business growth and profitability improvement strategies depend on investments in capital expenditures and strategic investments. We are projecting total capital expenditures to be less than $19 million for all of fiscal 2024. Projected capital expenditures include purchasing manufacturing equipment for new or enhanced product production and expanded capacity and increased automation of processes; 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 six months of fiscal 2024, we entered into a new credit facility, mortgage, and the Convertible Note as disclosed within this Report. There have been no other material changes in our contractual obligations since the end of
30
fiscal 2023. See our Annual Report on Form 10-K for the fiscal year ended April 28, 2023 for additional information regarding our contractual obligations and commercial commitments.
Significant Accounting Policies and Estimates
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 included elsewhere in this Report.
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 six 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 October 28, 2023, 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 October 28, 2023, 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 below 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 six months of fiscal 2024, we conducted additional training of our control operators.
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Changes in Internal Control Over Financial Reporting
During the quarter ended October 28, 2023, 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 7. 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, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Share Repurchases
During the three months ended October 28, 2023, 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.
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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.
| 101.INS | 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) | ||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||
(1)Filed herewith electronically. | |||||
| * Indicates a management contract or compensatory plan or arrangement. | |||||
1
33
SIGNATURES
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.
| /s/ Sheila M. Anderson | |||||
| Daktronics, Inc. | |||||
| Sheila M. Anderson | |||||
| Chief Financial Officer | |||||
| (Principal Financial Officer and | |||||
| Principal Accounting Officer) | |||||
Date: December 5, 2023 | |||||
34
EXHIBIT 31.1
DAKTRONICS, INC.
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER REQUIRED BY RULE 13a-14(e)
OR RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Reece A. Kurtenbach, certify that:
1.I have reviewed this quarterly report on Form 10-Q for the quarter ended October 28, 2023 of Daktronics, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financially reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /s/ Reece A. Kurtenbach | ||||||||
| Reece A. Kurtenbach | ||||||||
| Chief Executive Officer | ||||||||
| Date: | December 5, 2023 | |||||||
EXHIBIT 31.2
DAKTRONICS, INC.
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER REQUIRED BY RULE 13a-14(e)
OR RULE 15d-14(a) OF THE SECURITIES EXCHANGE ACT OF 1934,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Sheila M. Anderson, certify that:
1.I have reviewed this quarterly report on Form 10-Q for the quarter ended October 28, 2023 of Daktronics, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financially reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| /s/ Sheila M. Anderson | ||||||||
| Sheila M. Anderson | ||||||||
| Chief Financial Officer | ||||||||
| Date: | December 5, 2023 | |||||||
EXHIBIT 32.1
DAKTRONICS, INC.
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Daktronics, Inc. (the “Company”) for the quarterly period ended October 28, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Reece A. Kurtenbach, Chief Executive Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
| /s/ Reece A. Kurtenbach | ||||||||
| Reece A. Kurtenbach | ||||||||
| Chief Executive Officer | ||||||||
| Date: | December 5, 2023 | |||||||
EXHIBIT 32.2
DAKTRONICS, INC.
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Daktronics, Inc. (the “Company”) for the quarterly period ended October 28, 2023 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Sheila M. Anderson, Chief Financial Officer of the Company, hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1)The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
| /s/ Sheila M. Anderson | ||||||||
| Sheila M. Anderson | ||||||||
| Chief Financial Officer | ||||||||
| Date: | December 5, 2023 | |||||||