AeroVironment 10Q 2021 Q3 Quarterly report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended January 30, 2021

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-33261

AEROVIRONMENT, INC.

(Exact name of registrant as specified in its charter)

Delaware		95-2705790
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

900 Innovators Way
Simi Valley, California		93065
(Address of principal executive offices)		(Zip Code)

(805) 520-8350

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	AVAV	The NASDAQ Stock Market LLC

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 ☒ No ☐

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 ☒ No ☐

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 ☒		Accelerated filer ☐

Non-accelerated filer ☐		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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of March 3, 2021, the number of shares outstanding of the registrant’s common stock, $0.0001 par value, was 24,676,485.

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AeroVironment, Inc.

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Item 1.	Financial Statements :
	Consolidated Balance Sheets as of January 30, 2021 (Unaudited) and April 30, 2020	3
	Consolidated Statements of Operations for the three and nine months ended January 30, 2021 (Unaudited) and January 25, 2020 (Unaudited)	4
	Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended January 30, 2021 (Unaudited) and January 25, 2020 (Unaudited)	5
	Consolidated Statements of Stockholders’ Equity for the three and nine months ended January 30, 2021 (Unaudited) and January 25, 2020 (Unaudited)	7
	Consolidated Statements of Cash Flows for the nine months ended January 30, 2021 (Unaudited) and January 25, 2020 (Unaudited)	8
	Notes to Consolidated Financial Statements (Unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36
Item 4.	Controls and Procedures	36

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	42
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	43
Signatures		45

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AeroVironment, Inc.

Consolidated Balance Sheets

(In thousands except share and per share data)


	January 30,		April 30,
	2021		2020
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	324,543	$	255,142
Short-term investments		48,499		47,507
Accounts receivable, net of allowance for doubtful accounts of $565 at January 30, 2021 and $1,190 at April 30, 2020		26,621		73,660
Unbilled receivables and retentions (inclusive of related party unbilled receivables of $6,834 at January 30, 2021 and $15,779 at April 30, 2020)		61,084		75,837
Inventories		53,104		45,535
Prepaid expenses and other current assets		7,693		6,246
Total current assets		521,544		503,927
Long-term investments		11,222		15,030
Property and equipment, net		22,920		21,694
Operating lease right-of-use assets		11,281		8,793
Deferred income taxes		5,821		4,928
Intangibles, net		11,552		13,637
Goodwill		6,340		6,340
Other assets		312		10,605
Total assets	$	590,992	$	584,954
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	15,837	$	19,859
Wages and related accruals		20,081		23,972
Customer advances		4,279		7,899
Current operating lease liabilities		4,403		3,380
Income taxes payable		2,370		1,065
Other current liabilities		9,158		10,778
Total current liabilities		56,128		66,953
Non-current operating lease liabilities		8,426		6,833
Other non-current liabilities		243		250
Liability for uncertain tax positions		1,017		1,017
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.0001 par value:
Authorized shares—10,000,000; none issued or outstanding at January 30, 2021 and April 30, 2020		—		—
Common stock, $0.0001 par value:
Authorized shares—100,000,000
Issued and outstanding shares—24,102,691 shares at January 30, 2021 and 24,063,639 shares at April 30, 2020		2		2
Additional paid-in capital		184,366		181,481
Accumulated other comprehensive income		347		328
Retained earnings		340,475		328,090
Total AeroVironment, Inc. stockholders’ equity		525,190		509,901
Noncontrolling interest		(12)		—
Total equity		525,178		509,901
Total liabilities and stockholders’ equity	$	590,992	$	584,954

See accompanying notes to consolidated financial statements (unaudited).

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AeroVironment, Inc.

Consolidated Statements of Operations (Unaudited)

(In thousands except share and per share data)


	Three Months Ended				Nine Months Ended
	January 30,		January 25,		January 30,		January 25,
	2021		2020		2021		2020
Revenue:
Product sales	$	58,348	$	36,432	$	182,233	$	159,657
Contract services (inclusive of related party revenue of $7,480 and $11,762 for the three months ended January 30, 2021 and January 30, 2020, respectively; and $35,318 and $37,491 for the nine months ended January 30, 2021 and January 25, 2020, respectively)		20,434		25,459		76,664		72,416
		78,782		61,891		258,897		232,073
Cost of sales:
Product sales		35,746		21,034		102,039		82,244
Contract services		14,395		17,361		51,955		49,895
		50,141		38,395		153,994		132,139
Gross margin:
Product sales		22,602		15,398		80,194		77,413
Contract services		6,039		8,098		24,709		22,521
		28,641		23,496		104,903		99,934
Selling, general and administrative		15,652		13,223		42,640		43,146
Research and development		13,631		11,381		36,710		30,948
(Loss) income from operations		(642)		(1,108)		25,553		25,840
Other income:
Interest income, net		94		1,122		417		3,717
Other (expense) income, net		(37)		120		68		632
(Loss) income before income taxes		(585)		134		26,038		30,189
(Benefit from) provision for income taxes		(924)		(38)		2,774		3,203
Equity method investment loss, net of tax		(81)		(1,200)		(10,891)		(3,410)
Net income (loss)		258		(1,028)		12,373		23,576
Net (income) loss attributable to noncontrolling interest		(47)		20		12		27
Net income (loss) attributable to AeroVironment, Inc.	$	211	$	(1,008)	$	12,385	$	23,603
Net income (loss) per share attributable to AeroVironment, Inc.
Basic	$	0.01	$	(0.04)	$	0.52	$	0.99
Diluted	$	0.01	$	(0.04)	$	0.51	$	0.98
Weighted-average shares outstanding:
Basic		23,942,782		23,821,145		23,924,017		23,790,788
Diluted		24,260,874		23,821,145		24,216,371		24,076,195

See accompanying notes to consolidated financial statements (unaudited).

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AeroVironment, Inc.

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(In thousands)


	Three Months Ended				Nine Months Ended
	January 30,		January 25,		January 30,		January 25,
	2021		2020		2021		2020
Net income (loss)	$	258	$	(1,028)	$	12,373	$	23,576
Other comprehensive income (loss):
Change in foreign currency translation adjustments		—		(112)		75		67
Unrealized gain (loss) on available-for-sale investments, net of deferred tax benefit of $2 for the 3 and nine months ended January 30, 2021		5		—		(56)		—
Total comprehensive income (loss)		263		(1,140)		12,392		23,643
Net loss (income) attributable to noncontrolling interest		(47)		20		12		27
Comprehensive income (loss) attributable to AeroVironment, Inc.	$	216	$	(1,120)	$	12,404	$	23,670

See accompanying notes to consolidated financial statements (unaudited).

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AeroVironment, Inc.

Consolidated Statements of Stockholders’ Equity

For the nine months ended January 30, 2021 and January 25, 2020 (Unaudited)

(In thousands except share data)


								Accumulated
				Additional				Other		Total		Non-
	Common Stock			Paid-In		Retained		Comprehensive		AeroVironment, Inc.		Controlling
	Shares	Amount		Capital		Earnings		Loss		Equity		Interest		Total
Balance at April 30, 2020	24,063,639	$	2	$	181,481	$	328,090	$	328	$	509,901	$	—	$	509,901
Net income (loss)	—		—		—		12,385		—		12,385		(12)		12,373
Unrealized loss on investments	—		—		—		—		(56)		(56)		—		(56)
Foreign currency translation	—		—		—		—		75		75		—		75
Stock options exercised	3,500		—		86		—		—		86		—		86
Restricted stock awards	62,675		—		—		—		—		—		—		—
Restricted stock awards forfeited	(1,833)		—		—		—		—		—		—		—
Tax withholding payment related to net share settlement of equity awards	(25,290)		—		(1,955)		—		—		(1,955)		—		(1,955)
Stock based compensation	—		—		4,754		—		—		4,754		—		4,754
Balance at January 30, 2021	24,102,691	$	2	$	184,366	$	340,475	$	347	$	525,190	$	(12)	$	525,178

								Accumulated
				Additional				Other		Total		Non-
	Common Stock			Paid-In		Retained		Comprehensive		AeroVironment, Inc.		Controlling
	Shares	Amount		Capital		Earnings		Loss		Equity		Interest		Total
Balance at April 30, 2019	23,946,293	$	2	$	176,216	$	286,351	$	2	$	462,571	$	4	$	462,575
Adoption of ASU 2018-09	—		—		—		665		—		665		—		665
Net income (loss)	—		—		—		23,603		—		23,603		(27)		23,576
Foreign currency translation	—		—		—		—		67		67		—		67
Stock options exercised	3,000		—		93		—		—		93		—		93
Restricted stock awards	74,892		—		—		—		—		—		—		—
Restricted stock awards forfeited	(11,769)		—		—		—		—		—		—		—
Tax withholding payment related to net share settlement of equity awards	(17,307)		—		(1,009)		—		—		(1,009)		—		(1,009)
Stock based compensation	—		—		4,751		—		—		4,751		—		4,751
Balance at January 25, 2020	23,995,109	$	2	$	180,051	$	310,619	$	69	$	490,741	$	(23)	$	490,718

See accompanying notes to consolidated financial statements (unaudited).

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AeroVironment, Inc.

Consolidated Statements of Stockholders’ Equity

For the three months ended January 30, 2021 and January 25, 2020 (Unaudited)

(In thousands except share data)


								Accumulated
				Additional				Other		Total		Non-
	Common Stock			Paid-In		Retained		Comprehensive		AeroVironment, Inc.		Controlling
	Shares	Amount		Capital		Earnings		Income		Equity		Interest		Total
Balance at October 31, 2020	24,103,980	$	2	$	183,298	$	340,264	$	342	$	523,906	$	(59)	$	523,847
Net income	—		—		—		211		—		211		47		258
Unrealized loss on investments	—		—		—		—		5		5		—		5
Restricted stock awards	2,083		—		—		—		—		—		—		—
Restricted stock awards forfeited	(1,318)		—		—		—		—		—		—		—
Tax withholding payment related to net share settlement of equity awards	(2,054)		—		(177)		—		—		(177)		—		(177)
Stock based compensation	—		—		1,245		—		—		1,245		—		1,245
Balance at January 30, 2021	24,102,691	$	2	$	184,366	$	340,475	$	347	$	525,190	$	(12)	$	525,178

								Accumulated
				Additional				Other		Total		Non-
	Common Stock			Paid-In		Retained		Comprehensive		AeroVironment, Inc.		Controlling
	Shares	Amount		Capital		Earnings		Income		Equity		Interest		Total
Balance at October 26, 2019	23,990,616		2		178,550		311,627		181		490,360		(3)		490,357
Net loss	—		—		—		(1,008)		—		(1,008)		(20)		(1,028)
Foreign currency translation	—		—		—		—		(112)		(112)		—		(112)
Restricted stock awards	9,200		—		—		—		—		—		—		—
Restricted stock awards forfeited	(764)		—		—		—		—		—		—		—
Tax withholding payment related to net share settlement of equity awards	(3,943)		—		(266)		—		—		(266)		—		(266)
Stock-based compensation	—		—		1,767		—		—		1,767		—		1,767
Balance at January 25, 2020	23,995,109	$	2	$	180,051	$	310,619	$	69	$	490,741	$	(23)	$	490,718

See accompanying notes to consolidated financial statements (unaudited).

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AeroVironment, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)


	Nine Months Ended
	January 30,		January 25,
	2021		2020
Operating activities
Net income	$	12,373	$	23,576
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization		8,650		7,107
Losses from equity method investments		10,891		3,410
Realized gain from sale of available-for-sale investments		(11)		—
Provision for doubtful accounts		(145)		(2)
Other non-cash income		(473)		(719)
Non-cash lease expense		3,592		3,453
Loss on foreign currency transactions		1		—
Deferred income taxes		(897)		(946)
Stock-based compensation		4,754		4,751
Loss (gain) on sale of property and equipment		2		(71)
Amortization of debt securities		143		(1,291)
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable		47,184		3,245
Unbilled receivables and retentions		14,753		(24,364)
Inventories		(7,569)		(10,766)
Income tax receivable		—		821
Prepaid expenses and other assets		(1,622)		216
Accounts payable		(3,346)		(1,301)
Other liabilities		(9,318)		7,947
Net cash provided by operating activities		78,962		15,066
Investing activities
Acquisition of property and equipment		(8,472)		(8,504)
Equity method investments		(2,150)		(9,551)
Business acquisition, net of cash acquired		—		(18,641)
Proceeds from sale of property and equipment		—		81
Redemptions of held-to-maturity investments		—		166,917
Purchases of held-to-maturity investments		—		(162,517)
Redemptions of available-for-sale investments		130,066		41,150
Purchases of available-for-sale investments		(125,644)		(59,297)
Net cash used in investing activities		(6,200)		(50,362)
Financing activities
Tax withholding payment related to net settlement of equity awards		(1,955)		(1,009)
Holdback and retention payments for business acquisition		(1,492)		—
Exercise of stock options		86		93
Net cash used in financing activities		(3,361)		(916)
Net increase (decrease) in cash, cash equivalents, and restricted cash		69,401		(36,212)
Cash, cash equivalents and restricted cash at beginning of period		255,142		172,708
Cash, cash equivalents and restricted cash at end of period	$	324,543	$	136,496
Supplemental disclosures of cash flow information
Cash paid, net during the period for:
Income taxes	$	2,364	$	518
Non-cash activities
Unrealized loss on available-for-sale investments, net of deferred tax benefit of $2	$	56	$	—
Change in foreign currency translation adjustments	$	75	$	67
Acquisitions of property and equipment included in accounts payable	$	746	$	263

See accompanying notes to consolidated financial statements (unaudited).

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AeroVironment, Inc.

Notes to Consolidated Financial Statements (Unaudited)

1. Organization and Significant Accounting Policies

Organization

AeroVironment, Inc., a Delaware corporation (the “Company”), is engaged in the design, development, production, support and operation of unmanned aircraft systems (“UAS”) for various industries and governmental agencies.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions of Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation with respect to the interim financial statements have been included. The results of operations for the three and nine months ended January 30, 2021 are not necessarily indicative of the results for the full year ending April 30, 2021. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended April 30, 2020, included in the Company’s Annual Report on Form 10-K.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions, including estimates of anticipated contract costs and revenue utilized in the revenue recognition process, that affect the reported amounts in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

The Company’s consolidated financial statements include the assets, liabilities and operating results of wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.

