AeroVironment
Annual Report 2018

Plain-text annual report

Table of ContentsUNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10‑K ☒☒Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the fiscal year ended April 30, 2018☐☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934For the transition period from to Commission file number 001‑33261 AEROVIRONMENT, INC.(Exact name of registrant as specified in its charter) Delaware95‑2705790(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)800 Royal Oaks Drive, Suite 210 Monrovia, CA91016(Address of Principal Executive Offices)(Zip Code)Registrant’s telephone number, including area code: (626) 357‑9983 Securities registered pursuant to Section 12(b) of the Act: Title of Class Name of each exchange on which registeredCommon Stock, par value $0.0001 per share The NASDAQ Stock Market LLCSecurities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ☐ No ☒ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange 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 and posted on its corporate Web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during thepreceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will notbe contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10‑K or any amendment to this Form 10‑K. ☒ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reportingcompany, 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 ☐Smaller reporting company ☐ Non-accelerated filer ☐ (Do not check if a 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 forcomplying 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 Act). Yes ☐ No ☒ The aggregate market value of the voting stock held by non‑affiliates of the registrant, based on the closing price on the NASDAQGlobal Select Market on October 28, 2017 was approximately $1,074.2 million. As of June 20, 2018, the issuer had 23,906,534 shares of common stock, par value $0.0001 per share, issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission pursuant toRegulation 14A not later than 120 days after the conclusion of the registrant’s fiscal year ended April 30, 2018, are incorporated by referenceinto Part III of this Form 10‑K. Table of ContentsAEROVIRONMENT, INC.INDEX TO FORM 10‑K Page PART I Item 1. Business 3 Item 1A. Risk Factors 19 Item 1B. Unresolved Staff Comments 41 Item 2. Properties 41 Item 3. Legal Proceedings 42 Item 4. Mine Safety Disclosure 42 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchasesof Equity Securities 43 Item 6. Selected Consolidated Financial Data 45 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 45 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 58 Item 8. Financial Statements and Supplementary Data 59 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 98 Item 9A. Controls and Procedures 98 Item 9B. Other Information 99 PART III Item 10. Directors, Executive Officers and Corporate Governance 102 Item 11. Executive Compensation 102 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related StockholderMatters 102 Item 13. Certain Relationships and Related Transactions, and Director Independence 102 Item 14. Principal Accounting Fees and Services 102 PART IV Item 15. Exhibits, Financial Statement Schedules 103 1 Table of Contents PART I Forward‑Looking Statements This Annual Report on Form 10‑K, or Annual Report, contains forward‑looking statements, which reflect our currentviews about future events and financial results. We have made these statements in reliance on the safe harbor created by thePrivate Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, or theSecurities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act). Forward‑lookingstatements include our views on future financial results, financing sources, product development, capital requirements,market growth and the like, and are generally identified by terms such as “may,” “will,” “should,” “could,” “targets,”“projects,” “predicts,” “contemplates,” “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans” and similarwords. Forward‑looking statements are merely predictions and therefore inherently subject to uncertainties and other factorswhich could cause the actual results to differ materially from the forward‑looking statement. These uncertainties and otherfactors include, among other things: ·our ability to consummate the sale of the assets of our Efficient Energy Systems (“EES”) business segment toWebasto Charging Systems, Inc., as described in this Annual Report; ·unexpected technical and marketing difficulties inherent in major research and product development efforts; ·availability of U.S. government funding for defense procurement and research and development programs; ·the extensive regulatory requirements governing our contracts with the U.S. government and the results of anyaudit or investigation of our compliance therewith; ·our ability to remain a market innovator and to create new market opportunities; ·the potential need for changes in our long‑term strategy in response to future developments; ·unexpected changes in significant operating expenses, including components and raw materials; ·changes in the supply, demand and/or prices for our products and services; ·increased competition, including from firms that have substantially greater resources than we have and in theUAS business from lower‑cost consumer drone manufacturers who may seek to enhance their systems’capabilities over time; ·the complexities and uncertainty of obtaining and conducting international business, including exportcompliance and other reporting requirements; ·the impact of potential security and cyber threats; ·uncertainty in the customer adoption rate of commercial use unmanned aircraft systems; ·changes in the regulatory environment; and ·general economic and business conditions in the United States and elsewhere in the world. Set forth below in Item 1A, “Risk Factors” are additional significant uncertainties and other factors affectingforward‑looking statements. The reader should understand that the uncertainties and other factors identified in this AnnualReport are not a comprehensive list of all the uncertainties and other factors that may affect forward‑looking2 Table of Contentsstatements. We do not undertake any obligation to update or revise any forward‑looking statements or the list ofuncertainties and other factors that could affect those statements. Item 1. Business. Proposed Sale of EES Business Segment On June 1, 2018, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Webasto ChargingSystems, Inc. (“Webasto”) pursuant to which we agreed to sell, and Webasto agreed to acquire, substantially all of the assetsof our Efficient Energy Systems business segment (the “EES Business”) and to assume certain liabilities related to the EESBusiness. The closing of the transactions contemplated by the Purchase Agreement is subject to certain closing conditions,including: (i) the accuracy of each party’s representations and warranties (subject to customary materiality qualifiers), (ii)each party’s compliance with its covenants and agreements contained in the Purchase Agreement (subject to customarymateriality qualifiers), (iii) the execution by the parties of certain ancillary agreements and (iv) other customary closingconditions. As of April 30, 2018, we determined that the EES Business met the criterion for classification as an asset held forsale and represents a strategic shift in in our operations. Therefore, the assets and liabilities and the results of operations ofthe EES Business are reported in this Annual Report as discontinued operations for all periods presented. The disclosures and references in this Annual Report, including financial data, the description of our businessoperations in this Item 1, and risk factors related to our operations included in Item 1A relate to our continuing operations,unless otherwise specifically noted. Overview We design, develop, produce, support and operate a technologically‑advanced portfolio of products and services forgovernment agencies and businesses. We supply unmanned aircraft systems (“UAS”) and related services primarily toorganizations within the U.S. Department of Defense (“DoD”) and to international allied governments, and tactical missilesystems and related services to organizations within the U.S. Government. We derive the majority of our revenue from thesebusiness areas and we believe that the markets for these solutions have significant growth potential. Additionally, we believethat some of the innovative potential products and services in our research and development pipeline will emerge as newgrowth platforms in the future, creating additional market opportunities. Our success with current products and services stems from our investment in research and development and ourability to invent and deliver advanced solutions, utilizing proprietary and commercially available technologies, to help ourgovernment, commercial and consumer customers operate more effectively and efficiently. We develop these highlyinnovative solutions by working very closely with our key customers to solve their most important challenges related to ourareas of expertise. Our core technological capabilities, developed through more than 45 years of innovation, includelightweight aerostructures; power electronics; electric propulsion systems; efficient electric power conversion, and storagesystems; high‑density energy packaging; miniaturization; digital data links (“DDL”); sensors; controls integration; systemsintegration; engineering optimization; vertical takeoff fixed wing flight and autonomy, each coupled with professional fieldservice capabilities. Our UAS business focuses primarily on the design, development, production, marketing, support and operation ofinnovative UAS and tactical missile systems and the delivery of UAS‑related services that provide situational awareness,remote sensing, multi‑band communications, force protection and other information and mission effects to increase the safetyand effectiveness of our customers’ operations. Our Strategy As a technology solutions provider, our strategy is to develop innovative, safe and reliable new solutions thatprovide customers with valuable benefits and enable us to create new markets or market segments, gain market share andgrow as market adoption increases. We believe that by introducing new solutions that provide customers with compellingvalue we are able to create new markets or market segments and then grow our positions within those3 Table of Contentsmarkets or market segments profitably, instead of entering existing markets and competing directly against large, incumbentcompetitors that may possess advantages in scope, scale, resources and relationships. We intend to grow our business by preserving a leadership position in the UAS and tactical missile system markets,and by creating new solutions that enable us to create and establish leadership positions in new markets. Key components ofthis strategy include