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, 2021, as updated by our
subsequent filings under the Securities and Exchange Act of 1934, as amended
("the Exchange Act").

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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 conventions 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 year ended.
April 30, 2021.

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 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 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, including ISR services, is recognized over time as services
are rendered. We elected the right to invoice practical expedient in which if an
entity has a right to consideration from a customer in an amount that
corresponds directly with the value to the customer of the entity's performance
completed to date, such as flight hours for ISR services, the entity may
recognize revenue in the amount to which the entity has a right to invoice.
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' 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. Our small UAS, MUAS and
UGV product sales revenue is composed of revenue recognized on contracts for the
delivery of small UAS, MUAS and UGV systems and spare parts, respectively.
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.


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 six months ended October 30, 2021 and October 31, 2020,
changes in accounting estimates on contracts recognized over time are presented
below.



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For the three months ended October 30, 2021 and October 31, 2020, favorable and
unfavorable cumulative catch-up adjustments included in revenue were as follows
(in thousands):




                                                Three Months Ended
                                           October 30,      October 31,
                                               2021            2020

Gross favorable adjustments                $        289    $       1,140
Gross unfavorable adjustments                   (1,137)            (891)

Favorable (unfavorable) net adjustments $ (848) $ 249

For the three months ended October 30, 2021, favorable cumulative catch-up
adjustments of $0.3 million were primarily due to final cost adjustments on six
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 18 contracts, which individually were
not material.


For the three months ended October 31, 2020, favorable cumulative catch-up
adjustments of $1.1 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 $0.9 million were primarily
related to higher than expected costs on 30 contracts, which individually were
not material.



For the six months ended October 30, 2021 and October 31, 2020, favorable and
unfavorable cumulative catch-up adjustments included in revenue were as follows
(in thousands):




                                                  Six Months Ended
                                            October 30,      October 31,
                                               2021             2020

Gross favorable adjustments                $         872    $       1,505
Gross unfavorable adjustments                    (1,851)          (1,015)

Favorable (unfavorable) net adjustments $ (979) $ 490




For the six months ended October 30, 2021, favorable cumulative catch-up
adjustments of $0.9 million were primarily due to final cost adjustments on 18
contracts, which individually were not material. For the same period,
unfavorable cumulative catch-up adjustments of $1.9 million were primarily
related to higher than expected costs on 17 contracts, which individually were
not material.



For the six months ended October 31, 2020, favorable cumulative catch-up
adjustments of $1.5 million were primarily due to final cost adjustments on 13
contracts, which individually were not material. For the same period,
unfavorable cumulative catch-up adjustments of $1.0 million were primarily
related to higher than expected costs on 21 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 2022 fiscal
year ends on April 30, 2022 and our fiscal quarters end on July 31, 2021,
October 30, 2021 and January 29, 2022, respectively.



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Results of Operations


The following tables present our operating results for the periods indicated (in thousands):

 Three Months Ended October 30, 2021 Compared to Three Months Ended October 31,
                                      2020


                                                   Three Months Ended
                                              October 30,      October 31,
                                                 2021             2020

Revenue                                      $     122,008    $      92,665
Cost of sales                                       79,553           51,814
Gross margin                                        42,455           40,851
Selling, general and administrative                 24,819           14,977
Research and development                            14,297           11,976
Income from operations                               3,339           13,898
Other (loss) income:
Interest (expense) income, net                     (1,379)              115
Other (expense) income, net                       (10,048)               72
Income before income taxes                         (8,088)           14,085
(Benefit from) provision for income taxes          (9,511)            2,491
Equity method investment loss, net of tax            1,133          (9,522)
Net income                                   $       2,556    $       2,072




We operate the business as three reportable segments, Small Unmanned Aircraft
Systems ("Small UAS"), Tactical Missile Systems ("TMS") and Medium Unmanned
Aircraft Systems ("MUAS"). The Small UAS segment consists of our existing small
UAS product lines. The TMS segment consists of our existing tactical missile
systems product lines. The MUAS segment consists of our recently acquired
Arcturus business. All other includes HAPS, MacCready Works, which includes the
recently acquired ISG and Telerob businesses. The following table (in thousands)
sets forth our revenue, gross margin and adjusted operating income (loss) from
operations generated by each reporting segment for the periods indicated.
Adjusted operating income is defined as operating income before intangible
amortization, amortization of purchase accounting adjustments, and acquisition
related expenses.