In December 2017, the Company and SoftBank Corp. (“SoftBank”) formed a joint venture, HAPSMobile Inc. (“HAPSMobile”). As the Company has the ability to exercise significant influence over the operating and financial policies of HAPSMobile, the Company’s investment has been accounted for as an equity method investment. The Company has presented its proportion of HAPSMobile’s net loss in equity method investment loss, net of tax in the consolidated statements of operations. During the nine months ended January 25, 2021, the Company recorded its proportion of a loss for HAPSMobile’s impairment of its investment in Loon LLC in the amount of $8,363,000. The Company’s investment has been written down to zero. Refer to Note 6—Equity Method Investments for further details.

On June 10, 2019, the Company purchased 100% of the issued and outstanding member units of Pulse Aerospace, LLC (“Pulse”) pursuant to the terms of a Unit Purchase Agreement (the “Pulse Purchase Agreement”). The assets, liabilities and operating results of Pulse have been included in the Company’s consolidated financial statements. On February 12, 2021, the Company dissolved its wholly-owned subsidiary, Pulse Aerospace, LLC, the results of which were not material to the consolidated financial statements as the Company has integrated the assets and operations. Refer to Note 17—Business Acquisitions for further details.

During the nine months ended January 25, 2020, the Company dissolved its wholly-owned subsidiary, Skytower, Inc., the results of which were not material to the consolidated financial statements.

Recently Adopted Accounting Standards

Effective May 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, along with several additional clarification ASU’s issued during 2018 and 2019, collectively “CECL”. CECL requires the reporting entity to estimate

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expected credit losses over the life of a financial asset. CECL requires the credit loss to be recognized upon initial recognition of the financial asset. ASU 2016-13 requires the entity to adopt CECL using the modified retrospective transition approach through a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. As part of the assessment of the adequacy of the Company’s allowances for credit losses, the Company considered a number of factors including, but not limited to, customer credit ratings, age of receivables, and expected loss rates. However, the adoption of CECL did not have a material impact to retained earnings for the Company.

Effective May 1, 2020, the Company adopted ASU 2018-15, “Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). ASU 2018-15 provides guidance on the treatment of accounting for fees paid by a customer in a cloud computing arrangement. This guidance includes the requirements for capitalizing implementation costs incurred in a hosting arrangement. The Company adopted ASU 2018-15 using the prospective method, applying the new guidance to all implementation costs incurred after adoption. The adoption of ASU 2018-15 did not have an impact on the Company’s consolidated financial statements.

Revenue Recognition

The Company’s revenue is generated pursuant to written contractual arrangements to design, develop, manufacture and/or modify complex products and to provide related engineering, technical and other services according to the specifications of the customers. These contracts may be firm fixed price (“FFP”), cost plus fixed fee (“CPFF”), or time and materials (“T&M”). The Company considers all such contracts to be within the scope of ASC Topic 606.

Performance Obligations

A performance obligation is a promise in a contract to transfer distinct goods or services to a customer, and it is the unit of account in ASC Topic 606. A contract’s transaction price is allocated to each distinct performance obligation and revenue is recognized when each performance obligation under the terms of a contract is satisfied. Revenue is measured at the amount of consideration the Company expects to receive in exchange for transferring goods or providing services. For contracts with multiple performance obligations, the Company allocates the contract’s transaction price to each performance obligation using its observable standalone selling price for products and services. When the standalone selling price is not directly observable, the Company uses its best estimate of the standalone selling price of each distinct good or service in the contract using the cost plus margin approach. This approach estimates the Company’s expected costs of satisfying the performance obligation and then adds an appropriate margin for that distinct good or service.

Contract modifications are routine in the performance of the Company’s contracts. In most instances, contract modifications are for additional goods and/or services that are distinct and, therefore, accounted for as new contracts.

The Company’s performance obligations are satisfied over time or at a point in time. Performance obligations are satisfied over time if the customer receives the benefits as the Company performs, if the customer controls the asset as it is being developed or produced, or if the product being produced for the customer has no alternative use and the Company has a contractual right to payment for the Company’s costs incurred to date plus a reasonable margin. The contractual right to payment is generally supported by termination for convenience clauses that allow the customer to unilaterally terminate the contract for convenience, pay the Company for costs incurred plus a reasonable profit, and take control of any work in process. Revenue for tactical missile systems (“TMS”) product deliveries and Customer-Funded Research and Development contracts is recognized over time as costs are incurred. Contract services revenue is composed of revenue recognized on contracts for the provision of services, including repairs and maintenance, training, engineering design, development and prototyping activities, and technical support services. Contract services revenue is recognized over time as services are rendered. Typically, revenue is recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress. Training services are recognized over time using an output method based on days of training completed.

For performance obligations satisfied over time, revenue is generally recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with, and thereby best depict, transfer of control to the customer. Contract costs include labor, materials, subcontractors’

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costs, other direct costs, and indirect costs applicable on government and commercial contracts.

For performance obligations which are not satisfied over time per the aforementioned criteria above, revenue is recognized at the point in time in which each performance obligation is fully satisfied. The Company’s small UAS product sales revenue is composed of revenue recognized on contracts for the delivery of small UAS systems and spare parts. Revenue is recognized at the point in time when control transfers to the customer, which generally occurs when title and risk of loss have passed to the customer.

Performance obligations satisfied over time accounted for 39% of revenue during the three and nine months ended January 30, 2021. Performance obligations satisfied at a point in time accounted for 61% of revenue during the three and nine months ended January 30, 2021.

On January 30, 2021, the Company had approximately $103,869,000 of remaining performance obligations under fully funded contracts with its customers, which the Company also refers to as funded backlog. The Company currently expects to recognize approximately 73% of the remaining performance obligations as revenue in fiscal 2021, an additional 26% in fiscal 2022, and the balance thereafter.

The Company collects sales, value added, and other taxes concurrent with revenue producing activities, which are excluded from revenue when they are both imposed on a specific transaction and collected from a customer.

Contract Estimates

Accounting for contracts and programs primarily with a duration of less than six months involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, the Company estimates the total expected costs to complete the contract and recognizes revenue based on the percentage of costs incurred at period end. Typically, revenue is recognized over time using costs incurred to date relative to total estimated costs at completion to measure progress toward satisfying the Company’s performance obligations. Incurred costs represent work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, materials, subcontractors’ costs, other direct costs, and indirect costs applicable on government and commercial contracts.

Contract estimates are based on various assumptions to project the outcome of future events that may span several years. These assumptions include labor productivity and availability, the complexity of the work to be performed, the cost and availability of materials, the performance of subcontractors, and the availability and timing of funding from the customer.

The nature of the Company’s contracts gives rise to several types of variable consideration, including penalty fees and incentive awards generally for late delivery and early delivery, respectively. The Company generally estimates such variable consideration as the most likely amount. In addition, the Company includes the estimated variable consideration to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the related uncertainty is resolved. These estimates are based on historical award experience, anticipated performance and the Company’s best judgment at the time. Based on experience in estimating these amounts, they are included in the transaction price of the Company’s contracts and the associated remaining performance obligations.

As a significant change in one or more of these estimates could affect the profitability of the Company’s contracts, the Company regularly reviews and updates its contract-related estimates. Changes in cumulative revenue estimates, due to changes in the estimated transaction price or cost estimates, are recorded using a cumulative catch-up adjustment in the period identified for contracts with performance obligations recognized over time. If at any time the estimate of contract profitability indicates an anticipated loss on the contract, the Company recognizes the total loss in the quarter it is identified, and it is recorded in other current liabilities.

The impact of adjustments in contract estimates on the Company’s operating earnings can be reflected in either operating costs and expenses, or revenue. The aggregate impact of adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was not significant for the three or nine month

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periods ended January 30, 2021. NaN adjustment on any 1 contract was material to the Company’s unaudited consolidated financial statements for the three or nine month periods ended January 30, 2021.

The aggregate net favorable impact of adjustments in contract estimates on revenue related to performance obligations satisfied or partially satisfied in previous periods was approximately $1,152,000 and $1,169,000 for the three and nine month periods ended January 25, 2020, respectively. NaN adjustment on any 1 contract was material to the Company’s unaudited consolidated financial statements for the three month period ended January 25, 2020. During the nine month period ended January 25, 2020, the Company revised its estimates of the total expected costs to complete a contract associated with a design and development agreement. The impact of the revised estimate on this contract on revenue related to performance obligations satisfied or partially satisfied in previous periods was an increase of approximately $1,036,000.

Revenue by Category

The following tables present the Company’s revenue disaggregated by major product line, contract type, customer category and geographic location (in thousands):


	Three Months Ended				Nine Months Ended
	January 30,		January 25,		January 30,		January 25,
Revenue by major product line/program	2021		2020		2021		2020
Small UAS	$	50,536	$	36,965	$	165,003	$	162,868
TMS		19,598		7,908		48,093		21,419
HAPS		7,480		11,762		35,318		37,490
Other		1,168		5,256		10,483		10,296
Total revenue	$	78,782	$	61,891	$	258,897	$	232,073


	Three Months Ended				Nine Months Ended
	January 30,		January 25,		January 30,		January 25,
Revenue by contract type	2021		2020		2021		2020
FFP	$	61,230	$	40,145	$	190,530	$	168,607
CPFF		17,530		20,863		68,329		60,384
T&M		22		883		38		3,082
Total revenue	$	78,782	$	61,891	$	258,897	$	232,073

Each of these contract types presents advantages and disadvantages. Typically, the Company assumes more risk with FFP contracts. However, these types of contracts generally offer additional profits when the Company completes the work for less than originally estimated. CPFF contracts generally subject the Company to lower risk. Accordingly, the associated base fees are usually lower than fees on FFP contracts. Under T&M contracts, the Company’s profit may vary if actual labor hour rates vary significantly from the negotiated rates.


	Three Months Ended				Nine Months Ended
	January 30,		January 25,		January 30,		January 25,
Revenue by customer category	2021		2020		2021		2020
U.S. government	$	60,633	$	25,535	$	170,023	$	124,971
Non-U.S. government		18,149		36,356		88,874		107,102
Total revenue	$	78,782	$	61,891	$	258,897	$	232,073


	Three Months Ended				Nine Months Ended
	January 30,		January 25,		January 30,		January 25,
Revenue by geographic location	2021		2020		2021		2020
Domestic	$	51,062	$	27,626	$	150,890	$	116,399
International		27,720		34,265		108,007		115,674
Total revenue	$	78,782	$	61,891	$	258,897	$	232,073

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Contract Balances

The timing of revenue recognition, billings, and cash collections results in billed accounts receivable, unbilled receivables, and customer advances and deposits on the consolidated balance sheet. In the Company’s services contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals, which is generally monthly, or upon the achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets recorded in unbilled receivables and retentions on the consolidated balance sheet. However, the Company sometimes receives advances or deposits from its customers before revenue is recognized, resulting in contract liabilities recorded in customer advances on the consolidated balance sheet. Contract liabilities are not a significant financing component as they are generally utilized to pay for contract costs within a one-year period or are used to ensure the customer meets contractual requirements. These assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period. For the Company’s product revenue, the Company generally receives cash payments subsequent to satisfying the performance obligation via delivery of the product, resulting in billed accounts receivable. Changes in the contract asset and liability balances during the nine month period ended January 30, 2021 were not materially impacted by any other factors. For the Company’s contracts, there are no significant gaps between the receipt of payment and the transfer of the associated goods and services to the customer for material amounts of consideration.

Revenue recognized for the three and nine month periods ended January 30, 2021 that was included in contract liability balances at the beginning of April 30, 2020 was $0 and $5,423,000, respectively; and revenue recognized for the three and nine month periods ended January 25, 2020 that was included in contract liability balances at the beginning of April 30, 2019 was $12,000 and $1,670,000, respectively.

Segments

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resources and in assessing performance. The Company’s CODM, who is the Chief Executive Officer, makes operating decisions, assesses performance and makes resource allocation decisions, including the focus of research and development (“R&D”), on a consolidated basis for the Company’s continuing operations. Accordingly, the Company operates its business as a single reportable segment.

Investments

The Company’s investments are accounted for as available-for-sale and are reported at fair value. Unrealized gains and losses are excluded from earnings and reported as a separate component of stockholders’ equity, net of deferred income taxes for available-for-sale investments. Gains and losses realized on the disposition of investment securities are determined on the specific identification basis and credited or charged to income. Management determines the appropriate classification of securities at the time of purchase and reevaluates such designation as of each balance sheet date.

Investments are considered to be impaired if the fair value of the investment is less than its amortized cost basis. On a quarterly basis, the Company considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds its fair value, the Company evaluates if the decline in fair value resulted from a credit loss or other factors. The Company considers factors such as general market conditions and potential adverse conditions related to the financial health of the issuer based on rating agency actions. Impairments relating to credit losses are recorded in earnings through an allowance for credit losses. The allowance is limited by the amount that the fair value is less than the amortized cost basis. Impairments not related to credit losses are recorded through other comprehensive income, net of applicable taxes.

Fair Values of Financial Instruments

Fair values of cash and cash equivalents, accounts receivable, unbilled receivables and retentions, and accounts payable approximate cost due to the short period of time to maturity.

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Government Contracts

Payments to the Company on government CPFF or T&M contracts are based on provisional, or estimated indirect rates, which are subject to an annual audit by the Defense Contract Audit Agency (“DCAA”). The cost audits result in the negotiation and determination of the final indirect cost rates that the Company may use for the period(s) audited. The final rates, if different from the provisional rates, may create an additional receivable or liability for the Company for CPFF and T&M contracts.