the following: Expand our market leadership to grow existing markets and create new adjacent markets. Our small UAS andtactical missile systems enjoy leading positions in their respective markets. We intend to increase the penetration of oursmall UAS products and services within the U.S. military, the military forces of allied nations, other government agencies andnon‑government organizations, including commercial entities, and to increase the penetration of our tactical missile systemswithin the U.S. military and allied nations. We believe that the broad adoption of our small UAS by the U.S. military willcontinue to spur demand by allied nations, and that our efforts to pursue new applications are creating opportunities beyondthe early adopter military market. Deliver innovative new solutions for existing and new markets. Customer‑focused innovation is the primarydriver of our growth. We plan to continue pursuing internal and customer‑funded research and development to developbetter, more capable products, services and business models, both in response to and in anticipation of emerging customerneeds. In some cases, these innovations result in upgrades to existing offerings, expanding their value among existingcustomers and markets. In other cases, these innovations become entirely new solutions that position us to address newmarkets, customers and business opportunities. We believe focused research and development investments will allow us todeliver innovative new products and services that address market needs within and outside of our current target markets, andenable us to create new opportunities for growth. We view strategic partnerships as a means by which to further the reach ofour innovative solutions through access to new markets, customers and complementary capabilities. Foster our entrepreneurial culture and continue to attract, develop and retain highly‑skilled personnel. Ourcompany culture encourages innovation and an entrepreneurial spirit, which helps to attract and retain highly‑skilledprofessionals. We intend to preserve this culture to encourage the development of the innovative, highly technical systemsolutions and business models that give us our competitive advantage. A core component of our culture is our intent todemonstrate trust and integrity in all of our interactions, contributing to a positive work environment and engenderingloyalty among our employees and customers. Preserve our agility and flexibility. We respond rapidly to evolving markets, solve complicated customerproblems, and strive to deliver new products, services and capabilities quickly, efficiently and affordably relative toavailable alternatives. We believe our agility and flexibility help us to strengthen our relationships with customers andpartners. We intend to maintain our agility and flexibility, which we believe to be important sources of differentiation whenwe compete against organizations with more extensive resources. Effectively manage our growth portfolio for long‑term value creation. Our production and developmentprograms and services position us for investment opportunities that we believe will deliver long‑term growth by providingour customers with valuable new capabilities. We evaluate each opportunity independently and within the context of otherinvestment opportunities to determine its relative timing and potential, and thereby its priority. This process helps us tomake informed decisions regarding potential growth capital requirements and supports how we allocate resources based onrelative risks and returns to maximize long‑term value creation, which is a key element of our growth strategy. We alsoreview our portfolio on a regular basis to determine if and when to narrow our focus on the highest potential growthopportunities. Customers We sell the majority of our UAS and services to organizations within the DoD, including the U.S. Army, MarineCorps, Special Operations Command, Air Force and Navy, and increasingly to allied governments. We sell our tacticalmissile systems to organizations within the U.S. government. We also develop High Altitude Pseudo-Satellite (“HAPS”)systems for a commercial customer based in Japan.4 Table of Contents During our fiscal year ended April 30, 2018, we generated approximately 19% of our revenue from the U.S. Armypursuant to orders placed under contract by the U.S. Army on behalf of itself as well as several other organizations within theDoD. Other U.S. government agencies and government subcontractors accounted for 35% of our sales revenue, whilepurchases by foreign, commercial and consumer customers accounted for the remaining 46% of sales revenue during ourfiscal year ended April 30, 2018. Technology, Research and Development Technological Competence and Intellectual Property Our company was founded by the late Dr. Paul B. MacCready, the former Chairman of our board of directors and aninternationally renowned innovator who was instrumental in establishing our entrepreneurial and creative culture. Thisculture has consistently enabled us to attract and retain highly‑motivated, talented employees and has established ourreputation as an innovative leader in the industries in which we compete. The innovations developed by our company and our founder include, among others: the world’s first effectivehuman‑powered and manned solar‑powered airplanes; the first modern passenger electric car, the EV1 prototype for GeneralMotors; the world’s highest flying airplane in level flight, Helios™, a solar‑powered unmanned aircraft system that reachedover 96,000 feet above sea level in 2001; Global Observer, the world’s first liquid hydrogen‑fueled unmanned aircraftsystem; the Nano Hummingbird™, the world’s first flapping wing unmanned aircraft system capable of precise hover andomni‑directional flight; and Blackwing™, the first submarine-launched unmanned aircraft system deployed by the U.S.Navy. The Smithsonian Institution possesses seven vehicles developed by our company or our founder in its permanentcollection. Our history of innovation excellence is the result of our talented, creative and skilled employees whom weencourage to invent and develop innovative new solutions. A component of our ongoing innovation is a screening process that helps our business managers identify earlymarket needs, which assists us in making timely investments into critical technologies necessary to develop solutions toaddress these needs. Similarly, we manage new product and business concepts through a commercialization process thatbalances spending, resources, time and intellectual property considerations against market requirements and potential returnson investment. Strongly linking our technology and business development activities to customer needs in attractive growthmarkets constitutes an important element of this process. Through the process we revisit our customer requirementassumptions to evaluate continued investment and to help ensure that our products and services deliver high value.As a result of our commitment to research and development, we possess an extensive portfolio of intellectualproperty in the form of patents, trade secrets, copyrights and trademarks across a broad range of UAS and advanced energytechnologies. As of April 30, 2018, we had 201 U.S. patents issued; 87 U.S. patent applications pending; 7 active PatentCooperation Treaty applications; and numerous foreign patents and applications, of which 51 U.S. patents, 20 U.S. patentapplications and no active Patent Cooperation Treaty applications are anticipated to be assigned to Webasto upon theclosing of the transactions contemplated by the Purchase Agreement. In many cases, when appropriate and to preserveconfidentiality, we opt to protect our intellectual property through trade secrets as opposed to filing for patent protection.Pursuant to the Purchase Agreement, a portion of our patents and pending patent applications relating to the EES Businesswill be sold and to Webasto at the closing of the transactions contemplated by the Purchase Agreement. The U.S. government has licenses to some of our intellectual property that was specifically developed inperformance of government contracts, and may use or authorize others to use this intellectual property. In some cases we fundthe development of certain intellectual property to maximize its value and limit its use by potential competitors. While weconsider the development and protection of our intellectual property to be integral to the future success of our business, atthis time we do not believe that a loss or limitation of rights to any particular piece of our intellectual property would have amaterial adverse effect on our overall business. 5 Table of ContentsResearch, Development and Commercialization Projects A core component of our business strategy is the focused development and commercialization of innovativesolutions that we believe can become new products or services that enable us to create large new markets or accelerate thegrowth of our current products and services. We invest in an active pipeline of these commercialization projects that range inmaturity from technology validation to early market adoption. We cannot predict when, if ever, we will successfullycommercialize these projects, or the exact level of capital expenditures they could require, which could be substantial. For the fiscal years ended April 30, 2018, 2017 and 2016, our internal research and development spendingamounted to 10%, 12% and 15%, of our revenue, respectively, and customer‑funded research and development spendingamounted to an additional 19%, 19% and 23%, of our revenue, respectively. Sales and Marketing Our marketing strategy is based on developing leadership positions in new markets that we create through theintroduction of innovation solutions that improve customer operational effectiveness and efficiency. Our ability to operate inan agile, flexible manner helps us achieve first mover advantage and work closely with early customers to achieve thesuccessful adoption of our solutions. Once we establish a market position we work to maintain our leadership position whileseeking to grow our revenue by expanding sales and through continuous innovation and customer support. Our reputationfor innovation is a key component of our brand and has been acknowledged through a variety of awards and recognized innumerous articles in domestic and international publications. We have U.S. registered trademarks for AeroVironment,AV, Switchblade, Raven, Wasp, Snipe, and EV Solutions, and have several other pending applications for trademarkregistration. Pursuant to the Purchase Agreement, a portion of our registered trademarks and pending trademark registrationapplications that relate to the EES Business will be sold and assigned to Webasto at the closing of the transactionscontemplated by the Purchase Agreement, including the U.S. registered trademarks for EV Solutions, TurboCord, PosiCharge,BMID, BATTERY RX, Procore, Powered