                                                  Three Months Ended October 30, 2021
                                     Small UAS       TMS         MUAS       All other       Total
Revenue                             $    54,714    $ 18,418    $  26,525    $   22,351    $ 122,008
Gross margin                             27,754       6,222        2,223         6,256       42,455
Income (loss) from operations            13,377          47      (7,000)       (3,085)        3,339
Acquisition-related expenses                297         163          108           280          848
Amortization of acquired
intangible assets and other
purchase accounting adjustments             707           -        6,358   
     3,257       10,322
Adjusted income (loss) from
operations                          $    14,381    $    210    $   (534)    $      452    $  14,509






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                                                Three Months Ended October 31, 2020
                                    Small UAS       TMS         MUAS       All other      Total
Revenue                            $    58,265    $ 18,961    $      -    $    15,439    $ 92,665
Gross margin                            29,695       5,943           -          5,213      40,851

Income (loss) from operations           15,386       (995)           -          (493)      13,898
Acquisition-related expenses               171          94          58             91         414
Amortization of acquired
intangible assets and other
purchase accounting adjustments            715           -           -     
        -         715
Adjusted income (loss) from
operations                         $    16,272    $  (901)    $     58    $     (402)    $ 15,027





The Company has recognized amortization expense for intangible assets and other purchase accounting adjustments in the following categories in the accompanying unaudited Consolidated Statements of Income:




                                                 Three Months Ended                Six Months Ended
                                           October 30,       October 31,     October 30,      October 31,
                                               2021             2020            2021             2020
Cost of sales:
Product sales                              $      2,320     $         677   $       3,987    $       1,300
Contract services                                 3,141                 -           5,503                -
Selling, general and administrative               4,861                38  
        9,956               76
Total                                      $     10,322     $         715   $      19,446    $       1,376




Revenue. Revenue for the three months ended October 30, 2021 was $122.0 million,
as compared to $92.7 million for the three months ended October 31, 2020,
representing an increase of $29.3 million, or 32%. The increase in revenue was
due to an increase in service revenue of $23.9 million and an increase in
product revenue of $5.5 million. The increase in service revenue was primarily
due to an increase in MUAS service revenue, resulting from our acquisition of
Arcturus in February 2021, partially offset by a decrease in TMS service
revenue. The increase in product revenue was primarily due to an increases in
UGV and MUAS product revenue, resulting from our acquisitions of Telerob and
Arcturus, respectively, partially offset by a decrease in small UAS product
revenue.



Cost of Sales. Cost of sales for the three months ended October 30, 2021 was
$79.6 million, as compared to $51.8 million for the three months ended October
31, 2020, representing an increase of $27.7 million, or 54%. The increase in
cost of sales was a result of an increase in service cost of sales of $23.0
million and an increase in product costs of sales of $4.7 million. The increase
in service cost of sales was primarily due to the increase in service revenues
resulting from the acquisitions of Arcturus and ISG, and an increase in
intangible amortization expense and other purchase accounting adjustments. The
increase in product costs of sales was primarily due to an increase in
intangible amortization expense and other purchase accounting adjustments, an
increase in product revenue and an unfavorable product mix. Cost of sales for
the three months ended October 30, 2021 included $5.5 million of intangible
amortization and other related non-cash purchase accounting expenses as compared
to $0.7 million for the three months ended October 31, 2020. As a percentage of
revenue, cost of sales increased from 56% to 65%, primarily due to an increase
in the proportion of service revenue to total revenues resulting from the
acquisitions of Arcturus and ISG, an increase in intangible amortization expense
and other purchase accounting adjustments, and an unfavorable product mix.