For example, during the course of its audits, the DCAA may question the Company’s incurred costs, and if the DCAA believes the Company has accounted for such costs in a manner inconsistent with the requirements under Federal Acquisition Regulations, the DCAA auditor may recommend to the Company’s administrative contracting officer to disallow such costs. Historically, the Company has not experienced material disallowed costs as a result of government audits. However, the Company can provide no assurance that the DCAA or other government audits will not result in material disallowances for incurred costs in the future.

The Company’s revenue recognition policy calls for revenue recognized on all cost reimbursable government contracts to be recorded at actual rates unless collectability is not reasonably assured. During the fiscal year ended April 30, 2020, the Company settled rates for its incurred cost claims with the DCAA for fiscal year 2015 for an amount that was not significant. At January 30, 2021 and April 30, 2020, the Company had no reserve for incurred cost claim audits.

Earnings (Loss) Per Share

Basic earnings (loss) per share is computed using the weighted-average number of common shares outstanding, excluding shares of unvested restricted stock.

The reconciliation of basic to diluted shares is as follows:


		Three Months Ended				Nine Months Ended
	January 30, 2021		January 25, 2020		January 30, 2021		January 25, 2020
Denominator for basic earnings (loss) per share:
Weighted average common shares		23,942,782		23,821,145		23,924,017		23,790,788
Dilutive effect of employee stock options, restricted stock and restricted stock units		318,092		—		292,354		285,407
Denominator for diluted earnings (loss) per share		24,260,874		23,821,145		24,216,371		24,076,195

Potentially dilutive shares not included in the computation of diluted weighted-average common shares because their effect would have been anti-dilutive were 0 and 24 for the three and nine months ended January 30, 2021. Due to the net loss for the three months ended January 25, 2020, no shares reserved for issuance upon exercise of stock options or shares of unvested restricted stock were included in the computation of diluted loss per share as their inclusion would have been anti-dilutive. Potentially dilutive shares not included in the computation of diluted weighted-average common shares because their effect would have been anti-dilutive were 287,408 and 3,076 for the three and nine months ended January 25, 2020, respectively.

Recently Issued Accounting Standards

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The guidance is effective for fiscal years beginning after December 15, 2020 and interim periods therein, with early adoption permitted. The adoption method is dependent on the specific amendment included in this update as certain amendments require retrospective adoption, modified retrospective adoption, an option of retrospective or modified retrospective, and prospective adoption. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

In January 2020, the FASB issued ASU 2020-01, Clarifying the Interactions between Topic 321, Topic 323, and Topic

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815 (Topic 321, Topic 323, and Topic 815). This ASU clarifies accounting certain topics impacted by Topic 321 Investments—Equity Securities. These topics include measuring equity securities using the measurement alternative, how the measurement alternative should be applied to equity method accounting, and certain forward contracts and purchased options which would be accounted for under the equity method of accounting upon settlement or exercise. The guidance is effective for fiscal years beginning after December 15, 2020 and interim periods therein, with early adoption permitted. The amendments should be adopted prospectively. The Company is evaluating the potential impact of this adoption on its consolidated financial statements.

2. Discontinued Operations

On June 29, 2018, the Company completed the sale of substantially all of the assets and related liabilities of its efficient energy systems business segment (the “EES Business”) to Webasto Charging Systems, Inc. (“Webasto”) pursuant to an Asset Purchase Agreement (the “Purchase Agreement”) between Webasto and the Company. In accordance with the terms of the Purchase Agreement, as amended by a side letter agreement executed at the closing, the Company received cash consideration of $31,994,000 upon closing, which resulted in a gain of $11,420,000 and has been recorded in gain on sale of business, net of tax in the consolidated statements of income. During the year ended April 30, 2019, the Company recorded a reduction to the gain resulting from a working capital adjustment of $486,000. During the year ended April 30, 2020, the Company and Webasto engaged an independent accounting firm to resolve a working capital dispute with a maximum exposure of $922,000 pursuant to the terms of the Purchase Agreement. In June 2020, the independent accounting firm determined the final adjustment to the working capital dispute to be $341,000 which has been recorded net of tax as a loss of discontinued operations in the consolidated statements of income for the year ended April 30, 2020.

The Company is entitled to receive additional cash consideration of $6,500,000 (the “Holdback”) upon tendering consents to assignment of 2 remaining customer contracts to Webasto. The Holdback was not recorded in the Company’s consolidated financial statements as the amount was not realized or realizable as of January 30, 2021. The Company’s satisfaction of the requirements for the payment of the Holdback is currently in dispute.

On February 22, 2019, Webasto filed a lawsuit alleging several claims against the Company for breach of contract, indemnity, and bad faith, including allegations regarding inaccuracy of certain diligence disclosures, failure to provide certain consents to contract assignments and related to a previously announced product recall. Webasto seeks to recover the costs of the recall and other damages totaling a minimum of $6,500,000 in addition to attorneys’ fees, costs, and punitive damages. On August 16, 2019, the Company filed a counterclaim against Webasto seeking payment of the Holdback and declaratory relief regarding Webasto’s cancellation of an assigned contract. The Company believes that the allegations are generally meritless and is mounting a vigorous defense.

During the three months ended October 27, 2018, Webasto filed a recall report with the National Highway Traffic Safety Administration that named certain of the Company’s EES products as subject to the recall. The Company is continuing to assess the facts giving rise to the recall. Under the terms of the Purchase Agreement, the Company may be responsible for certain costs of such recall of named products the Company manufactured, sold or serviced prior to the closing of the sale of the EES Business. On August 14, 2019, Benchmark Electronics, Inc. (“Benchmark”), the company that assembled the products subject to the recall, served a demand for arbitration to the Company and Webasto, and a third-party part supplier pursuant to its contracts with the Company and Webasto, respectively. The Company filed a responsive pleading in the Benchmark arbitration on October 29, 2019, consisting of a general denial, affirmative defenses, and a reservation of the right to file counter-claims at a later date. Webasto challenged the validity of the Benchmark arbitration by filing an action in New York Superior Court. In December 2019, Webasto and Benchmark reached a settlement of their disputed claims. Benchmark withdrew its Notice of Arbitration against Webasto and the Company, but reserved its right to pursue indemnity claims against suppliers. The recall remains a significant part of the Webasto lawsuit.

Concurrent with the execution of the Purchase Agreement, the Company entered into a transition services agreement (the “TSA”) to provide certain general and administrative services to Webasto for a defined period. Income from performing services under the TSA was $0 and $38,000 and has been recorded in other income, net in the consolidated statements of operations for the three and nine months ended January 30, 2021, respectively, and $57,000 and $545,000 and has been

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recorded in other income, net in the consolidated statements of operations for the three and nine months ended January 25, 2020, respectively.

3. Investments

Investments consist of the following (in thousands):


	January 30,		April 30,
	2021		2020
Short-term investments:
Available-for-sale securities:			��
Municipal securities		25,709		5,244
U.S. government securities		13,019		33,771
Corporate bonds		9,771		8,492
Total short-term investments	$	48,499	$	47,507
Long-term investments:
Available-for-sale securities:
Municipal securities		989		1,592
U.S. government securities		4,003		8,996
Total available-for-sale investments		4,992		10,588
Equity method investments
Investment in limited partnership fund		6,230		4,442
Total equity method investments		6,230		4,442
Total long-term investments	$	11,222	$	15,030

Available-For-Sale Securities

As of January 30, 2021 and April 30, 2020, the balance of available-for-sale securities consisted of state and local government municipal securities, U.S. government securities, U.S. government agency securities, and investment grade corporate bonds. Interest earned from these investments is recorded in interest income. Realized gains on sales of these investments on the basis of specific identification is recorded in interest income.

The following table is a summary of the activity related to the available-for-sale investments recorded in short-term and long-term investments as of January 30, 2021 and April 30, 2020, respectively (in thousands):


	January 30, 2021
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Municipal securities	$	26,691	$	12	$	(5)	$	26,698
U.S. government securities		17,017		5		—		17,022
Corporate bonds		9,771		1		(1)		9,771
Total available-for-sale investments	$	53,479	$	18	$	(6)	$	53,491


	April 30, 2020
			Gross		Gross
	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value
Municipal securities	$	6,807	$	29	$	—	$	6,836
U.S. government securities		42,730		41		(4)		42,767
Corporate bonds		8,495		—		(3)		8,492
Total available-for-sale investments	$	58,032	$	70	$	(7)	$	58,095

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The amortized cost and fair value of the available-for-sale debt securities by contractual maturity at January 30, 2021 were as follows (in thousands):


	Cost		Fair Value
Due within one year	$	48,494	$	48,499
Due after one year through five years		4,985		4,992
Total	$	53,479	$	53,491

4. Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy contains three levels as follows:

●Level 1—Inputs to the valuation based upon quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date.

●Level 2—Inputs to the valuation include quoted prices in either markets that are not active, or in active markets for similar assets or liabilities, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data.

●Level 3—Inputs to the valuation that are unobservable inputs for the asset or liability.

The Company’s financial assets measured at fair value on a recurring basis at January 30, 2021, were as follows (in thousands):


	Fair Value Measurement Using
			Significant
	Quoted prices in		other		Significant
	active markets for		observable		unobservable
	identical assets		inputs		inputs
Description	(Level 1)		(Level 2)		(Level 3)		Total
Available-for-sale securities	$	—	$	53,491	$	—	$	53,491
Total	$	—	$	53,491	$	—	$	53,491

The Company’s financial assets measured at fair value on a recurring basis at April 30, 2020, were as follows (in thousands):


	Fair Value Measurement Using
			Significant
	Quoted prices in		other		Significant
	active markets for		observable		unobservable
	identical assets		inputs		inputs
Description	(Level 1)		(Level 2)		(Level 3)		Total
Available-for-sale securities	$	—	$	58,095	$	—	$	58,095
Total	$	—	$	58,095	$	—	$	58,095

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5. Inventories, net

Inventories consist of the following (in thousands):


	January 30,		April 30,
	2021		2020
Raw materials	$	23,608	$	15,988
Work in process		12,225		10,340
Finished goods		25,843		29,439
Inventories, gross		61,676		55,767
Reserve for inventory excess and obsolescence		(8,572)		(10,232)
Inventories, net	$	53,104	$	45,535

6. Equity Method Investments

In December of 2017, the Company and SoftBank formed a joint venture, HAPSMobile, which is a Japanese corporation. As of January 30, 2021, the Company’s ownership stake in HAPSMobile was approximately 7%, with the remaining 93% held by SoftBank. In connection with the formation of the joint venture on December 27, 2017, the Company initially purchased shares of HAPSMobile representing a 5% ownership interest in exchange for an investment of 210,000,000 yen ($1,860,000). The Company subsequently purchased additional shares of HAPSMobile in order to maintain a 5% ownership stake in the joint venture. The first such purchase occurred on April 17, 2018, at which time the Company invested 150,000,000 yen ($1,407,000) for the purchase of additional shares of HAPSMobile. On January 29, 2019, the Company invested an additional 209,500,000 yen ($1,926,000) to maintain its 5% ownership stake. On February 9, 2019, the Company elected to purchase 632,800,000 yen ($5,671,000) of additional shares of HAPSMobile to increase the Company’s ownership in the joint venture from 5% to 10%, and on May 10, 2019, the Company purchased 500,000,000 yen ($4,569,000) of additional shares of HAPSMobile to maintain its 10% ownership stake. The Company’s ownership percentage was subsequently diluted from 10% to approximately 5%. On December 4, 2019, the Company purchased 540,050,000 yen ($4,982,000) of additional shares of HAPSMobile to increase its ownership stake to approximately 7%.

As the Company has the ability to exercise significant influence over the operating and financial policies of HAPSMobile pursuant to the applicable Joint Venture Agreement and related organizational documents, the Company’s investment is accounted for as an equity method investment. During the nine months ended January 25, 2021, the Company recorded its proportion of a loss for HAPSMobile’s impairment of its investment in Loon LLC in the amount of $8,363,000. For the three and nine months ended January 30, 2021, the Company recorded its ownership percentage of the net loss of HAPSMobile, or $0 and $10,810,000, respectively, in equity method investment loss, net of tax in the unaudited consolidated statement of income. HAPSMobile initially made its investment in Loon LLC in April 2019. For the three and nine months ended January 25, 2020, the Company recorded its ownership percentage of the net loss of HAPSMobile, or $1,200,000 and $3,410,000, respectively, in equity method investment loss, net of tax in the unaudited consolidated statement of operations. At January 30, 2021 and April 30, 2020, the carrying value of the investment in HAPSMobile of $0 and $10,455,000, respectively, was recorded in other assets. As the Company’s investment has been written down to zero, no future losses of HAPSMobile will be recorded in equity method investment loss, net of tax in subsequent periods.

Investment in Limited Partnership Fund

In July 2019, the Company made its initial capital contribution to a limited partnership fund focusing on highly relevant technologies and start-up companies serving defense and industrial markets. On July 15, 2020 and January 4, 2021, the Company made additional contributions of $1,173,000 and $977,000, respectively. Under the terms of the limited partnership agreement, the Company has committed to make additional capital contributions of $2,904,000 to the fund. The Company accounts for investments in limited partnerships as equity method investments as the Company is deemed to have influence when it holds more than a minor interest. For the three and nine months ended January 30, 2021, the Company recorded its ownership percentage of the net loss of the limited partnership, or $81,000 and $361,000, respectively, in equity method investment loss in the consolidated statements of income. For the three and nine months

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ended January 25, 2020, the Company recorded 0 net loss of the limited partnership. At January 30, 2021 and April 30, 2020, the carrying value of the investment in the limited partnership of $6,230,000 and $4,442,000, respectively, was recorded in long-term investments.