Your Way, Turbodock, NXT, and Turbo DX. International Sales We contract with international sales representatives and team with domestic organizations in a number of foreignmarkets and believe that these markets represent growth opportunities for our business. Our international sales accounted forapproximately 46%, 37% and 29%, of our revenue for the fiscal years ended April 30, 2018, 2017 and 2016, respectively. Competition We believe that the principal competitive factors in the markets for our products and services include productperformance; safety; features; acquisition cost; lifetime operating cost, including maintenance and support; ease of use; rapidintegration with existing equipment and processes; quality; reliability; customer support; and brand and reputation. Manufacturing and Operations We pursue a lean and efficient production strategy across our business, focusing on rapid prototyping, supply chainmanagement, final assembly, integration, quality and final acceptance testing. Using concurrent engineering techniqueswithin an integrated product team structure, we rapidly prototype design concepts and products, while working to optimizeour designs to meet manufacturing requirements, mission capabilities and customer specifications. Within this framework wedevelop our products with feedback and input from manufacturing, quality, supply chain management, key suppliers,logistics personnel and customers. We incorporate this input into product designs in an effort to maximize the efficiency andquality of our products. As a result, we believe that we significantly reduce the time required to move a product from itsdesign phase to full‑rate production deliveries while achieving high reliability, quality and yields. 6 Table of ContentsWe outsource certain production activities, such as the fabrication of structures, the manufacture of electronicprinted circuit board subassemblies, payload components and, the production of our Quantix drone, to qualified suppliers,with many of whom we have long‑term relationships. This outsourcing enables us to focus on final assembly, systemintegration and test processes for our products, ensuring high levels of quality and reliability. We forge strong relationshipswith key suppliers based on their ability to grow with our production needs and support our growth plans. We continue toexpand upon our suppliers’ expertise to improve our existing products and develop new solutions. We rely on both singleand multiple suppliers for certain components and subassemblies. See “Risk Factors—If critical components or raw materialsused to manufacture our products become scarce or unavailable, then we may incur delays in manufacturing and delivery ofour products, which could damage our business” for more information. All of our production system operations incorporateinternal and external quality programs and processes to increase acceptance rates, reduce lead times and lower cost. Customer Funded Research and Development We actively pursue externally funded projects that help us to strengthen our technological capabilities. Our UASbusiness submits bids to large research customers such as the Defense Advanced Research Projects Agency, the U.S. AirForce, the U.S. Army and the U.S. Special Operations Command for projects that we believe have future commercialapplication. In some cases commercial enterprises may fund our research and development activities, as with ourHAPSMobile, Inc. development program. Providing these services contributes to the development and enhancement of ourtechnical competencies. In an effort to manage the ability of our key technical personnel to support multiple, high‑valueresearch and development initiatives, we attempt to limit the volume of customer funded research and development projectsthat we accept. This process enables us to focus these personnel on projects we believe offer the greatest current and futurevalue to our business. Seasonality Historically, and more pronounced in recent years, our revenue in the second half of our fiscal years has exceededour revenue in the first half of our fiscal years. The factors that affect our revenue recognition between accounting periodsinclude the timing of new contract awards, the availability of U.S. government and international government funding, leadtime to manufacture our family of systems to customer specification, customer acceptance and other regulatory requirements.We expect our fiscal year 2019 to have more balanced revenue between the first and second halves. Raw Materials and Suppliers Historically, we have not experienced significant delays in the supply or availability of our key raw materials orcomponents provided by our suppliers, nor have we experienced a significant price increase for raw materials orcomponents. We do not anticipate any such delays or significant price increases in our fiscal year 2019. Contract Mix The table below shows our revenue for the periods indicated by contract type, including both government andcommercial sales: Fiscal Year Ended April 30, 2018 2017 2016 Fixed-price contracts 80% 76% 75% Cost-reimbursable contracts 20% 24% 25% Employees As of April 30, 2018, we had 697 full time employees of our continuing business operations, of whom 253 were inresearch and development and engineering, 34 were in sales and marketing, 252 were in operations and 158 were general andadministrative personnel. We believe that we have a good relationship with our employees. As of April 30,7 Table of Contents2018, we had 100 employees of our EES Business. Upon the closing of the transactions contemplated by the PurchaseAgreement, it is anticipated that we will terminate the employees of the EES Business who will become employees ofWebasto after the closing. Backlog We define funded backlog as unfilled firm orders for products and services for which funding currently isappropriated to us under the contract by the customer. As of April 30, 2018 and 2017, our funded backlog was approximately$174.3 million and $70.9 million, respectively. We expect that approximately 84% of our funded backlog will be filledduring our fiscal year ending April 30, 2019. In addition to our funded backlog, we had unfunded backlog of $58.1 million and $14.1 million as of April 30,2018 and 2017, respectively. We define unfunded backlog as the total remaining potential order amounts under costreimbursable and fixed price contracts with (i) multiple one‑year options, and indefinite delivery, indefinite quantity, or IDIQcontracts, or (ii) incremental funding. Unfunded backlog does not obligate the customer to purchase goods or services. Therecan be no assurance that unfunded backlog will result in any orders in any particular period, if at all. Management believesthat unfunded backlog does not provide a reliable measure of future estimated revenue under our contracts. Unfundedbacklog does not include the remaining potential value associated with a U.S. Army IDIQ‑type contract for small UASbecause that contract was awarded to seven companies in 2018, including AeroVironment, and we cannot be certain that wewill receive all task orders issued against the contract. Because of possible future changes in delivery schedules and/or cancellations of orders, backlog at any particulardate is not necessarily representative of actual sales to be expected for any succeeding period, and actual sales for the yearmay not meet or exceed the backlog represented. Our backlog is typically subject to large variations from quarter to quarteras existing contracts expire, are renewed, or new contracts are awarded. A majority of our contracts, specifically our IDIQcontracts, do not obligate the U.S. government to purchase any goods or services. Additionally, all U.S. government contractsincluded in backlog, whether or not they are funded, may be terminated at the convenience of the U.S. government. Other Information AeroVironment, Inc. was originally incorporated in the State of California in July 1971 and reincorporated inDelaware in 2006. Our principal executive offices are located at 800 Royal Oaks Drive, Suite 210, Monrovia, California 91016. Ourtelephone number is (626) 357‑9983. Our website home page is http://www.avinc.com. We make our website contentavailable for information purposes only. It should not be relied upon for investment purposes, nor is it incorporated byreference into this Annual Report. We make our annual reports on Form 10‑K, quarterly reports on Form 10‑Q, current reports on Form 8‑K and proxystatements for our annual stockholders’ meetings, as well as any amendments to those reports, available free of chargethrough our website as soon as reasonably practical after we electronically file that material with, or furnish it to, theSecurities and Exchange Commission, or SEC. You can learn more about us by reviewing our SEC filings. Our SEC reportscan be accessed through the investor relations page of our web site at http://investor.avinc.com. These reports may also beobtained at the SEC’s public reference room at 100 F. Street, N.E., Washington, DC 20549. The SEC also maintains a web siteat www.sec.gov that contains our reports, proxy statements and other information regarding us. Unmanned Aircraft Systems Our UAS business addresses the increasing economic and security value of network‑centric intelligence,surveillance and reconnaissance (“ISR”) communications, remote sensing and effects delivery with innovative UAS andtactical missile system solutions. 