Gross Margin. Gross margin for the three months ended October 30, 2021 was $42.5
million, as compared to $40.9 million for the three months ended October 31,
2020, representing an increase of $1.6 million, or 4%. The increase in gross
margin was due to an increase in service margin of $0.9 million and an increase
in product margin of $0.7 million. The increase in product margin was primarily
due to the increase in product sales, partially offset by an increase in
intangible amortization expense and other purchase accounting adjustments and an
unfavorable product mix. The increase in service margin was primarily due to an
increase in service revenue, partially offset by an increase in intangible
amortization expense and other purchase accounting adjustments. As a percentage
of revenue, gross margin decreased from 44% to 35%, primarily due to an increase
in the proportion of service revenue to total revenues resulting from the
acquisitions of Arcturus and ISG, an increase in intangible amortization expense
and other purchase accounting

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adjustments, and an unfavorable product mix. With the acquisitions of Arcturus
and ISG we expect that we will continue to experience a higher proportion of
service revenue, which generally have lower gross margins than our product
sales, in future quarters as compared to our historical trends in future
quarters.



Selling, General and Administrative. SG&A expense for the three months ended
October 30, 2021 was $24.8 million, or 20% of revenue, as compared to SG&A
expense of $15.0 million, or 16% of revenue, for the three months ended October
31, 2020. The increase in SG&A expense was primarily due to an increase in
headcount and related costs associated with our Arcturus, ISG and Telerob
acquisitions and an increase in intangible amortization and acquisition related
expenses, partially offset by a decrease in bonus and equity based compensation
expense. SG&A included $5.7 million and $0.4 million of acquisition-related
expenses and intangible amortization expenses for the three months ended October
30, 2021 and October 31, 2020, respectively.



Research and Development. R&D expense for the three months ended October 30,
2021 was $14.3 million, or 12% of revenue, as compared to R&D expense of
$12.0 million, or 13% of revenue, for the three months ended October 31, 2020.
R&D expense increased by $2.3 million, or 19%, for the three months ended
October 30, 2021, primarily due to an increase in development activities
regarding enhanced capabilities for our products, development of new product
lines and to support our recently acquired businesses.



Interest (Expense) Income, net. Interest expense, net for the three months ended
October 30, 2021 was $1.4 million compared to interest income, net of $0.1
million for the three months ended October 31, 2020. The increase in interest
expense was primarily due to an increase in interest expense resulting from the
term debt issued concurrent with the acquisition of Arcturus.



Other (Expense) Income, net. Other expense, net, for the three months ended
October 30, 2021 was $10.0 million compared to other income, net of $0.1 million
for the three months ended October 31, 2020. The increase was due to an
additional legal accrual of $10.0 million for the expected settlement of all
claims made by the buyers of our former EES business.



(Benefit from) Provision for Income Taxes. Our effective income tax rate was
117.6% for the three months ended October 30, 2021, as compared to 17.7% for the
three months ended October 31, 2020. The increase in the effective income tax
rate was primarily due to a change in estimate during the current quarter to
reduce projected annual income (loss) before income taxes, combined with the
year over year decrease in projected annual income (loss) before income taxes.



Equity Method Investment Income (Loss), net of Tax. Equity method investment
income, net of tax for the three months ended October 30, 2021 was $1.1 million
compared to equity method investment loss, net of tax of $9.5 million for the
three months ended October 31, 2020. The increase was primarily due to a loss of
$8.4 million for our proportion of HAPSMobile impairment of its investment in
Loon LLC during the three months ended October 31, 2020. The equity method
investment income during the current quarter was due to an increase in our
limited partnership investment.