7. Warranty Reserves

The Company accrues an estimate of its exposure to warranty claims based upon both current and historical product sales data and warranty costs incurred. The warranty reserve is included in other current liabilities. The related expense is included in cost of sales. Warranty reserve activity is summarized as follows for the three and nine months ended January 30, 2021 and January 25, 2020, respectively (in thousands):


	Three Months Ended				Nine Months Ended
	January 30,			January 25,	January 30,		January 25,
	2021		2020		2021		2020
Beginning balance	$	2,126	$	1,875	$	2,015	$	1,704
Warranty expense		277		250		1,038		1,469
Changes in estimates related to pre-existing warranties		—		—		—		(189)
Warranty costs settled		(231)		(289)		(881)		(1,148)
Ending balance	$	2,172	$	1,836	$	2,172	$	1,836

8. Intangibles, net

The components of intangibles are as follows (in thousands):


	January 30,		April 30,
	2021		2020
Technology	$	14,950	$	14,950
Licenses		1,006		1,006
Customer relationships		873		873
In-process research and development		550		550
Non-compete agreements		320		320
Trademarks and tradenames		68		68
Other		3		3
Intangibles, gross		17,770		17,770
Less accumulated amortization		(6,218)		(4,133)
Intangibles, net	$	11,552	$	13,637

The weighted average amortization period at January 30, 2021 and April 30, 2020 was four years. Amortization expense for the three and nine months ended January 30, 2021 was $662,000 and $2,086,000, respectively. Amortization expense for the three and nine months ended January 25, 2020 was $775,000 and $2,102,000, respectively.

Technology, in-process research and development, customer relationships, trademarks and tradenames, and non-compete agreements were recognized in conjunction with the Company’s acquisition of Pulse on June 10, 2019. Refer to Note 17—Business Acquisitions for further details.

Estimated amortization expense for the next five years is as follows (in thousands):


	Year ending
	April 30,
2021	$	707
2022		2,829
2023		2,688
2024		2,629
2025		2,492
	$	11,345

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9. Goodwill

The following table presents the changes in the Company’s goodwill balance (in thousands):


Balance at April 30, 2020	$	6,340
Additions to goodwill		-
Impairment of goodwill		-
Balance at January 30, 2021	$	6,340

The goodwill balance at April 30, 2020 is attributable to the acquisition of Pulse. Refer to Note 17—Business Acquisitions for further details.

10. Leases

The Company leases certain buildings, land and equipment. At contract inception the Company determines whether the contract is, or contains, a lease and whether the lease should be classified as an operating or a financing lease. Operating leases are recorded in operating lease right-of-use assets, current operating lease liabilities and non-current operating lease liabilities.

The Company recognizes operating lease right-of-use assets and operating lease liabilities based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses its incremental borrowing rate based on the information available at commencement date to determine the present value of future payments and the appropriate lease classification. The Company defines the initial lease term to include renewal options determined to be reasonably certain. The Company’s leases have remaining lease terms of less than one year to six years, some of which may include options to extend the lease for up to 10 years, and some of which may include options to terminate the lease after two years. None of the Company’s options to extend or terminate are reasonably certain of being exercised, and are therefore not included in the Company’s determination of lease assets and liabilities. For operating leases, the Company recognizes lease expense for these leases on a straight-line basis over the lease term.

Many of the Company’s real estate lease agreements contain incentives for tenant improvements, rent holidays, or rent escalation clauses. For tenant improvement incentives, if the incentive is determined to be a leasehold improvement owned by the lessee, the Company generally records incentive as a reduction to fixed lease payments thereby reducing rent expense. For rent holidays and rent escalation clauses during the lease term, the Company records rental expense on a straight-line basis over the term of the lease. For these lease incentives, the Company uses the date of initial possession as the commencement date, which is generally when the Company is given the right of access to the space and begins to make improvements in preparation for intended use.

The Company does not have any finance leases. The Company does not have any material restrictions or covenants in its lease agreements, sale-leaseback transactions, land easements or residual value guarantees.

In determining the inputs to the incremental borrowing rate calculation, the Company makes judgments about the value of the leased asset, its credit rating and the lease term including the probability of its exercising options to extend or terminate the underlying lease. Additionally, the Company makes judgments around contractual asset substitution rights in determining whether a contract contains a lease.

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The components of lease costs recorded in cost of sales for product sales and contract services and selling, general and administrative (“SG&A”) expense were as follows (in thousands):


	Nine Months Ended		Nine Months Ended
	January 30,		January 25,
	2021		2020
Operating lease cost	$	3,592	$	3,453
Short term lease cost		369		489
Variable lease cost		3		609
Sublease income		(48)		(230)
Total lease costs, net	$	3,916	$	4,321

Supplemental lease information were as follows:


	Nine Months Ended		Nine Months Ended
	January 30,		January 25,
	2021		2020
	(In thousands)		(In thousands)
Cash paid for amounts included in the measurement of operating lease liabilities	$	3,470	$	4,029
Right-of-use assets obtained in exchange for new lease liabilities	$	5,760	$	12,634

Weighted average remaining lease term		43 months		35 months
Weighted average discount rate		3.4%		3.6%

Maturities of operating lease liabilities as of January 30, 2021 were as follows (in thousands):


2021	$	896
2022		4,581
2023		3,173
2024		2,608
2025		1,661
Thereafter		763
Total lease payments		13,682
Less: imputed interest		(853)
Total present value of operating lease liabilities	$	12,829

11. Accumulated Other Comprehensive Income and Reclassifications Adjustments

The components of accumulated other comprehensive income and adjustments are as follows (in thousands):


	Nine Months Ended		Nine Months Ended
	January 30,		January 25,
	2021		2020
Balance, net of $0 deferred taxes, as of April 30, 2020 and April 30, 2019	$	328	$	2
Changes in foreign currency translation adjustments		75		67
Unrealized losses, net of $2 of deferred taxes for the nine months ended January 30, 2021		(56)		—
Balance, net of $2 and $0 deferred taxes, as of January 30, 2021 and January 25, 2020, respectively	$	347	$	69

12. Customer-Funded Research & Development

Customer-funded R&D costs are incurred pursuant to contracts (revenue arrangements) to perform R&D activities according to customer specifications. These costs are direct contract costs and are expensed to cost of sales as costs are

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incurred. Revenue from customer-funded R&D contracts are recognized in accordance with Topic 606 over time as costs are incurred. Revenue from customer-funded R&D was approximately $14,811,000 and $58,979,000 for the three and nine months ended January 30, 2021, respectively. Revenue from customer-funded R&D was approximately $17,939,000 and $50,565,000 for the three and nine months ended January 25, 2020, respectively.

13. Long-Term Incentive Awards

During the three months ended August 1, 2020, the Company granted awards under its amended and restated 2006 Equity Incentive Plan (the “Restated 2006 Plan”) to key employees (“Fiscal 2021 LTIP”). Awards under the Fiscal 2021 LTIP consist of: (i) time-based restricted stock awards, which vest in equal tranches in July 2021, July 2022 and July 2023, and (ii) performance-based restricted stock units (“PRSUs”), which vest based on the Company’s achievement of revenue and operating income targets for the three-year period ending April 30, 2023. At the award date, target achievement levels for each of the financial performance metrics were established for the PRSUs, at which levels the PRSUs would vest at 100% for each such metric. Threshold achievement levels for which the PRSUs would vest at 50% for each such metric and maximum achievement levels for which such awards would vest at 250% for each such metric were also established. The actual payout for the PRSUs at the end of the performance period will be calculated based upon the Company’s achievement of the established revenue and operating income targets for the performance period. Settlement of the PRSUs will be made in fully-vested shares of common stock. For the three and nine months ended January 30, 2021, the Company recorded $126,000 and $564,000 of compensation expense related to the Fiscal 2021 LTIP. The Company recorded 0 compensation expense related to the Fiscal 2021 LTIP for the three and nine months ended January 25, 2020. At January 30, 2021, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 2021 LTIP is $7,946,000.

During the three months ended July 27, 2019, the Company granted awards under the Restated 2006 Plan to key employees (“Fiscal 2020 LTIP”). Awards under the Fiscal 2020 LTIP consist of: (i) time-based restricted stock awards, which vest in equal tranches in July 2020, July 2021 and July 2022, and (ii) PRSUs, which vest based on the Company’s achievement of revenue and operating income targets for the three-year period ending April 30, 2022. At the award date, target achievement levels for each of the financial performance metrics were established for the PRSUs, at which levels the PRSUs would vest at 100% for each such metric. Threshold achievement levels for which the PRSUs would vest at 50% for each such metric and maximum achievement levels for which such awards would vest at 200% for each such metric were also established. The actual payout for the PRSUs at the end of the performance period will be calculated based upon the Company’s achievement of the established revenue and operating income targets for the performance period. Settlement of the PRSUs will be made in fully-vested shares of common stock. For the three months ended January 30, 2021, the Company recorded a reduction of $26,000 of compensation expense related to the Fiscal 2020 LTIP, and for the nine months ended January 30, 2021, the Company recorded $319,000 of compensation expense related to the Fiscal 2020 LTIP. For the three and nine months ended January 25, 2020, the Company recorded $215,000 and $512,000 of compensation expense related to the Fiscal 2020 LTIP, respectively. At January 30, 2021, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 2020 LTIP is $4,263,000.

During the three months ended July 28, 2018, the Company also granted awards under the Restated 2006 Plan to key employees (“Fiscal 2019 LTIP”). Awards under the Fiscal 2019 LTIP consist of: (i) time-based restricted stock awards, which vest in equal tranches in July 2019, July 2020 and July 2021, and (ii) PRSUs, which vest based on the Company’s achievement of revenue and operating income targets for the three-year period ending April 30, 2021. At the award date, target achievement levels for each of the financial performance metrics were established for the PRSUs, at which levels the PRSUs would vest at 100% for each such metric. Threshold achievement levels for which the PRSUs would vest at 50% for each such metric and maximum achievement levels for which such awards would vest at 200% for each such metric were also established. The actual payout for the PRSUs at the end of the performance period will be calculated based upon the Company’s achievement of the established revenue and operating income targets for the performance period. Settlement of the PRSUs will be made in fully-vested shares of common stock. For the three and nine months ended January 30, 2021, the Company recorded $27,000 and $291,000 of compensation expense related to the Fiscal 2019 LTIP, respectively. For the three and nine months ended January 25, 2020, the Company recorded $246,000 and $294,000 of compensation expense related to the Fiscal 2019 LTIP, respectively. At January 30, 2021, the maximum compensation expense that may be recorded for the performance-based portion of the Fiscal 2019 LTIP is $2,478,000.

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During the three months ended July 29, 2017, the Company also granted awards under the Restated 2006 Plan to key employees (“Fiscal 2018 LTIP”). Awards under the Fiscal 2018 LTIP consist of: (i) time-based restricted stock awards, which vest in equal tranches in July 2018, July 2019 and July 2020, and (ii) PRSUs, which vest based on the Company’s achievement of revenue and operating income targets for the three-year period ending April 30, 2020. During the three months ended August 1, 2020, the Company issued a total of 16,228 fully-vested shares of common stock to settle the PRSUs in the Fiscal 2018 LTIP. For the three and nine months ended January 30, 2021, the Company recorded 0 compensation expense. For the three and nine months ended January 25, 2020, the Company recorded $201,000 and $162,000 of compensation expense related to the Fiscal 2018 LTIP, respectively.

At January 30, 2021 and April 30, 2020, the Company recorded cumulative stock-based compensation expense from the Fiscal 2021 LTIP, Fiscal 2020 LTIP and Fiscal 2019 LTIP of $2,780,000 and $1,607,000, respectively. At each reporting period, the Company reassesses the probability of achieving the performance targets for the PRSUs. The estimation of whether the performance targets will be achieved requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, the cumulative effect on current and prior periods of those changes will be recorded in the period estimates are revised. No compensation cost is ultimately recognized for awards for which employees do not render the requisite service and are forfeited.

14. Income Taxes

For the three and nine months ended January 30, 2021, the Company recorded a (benefit from) and provision for income taxes of $(924,000) and $2,774,000, respectively, yielding effective tax rates of 157.9% and 10.7%, respectively. For the three and nine months ended January 25, 2020, the Company recorded a (benefit from) and provision for income taxes of $(38,000) and $3,203,000, respectively, yielding effective tax rates of (28.4)% and 10.6%, respectively. The variance from statutory rates for the three and nine months ended January 30, 2021 was primarily due to federal R&D credits, foreign derived intangible income deductions and the recording of discrete excess tax benefits resulting from the vesting of restricted stock awards and exercises of stock options. The variance from statutory rates for the three and nine months ended January 25, 2020 was primarily due to federal R&D credits, foreign derived intangible income deductions and the recording of discrete excess tax benefits resulting from the vesting of restricted stock awards and exercises of stock options.

15. Share Repurchase

In September 2015, the Company’s Board of Directors authorized a program to repurchase up to $25,000,000 of the Company’s common stock with no specified termination date for the program. NaN shares were repurchased under the program during the three and nine months ended January 30, 2021 or January 25, 2020. As of January 30, 2021 and April 30, 2020, approximately $21,200,000 remained authorized for future repurchases under this program.

16. Related Party Transactions

Related party transactions are defined as transactions between the Company and entities either controlled by the Company or that the Company can significantly influence. Although SoftBank has a controlling interest in HAPSMobile, the Company determined that it has the ability to exercise significant influence over HAPSMobile. As such, HAPSMobile and SoftBank are considered related parties of the Company. Concurrent with the formation of HAPSMobile, the Company executed a Design and Development Agreement (the “DDA”) with HAPSMobile. Under the DDA and related efforts, the Company will use its best efforts, up to a maximum net value of $181,320,000, to design and build prototype solar powered high altitude aircraft and ground control stations for HAPSMobile and conduct low altitude and high altitude flight tests of the prototype aircraft.

The Company recorded revenue under the DDA and preliminary design agreements between the Company and SoftBank of $7,480,000 and $35,318,000 for the three and nine months ended January 30, 2021, respectively. The Company recorded revenue under the DDA and preliminary design agreements between the Company and SoftBank of $11,762,000 and $37,491,000 for the three and nine months ended January 25, 2020, respectively. At January 30, 2021 and April 30, 2020, the Company had unbilled related party receivables from HAPSMobile of $6,834,000 and $15,779,000 recorded in unbilled receivables and retentions on the consolidated balance sheets, respectively. Refer to Note 6—Equity Method Investments for further details.