8 Table of ContentsIndustry Background Small UAS The defense market for small UAS has grown significantly since the early 2000s driven largely by the demandsassociated with the global threat environment and the resulting procurement by military customers, the early adopters for thistechnology. Small UAS now represent an accepted and enduring capability for the military. The U.S. military’stransformation into a smaller, more agile force that operates via a network of observation, communication and precisiontargeting technologies accelerated following the terrorist attacks of September 11, 2001, as it required improved, distributedobservation and targeting of enemy combatants who operate in small groups, often embedded in dense population centers ordispersed in remote locations. We believe that UAS, which range from large systems, such as Northrop Grumman’s GlobalHawk and General Atomics’ Predator, Sky Warrior, Reaper and Gray Eagle, to small systems, such as our Raven, Wasp AE,Puma AE and Snipe, serve as integral components of today’s military force. These systems provide critical observation andcommunications capabilities serving the increasing demand for actionable intelligence, while reducing risk to individual“warfighters.” Small UAS can provide real‑time observation and communication capabilities to the small units who controlthem. As airspace regulations in the U.S. and other nations evolve to accommodate the commercial use of small UAS, we arefurthering the application of small UAS technology in new markets such as precision agriculture. We expect further growththrough the introduction of UAS technology and services to these emerging commercial applications. Tactical Missile Systems The development of weapons capable of rapid deployment and precision strike while minimizing the risk tosurrounding civilians, property and operators accelerated in recent years due to advances in enabling technologies. Weaponssuch as laser‑guided missiles, “smart” bombs and GPS‑guided artillery shells have dramatically improved the accuracy ofstrikes against hostile targets. When ground forces find themselves engaged in a firefight or near a target, their ability toemploy a precision weapon system quickly and easily can mean the difference between mission success and failure. A rapidlydeployable solution could address emerging requirements beyond ground engagements for use in other types of situationsand from a variety of sea, air and land platforms. We believe that embedding a precision lethal payload into a remotelycontrolled, man‑portable delivery system provides warfighters with a valuable and more cost‑effective alternative to existingmunition and missile systems. Large UAS We believe a market opportunity exists for large UAS that can fly for long periods of time to provide continuousremote sensing and communications in an affordable manner over great distances. Existing solutions such ascommunications satellites and manned and unmanned aircraft address some of the emerging demand for this capability, butdo so at relatively high financial and resource costs. Geosynchronous satellites provide fixed, continuous communicationscapabilities to large portions of the globe, but they operate more than 20,000 miles from the surface of the earth, thereforelimiting the bandwidth they can provide and requiring relatively larger, higher power ground stations. Remote sensingsatellites typically operate at lower altitudes, but are unable to maintain geosynchronous positions, meaning they are movingwith respect to the surface of the earth, resulting in a limited presence over specific areas of interest and significant periods oftime during which they are not present over those areas. A new category of constellations consisting of a large number ofvery small and low earth orbiting satellites is designed to provide a lower cost alternative with more ubiquitous coverage forreconnaissance and communication, but has yet to be deployed in meaningful quantities. UAS that are capable of operatingin an affordable manner for extended periods of time over an area of interest without gaps in availability while carrying acommunications or observation payload could help to satisfy this need. Our UAS Solutions We supply our UAS products and services to multiple customers within and outside of the United States.9 Table of ContentsSmall UAS Products Our small UAS, including Raven, Wasp AE, Puma AE and Snipe, are designed to operate reliably a few hundred feetabove the ground in a wide range of environmental conditions, providing a vantage point from which to collect and delivervaluable information. Military forces employ our small UAS to deliver ISR and communications, including real‑time tacticalreconnaissance, tracking, combat assessment and geographic data, directly to the small tactical unit or individual operator,thereby increasing flexibility in mission planning and execution. In commercial applications, we operate our small UAS aspart of a turnkey information solution to deliver advanced analysis that can reduce customers’ costs, enhance their safety andincrease their revenue. Our small UAS wirelessly transmit critical live video and other information generated by their payloadof electro‑optical, infrared or other sensors directly to a hand‑held ground control unit, enabling the operator to view andcapture images, during the day or at night, on the control unit. Our Quantix data collection drone generates a volume of high-resolution data significantly larger than wireless bandwidth can accommodate, requiring the transfer of data once the airvehicle has landed. With the exception of Quantix, our ground control systems allow the operator to control the aircraft byprogramming it for GPS‑based autonomous navigation using operator‑designated way‑points, or by manual flight operation.The ground control systems are designed for durability and ease of use in harsh environments and incorporate a user‑friendly,intuitive user interface. All of our fixed wing small UAS currently in production for military customers operate from ourcommon ground control system. We designed our small UAS to be transportable by a single person, assembled without tools in less than five minutesand launched and operated by one or two people, with limited training required. The efficient and reliable electric motorsused in all of our small UAS are powered by modular battery packs that can be replaced quickly, enabling rapid return toflight. We designed all of our small UAS to be reusable for hundreds of flights under normal operating circumstances and tobe recovered through an autonomous landing feature that enables a controlled descent to a designated location. In military applications, our small UAS provide forward aerial observation capabilities that enable tacticalcommanders to observe around the next corner, to the next intersection or past a ridgeline in real‑time. This informationfacilitates faster, safer movement through urban, rural and mountainous environments and can enable troops to be proactivebased on field intelligence rather than reactive to attack. Moreover, by providing this information, our systems reduce therisk to warfighters and to the surrounding population by providing the ability to tailor the military response to the threat.U.S. military personnel regularly use our small UAS, such as Raven, for missions such as force protection, combat observationand damage assessment. These reusable systems are easy to transport, assemble and operate and are relatively quiet whenflying at typical operational altitudes of 200 to 300 feet above ground level, the result of our efficient electric propulsionsystems. Furthermore, their small size makes them difficult to see from the ground. In addition, the low cost of our small UASrelative to larger systems and alternatives makes it practical for customers to deploy these assets directly to warfighters. In emerging commercial applications, our small UAS enable enterprises to manage valuable assets such as crops,powerlines and railroad infrastructure, more effectively and safely than previously possible. Our Quantix data collectiondrone and AeroVironment Decision Support System (“AVDSS”), a cloud‑based platform for processing, analyzing andstoring collected data, are designed to provide agriculture operations with more accurate and timely information regardingtheir crops. Better and more timely information can translate into more efficient activities that facilitate more efficient use ofscarce resources such as water for agriculture. Our small UAS offering also includes spare equipment, alternative payload modules, batteries, chargers, repairservices and customer support. We provide training by our highly‑skilled instructors, who typically possess extensivemilitary experience, and continuous refurbishment and repair services for our products. We designed our Quantix system forminimal training so customers can learn how to operate it on their own. By maintaining close contact with our customers andusers in the field, we gather critical feedback on our products and incorporate that information into ongoing productdevelopment and research and development efforts. This approach enables us to improve our solutions in response to, and inanticipation of, evolving customer needs. 10 Table of ContentsEach system in our small UAS portfolio typically includes multiple aircraft, our common and interoperablehand‑held ground control system and an array of spare parts and accessories. Our current small UAS portfolio for defenseapplications consists of the following aircraft: Small UAS Wingspan Weight Standard Range Flight Time Product (ft.) (lbs.) Recovery Sensors (mi.)(1) (min.)(1) Puma AE 9.2 14 Vertical autonomous landingcapable (ground or water) Mechanical pan, tilt, zoom and digitalzoom electro-optical and infrared 9.0 210 Raven 4.5 4.5 Vertical autonomous landingcapable Mechanical pan, tilt, zoom and digitalzoom electro-optical and infrared 6.0 60-90 Wasp AE 3.3 2.8 Vertical autonomous landingcapable (ground or water) Mechanical pan, tilt, zoom and digitalzoom electro-optical and infrared 3.0 50 Snipe 0.8 0.3 Vertical takeoff and landing Mechanical tilt, electro-optical andinfrared 0.6 15 (1)Represents point‑to‑point minimum customer‑mandated specifications for all operating conditions. In optimalconditions, the performance of our products may significantly exceed these specifications. Our DDL relay can enableoperational modes that can extend range significantly. The ground control system serves as the primary interface between the operator and our small UAS designed fordefense applications, and allows the operator to control the direction, speed and altitude of the aircraft as well as theorientation of the sensors to view the visual information they produce through real‑time, streaming video and metadata. Ourcommon ground control system interfaces with each of our air vehicles, except Snipe, providing a common user interfacewith each of our air vehicles. In addition to the thousands of air vehicles delivered to our customers, thousands of groundcontrol systems are also in our customers’ hands. The Snipe nano quadrotor is an unmanned aircraft system tailored to the needs of frontline troops who needimmediate situational awareness. Snipe incorporates an advanced touch screen interface to control the system and view theinformation produced by the air vehicle’s onboard sensors. Highly portable and easy to assemble, operate and stow, Snipe isdesigned to provide rapid airborne information within one kilometer of its launch point in situations where time is short andrisk is high. Our line of miniature gimbaled sensor payloads provides small UAS operators with enhanced observation and targettracking functionality. Our DDL is integrated into Puma AE, Raven and Wasp AE and Snipe systems, enhancing theircapabilities, and ultimately, the utility of our small UAS by enabling more efficient radio spectrum utilization andcommunications security. Small UAS incorporating our DDL offer many more channels as compared to our analog link,increasing the number of air vehicles that can operate in a given area. Additionally, our DDL enables each air vehicle tooperate as an Internet‑Protocol addressable hub capable of routing and relaying video, voice and data to and from multipleother nodes on this ad hoc network. This capability enables beyond line‑of‑sight operation of our small UAS, furtherenhancing their value proposition to our customers. Tactical Missile Systems