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Six Months Ended October 30, 2021 Compared to Six Months Ended October 31, 2020




                                                    Six Months Ended
                                              October 30,      October 31,
                                                 2021             2020

Revenue                                      $     223,017    $     180,115
Cost of sales                                      151,839          103,853
Gross margin                                        71,178           76,262
Selling, general and administrative                 51,947           26,988
Research and development                            28,005           23,079
(Loss) income from operations                      (8,774)           26,195
Other (loss) income:
Interest (expense) income, net                     (2,654)              323
Other (expense) income, net                       (10,394)              105
(Loss) income before income taxes                 (21,822)           26,623
(Benefit from) provision for income taxes         (10,468)            3,698
Equity method investment loss, net of tax              (8)         (10,810)
Net (loss) income                             $   (11,362)     $     12,115





The following table (in thousands) presents our revenues, gross margin and adjusted operating profit (loss) generated by each operating segment for the periods indicated. Adjusted operating income is defined as operating income before amortization of intangible assets, amortization of purchase accounting adjustments and acquisition-related expenses.



                                                   Six Months Ended October 30, 2021
                                     Small UAS       TMS          MUAS       All other       Total
Revenue                             $    94,638    $ 37,594    $   48,904    $   41,881    $ 223,017
Gross margin                             44,674      12,211         5,404         8,889       71,178

Income (loss) from operations            15,335       (416)      (13,381)      (10,312)      (8,774)
Acquisition-related expenses                721         414         1,492         1,475        4,102
Amortization of acquired
intangible assets and other
purchase accounting adjustments           1,414           -        11,549  
      6,483       19,446
Adjusted income (loss) from
operations                          $    17,470    $    (2)    $    (340)    $  (2,354)    $  14,774





                                                  Six Months Ended October 31, 2020
                                   Small UAS        TMS         MUAS       All other       Total
Revenue                            $  114,467    $  28,495    $      -    $    37,153    $ 180,115
Gross margin                           57,178        7,863           -         11,221       76,262

Income (loss) from operations          30,583      (5,140)           -            752       26,195
Acquisition-related expenses              171           94          58             91          414
Amortization of acquired
intangible assets and other
purchase accounting adjustments         1,376            -           -     
        -        1,376
Adjusted income (loss) from
operations                         $   32,130    $ (5,046)    $     58    $       843    $  27,985






Revenue. Revenue for the six months ended October 30, 2021 was $223.0 million,
as compared to $180.1 million for the six months ended October 31, 2020,
representing an increase of $42.9 million, or 24%. The increase in revenue was
due to an increase in service revenue of $42.7 million and an increase in
product revenue of $0.2 million. The increase in service revenue was primarily
due to an increase in MUAS service revenue, resulting from our acquisition of
Arcturus in February 2021, and small UAS service revenue, partially offset by a
decrease in HAPS service revenue. The increase in product revenue was primarily
due to an increase in TMS revenue, an increase in UGV and MUAS product revenue,

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resulting from our acquisitions of Telerob and Arcturus, respectively, partially offset by lower revenues from small UAS products.

Cost of Sales. Cost of sales for the six months ended October 30, 2021 was
$151.8 million, as compared to $103.9 million for the six months ended October
31, 2020, representing an increase of $48.0 million, or 46%. The increase in
cost of sales was a result of an increase in service cost of sales of $42.8
million and an increase in product costs of sales of $5.2 million. The increase
in service cost of sales was primarily due to the increase in service revenues
resulting from the acquisitions of Arcturus and ISG, and an increase in
intangible amortization expense and other purchase accounting adjustments. The
increase in product costs of sales was primarily due to an increase in
intangible amortization expense and other purchase accounting adjustments and an
unfavorable product mix. Cost of sales for the six months ended October 30, 2021
included $9.5 million of intangible amortization and other related non-cash
purchase accounting expenses as compared to $1.3 million for the six months
ended October 31, 2020. As a percentage of revenue, cost of sales increased from
58% to 68%, primarily due to an increase in the proportion of service revenue to
total revenues resulting from the acquisitions of Arcturus and ISG, an increase
in intangible amortization expense and other purchase accounting adjustments,
and an unfavorable product mix.