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17. Business Acquisitions

On June 10, 2019, the Company purchased 100% of the issued and outstanding member units of Pulse pursuant to the terms of the Pulse Purchase Agreement. The Company’s acquisition of Pulse’s helicopter UAS product family strengthens AeroVironment’s leading family of fixed-wing small unmanned aircraft systems and increases the mission capabilities of AeroVironment’s family of systems.

Pursuant to the Pulse Purchase Agreement, at closing, the Company paid $20,650,000 in cash, less closing indebtedness and transaction costs as defined in the Pulse Purchase Agreement, less a $250,000 retention to cover any post-closing indemnification claims, and less a $1,250,000 holdback amount, with the retention and holdback to be released to the member unit holders of Pulse, less any amounts paid or reserved, 18 months after the closing of the transactions in accordance with the terms of the Pulse Purchase Agreement. The closing cash consideration included the payoff of the outstanding indebtedness of Pulse as of the closing date. The Company financed the acquisition entirely from available cash on hand. During the three months ended January 30, 2021, the Company paid a total of $1,492,000 in holdback and retention payments.

In addition to the consideration paid at closing, the acquisition of Pulse included contingent consideration arrangements that required additional consideration to be paid by the Company to the sellers of Pulse if 2 specified research and development milestones were achieved by December 10, 2021 and the continued employment of specified employees. Amounts were payable upon the achievement of the milestones. The range of the undiscounted amounts the Company could pay under each of the contingent consideration agreements were 0 or $2,500,000 ($5,000,000 in total if both milestones are achieved and specific key employees continued employment). The fair value of the contingent consideration recognized on the acquisition date of $1,703,000 was estimated by applying the income approach. That measure was based on significant Level 3 inputs not observable in the market. Key assumptions include (1) a discount rate of 4.5% and (2) the probability that each of the milestones would be achieved.

During the three months ended January 25, 2020, 1 of the research and development milestones was achieved, and the requirements for the payout of remaining contingent consideration were concluded to not have been met. As a result, the Company recorded a gain of $832,000 which was recorded in selling, general, and administrative expense in the consolidated statements of income. On February 26, 2020, $2,500,000 of contingent consideration was paid to the sellers for the achieved milestone.

During the fiscal year ended April 30, 2020, the Company finalized its determination of the fair value of the assets and liabilities assumed as of the acquisition date, which is summarized in the following table (in thousands):


	June 10,
	2019
Technology	$	14,950
Goodwill		6,340
In-process R&D		550
Inventory		334
Non-compete agreements		320
Other assets, net of liabilities assumed		(614)
Total net identified assets acquired	$	21,880

Fair value of consideration:
Cash	$	18,677
Holdback		1,250
Retention		250
Contingent consideration		1,703
Total	$	21,880

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Determining the fair value of the intangible assets acquired requires significant judgment, including the amount and timing of expected future cash flows, long-term growth rates and discount rates. The fair value of the intangibles assets was determined using a discounted cash flow analysis, which were based on the Company’s best estimate of future sales, earnings and cash flows after considering such factors as general market conditions, anticipated customer demand, changes in working capital, long term business plans and recent operating performance. Use of different estimates and judgments could yield materially different results.

The goodwill is attributable to the synergies the Company expects to achieve through leveraging the acquired technology to its existing customers, the workforce of Pulse and expected future customers in the helicopter UAS market. For tax purposes the acquisition was treated as an asset purchase and the goodwill is deductible ratably over a period of fifteen years.

Supplemental Pro Forma Information (unaudited)

The following unaudited pro forma summary presents consolidated information of the Company as if the business acquisition had occurred on May 1, 2018 (in thousands):


	Three Months Ended				Nine Months Ended
	January 25		January 26		January 25		January 26
	2020		2019		2020		2019
Revenue	$	61,891	$	75,922	$	232,300	$	228,533
Net income attributable to AeroVironment, Inc.	$	(726)	$	7,244	$	24,227	$	38,471

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The Company did not have any material, nonrecurring pro forma adjustments directly attributable to the business acquisition included in the reported pro forma revenue and earnings.

These pro forma amounts have been calculated by applying the Company’s accounting policies, assuming transaction costs had been incurred during the three months ended July 28, 2018, reflecting the additional amortization that would have been charged assuming the fair value adjustments to intangible assets had been applied from May 1, 2018 with the consequential tax effects, and including the results of Pulse prior to acquisition.

The Company incurred approximately $344,000 and $1,036,000 of acquisition-related expenses for the three and nine months ended January 25, 2020, respectively. These expenses are included in selling, general and administrative, research and development, and product cost of sales on the Company’s consolidated statement of operations.

The unaudited pro forma supplemental information is based on estimates and assumptions, which the Company believes are reasonable and are not necessarily indicative of the results that have been realized had the acquisitions been consolidated in the tables above as of May 1, 2018, nor are they indicative of results of operations that may occur in the future.

18. Subsequent Events

Arcturus Acquisition

On February 19, 2021, the Company closed its acquisition of Arcturus UAV, Inc., a California corporation (“Arcturus UAV”) pursuant to the Stock Purchase Agreement (the “Arcturus Purchase Agreement”) with Arcturus UAV and each of the shareholders and other equity interest holders of Arcturus UAV (collectively, the “Arcturus Sellers”), to purchase 100% of the issued and outstanding equity of Arcturus UAV (the “Arcturus Acquisition”). Arcturus UAV, headquartered in Petaluma, California, designs, engineers, tools, and manufactures unmanned aerial and aircraft systems including airborne platforms, payloads and payload integration, ground control systems, and ground support equipment and other items and services related generally to unmanned aircraft systems. Arcturus UAV became a wholly-owned subsidiary of the Company as of February 19, 2021.

Pursuant to the Arcturus Purchase Agreement, at the closing of the Arcturus Acquisition, the Company paid approximately $431,000,000 (subject to certain customary adjustments and escrow arrangements set forth in the Arcturus Purchase Agreement), financed with a combination of approximately $159,000,000 of cash-on-hand, $200,000,000 of financing pursuant to the Term Loan Facility, described below, and the issuance of approximately $72,000,000 of unregistered, restricted shares of common stock. As specified in the Arcturus Purchase agreement, the number of shares issued was determined based on a value of $50,000,000 and a calculated average price as of the last business day prior to execution of the Arcturus Purchase Agreement.

The final cash consideration is subject to certain customary adjustments, including for net working capital, cash, debt and unpaid transaction expenses (including change in control related payments triggered by the transaction) of Arcturus UAV at the Arcturus Closing, less $6,500,000 to be held in escrow to address final purchase price adjustments post-Arcturus Closing, if any (the “Adjustment Escrow”), and $1,822,500 to be held in escrow to address Arcturus UAV’s and/or the Sellers’ indemnification obligations (the “Indemnification Escrow”). The Adjustment Escrow, less any negative post-Closing adjustment to the cash consideration paid at Closing, is to be released to the Arcturus Sellers upon completion of the post-Arcturus Closing purchase price adjustment process; the Indemnification Escrow, less any amounts paid or reserved, is to be released to the Arcturus Sellers 12 months following the Arcturus Closing. To further address potential breaches of Arcturus UAV’s and the Sellers’ representations and warranties beyond the application of the Indemnification Escrow, the Company also obtained representation and warranty insurance policies providing $40,000,000 in coverage, subject to customary terms, exclusions and retention amounts.

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Due to the timing of the close of the acquisition, the purchase accounting for the business combination is incomplete at the time of this filing. As a result, the Company is unable to provide the amounts recognized as of the acquisition date for the major classes of assets acquired and liabilities assumed, pre-acquisition contingencies and goodwill. In addition, the Company is unable to provide pro forma revenues and earnings of the combined entity. All required disclosures will be included in the Company's Annual Report on Form 10-K for the fiscal year quarter ending April 30, 2021.

Credit Facilities

In connection with the consummation of the Arcturus Acquisition on February 19, 2021, the Company, as borrower, and Arcturus UAV, as guarantor, entered into a Credit Agreement with certain lenders, letter of credit issuers, Bank of America, N.A., as the administrative agent and the swingline lender, and BofA Securities, Inc., JPMorgan Chase Bank, N.A., and U.S. Bank National Association, as joint lead arrangers and joint bookrunners (the “Credit Agreement”).

The Credit Agreement and its associated Security and Pledge Agreement set forth the terms and conditions for (i) a five-year $100 million revolving credit facility, which includes a $10 million sublimit for the issuance of standby and commercial letters of credit (the “Revolving Facility”), and (ii) a five-year amortized $200 million term A loan (the “Term Loan Facility”, and together with the Revolving Facility, the “Credit Facilities”). Certain existing letters of credit issued by JPMorgan Chase Bank were reserved for under the Revolving Facility at closing and remain outstanding under the terms thereof. Upon execution of the Credit Agreement, the Company drew the full principal of the Term Loan Facility for use in the acquisition of Arcturus UAV. The Term Loan Facility requires payment of 5% of the outstanding obligations in each of the first four loan years, with the remaining 80.0% payable in loan year five, consisting of 3 quarterly payments of 1.25% each, with the remaining outstanding principal amount of the Term Loan Facility due and payable on the final maturity date. Proceeds from the Term Loan Facility were used in part to finance a portion of the cash consideration for the Arcturus Acquisition. Borrowings under the Revolving Facility may be used for working capital and other general corporate purposes.

The Credit Facilities provide the Company with a choice of interest rates between (a) LIBOR (with a 0% floor) plus the Applicable Margin; or (b) Base Rate (defined as the highest of (a) the Federal Funds Rate plus one-half percent (0.50%), (b) the Bank of America prime rate, and (c) the one (1) month LIBOR plus one percent (1.00%)) plus the Applicable Margin. The Applicable Margin is based upon the Consolidated Leverage Ratio (as defined in the Credit Agreement) and whether the Company elects LIBOR (ranging from 1.50 - 2.25%) or Base Rate (ranging from 0.50 - 1.25%). The Company is also responsible for certain commitment fees from 0.20-0.35% depending on the Consolidated Leverage Ratio, and administrative agent expenses incurred in relation to the Credit Facilities. In the event of a default, an additional 2% default interest rate would apply.

Any borrowing under the Credit Agreement may be repaid, in whole or in part, at any time and from time to time without premium or penalty other than customary breakage costs, and any amounts repaid under the Revolving Facility may be reborrowed. Mandatory prepayments are required under the revolving loans when borrowings and letter of credit usage exceed the aggregate revolving commitments of all lenders. Mandatory prepayments are also required in connection with the disposition of assets to the extent not reinvested and unpermitted debt transactions.

In support of its obligations pursuant to the Credit Facilities, the Company has granted security interests in substantially all of the personal property of the Company and its domestic subsidiaries, including a pledge of the equity interests in its subsidiaries (limited to 65% of outstanding equity interests in the case of foreign subsidiaries), and the proceeds thereof, with customary exclusions and exceptions. The Company’s existing and future domestic subsidiaries, including Arcturus UAV (as of the closing of its acquisition by the Company), will be guarantors for the Credit Facilities.

The Credit Agreement contains certain customary representations and warranties and affirmative and negative covenants, including certain restrictions on the ability of the Company and its Subsidiaries (as defined in the Credit Agreement) to incur any additional indebtedness or guarantee indebtedness of others, to create liens on properties or assets, or to enter into certain asset and stock-based transactions. In addition, the Credit Agreement includes certain financial maintenance covenants, requiring that (x) the Consolidated Leverage Ratio (as defined in the Credit Agreement) shall not be more than 3.00 to 1.00 as of the end of any fiscal quarter and (y) the Consolidated Fixed Charge Coverage Ratio (as defined in the Credit Agreement) shall not be less than 1.25 to 1.00 as of the end of any fiscal quarter.

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The Credit Agreement contains certain customary events of default, which include failure to make payments when due thereunder, the material inaccuracy of representations or warranties, failure to observe or perform certain covenants, cross-defaults, bankruptcy and insolvency-related events, certain judgments, certain ERISA-related events, invalidity of loan documents, or a Change of Control (as defined in the Credit Agreement). Upon the occurrence and continuation of an event of default, the Lenders may cease making future loans under the Credit Agreement and may declare all amounts owing under the Credit Agreement to be immediately due and payable.

Intelligent Systems Group Acquisition

On February 23, 2021, the Company purchased certain assets of, and assumed certain liabilities of, the Intelligent Systems Group business segment (“ISG”) of Progeny Systems Corporation (the “ISG Acquisition��), a Virginia corporation (the “ISG Seller”), pursuant to the terms of an Asset Purchase Agreement (the “ISG Purchase Agreement”) of the same date by and among the Company, Seller and the sole shareholder of Seller (the “Beneficial Owner”). ISG is engaged in development of artificial intelligence-enabled computer vision, machine learning and perceptive autonomy technologies and provides related services to United States government customers.

In connection with the ISG Acquisition, the Company (i) paid a base purchase price of $30,000,000 in cash at closing and (ii) may pay additional cash consideration of up to $6,000,000 based on the achievement of certain revenue targets by ISG during the 3 years following closing, in each case, subject to the terms and conditions of the ISG Purchase Agreement, including certain customary adjustments.

As a condition to closing pursuant to the ISG Purchase Agreement, the Company and the ISG Seller entered into certain ancillary agreements, including a transition services agreement and two subleases pursuant to which the ISG Seller will provide the Company certain services and facilities space to accommodate the transition of ISG to the Company.

The parties to the ISG Purchase Agreement have made representations, warranties, and covenants that are customary for a transaction of this type, including, among other things, restrictions on the ISG Seller and the Beneficial Owner from engaging in certain competitive activities, as well as mutual indemnification obligations between the Company and the ISG Seller. To supplement certain indemnifications provided by the ISG Seller, the Company obtained a representation and warranty insurance policy.