Products Our tactical missile systems consist of tube-launched aircraft that deploy with the push of a button, fly at higherspeeds than our small UAS, and perform either effects delivery or reconnaissance missions. Switchblade, the first of ourtactical missile systems products, can be transported in its launch tube, within a backpack, and deployed within minutes todefend against lethal threats such as snipers and mortar teams. With a high level of precision, including a custom warhead,wave-off, loiter and re-engagement capabilities, Switchblade can neutralize a target rapidly and accurately without causingcollateral damage. Furthermore, because it streams live electro-optical and thermal video to its operator, Switchblade can becalled off in the final moments prior to a strike should the situation require, minimizing damage to non-combatants. Blackwing, a variant of Switchblade, launches from a submerged submarine and carries extra batteries instead ofa warhead, providing longer flight time for reconnaissance operations. UAS Logistics Services In support of our small UAS for defense applications we offer a suite of services that help to ensure the successfuloperation of our products by our customers. These services generate incremental revenue for us and provide us withcontinuous feedback to understand the performance of our systems, anticipate our customers’ needs and develop11 Table of Contentsadditional customer insights. We believe that this ongoing feedback loop enables us to continue to provide our customerswith innovative solutions that help them succeed. We provide spare parts as well as repair, refurbishment and replacementservices in a manner that seeks to minimize supply chain delays, and we support our customers with spare parts, replacementaircraft and support whenever and wherever they need them. One of our facilities also serves as the primary depot for repairsand spare parts. We provide comprehensive training services to support all of our small UAS for defense applications. Ourhighly‑skilled instructors typically have extensive military experience. We deploy training teams throughout the continentalUnited States and overseas to support our customers’ training needs on both production and development‑stage systems. UAS Customer Funded Research and Development We provide specialized services in support of customer‑funded research and development projects, delivering newvalue‑added technology solutions to our customers. These types of projects typically involve developing new systemsolutions and technology or new capabilities for existing solutions that we introduce as retrofits or upgrades. We recognizecustomer‑funded research and development projects as revenue. UAS Technology, Research and Development Our primary areas of technological competence represent the sum of numerous technical skills and capabilities thathelp to differentiate our approach and product offerings. The following list highlights a number of our key UAStechnological capabilities: ·lightweight, low speed aerostructures and aerodynamic design; ·miniaturized avionics and micro/nano unmanned aircraft systems; ·image stabilization and target tracking; ·software; ·sensor design, development, miniaturization and integration;·advanced flight control systems; ·electric propulsion systems; ·high altitude long endurance flight operations; ·fluid dynamics; ·miniature, low power wireless digital communications; ·vertical takeoff and landing fixed‑wing flight unmanned aircraft systems; and ·system integration and optimization. Three of our UAS and tactical missile systems development initiatives are described below: Tactical Missile System Variants. We pioneered our first rapidly deployable, high‑precisiontactical missile system, named Switchblade, for use by defense ground forces. Switchblade is now deployedby the U.S. military to provide force protection to its troops overseas in combat operations.12 Table of ContentsDuring a multitude of demonstrations over the course of several years, multiple potential customersrequested modifications to Switchblade to accommodate their specific mission requirements. We performeda number of successful demonstrations and are now developing several variants to Switchblade for newcustomers and applications, including deployment from sea and air vehicles. Blackwing, a submarine-launched reconnaissance system, represents one of the variants. Other variants have transitioned intoproduction and sale to U.S. customers. We believe these new variants have the potential to expand ourtactical missile systems opportunities significantly. Commercial Unmanned Aircraft Systems‑Based Information Solutions. In the same way oursmall UAS provide situational awareness to military customers, we can employ our small UAS withadvanced sensors to scan vast or inaccessible infrastructure, plants or wildlife, then process and analyze theresulting data to produce actionable information for a wide variety of companies in industries that includeenergy, agriculture and natural resource management. Our Quantix data collection drone is designed forhighly automated vegetation and topographical scanning of more than 400 acres in its 45 minute flighttime. Equipped with fixed electro-optical and multi-spectral sensors, Quantix takes off vertically,transitions to horizontal operation, flies its designated mission, then lands itself vertically at its launchpoint. Lower resolution data can be viewed immediately through the wireless transmission of image datafrom the Quantix to its commercial tablet controller pre-loaded with custom software. Further automatedanalysis can be performed by uploading the data to the AVDSS, a cloud-based platform for processing,analyzing and storing collected data. We have developed this capability based on extensive work withearly adopters for anticipated adoption in what could be a large market. High Altitude Pseudo-Satellites, or HAPS. Building on our decades of groundbreakingdevelopment and demonstration of high altitude solar-powered UAS, in 2018 we established a jointventure with SoftBank Corp. to create a global broadband and telecommunications company todemonstrate and deploy HAPS UAS around the world. HAPSMobile, Inc. is five percent owned byAeroVironment, Inc. and 95 percent owned by SoftBank Corp. The joint venture is providing $76 millionin funding to AeroVironment to develop and demonstrate solar HAPS UAS. AeroVironment possessesexclusive rights to manufacture and supply the solar HAPS UAS developed by the joint venture toHAPSMobile, Inc., subject to meeting contractual performance criteria. HAPSMobile, Inc. possessesexclusive rights to the solar HAPS UAS for commercial markets globally, while AeroVironment possessesexclusive rights to the solar HAPS UAS for non-commercial markets globally, with the exception of Japan. UAS Sales and Marketing We organize our U.S. UAS business development team members by target market and customer and we locate teammembers in close proximity to the customers they support, where possible. We organize our program managers by productand focus on designing optimal solutions and contract fulfillment, as well as internalizing feedback from customers andusers. By maintaining assigned points of contact with our customers, we believe that we are able to maintain ourrelationships, service existing contracts effectively and gain vital feedback to improve our responsiveness and productofferings. We employ a direct-sale and dealer-based distribution strategy for our Commercial Information Solutions. UAS Manufacturing and Operations Continued investment in infrastructure has established our manufacturing capability to meet demand with scalablecapacity. We have the manufacturing infrastructure to produce UAS products at rates higher than our historical volumes,support initial low rate production for new UAS development programs and tactical missile systems and execute initiallow‑rate production of large UAS. By drawing upon experienced personnel across various manufacturing industriesincluding aerospace, automotive and volume commodities, we have instituted lean production systems and leverage ourInternational Organization for Standardization, or ISO certification for Quality Management, integrated supply chainstrategy, document control systems and process control methodologies for production. Presently, we13 Table of Contentsperform small UAS manufacturing at the 85,000 square foot manufacturing facility we established in 2005. Our 9001:2015 +AS9100D certified manufacturing facilities are designed to accommodate demand of up to 1,000 aircraft per month. ISO9001:2015 + AS9100D refers to a set of voluntary standards for quality management systems. These standards are establishedby the ISO to govern quality management systems used worldwide. Companies that receive ISO certification have passedaudits performed by a Registrar Accreditation Board‑certified auditing company. These audits evaluate the effectiveness ofcompanies’ quality management systems and their compliance with ISO standards. Some companies and governmentagencies view ISO certification as a positive factor in supplier assessments. UAS Competition The market for defense small UAS continues to evolve in response to changing technologies, shifting customerneeds and expectations and the potential introduction of new products. We believe that a number of established domesticand international defense contractors have developed or are developing small UAS that continue to compete, or willcompete, directly with our products. Some of these contractors have significantly greater financial and other resources thanwe possess. Our current principal small UAS competitors include Elbit Systems Ltd., L3 Technologies, Inc., and LockheedMartin Corporation. We do not view large UAS such as Northrop Grumman Corporation’s Global Hawk, GeneralAtomics, Inc.’s Predator and its derivatives, The Boeing Company’s ScanEagle and Textron Inc.’s Shadow as directcompetitors to our small UAS because they perform different missions, do not typically deliver their information directly tofront‑line ground forces and are not hand‑launched and controlled. However, we cannot be certain that these platforms willnot become direct competitors in the future. Potential competition from consumer-focused drone manufacturers could emergeas their capabilities increase and their prices remain low relative to existing defense solutions, which could result in somelevel of military consideration even if such drones do not meet traditional military performance or security specifications. The market for HAPS UAS is in an early stage of development. As a result, this category is not well defined and ischaracterized by multiple potential solutions. An existing contractor that claims to provide high altitude long enduranceUAS is Northrop Grumman Corporation with its Global Hawk. Several aerospace and defense contractors are pursuing thismarket opportunity with proposed very long duration