Gross Margin. Gross margin for the six months ended October 30, 2021 was $71.2
million, as compared to $76.3 million for the six months ended October 31, 2020,
representing a decrease of $5.1 million, or 7%. The decrease in gross margin was
due to a decrease in product margin of $5.0 million and a decrease in service
margin of $0.1 million. The decrease in product margin was primarily due to an
increase in intangible amortization expense and other purchase accounting
adjustments and an unfavorable product mix. The decrease in service margin was
primarily due to an increase in intangible amortization expense and other
purchase accounting adjustments, partially offset by the increase in service
revenue. As a percentage of revenue, gross margin decreased from 42% to 32%,
primarily due to an increase in the proportion of service revenue to total
revenues resulting from the acquisitions of Arcturus and ISG, an increase in
intangible amortization expense and other purchase accounting adjustments, and
an unfavorable product mix. With the acquisitions of Arcturus and ISG we expect
that we will continue to experience a higher proportion of service revenue,
which generally have lower gross margins than our product sales, in future
quarters as compared to our historical trends.



Selling, General and Administrative. SG&A expense for the six months ended
October 30, 2021 was $51.9 million, or 23% of revenue, as compared to SG&A
expense of $27.0 million, or 15% of revenue, for the six months ended October
31, 2020. The increase in SG&A expense was primarily due to an increase in
headcount and related costs associated with our Arcturus, ISG and Telerob
acquisitions and an increase in intangible amortization and acquisition related
expenses. SG&A included $14.0 million and $0.5 million of acquisition-related
expenses and intangible amortization expenses for the six months ended October
30, 2021 and October 31, 2020, respectively.



Research and Development. R&D expense for the six months ended October 30, 2021
was $28.0 million, or 13% of revenue, as compared to R&D expense of
$23.1 million, or 13% of revenue, for the six months ended October 31, 2020. R&D
expense increased by $4.9 million, or 21%, for the six months ended October 30,
2021, primarily due to an increase in development activities regarding enhanced
capabilities for our products, development of new product lines and to support
our recently acquired businesses.



Interest (Expense) Income, net. Interest expense, net for the six months ended
October 30, 2021 was $2.7 million compared to interest income, net of $0.3
million for the six months ended October 31, 2020. The increase in interest
expense was primarily due to an increase in interest expense resulting from the
term debt issued concurrent with the acquisition of Arcturus.



Other (Expense) Income, net. Other expense, net, for the six months ended
October 30, 2021 was $10.4 million compared to other income, net of $0.1 million
for the six months ended October 31, 2020. The increase was due to an additional
legal accrual of $10.0 million for the expected settlement of all claims made by
the buyers of our former EES business.



(Benefit from) Provision for Income Taxes. Our effective income tax rate was
48.0% for the six months ended October 30, 2021, as compared to a provision for
13.9% for the six months ended October 31, 2020. The increase in the effective

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The income tax rate is mainly due to the decrease in the projected annual profit (loss) before income taxes for the current year compared to the previous year.



Equity Method Investment Loss, net of Tax. Equity method investment loss, net of
tax for the six months ended October 30, 2021 was $8 thousand compared to $10.8
million for the six months ended October 31, 2020. The decrease was primarily
due to a loss of $8.4 million for our proportion of HAPSMobile impairment of its
investment in Loon LLC during the three months ended October 31, 2020. During
the six months ended October 30, 2021 equity method losses from HAPSMobile were
largely offset by equity method income from our limited partnership investment.



Backlog


In accordance with ASC 606, we define funded backlog as the outstanding performance obligations under firm orders for which funding is currently allocated to us under a customer contract. From October 30, 2021, our funded order book was approximately $ 252.0 million.



In addition to our funded backlog, we also had unfunded backlog of $155.1
million as of October 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 Flight
Control Systems ("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.



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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 10-Debt to our unaudited
consolidated financial statements in Part I, Item 1 of this Quarterly Report on
Form 10-Q for further details. In addition, Telerob has a line of credit of €5.5
million available for issuing letters of credit of which €1.6 million ($1.8
million) was outstanding as of October 30, 2021.