Telerob Acquisition

On December 3, 2020, the Company entered into a Share Purchase Agreement (the “Telerob Purchase Agreement”) with Unmanned Systems Investments GmbH, a German limited liability company incorporated under the laws of Germany (the “Telerob Seller”), and each of the unit holders of the Telerob Seller (collectively, the “Shareholders”), to purchase 100% of the issued and outstanding shares of Seller’s wholly-owned subsidiary, Telerob Gesellschaft für Fernhantierungstechnik mbH, a German company based in Ostfildern (near Stuttgart), Germany (“Telerob”), including Telerob’s wholly owned subsidiary, Telerob USA, Inc. (“Telerob USA,” and collectively with Telerob, the “Telerob Group”). The Telerob Group develops, manufactures, sells, and services remote-controlled ground robots and transport vehicles for civil and defense applications. Upon closing of the transactions contemplated by the Telerob Purchase Agreement, which is anticipated in the fourth quarter, Telerob will become a wholly-owned subsidiary of the Company.

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Pursuant to the Telerob Purchase Agreement, the Company will pay approximately €37,455,000 (approximately $45.4 million) in cash at the closing to the Telerob Seller, subject to certain purchase price adjustments, less (a) €3,000,000 (approximately $3.6 million) to be held in escrow for breaches of the Telerob Seller’s warranties; (b) transaction-related fees and costs incurred by the Telerob Seller; (c) 50% of the cost of obtaining the warranty insurance policy; and (d) payments to Shareholders or outside the ordinary course of business if made after September 30, 2020. In addition, at closing the Company will pay off approximately €7.8 million (approximately $9.4 million) of certain indebtedness of the Telerob Group. This indebtedness may be offset by any cash on hand at the Telerob Group at closing. The escrow amount is to be released to the Telerob Seller, less any amounts paid or reserved, 30 months following the closing date.

In addition, the Telerob Seller may receive up to a total of €6,000,000 (approximately $7.3 million) in additional cash consideration over a three year period contingent upon the achievement of 3 distinct milestones. The first two milestones are the achievement of specific revenue targets and the third milestone is obtaining certain contract awards from the U.S. military.

The transactions contemplated by the Telerob Purchase Agreement are subject to certain closing conditions, including: (i) clearance by the German government; (ii) the accuracy of each party’s warranties (subject to customary materiality qualifiers); (iii) each party’s compliance with its covenants and agreements contained in the Telerob Purchase Agreement (subject to customary materiality qualifiers); and (iv) other customary closing conditions.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion and analysis of our financial condition and the results of operations as of and for the periods presented below. The following discussion and analysis should be read in conjunction with the “Consolidated Financial Statements” and notes thereto included elsewhere in this Quarterly Report on Form 10-Q. This section and other parts of this Quarterly Report on Form 10-Q contain forward-looking statements that involve risks and uncertainties. In some cases, forward-looking statements can be identified by words such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “will,” “would” or similar expressions. Such forward-looking statements are based on current expectations, estimates and projections about our industry, our management’s beliefs and assumptions made by our management. Forward-looking statements are not guarantees of future performance and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended April 30, 2020, as updated by our subsequent filings under the Securities and Exchange Act of 1934, as amended (“the Exchange Act”).

Unless required by law, we expressly disclaim any obligation to update publicly any forward-looking statements, whether as result of new information, future events or otherwise.

Critical Accounting Policies and Estimates

The following should be read in conjunction with the critical accounting estimates presented in our Annual Report on Form 10-K for the fiscal year ended April 30, 2020.

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of our accounting policies require that we make subjective judgments, including estimates that involve matters that are inherently uncertain. Our most critical estimates include those related to revenue recognition, inventory reserves for excess and obsolescence, intangible assets acquired in a business combination, goodwill, and income taxes. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities

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that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

We recognize revenue in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Topic 606 requires revenue to be recognized when promised goods or services are transferred to customers in amounts that reflect the consideration to which we expect to be entitled in exchange for those goods or services.

Revenue for small UAS product contracts with both the U.S. government and foreign governments are recognized at the point in time when the transfer of control passes to the customer, which is generally when title and risk of loss transfer. Revenue for TMS contracts is recognized over time as costs are incurred. Revenue for Customer-Funded R&D contracts is recognized over time as costs are incurred.

We review cost performance and estimates-to-complete at least quarterly and in many cases more frequently. Adjustments to original estimates for a contract’s revenue, estimated costs at completion and estimated profit or loss are often required as work progresses under a contract, as experience is gained and as more information is obtained, even though the scope of work required under the contract may not change, or if contract modifications occur. The impact of revisions in estimate of completion for all types of contracts are recognized on a cumulative catch-up basis in the period in which the revisions are made. During the three and nine months ended January 30, 2021 and January 25, 2020, changes in accounting estimates on contracts recognized over time are presented below.

For the three months ended January 30, 2021 and January 25, 2020, favorable and unfavorable cumulative catch-up adjustments included in revenue were as follows (in thousands):


	Three Months Ended
	January 30,		January 25,
	2021		2020

Gross favorable adjustments	$	428	$	1,369
Gross unfavorable adjustments		(228)		(217)
Net favorable adjustments	$	200	$	1,152

For the three months ended January 30, 2021, favorable cumulative catch-up adjustments of $0.4 million were primarily due to final cost adjustments on nine contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $0.2 million were primarily related to higher than expected costs on 12 contracts, which individually were not material.

For the three months ended January 25, 2020, favorable cumulative catch-up adjustments of $1.4 million were primarily due to final cost adjustments on seven contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $0.2 million were primarily related to higher than expected costs on 13 contracts, which individually were not material.


	Nine Months Ended
	January 30,		January 25,
	2021		2020

Gross favorable adjustments	$	1,898	$	1,878
Gross unfavorable adjustments		(1,103)		(709)
Net favorable adjustments	$	795	$	1,169

For the nine months ended January 30, 2021, favorable cumulative catch-up adjustments of $1.9 million were primarily due to final cost adjustments on 15 contracts, which individually were not material. For the same period, unfavorable cumulative catch-up adjustments of $1.1 million were primarily related to higher than expected costs on 23 contracts, which individually were not material.

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For the nine months ended January 25, 2020, favorable cumulative catch-up adjustments of $1.9 million were primarily due to final cost adjustments on 17 contracts. The Company revised its estimates of the total expected costs to complete a contract associated with a design and development agreement, which had a favorable impact of $1.0 million. For the same period, unfavorable cumulative catch-up adjustments of $0.7 million were primarily related to higher than expected costs on 16 contracts, which individually were not material.

Fiscal Periods

Due to our fixed year end date of April 30, our first and fourth quarters each consist of approximately 13 weeks. The second and third quarters each consist of exactly 13 weeks. Our first three quarters end on a Saturday. Our 2021 fiscal year ends on April 30, 2021 and our fiscal quarters end on August 1, 2020, October 31, 2020 and January 30, 2021, respectively.

Results of Operations

The following tables set forth our results of operations for the periods indicated (in thousands):

Three Months Ended January 30, 2021 Compared to Three Months Ended January 25, 2020


	Three Months Ended
	January 30,		January 25,
	2021		2020

Revenue	$	78,782	$	61,891
Cost of sales		50,141		38,395
Gross margin		28,641		23,496
Selling, general and administrative		15,652		13,223
Research and development		13,631		11,381
Loss from operations		(642)		(1,108)
Other income:
Interest income, net		94		1,122
Other (expense) income, net		(37)		120
(Loss) income before income taxes		(585)		134
Benefit from income taxes		(924)		(38)
Equity method investment loss, net of tax		(81)		(1,200)
Net income (loss)	$	258	$	(1,028)

Revenue. Revenue for the three months ended January 30, 2021 was $78.8 million, as compared to $61.9 million for the three months ended January 25, 2020, representing an increase of $16.9 million, or 27%. The increase in revenue was due to an increase in product revenue of $21.9 million, partially offset by a decrease in service revenue of $5.0 million. The increase in product revenue was primarily due to an increase in small UAS and TMS revenue. Within small UAS, increases in product deliveries to customers within the U.S. Department of Defense were partially offset by decreases in product deliveries to international allied customers. The decrease in service revenue was primarily due to a decrease in customer-funded R&D revenue.

Cost of Sales. Cost of sales for the three months ended January 30, 2021 was $50.1 million, as compared to $38.4 million for the three months ended January 25, 2020, representing an increase of $11.7 million, or 31%. The increase in cost of sales was a result of an increase in product cost of sales of $14.7 million, partially offset by a decrease in service costs of sales of $3.0 million. The increase in product cost of sales was primarily due to an increase in product sales and an unfavorable mix. The decrease in service costs of sales was primarily due to the decrease in service revenue. As a percentage of revenue, cost of sales increased from 62% to 64%, primarily due to an unfavorable product mix, partially offset by an increase in the proportion of product sales to total revenue.

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Gross Margin. Gross margin for the three months ended January 30, 2021 was $28.6 million, as compared to $23.5 million for the three months ended January 25, 2020, representing an increase of $5.1 million, or 22%. The increase in gross margin was due to an increase in product margin of $7.2 million, partially offset by a decrease in service margin of $2.1 million. The increase in product margin was primarily due to the increase in product sales, partially offset by an unfavorable product mix. The decrease in service margin was primarily due to the decrease in service revenue. As a percentage of revenue, gross margin decreased from 38% to 36%, primarily due to an unfavorable product mix, partially offset by an increase in the proportion of product sales to total revenue.

Selling, General and Administrative. SG&A expense for the three months ended January 30, 2021 was $15.7 million, or 20% of revenue, as compared to SG&A expense of $13.2 million, or 21% of revenue, for the three months ended January 25, 2020. The increase in SG&A expense was primarily due to an increase in acquisition related expenses of $3.1 million related to the Arcturus Acquisition, ISG Acquisition and the pending acquisition of Telerob.

Research and Development. R&D expense for the three months ended January 30, 2021 was $13.6 million, or 17% of revenue, as compared to R&D expense of $11.4 million, or 18% of revenue, for the three months ended January 25, 2020. R&D expense increased by $2.3 million, or 20%, for the three months ended January 30, 2021, primarily due to an increase in development activities regarding enhanced capabilities for our products and development of new product lines.

Interest Income, net. Interest income, net for the three months ended January 30, 2021 was $0.1 million compared to interest income, net of $1.1 million for the three months ended January 25, 2020. The decrease in interest income was primarily due to a decrease in the average interest rate earned on our investment portfolio.

Other (Expense) Income, net. Other expense, net, for the three months ended January 30, 2021 was $37 thousand compared to other income, net of $0.1 million for the three months ended January 25, 2020.

Benefit from Income Taxes. Our effective income tax rate was 157.9% for the three months ended January 30, 2021, as compared to (28.4)% for the three months ended January 25, 2020. The decrease in the effective income tax rate was primarily due to lower projected annual effective tax rate in the current fiscal year over last fiscal year.

Equity Method Investment Loss, net of Tax. Equity method investment loss, net of tax for the three months ended January 30, 2021 was $0.1 million compared to $1.2 million for the three months ended January 25, 2020.

Nine Months Ended January 30, 2021 Compared to Nine Months Ended January 25, 2020


	Nine Months Ended
	January 30,		January 25,
	2021		2020

Revenue	$	258,897	$	232,073
Cost of sales:		153,994		132,139
Gross margin		104,903		99,934
Selling, general and administrative		42,640		43,146
Research and development		36,710		30,948
Income from operations		25,553		25,840
Other income:
Interest income, net		417		3,717
Other income, net		68		632
Income before income taxes		26,038		30,189
Provision for income taxes		2,774		3,203
Equity method investment loss, net of tax		(10,891)		(3,410)
Net income	$	12,373	$	23,576

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Revenue. Revenue for the nine months ended January 30, 2021 was $258.9 million, as compared to $232.1 million for the nine months ended January 25, 2020, representing an increase of $26.8 million, or 12%. The increase in revenue was due an increase in product revenue of $22.6 million and an increase in service revenue of $4.2 million. The increase in product deliveries was primarily due to an increase in TMS revenue and an increase in product deliveries of small UAS. Within small UAS, increases in product deliveries to customers within the U.S. Department of Defense were partially offset by decreases in product deliveries to international allied customers. The increase in service revenue was primarily due to an increase in customer-funded R&D revenue, partially offset by a decrease in engineering services revenue.

Cost of Sales. Cost of sales for the nine months ended January 30, 2021 was $154.0 million, as compared to $132.1 million for the nine months ended January 25, 2020, representing an increase of $21.9 million, or 17%. The increase in cost of sales was a result of an increase in product cost of sales of $19.8 million and an increase in service costs of sales of $2.1 million. The increase in product costs was primarily due to the increase in product deliveries and an unfavorable product mix. The increase in service costs of sales was primarily due to the increase in service revenue. As a percentage of revenue, cost of sales increased from 57% to 59%, primarily due to an unfavorable product mix.

Gross Margin. Gross margin for the nine months ended January 30, 2021 was $104.9 million, as compared to $99.9 million for the nine months ended January 25, 2020. The increase in gross margin was primarily due to an increase in product margin of $2.8 million and an increase in service margin of $2.2 million. The increase in product margin was primarily due to an increase in product sales, partially offset by an unfavorable product mix. The increase in service margin was primarily due to an increase in service revenue. As a percentage of revenue, gross margin decreased from 43% to 41%, primarily due to an unfavorable product mix.

Selling, General and Administrative. SG&A expense for the nine months ended January 30, 2021 was $42.6 million, or 16% of revenue, as compared to SG&A expense of $43.1 million, or 19% of revenue, for the nine months ended January 25, 2020. The decrease in SG&A expense was primarily due to lower advertising, business travel and trade show expenses primarily related to COVID-19 related restrictions, partially offset by an increase in employee related expenses and acquisition related expenses of $3.1 million related to the Arcturus Acquisition, ISG Acquisition and the pending acquisition of Telerob.

Research and Development. R&D expense for the nine months ended January 30, 2021 was $36.7 million, or 14% of revenue, as compared to R&D expense of $30.9 million, or 13% of revenue, for the nine months ended January 25, 2020. R&D expense increased by $5.8 million, or 19%, for the nine months ended January 30, 2021, primarily due to an increase in development activities regarding enhanced capabilities for our products and development of new product lines.