UAS, including The Boeing Company, Airbus, Lockheed MartinCorporation and Northrop Grumman Corporation. Some internet technology companies have acquired small firms that focuson this type of capability and represent potential future competitors. Companies pursuing airships (high altitude aircraft thatare kept buoyant by a body of gas that is lighter than air) as a solution for this market include Lockheed Martin Corporationand Northrop Grumman Corporation. Companies pursuing conventional satellites as a solution for this market include TheBoeing Company, Lockheed Martin Corporation, General Dynamics Corporation, EADS N.V., Ball Corporation and OrbitalSciences Corporation. Companies pursuing Low Earth Orbit, or LEO, micro or cubesat satellite constellations for globalcommunication and remote sensing include OneWeb, SpaceX and The Boeing Company. The market for tactical missile systems is in an early stage of development, but it is evolving rapidly. Competitors inthis market include Textron Inc., Raytheon Company and Lockheed Martin Corporation. The market for commercial UAS products and services is in an early stage of development, but is evolving rapidly,generating a great deal of interest as government regulations evolve to accommodate commercial UAS operations in theNational Airspace System and in the airspace systems of other countries. Given the breadth of applications and the diversityof industries that could benefit from UAS technology, a growing number of potential competitors in this market includeconsumer drone manufacturers such as Dà-Jiāng Innovation, who seek to enhance their systems’ capabilities over time; othersmall UAS manufacturers, including large aerospace companies such as Lockheed Martin Corporation, and drone and aerialsurveying and mapping service providers such as PrecisionHawk and AgEagle; ground‑based surveying and mapping serviceproviders; satellite imagery providers; and specialty system manufacturers, software as a service and other service providersaiming to address specific market segments. The emerging non‑military market is attracting numerous additional competitorsand significant venture capital funding given perceived lower barriers to entry and a much more fragmented marketplace ascompared to the military market. Potential additional competitors include start‑up companies providing low cost solutions. 14 Table of ContentsWe believe that the principal competitive factors in the markets for our UAS products and services include productperformance, features, acquisition cost, lifetime operating cost, including maintenance and support, ease of use, integrationwith existing equipment and processes, quality, reliability, customer support, brand and reputation. UAS Regulation Due to the fact that we contract with the DoD and other agencies of the U.S. government, we are subject to extensivefederal regulations, including the Federal Acquisition Regulations, Defense Federal Acquisitions Regulations, Truth inNegotiations Act, Foreign Corrupt Practices Act, False Claims Act and the regulations promulgated under the DoD IndustrialSecurity Manual, which establishes the security guidelines for classified programs and facilities as well as individual securityclearances. The federal government audits and reviews our performance on contracts, pricing practices, cost structure, andcompliance with applicable laws, regulations and standards. Like most government contractors, our contracts are audited andreviewed on a continual basis by federal agencies, including the Defense Contract Management Agency, or DCMA, and theDefense Contract Audit Agency, or DCAA. Certain of these regulations impose substantial penalties for violations, including suspension or debarment fromgovernment contracting or subcontracting for a period of time. We monitor all of our contracts and contractual efforts tominimize the possibility of any violation of these regulations. In addition, we are subject to industry‑specific regulations due to the nature of the products and services we provide.For example, certain aspects of our business are subject to further regulation by additional U.S. government authorities,including (i) the FAA, which regulates airspace for all air vehicles in the U.S. National Airspace System, (ii) the NationalTelecommunications and Information Administration and the Federal Communications Commission, which regulate thewireless communications upon which our UAS depend in the United States and (iii) the Defense Trade Controls of the U.S.Department of State that administers the International Traffic in Arms Regulations, which regulate the export of controlledtechnical data, defense articles and defense services. The FAA issued the first restricted type certificate for the commercial operation of an unmanned aircraft overAmerican soil to our Puma AE system in 2014. Under a COA, we operated Puma AE systems in the Prudhoe Bay area ofAlaska to support a major oil and gas customer. The Secretary of Transportation has the authority to determine whether anairworthiness certificate is required for a UAS to operate safely in the U.S. National Airspace System. On September 25, 2014the FAA began issuing case‑by‑case authorization for certain unmanned aircraft to perform commercial operations prior tothe finalization of the rules providing for the integration of small UAS into the U.S. National Airspace System. As of May 11,2015 the FAA had granted us four exemptions for the use of our small UAS, including Puma AE systems, for agriculture,aerial survey, and patrol operations and for inspections of fixed infrastructures in controlled environments. On June 21, 2016the FAA released its final rules that allow routine use of certain small UAS in the U.S. National Airspace System. The FAArules, which went into effect in August 2016, provide safety rules for small UAS (under 55 pounds) conductingnon‑recreational operations. The rules limit flights to visual‑line‑of‑sight daylight operation, unless the UAS has anti-collision lights in which case twilight operation is permitted. The final rule also addresses height and speed restrictions,operator certification, optional use of a visual observer, aircraft registration and marking and operational limits, includingprohibiting flights over unprotected people on the ground who are not directly participating in the operation of the UAS.Current FAA regulations require drone operators to register their systems with the FAA and secure operating licenses for theirdrones as per the Part 107 specifications. These regulations continue to evolve to accommodate the integration of UAS intothe national airspace system for commercial applications, including HAPS UAS, that are designed to fly at very high altitudesfor extended periods of time. Furthermore, our non‑U.S. operations are subject to the laws and regulations of foreign jurisdictions, which mayinclude regulations that are more stringent than those imposed by the U.S. government on our U.S. operations. 15 Table of ContentsUAS Government Contracting Process We sell the significant majority of our small UAS and tactical missile system products and services as the primecontractor under contracts with the U.S. government. Certain important aspects of our government contracts are describedbelow. UAS Bidding Process Most of our current government contracts were awarded through a competitive bidding process. The U.S.government awards competitive‑bid contracts based on proposal evaluation criteria established by the procuring agency.Competitive‑bid contracts are awarded after a formal bid and proposal competition among providers. Interested contractorsprepare a bid and proposal in response to the agency’s request for proposal or request for information. A bid and proposal isusually prepared in a short time period in response to a deadline and requires the extensive involvement of numeroustechnical and administrative personnel. Following award, competitive‑bid contracts may be challenged by unsuccessfulbidders. UAS Funding The funding of U.S. government programs is subject to congressional appropriations. Although multi‑year contractsmay be authorized in connection with major procurements, Congress generally appropriates funds on a fiscal year basis, eventhough a program may continue for many years. Consequently, programs are often only partially funded initially, andadditional funds are committed only as Congress makes further appropriations. The U.S. military funds its contracts for our full‑rate production UAS either through operational need statements oras programs of record. Operational need statements require allocations of discretionary spending or reallocations of fundingfrom other government programs. Funding for our production of initial Raven system deliveries, for example, was providedthrough operational need statements. We define a program of record as a program which, after undergoing extensive DoDreview and product testing, is included in the five‑year government budget cycle, meaning that funding is allocated forpurchases under these contracts during the five‑year cycle, absent affirmative action by the customer or Congress to changethe budgeted amount. Despite being included in the five-year budget cycle, funding for these programs is subject to annualapproval. UAS Material Government Contract Provisions All contracts with the U.S. government contain provisions, and are subject to laws and regulations, that give thegovernment rights and remedies not typically found in commercial contracts, including rights that allow the government to: ·terminate existing contracts for convenience, in whole or in part, when it is in the interest of the government todo so; ·terminate contracts for default upon the occurrence of certain enumerated events; ·unilaterally modify contracts with regard to certain performance requirements; ·cancel multi‑year contracts and related orders, if funds for contract performance for any subsequent year becomeunavailable; ·potentially obtain rights in, or ownership to, intellectual property associated with products and systemsdeveloped or delivered by a contractor as a result of its performance of the contract; ·adjust contract costs and fees on the basis of audits completed by its agencies; ·suspend or debar a contractor from doing business with the U.S. government; and16 Table of Contents ·control or prohibit the export of certain items. Generally, government contracts are subject to oversight audits by government representatives. Compensation, ifany, in the event of a termination for default is limited to payment for work completed at the time of termination. In the eventof a termination for convenience, the contractor may receive the contract price for completed work, as well as its costs ofperformance of terminated work including an allowance for profit and reasonable termination settlement costs. UAS Government Contract Categories We have three types of government contracts, each of which involves a different payment methodology