The Credit Agreement contains certain customary representations and warranties
and affirmative and negative covenants. Based upon our revised projections,
there is a substantial risk that we may be required to make a prepayment to
reduce the outstanding balance of our Term Loan Facility or to obtain an
amendment to the Credit Agreement to remain in compliance with all of the
financial covenants in the Credit Agreement during the fiscal quarter ending
January 29, 2022. We currently estimate the range of the potentially required
prepayment to be $50 million to $60 million. We are in discussions with the
lenders regarding obtaining an amendment to the Credit Agreement to allow us to
remain in compliance with the financial covenants; however, if we are not able
to obtain such an amendment to the Credit Agreement, we have both the ability
and intent to make any required prepayment. We expect to be in compliance with
all financial covenants under the terms of our Credit Agreement, including any
amendment to such agreement, during the quarter ending April 30, 2022 regardless
of whether a required prepayment is made or loan amendment is obtained.



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, ISG and 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
and/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, and marketing acceptance and adoption
of our products and services. 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, 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.



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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
municipal securities.



In December 2021, we agreed in principle subject to formal written documentation
with Webasto to settle all existing claims related to the sale of our former EES
business for $20 million and allowing Webasto to keep the holdback amount. Under
the terms of the expected settlement agreement, payment of the settlement amount
will occur over a 24 month period after the execution of the settlement
agreement.



Although not material in value alone or in aggregate, we made certain
commitments outside of the ordinary course of business. We made commitments for
capital contributions 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 $0.6 million was remaining at
October 30, 2021. We also made commitments to lend HAPSMobile funds to continue
the development of Solar HAPS. The Company committed to and lent 500 million yen
($4.6 million) as of October 30, 2021. As of October 30, 2021, there are no
further lending commitments to HAPSMobile. Under the terms of the agreement the
loans are guaranteed and will be repaid when financing is obtained, or by
Softbank. We currently anticipate repayment of all amounts loaned to HAPS within
the fiscal year ended April 30, 2022.



Cash Flows


The following table presents our cash flow data for the half-year ended. October 30, 2021 and October 31, 2020 (in thousands):



                                                                    Six Months Ended
                                                              October 30,      October 31,
                                                                 2021             2020

                                                                      (Unaudited)

Net cash (used) provided by operating activities $ (3,344)

   $      58,593
Net cash used in investing activities                        $    (34,787)    $    (31,944)
Net cash used in financing activities                        $    (12,064) 
  $     (1,692)



Cash (Used in) Provided by Operating Activities. Net cash used in operating
activities for the six months ended October 30, 2021 increased by $61.9 million
to $3.3 million, as compared to net cash provided by operating activities of
$58.6 million for the six months ended October 31, 2020. The increase in net
cash used in operating activities was primarily due to a decrease in net income
of $23.5 million and a decrease in cash as a result of changes in operating
assets and liabilities of $55.2 million, largely related to accounts receivable
and unbilled retentions and receivables due to year over year timing differences
and income taxes receivable, partially offset by an increase in depreciation and
amortization of $24.3 million.



Cash Used in Investing Activities. Net cash used in investing activities
increased by $2.8 million to $34.8 million for the six months ended October 30,
2021, as compared to net cash used by investing activities of $31.9 million for
the six months ended October 31, 2020. The increase in net cash used in
investing activities was primarily due an increase in cash used for the
acquisition of Telerob of $46.2 million and a decrease in redemptions of
available-for-sale investments of $61.7 million, partially offset by a decrease
in purchases of available-for-sale investments of $116.9 million.



Cash Used in Financing Activities. Net cash used in financing activities
increased by $10.4 million to $12.1 million for the six months ended October 30,
2021, as compared to net cash used by financing activities of $1.7 million for
the six months ended October 31, 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 $6.0 million and an increase
in payments of loan principal of $5.0 million.



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Contractual Obligations



During the three and six months ended October 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,
2021.


Off-balance sheet provisions

From October 30, 2021, we did not have any off-balance sheet arrangement as defined in Article 303 (a) (4) of Regulation SK.


Inflation


Our operations have not been, and we do not expect them to be, significantly 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 six months ended October 30, 2021.

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