Interest Income, net. Interest income, net for the nine months ended January 30, 2021 was $0.4 million compared to interest income, net of $3.7 million for the nine months ended January 25, 2020. The decrease in interest income was primarily due to a decrease in the average interest rate earned on our investment portfolio.

Other Income, net. Other income, net, for the nine months ended January 30, 2021 was $0.1 million compared to other income, net of $0.6 million for the nine months ended January 25, 2020. The decrease in other income, net was primarily due to a decrease in transition services performed on behalf of the buyer of the discontinued EES Business.

Provision for Income Taxes. Our effective income tax rate was 10.7% for the nine months ended January 30, 2021, as compared to 10.6% for the nine months ended January 25, 2020.

Equity Method Investment Loss, net of Tax. Equity method investment loss, net of tax for the nine months ended January 30, 2021 was a loss of $10.9 million compared to equity method investment loss, net of tax of $3.4 million for the nine months ended January 25, 2020. The increase was primarily due to a loss of $8.4 million for our proportion of HAPSMobile’s impairment of its investment in Loon LLC.

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Backlog

Consistent with ASC 606, we define funded backlog as remaining performance obligations under firm orders for which funding is currently appropriated to us under a customer contract. As of January 30, 2021, our funded backlog was approximately $103.9 million.

In addition to our funded backlog, we also had unfunded backlog of $116.1 million as of January 30, 2021. Unfunded backlog does not meet the definition of a performance obligation under ASC Topic 606. We define unfunded backlog as the total remaining potential order amounts under cost reimbursable and fixed price contracts with (i) multiple one-year options and indefinite delivery, indefinite quantity (“IDIQ”) contracts, or (ii) incremental funding. Unfunded backlog does not obligate the customer to purchase goods or services. There can be no assurance that unfunded backlog will result in any orders in any particular period, if at all. Management believes that unfunded backlog does not provide a reliable measure of future estimated revenue under our contracts. Unfunded backlog, with the exception of the remaining potential value of the FCS domain, does not include the remaining potential value associated with a U.S. Army IDIQ-type contract for small UAS because values for each of the other domains within the contract have not been disclosed by the customer, and we cannot be certain that we will secure all task orders issued against the contract.

Because of possible future changes in delivery schedules and/or cancellations of orders, backlog at any particular date is not necessarily representative of actual sales to be expected for any succeeding period, and actual sales for the year may not meet or exceed the backlog represented. Our backlog is typically subject to large variations from quarter to quarter as existing contracts expire or are renewed or new contracts are awarded. A majority of our contracts, specifically our IDIQ contracts, do not currently obligate the U.S. government to purchase any goods or services. Additionally, all U.S. government contracts included in backlog, whether or not they are funded, may be terminated at the convenience of the U.S. government.

Liquidity and Capital Resources

On February 19, 2021 in connection with the consummation of the Arcturus Acquisition, we entered into a Credit Agreement for (i) a five-year $100 million revolving credit facility, which includes a $10 million sublimit for the issuance of standby and commercial letters of credit, and (ii) a five-year amortized $200 million term A loan (together the “Credit Facilities”). The Term Loan Facility requires payment of 5% of the outstanding obligations in each of the first four loan years, with the remaining 80.0% payable in loan year five, consisting of three quarterly payments of 1.25% each, with the remaining outstanding principal amount of the Term Loan Facility due and payable on the final maturity date. Proceeds from the Term Loan Facility were used in part to finance a portion of the cash consideration for the Arcturus Acquisition. Borrowings under the Revolving Facility may be used for working capital and other general corporate purposes. Refer to Note 18—Subsequent Events to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details.

We anticipate funding our normal recurring trade payables, accrued expenses, ongoing R&D costs and obligations under the Credit Facilities through our existing working capital and funds provided by operating activities including those provided by our recent acquisitions of Arcturus UAV and ISG and our pending acquisition of Telerob. The majority of our purchase obligations are pursuant to funded contractual arrangements with our customers. We believe that our existing cash, cash equivalents, cash provided by operating activities and other financing sources will be sufficient to meet our anticipated working capital, capital expenditure requirements, future obligations related to the recent acquisitions and obligations under the Credit Facilities during the next twelve months. There can be no assurance, however, that our business will continue to generate cash flow at current levels. If we are unable to generate sufficient cash flow from operations, then we may be required to sell assets, reduce capital expenditures or draw on our Credit Facilities. We anticipate that existing sources of liquidity, Credit Facilities, and cash flows from operations will be sufficient to satisfy our cash needs for the foreseeable future.

Our primary liquidity needs are for financing working capital, investing in capital expenditures, supporting product development efforts, introducing new products and enhancing existing products, marketing acceptance and adoption of our products and services and financing our pending acquisition of Telerob. Our future capital requirements, to a certain extent, are also subject to general conditions in or affecting the defense industry and are subject to general economic,

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political, financial, competitive, legislative and regulatory factors that are beyond our control. Moreover, to the extent that existing cash, cash equivalents, cash from operations, and cash from our Credit Facilities are insufficient to fund our future activities, we may need to raise additional funds through public or private equity or debt financing, subject to the limitations specified in our Credit Facility agreement. In addition, we may also need to seek additional equity funding or debt financing if we become a party to any agreement or letter of intent for potential investments in, or acquisitions of, businesses, services or technologies.

Our working capital requirements vary by contract type. On cost-plus-fee programs, we typically bill our incurred costs and fees monthly as work progresses, and therefore working capital investment is minimal. On fixed-price contracts, we typically are paid as we deliver products, and working capital is needed to fund labor and expenses incurred during the lead time from contract award until contract deliveries begin.

To date, COVID-19 has not had a significant impact on our liquidity, cash flows or capital resources. However, the continued spread of COVID-19 has led to disruption and volatility in the global capital markets, which, depending on future developments, could impact our capital resources and liquidity in the future. In consideration of the impact of the COVID-19 pandemic, we continue to hold a significant portion of our investments in cash and cash equivalents and U.S. government and U.S. government agency securities.

Although not material in value alone or in aggregate, during the nine months ended January 30, 2021, we made certain commitments outside of the ordinary course of business, including capital contributions of $2.1 million to a limited partnership fund. Under the terms of the limited partnership agreement, we have committed to make capital contributions totaling $10.0 million to the fund of which $2.9 million was remaining at January 30, 2021.

Cash Flows

The following table provides our cash flow data for the nine months ended January 30, 2021 and January 25, 2020 (in thousands):


	Nine Months Ended
	January 30,		January 25,
	2021		2020

	(Unaudited)
Net cash provided by operating activities	$	78,962	$	15,066
Net cash used in investing activities	$	(6,200)	$	(50,362)
Net cash used in financing activities	$	(3,361)	$	(916)

Cash Provided by Operating Activities. Net cash provided by operating activities for the nine months ended January 30, 2021 increased by $63.9 million to $79.0 million, as compared to net cash provided by operating activities of $15.1 million for the nine months ended January 25, 2020. The increase in net cash provided by operating activities was primarily due to an increase in cash as a result of changes in operating assets and liabilities of $64.3 million, largely related to collections of receivables, and losses from equity method investments of $7.5 million, partially offset by a decrease in net income $11.2 million.

Cash Used in Investing Activities. Net cash used in investing activities decreased by $44.2 million to $6.2 million for the nine months ended January 30, 2021, as compared to net cash used by investing activities of $50.4 million for the nine months ended January 25, 2020. The decrease in net cash used in investing activities was primarily due a decrease in cash used in business acquisition of $18.6 million and a decrease in purchases net of redemptions of available-for-sale investments of $22.6 million, partially offset by an increase in purchases net of redemptions of held-to-maturity investments of $4.4 million.

Cash Used in Financing Activities. Net cash used in financing activities increased by $2.4 million to $3.4 million for the nine months ended January 30, 2021, as compared to net cash used by financing activities of $0.9 million for the nine months ended January 25, 2020. The increase in net cash used by financing activities was primarily due to an increase in holdback and retention payments related to a prior business acquisition of $1.5 million and an increase in tax withholding payments related to net settlement of equity awards of $0.9 million.

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Contractual Obligations

During the three months ended January 30, 2021, there were no material changes in our contractual obligations and commercial commitments from those disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2020.

Off-Balance Sheet Arrangements

As of January 30, 2021, we had no off‑balance sheet arrangements as defined in Item 303(a)(4) of Regulation S‑K.

Inflation

Our operations have not been, and we do not expect them to be, materially affected by inflation. Historically, we have been successful in adjusting prices to our customers to reflect changes in our material and labor costs.

New Accounting Standards

Please refer to Note 1—Organization and Significant Accounting Policies to our unaudited consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of new accounting pronouncements and accounting pronouncements adopted during the nine months ended January 30, 2021.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In the ordinary course of business, we are exposed to various market risk factors, including fluctuations in interest rates, changes in general economic conditions, domestic and foreign competition, and foreign currency exchange rates.

Interest Rate Risk

It is our policy not to enter into interest rate derivative financial instruments. On February 19, 2021 in connection with the consummation of the Arcturus Acquisition, we entered into the Credit Facilities. The current outstanding balance of the Credit Facilities is $200 million and bears a variable interest rate. If market interest rates increase significantly, interest due on the Credit Facilities would increase.

Foreign Currency Exchange Rate Risk

Since a significant part of our sales and expenses are denominated in U.S. dollars, we have not experienced significant foreign exchange gains or losses to date. On December 3, 2020, we entered into a share purchase agreement to purchase 100% of the issued and outstanding shares of Seller’s wholly-owned subsidiary, Telerob Gesellschaft für Fernhantierungstechnik mbH for €51 million inclusive of certain contingent consideration payments. In addition, we occasionally engage in forward contracts in foreign currencies to limit our exposure on non-U.S. dollar transactions.

ITEM 4. CONTROLS AND PROCEDURES

Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired

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control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as of January 30, 2021, the end of the period covered by this Quarterly Report on Form 10-Q.

Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of January 30, 2021, the end of the period covered by this Quarterly Report on Form 10-Q, our disclosure controls and procedures were effective and were operating at a reasonable assurance level.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting or in other factors identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Exchange Act that occurred during the quarter ended January 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act).

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On February 22, 2019, Webasto filed a lawsuit, which was subsequently amended on April 5, 2019, against us in Delaware Superior Court, arising from the sale of the EES Business to Webasto in June 2018. The lawsuit generally alleges several claims against us for breach of contract, indemnity, declaratory judgment, and fraud and misrepresentation, including allegations regarding inaccuracy of certain diligence disclosures, failure to provide certain consents to contract assignments and related to the previously announced recall. Webasto seeks to recover the costs of the recall and other damages totaling over $100 million in addition to attorneys’ fees, costs, and punitive damages. Additionally, Webasto is seeking a declaratory judgment that we did not meet the requirements to receive the additional $6.5 million of the purchase price which was held back at the closing of the transaction (the “Holdback Amount”). On August 16, 2019, we filed our answer to Webasto’s complaint and a counterclaim against Webasto seeking payment of the Holdback Amount and declaratory relief regarding Webasto’s cancellation of an assigned contract. As to the Webasto lawsuit, our initial evaluation is that many of the allegations are meritless and that we lack sufficient information to fully analyze other allegations at this time. Discovery in this lawsuit has begun and is ongoing and, as of June 17, 2020, a trial has been set for July 14, 2021. At present, the parties continue to engage in discovery and started conducting depositions in October 2020. Depositions ceased in November 2020 due to restrictions resulting from the global COVID-19 pandemic and began again in February 2021. We expect to seek and obtain a trial continuance to account for pandemic-related delays, and therefore anticipate a new trial date in early 2022. We continue to mount a vigorous defense.

On August 14, 2019, Benchmark, the company that assembled the products subject to the recall, served a demand for arbitration to AeroVironment and Webasto pursuant to its contracts with AeroVironment and Webasto, respectively. In December 2019, Benchmark dismissed, without prejudice, all claims against us in the demand for arbitration. The recall remains a significant part of our pending litigation with Webasto.

We are subject to lawsuits, government investigations, audits and other legal proceedings from time to time in the ordinary course of our business. It is not possible to predict the outcome of any legal proceeding with any certainty. The outcome or costs we incur in connection with a legal proceeding could adversely impact our operating results and financial position.

ITEM 1A. RISK FACTORS

Except as set for below, there have been no material changes to the risk factors disclosed under Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the fiscal year ended April 30, 2020. Please refer to that section for disclosures regarding the risks and uncertainties related to our business.

Acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business, dilute stockholder value and impair our financial results.

In February 2021 we announced the acquisition of Arcturus UAV, Inc., which designs, engineers, tools, manufactures and provides unmanned UAS and related products and services, and ISG, which develops artificial intelligence-enabled computer vision, machine learning and perceptive autonomy technologies and provides related services. Additionally, in December 2020, we announced the planned acquisition of Telerob Gesellschaft für Fernhantierungstechnik mbH, a German company ("Telerob") that develops, manufactures, sells, and services remote-controlled ground robots and transport vehicles for civil and defense applications. We intend to consider additional acquisitions that could add to our customer base, technological capabilities or system offerings. Acquisitions involve numerous risks, any of which could harm our business, including the following:

●

difficulties in integrating the operations, technologies, products, existing contracts, accounting and personnel of each target company and realizing the anticipated synergies of the combined businesses;

●

difficulties in supporting and transitioning customers, if any, of each target company;

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●

diversion of financial and management resources from existing operations;

●

the price we pay or other resources that we devote may exceed the value we realize, or the value we could have realized if we had allocated the purchase price or other resources to another opportunity;

●

risks of entering new markets in which we have limited or no experience (including the introduction of international operations upon the planned acquisition of Telerob);

●

potential loss of key employees, customers and strategic alliances from either our current business or the target company’s business;

●

assumption of unanticipated problems or latent liabilities, such as problems with the quality of the target company’s products or its regulatory compliance;

●

expanded regulatory compliance complexity and risk; and

●

inability to generate sufficient revenue to offset acquisition costs.