and level ofrisk related to the cost of performance. These basic types of contracts are typically referred to as fixed‑price contracts, costreimbursable contracts, including cost‑plus‑fixed fee, cost‑plus‑award fee, and cost‑plus‑incentive fee, and time‑and‑materialscontracts. In some cases, depending on the urgency of the project and the complexity of the contract negotiation, we will enterinto a Letter Contract prior to finalizing the terms of a definitive fixed‑price, cost reimbursable or time‑and‑materialsdefinitive contract. A Letter Contract is a written preliminary contractual instrument that provides limited initial funding andauthorizes us to begin immediately manufacturing supplies or performing services while negotiating the definitive terms ofthe procurement. Fixed‑Price. These contracts are not subject to adjustment by reason of costs incurred in theperformance of the contract. With this type of contract, we assume the risk that we will not be able toperform at a cost below the fixed‑price, except for costs incurred because of contract changes ordered by thecustomer. Upon the U.S. government’s termination of a fixed‑price contract, generally we would be entitledto payment for items delivered to and accepted by the U.S. government and, if the termination is at the U.S.government’s convenience, for payment of fair compensation for work performed plus the costs of settlingand paying claims by any terminated subcontractors, other settlement expenses and a reasonable allowancefor profit on the costs incurred. Cost Reimbursable. Cost reimbursable contracts include cost‑plus‑fixed fee contracts,cost‑plus‑award fee contracts and cost‑plus‑incentive fee contracts, each of which are described below.Under each type of contract, we assume the risk that we may not be able to recover costs if they are notallowable under the contract terms or applicable regulations, or if the costs exceed the contract funding. ·Cost‑plus‑fixed fee contracts are cost reimbursable contracts that provide for payment of anegotiated fee that is fixed at the inception of the contract. This fixed fee does not vary withactual cost of the contract, but may be adjusted as a result of changes in the work to beperformed under the contract. This contract type poses less risk of loss than a fixed‑pricecontract, but our ability to win future contracts from the procuring agency may be adverselyaffected if we fail to perform within the maximum cost set forth in the contract. ·A cost‑plus‑award fee contract is a cost reimbursable contract that provides for a fee consistingof a base amount, which may be zero, fixed at inception of the contract and an award amount,based upon the government’s satisfaction with the performance under the contract. With thistype of contract, we assume the risk that we may not receive the award fee, or only a portion ofit, if we do not perform satisfactorily. ·A cost‑plus‑incentive fee contract is a cost reimbursable contract that provides for an initiallynegotiated fee to be adjusted later by a formula based on the relationship of total allowablecosts to total target costs.17 Table of Contents We typically experience lower profit margins and lower risk under cost reimbursable contractsthan under fixed‑price contracts. Upon the termination of a cost reimbursable contract, generally we wouldbe entitled to reimbursement of our allowable costs and, if the termination is at the U.S. government’sconvenience, a total fee proportionate to the percentage of work completed under the contract. Time‑and‑Materials. Under a time‑and‑materials contract, our compensation is based on a fixedhourly rate established for specified labor or skill categories. We are paid at the established hourly rates forthe hours we expend performing the work specified in the contract. Labor costs, overhead, general andadministrative costs and profit are included in the fixed hourly rate. Materials, subcontractors, travel andother direct costs are reimbursed at actual costs plus an amount for material handling. We make criticalpricing assumptions and decisions when developing and proposing time‑and‑materials labor rates. We riskreduced profitability if our actual costs exceed the costs incorporated into the fixed hourly labor rate. Onevariation of a standard time‑and‑materials contract is a time‑and‑materials, award fee contract. Under thistype of contract, a positive or negative incentive can be earned based on achievement against specificperformance metrics. UAS Indefinite Delivery Indefinite Quantity Contract Form The U.S. government frequently uses IDIQ contracts and IDIQ‑type contract forms, such as cost reimbursable andfixed price contracts with multiple one‑year options, to obtain fixed‑price, cost reimbursable and time‑and‑materialscontractual commitments to provide products or services over a period of time pursuant to established general terms andconditions. At the time of the award of an IDIQ contract or IDIQ‑type contract, the U.S. government generally commits topurchase only a minimal amount of products or services from the contractor to whom such contract is awarded. After award of an IDIQ contract the U.S. government may issue task orders for specific services or products it needs.The competitive process to obtain task orders under an award contract is limited to the pre‑selected contractors. If an IDIQcontract has a single prime contractor, then the award of task orders is limited to that contractor. If the contract has multipleprime contractors, then the award of the task order is competitively determined among only those prime contractors. IDIQ and IDIQ‑type contracts typically have multi‑year terms and unfunded ceiling amounts that enable, but do notcommit, the U.S. government to purchase substantial amounts of products and services from one or more contractors. 18 Table of Contents Item 1A. Risk Factors. General Business Risks The proposed acquisition of the assets associated with our EES operating segment by Webasto may disrupt our businessand, if this transaction is not completed, our stock price may decline and we will have incurred significant expenses. On June 1, 2018, we entered into the Purchase Agreement with Webasto, pursuant to which Webasto has agreed toacquire certain properties, assets and rights used or held for use in connection with our EES Business. The transaction,whether or not consummated, may disrupt our sales and marketing or other business activities, including our relationshipswith customers, suppliers and other third parties, and divert management’s and our employees’ attention from our day-to-dayoperations, which may have an adverse impact on our financial performance. Further, the failure to complete the transactionmay result in disruptions related to the re-integration of our EES Business, as well as a potential decline in employee morale.Alternatively, we could seek other strategic alternatives for the EES Business, such as a sale of the assets of the business toanother party. We may not be successful in consummating such other strategic alternatives or on terms as favorable as thecurrent proposed transaction with Webasto. Additionally, the employees of our EES Business, despite being offeredemployment with Webasto after the closing of the transactions contemplated by the Purchase Agreement, may decide todepart and seek alternative employment prior to the closing, which would have a negative impact on our ability to continueour operations. The Purchase Agreement generally requires us to operate our EES Business in the ordinary course pendingconsummation of the transaction and places certain contractual restrictions on the conduct of our EES Business that mayaffect our ability to execute on our business strategy and attain our financial objectives. Additionally, we have incurred andwill continue to incur substantial financial advisory, legal, and other professional fees and expenses in connection with thetransaction, which we must pay regardless of whether the transaction is completed. The obligations of the parties to complete the transaction with Webasto are subject to certain closing conditions,including: (i) the accuracy of each party’s representations and warranties (subject to customary materiality qualifiers), (ii)each party’s compliance with its covenants and agreements contained in the Purchase Agreement (subject to customarymateriality qualifiers), (iii) the execution by the parties of certain ancillary agreements and (iv) other customary closingconditions, which are described in more detail in the Purchase Agreement, which will be filed as an exhibit to our QuarterlyReport on Form 10-Q for the quarter ending July 29, 2018. In the event that any of the conditions set forth in the PurchaseAgreement are not satisfied or waived to the extent permitted by applicable law or the transactions contemplated by thePurchase Agreement do not occur when or as expected, the price per share of our common stock could decline. We will continue to be responsible for certain liabilities and obligations related to our EES business even if our proposeddivestiture of the related assets is consummated. Under our Purchase Agreement with Webasto, Webasto has assumed certain of our future obligations with respect toour EES business, although we will continue to be responsible for certain warranty, product and other liabilities arising priorto the closing of such transaction. If substantial unknown liabilities were to arise in the future, then our financial conditioncould be materially adversely affected. Further, we have agreed to indemnify Webasto for certain pre-closing liabilitiesassociated with our EES business assets and for breaches of the representations and warranties contained in the PurchaseAgreement for the transaction. There can be no guarantee that material claims will not arise during the relevantindemnification periods and that we will not have to provide the requisite indemnification. In addition, legal challenges toany potential claim for indemnification could result in increased legal expenses to us. We rely heavily on sales to the U.S. government, particularly to agencies of the Department of Defense. Historically, we have derived a significant portion of our total sales and substantially all of our small UAS sales fromthe U.S. government and its agencies. Sales to the U.S. government, either as a prime contractor or subcontractor, representedapproximately 54% of our revenue for the fiscal year ended April 30, 2018. The DoD, our principal U.S.19 Table of Contentsgovernment customer, accounted for approximately 46% of our revenue for the fiscal year ended April 30, 2018. We believethat the success and growth of our business for the foreseeable future will continue to depend to a significant degree on ourability to win government contracts, in particular from the DoD. Many of our government customers are subject to budgetaryconstraints and our continued performance under these contracts, or award of additional contracts from