Acquisitions also frequently result in the recording of goodwill and other intangible assets which are subject to potential impairments in the future that could harm our financial results. In addition, if we finance acquisitions by issuing equity, or securities convertible into equity, such as the stock consideration issued in the Arcturus Closing, then our existing stockholders may be diluted, which could lower the market price of our common stock. If we finance acquisitions through debt, such as the Credit Facilities we entered into in connection with the consummation of the Arcturus Acquisition, then such future debt financing may contain covenants or other provisions that limit our operational or financial flexibility.

If we fail to properly evaluate acquisitions or investments, then we may not achieve the anticipated benefits of any such acquisitions, and we may incur costs in excess of what we anticipate. The failure to successfully evaluate and execute acquisitions or investments or otherwise adequately address these risks could materially harm our business and financial results.

Borrowings under our credit facilities could adversely affect our financial condition and restrict our operating flexibility.

On February 19, 2021, in connection with the consummation of the Arcturus Acquisition, we entered into the Credit Agreement, which, together with its associated Security and Pledge Agreement, sets forth the terms and conditions of the Term Loan Facility and Revolving Facility. Upon execution of the Credit Agreement, we drew down $200.0 million, the full principal amount of the Term Loan Facility, to partially finance the acquisition of Arcturus UAV.

The Term Loan Facility has a five-year term expiring in February 2026 and bears interest, at our option, either at a LIBOR rate or a base rate plus a fixed applicable margin dependent on our consolidated leverage ratio under the terms of the agreement. We are required to pay 5.0% of the outstanding obligations under the Term Loan Facility in each of the first four loan years, with the remaining 80.0% payable in the fifth loan year, consisting of three quarterly payments of 1.25% each, with the remaining outstanding principal amount of the Term Loan Facility due and payable on the maturity date. The Revolving Facility as a term of 5 years. As of February 19, 2021 we have only letters of credit issued pursuant to the Revolving Facility, totaling $3.6 million and replacing prior letters of credit outstanding.

In support of our obligations under the Credit Facilities, we have granted security interests in substantially all of our personal property and that of our domestic subsidiaries, including a pledge of the equity interests in our subsidiaries (limited to 65% of outstanding equity interests in the case of our foreign subsidiaries), subject to customary exclusions and exceptions. In addition, our domestic subsidiaries, including Arcturus UAV, are required to be guarantors of the Credit Facilities.

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In addition, our increased level of indebtedness may have important consequences to us, including:

●

increasing our vulnerability to adverse general economic and industry conditions;

●

requiring us to dedicate a portion of our cash flows to the payment of interest and when applicable, principal, on our indebtedness and other obligations thereby reducing the availability of our cash flow to fund working capital, capital expenditures, research and development efforts, execution of our business strategy, acquisitions and other general corporate purposes;

●

limiting our flexibility in planning for, or reacting to, changes in the economy, the defense industry, and the markets in which we operate;

●

subjecting us to maintenance of various financial covenants and adherence to certain other affirmative and negative covenants, requiring us to seek lender consent or waiver in relation to our financial performance or other potential strategic actions in the future;

●

placing us at a competitive disadvantage compared to our competitors with less indebtedness;

●

exposing us to substantial interest rate risk due to the variable interest rate under the Credit Facilities, such that, if interest rates were to increase substantially during the term of the Credit Facilities, the resulting increase in our interest payment obligations could adversely affect our operating results and our ability to service the indebtedness under the Credit Facilities; and

●

making it more difficult for us to borrow additional funds in the future to fund our growth, acquisitions, working capital, capital expenditures, and other purposes.

To the extent we incur additional indebtedness, the risks described above could increase.

If we do not have sufficient funds to repay the Term Loan Facility when it becomes due in 2026, it may be necessary to refinance our debt through additional debt or equity financings. If, at the time of any such refinancing, prevailing interest rates or other factors result in higher interest rates on such refinanced debt, such increases in our interest expense could have an adverse effect on our business, results of operations and financial condition.

The Credit Agreement contain customary events of default, upon the occurrence and during the continuation of which, after any applicable grace period, the lenders would have the ability to declare the loans due and payable in whole or in part. Among other things, if we fail to make required debt payments, or if we fail to comply with financial or other covenants in the Credit Agreement, we would be in default under the terms thereof. The Credit Agreement contains customary negative covenants that include, subject to customary exclusions:

●

Restrictions on additional liens on our assets.

●

Restrictions on incurring additional indebtedness.

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Restrictions on new investments, including acquisitions, mergers, investments in subsidiaries that are not guarantors of the debt, and joint ventures.

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Restrictions on disposal of assets.

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Restrictions on payments of cash dividends.

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Restrictions on changing the nature of our business.

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A requirement to maintain a maximum consolidated leverage ratio and a minimum fixed charge coverage ratio.

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Restrictions on changes to our accounting policies.

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Restrictions on payments of any junior indebtedness.

To the extent we would wish to engage in any of the prohibited behaviors, we would need to obtain consent under the Credit Agreement, which may not be timely forthcoming or at all. If a default event were to occur, we may not have sufficient available cash to repay such outstanding debt obligations at the time they become due, or be able to refinance such debt on acceptable terms or at all.

Any of the foregoing limitations or events could materially and adversely affect our financial condition and results of operations.

We are presently classified as a small business Defense contractor and the loss of our small business status may adversely affect our ability to compete for small business set-aside US government contracts.

Because we have fewer than 1,500 employees, we are presently classified as a small business Defense contractor under our primary North American Industry Classification Systems (NAICS) industry and product specific codes (336411 - Aircraft Manufacturing) which are regulated in the United States by the Small Business Administration (SBA). Businesses that meet the small business size standard for the relevant NAICS code are able to bid on small business set-aside contracts. While we do not presently derive a substantial portion of our business from contracts which are set-aside for small businesses, we are able to bid on small business set-aside contracts as well as contracts which are open to non-small business entities. As we continue to grow and add employees, including through acquisitions, or if NAICS codes are revised, we could cease to qualify as a small business, which could adversely impact our eligibility for special small business programs and limit our ability to partner with other business entities that seek to team with small business entities as may be required under a specific contract. If we out grow our small business classification, we would not be eligible to serve as the prime contractor on small business set aside programs and may need to implement a small business subcontracting plan with other companies that qualify as a small business, for SBA approval. The loss of our small business classification could have a material adverse effect on our financial position and/or results of operations. Additionally, if we are no longer eligible for the small business exemption from compliance with the full range of Cost Accounting Standards (“CAS”), we would be required to demonstrate compliance with such standards upon the award of a contract subject to the full range of CAS, which will impose additional administrative costs on our business, and may significantly affect the manner in which we conduct our business with our customers and adversely affect our results of operations.

We face various risks related to the COVID-19 novel coronavirus pandemic and similar public health crises which may adversely impact our business.

In December 2019, a novel strain of a virus named SARS-CoV-2 (severe acute respiratory syndrome coronavirus 2), or coronavirus, which causes coronavirus disease, or COVID-19, was reported to have surfaced in Wuhan, China, and has reached multiple other regions and countries, including the United States and, more specifically, Southern California, where our primary operations are located. The coronavirus pandemic is evolving, and to date has led to the implementation of various responses, including government-imposed stay-at-home orders and quarantines, travel restrictions and other public health safety measures. Although our operations have mostly continued uninterrupted during the COVID-19 outbreak, adoption of work from home protocols, social distancing measures in the workplace and other responsive actions have required certain changes to our operations. If the current COVID-19 outbreak continues and results in additional periods of travel and other similar logistics restrictions, this may further reduce our and our customers’ capabilities to travel, domestically and internationally, which may impact our ability to perform certain contracts, develop and renew contracts, or market our products, or could otherwise disrupt portions of our business and have a material adverse effect on our results of operations.

Global health concerns, such as coronavirus, could result in social, economic and labor instability in the countries in which we or the third parties with whom we engage operate. It is not currently possible to ascertain the overall impact of the COVID-19 outbreak, if any, on our business. The extent to which COVID-19 impacts on our business, financial

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condition and results of operations and those of our third party partners will depend on future developments as to the geographic presence of COVID-19 and government and healthcare responses to such spread including the duration of the outbreak, new information that may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others, which remain highly uncertain. We cannot presently predict the scope and severity of any potential business disruptions, but if we or any of the third parties with whom we engage, including suppliers and other third parties with whom we conduct business, were to experience prolonged shutdowns or other business disruptions, including a slowdown in the effectiveness of our workforce due to illness or otherwise, our ability to conduct our business in the manner presently planned could be materially and negatively impacted. The COVID-19 outbreak has caused delays in the timing of our customers’ awarding of contracts to us, and while such delays have not yet had a significant impact on our business, there can be no assurances that any such delays would not have a material adverse impact on our business and results of operations in the future. The COVID-19 pandemic could also cause delays or limits in the ability of our customers to make timely payments to us. Additionally, our government customers may have more limited resources available to purchase our products due to deteriorating economic conditions or due to the diversion of resources to other budget priorities, including efforts to address the COVID-19 pandemic. The future progression of the COVID-19 outbreak and its resulting effects on our business, financial condition and results of operations are uncertain and are continuing to be assessed.

A decline in the U.S. and other government budgets, changes in spending or budgetary priorities, or delays in contract awards may significantly and adversely affect our future revenue.

Because we generate a significant portion of our total sales and our small UAS and tactical missile systems sales from the U.S. government and its agencies, our results of operations could be adversely affected by government spending caps or changes in government budgetary priorities, as well as by delays in the government budget process, program starts, or the award of contracts or orders under existing contracts. As a result, our business may be impacted due to shifts in the political environment and changes in the government and agency leadership positions as a result of the 2020 presidential election, as well as future election cycles. We cannot assure you that current levels of congressional funding for our products and services will continue and that our business will not decline. If annual budget appropriations or continuing resolutions are not enacted timely, we could face U.S. government shutdowns, which could adversely impact our programs and contracts with the U.S. government, our ability to receive timely payment from U.S. government entities and our ability to timely obtain export licenses for our products to fulfill contracts with our international customers.

Additionally, there is a possibility that political decisions following the 2020 presidential and congressional campaigns, or an impasse on policy issues, could impact future spending and program authorizations may not increase or may decrease or shift to programs in areas in which we do not provide services or are less likely to be awarded contracts. Such changes in spending authorizations and budgetary priorities may occur as a result of shifts in spending priorities from defense-related and other programs as a result of competing demands for federal funds, including in response to the COVID-19 pandemic, and the number and intensity of military conflicts or other factors.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

On September 24, 2015, we announced that on September 23, 2015 our Board of Directors authorized a share repurchase program (the “Share Repurchase Program”), pursuant to which we may repurchase up to $25.0 million of our common stock from time to time, in amounts and at prices we deem appropriate, subject to market conditions and other considerations. Share repurchases may be executed through open market transactions or negotiated purchases and may be made under a Rule 10b5-1 plan. There is no expiration date for the Share Repurchase Program. The Share Repurchase Program does not obligate us to acquire any particular amount of common stock and may be suspended at any time by our Board of Directors. No shares were repurchased in the nine months ended January 30, 2021. As of January 30, 2021, approximately $21.2 million remained authorized for future repurchases under the Share Repurchase Program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


Exhibit Number		Description
3.1(1)		Amended and Restated Certificate of Incorporation of AeroVironment, Inc.
3.2(2)		Third Amended and Restated Bylaws of AeroVironment, Inc.
10.1†		Stock Purchase Agreement, dated January 11, 2021, by and among AeroVironment, Inc., Arcturus UAV, Inc., and the shareholders and other equity interest holders of Arcturus UAV, Inc.
10.2		Loan commitment letter, dated January 11, 2021, by and among AeroVironment, Inc., Bank of America, N.A., BofA Securities, Inc., JPMorgan Chase Bank, N.A., and U.S. Bank National Association.
10.3†		Credit Agreement, dated February 19, 2021, by and among AeroVironment, Inc., certain lenders, letter of credit issuers, Bank of America, N.A., as the administrative agent and the swingline lender, and BofA Securities, Inc., JPMorgan Chase Bank, N.A., and U.S. Bank National Association, as joint lead arrangers and joint bookrunners.
10.4ǂ		Security and Pledge Agreement, dated February 19, 2021, by and among AeroVironment, Inc., certain obligors, and Bank of America, N.A., as the administrative agent.
10.5ǂ		Amendment No. 14 to the Design and Development Agreement by and between AeroVironment, Inc. and HAPSMobile Inc., dated as of January 11, 2021
10.6ǂ†		Share Purchase Agreement, dated December 3, 2020, by and between AeroVironment, Inc., Unmanned Systems Investments GmbH, and each of the unit holders of Unmanned Systems Investments GmbH.
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2		Certification of Interim Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
32#		Certification of Chief Executive Officer and Interim Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document – The instance document does not appear in the Interactive Data Files 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)	Incorporated by reference herein to Exhibit 3.1 to the Company’s Quarterly Report on Form 10‑Q filed March 9, 2007 (File No. 001‑33261).

(2)	Incorporated by reference herein to Exhibit 3.3 to the Company’s Annual Report on Form 10-K filed July 1, 2015 (File No. 001-33261).

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ǂ Pursuant to Items 601(b)(2) and/or 601(b)(10) of Regulation S-K, certain immaterial provisions of the agreement that would likely cause competitive harm to the Company if publicly disclosed have been redacted or omitted.

† Schedules (or similar attachments) to this Exhibit have been omitted in accordance with Items 601(a)(5) and/or 601(b)(2) of Regulation S-K. The Registrant agrees to furnish supplementally a copy of all omitted schedules to the Securities and Exchange Commission on a confidential basis upon request.

# The information in Exhibit 32 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act (including this report), unless the Company specifically incorporates the foregoing information into those documents by reference.

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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.


Date: March 9, 2021		AEROVIRONMENT, INC.

	By:	/s/ Wahid Nawabi
		Wahid Nawabi
		President and Chief Executive Officer
		(Principal Executive Officer)

		/s/ Kevin P. McDonnell
		Kevin P. McDonnell
		Senior Vice President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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Litigous
Readability	H.S. junior Avg

AeroVironment (AVAV) 10-Q2021 Q3 Quarterly report

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