these agencies, couldbe jeopardized by spending reductions, including constraints on government spending imposed by the Budget Control Actof 2011 and its subsequent amendments, or budget cutbacks at these agencies. The funding of U.S. government programs isuncertain and dependent on continued congressional appropriations and administrative allotment of funds based on anannual budgeting process. We cannot assure you that current levels of congressional funding for our products and serviceswill continue and that our business will not decline. Additionally, the U.S. military funds our contracts primarily throughoperational needs statements, and to a lesser extent, through programs of record, which provides us with less visibility andcertainty on future funding allocations for our contracts. Furthermore, all of our contracts with the U.S. government areterminable by the U.S. government at will. A significant decline in government expenditures generally, or with respect toprograms for which we provide products, could adversely affect our business and prospects. Our operating results may also benegatively impacted by other developments that affect these government programs generally, including the following: ·changes in government programs that are related to our products and services; ·adoption of new laws or regulations relating to government contracting or changes to existing laws orregulations; ·changes in political or public support for security and defense programs; ·delays or changes in the government appropriations and budget process; ·uncertainties associated with the current global threat environment and other geo‑political matters; and ·delays in the payment of our invoices by government payment offices. These developments and other factors could cause governmental agencies to reduce their purchases under existingcontracts, to exercise their rights to terminate contracts at‑will or to abstain from renewing contracts, any of which wouldcause our revenue to decline and could otherwise harm our business, financial condition and results of operations. Military transformation and changes in overseas operational levels may affect future procurement priorities and existingprograms, which could limit demand for our UAS. Over the last decade, operational activity in Afghanistan and Iraq led to adoption and an increase in demand for oursmall UAS. More recently, the U.S. military has reduced its presence and operational activity in Afghanistan and Iraq,reducing demand for certain of our small UAS products from prior levels. We cannot predict whether the reduction inoverseas operational levels will continue, how future procurement priorities related to defense transformation will beimpacted or how changes in the threat environment will impact opportunities for our small UAS business in terms of existing,additional or replacement programs. If defense transformation or overseas operations cease or slow down, then our business,financial condition and results of operations could be impacted negatively. We operate in evolving markets, which makes it difficult to evaluate our business and future prospects. Our UAS are sold in new and rapidly evolving markets. The commercial UAS market is in the early stages ofcustomer adoption. The market for HAPS UAS is also in an early stage of development. Accordingly, our business and futureprospects may be difficult to evaluate. We cannot accurately predict the extent to which demand for our products willincrease, if at all. The challenges, risks and uncertainties frequently encountered by companies in rapidly evolving marketscould impact our ability to do the following: ·generate sufficient revenue to maintain profitability;20 Table of Contents ·acquire and maintain market share; ·achieve or manage growth in our operations; ·develop and renew contracts; ·attract and retain additional engineers and other highly‑qualified personnel; ·successfully develop and commercially market new products; ·adapt to new or changing policies and spending priorities of governments and government agencies; and ·access additional capital when required and on reasonable terms. If we fail to address these and other challenges, risks and uncertainties successfully, our business, results ofoperations and financial condition would be materially harmed. We face competition from other firms, many of which have substantially greater resources. The defense industry is highly competitive and generally characterized by intense competition to win contracts. Ourcurrent principal small UAS competitors include Elbit Systems Ltd., L3 Technologies, Inc. and Lockheed MartinCorporation. We do not view large UAS such as Northrop Grumman Corporation’s Global Hawk, General Atomics, Inc.’sPredator and related products, The Boeing Company’s ScanEagle and Textron Inc.’s Shadow as direct competitors becausethey perform different missions, do not typically deliver their information directly to front‑line ground forces, and are nothand launched and controlled. However, we cannot be certain that these platforms will not become direct competitors in thefuture. The HAPS UAS market is in an early stage of development and our HAPS UAS faces competition from severalaerospace and defense contractors and internet technology companies pursuing the high altitude long endurance UAS marketfor global communication and remote sensing, including The Boeing Company, Airbus, Lockheed Martin Corporation andNorthrop Grumman Corporation, and competition from companies pursuing alternative solutions for this market such asLockheed Martin Corporation and Northrop Grumman Corporation with airships (high altitude aircraft that are kept buoyantby a body of gas that is lighter than air) and companies pursuing conventional satellites and Low Earth Orbit, or LEO, microor cubesat satellite constellations. Our tactical missile systems business faces competition from competitors includingTextron Inc., Raytheon Company and Lockheed Martin Corporation. Some of these firms have substantially greater financial, management, research and marketing resources than wehave. Our UAS services business also faces competition from smaller businesses that can provide training and logisticsservices for multiple UAS platforms, including our small UAS. Our competitors may be able to provide customers with different or greater capabilities or benefits than we canprovide in areas such as technical qualifications, past contract performance, geographic presence, price and the availabilityof key professional personnel, including those with security clearances. Furthermore, many of our competitors may be able toutilize their substantially greater resources and economies of scale to develop competing products and technologies,manufacture in high volumes more efficiently, divert sales away from us by winning broader contracts or hire away ouremployees by offering more lucrative compensation packages. Small business competitors in our services businesses may beable to offer more cost competitive services, due to their lower overhead costs, and take advantage of small businessincentive and set‑aside programs for which we are ineligible. In the event that the market for small UAS and services expands,we expect that competition will intensify as additional competitors enter the market and current competitors expand theirproduct lines. In order to secure contracts successfully when competing with larger, well‑financed companies, we may beforced to agree to contractual terms that provide for lower aggregate payments to us over the life of the contract, which couldadversely affect our margins. In addition, larger diversified competitors serving as prime contractors may be able to supplyunderlying products and services from affiliated entities, which would prevent us from competing for subcontractingopportunities on these contracts. Our failure to compete effectively21 Table of Contentswith respect to any of these or other factors could have a material adverse effect on our business, prospects, financialcondition or operating results. If the UAS, tactical missile systems, and commercial UAS markets do not experience significant growth, if we cannotexpand our customer base or if our products do not achieve broad acceptance, then we may not be able to achieve ouranticipated level of growth. We cannot accurately predict the future growth rates or sizes of the markets for our products. Demand for ourproducts may not increase, or may decrease, either generally or in specific markets, for particular types of products or duringparticular time periods. We believe the market for commercial UAS is nascent. Moreover, there are only a limited number ofmajor programs under which the U.S. military, our primary customer, is currently funding the development or purchase of ourUAS and tactical missile systems. Although we have expanded our UAS customer base to include foreign governments, anddomestic non‑military agencies, we cannot assure you that our continued efforts to further increase our sales to thesecustomers will be successful. The expansion of the UAS, tactical missile systems, and commercial UAS markets in general,and the market for our products in particular, depends on a number of factors, including the following: ·customer satisfaction with these types of systems as solutions; ·the cost, performance and reliability of our products and products offered by our competitors; ·customer perceptions regarding the effectiveness and value of these types of systems; ·limitations on our ability to market our UAS and tactical missile systems products and services outside theUnited States due to U.S. government regulations; ·obtaining timely regulatory approvals, including, with respect to our small UAS business, access to airspace andwireless spectrum; and ·marketing efforts and publicity regarding these types of systems. Even if UAS, tactical missile systems, and commercial UAS gain wide market acceptance, our products may notadequately address market requirements and may not continue to gain market acceptance. If these types of systems generally,or our products specifically, do not gain wide market acceptance, then we may not be able to achieve our anticipated level ofgrowth and our revenue and results of operations would decline. Our international business poses potentially greater risks than our domestic business. We derived approximately 46% of our revenue from international sales, including U.S. government foreign militarysales in which an end user is a foreign government, during the fiscal year ended April 30, 2018 compared to 37% for thefiscal year ended April 30, 2017. We expect to continue to derive an increasing portion of our revenue from internationalsales. Our international revenue and operations are subject to a number of material risks, including the following: ·the unavailability of, or difficulties in obtaining any, necessary U.S. governmental authorizations for the exportof our products to certain foreign jurisdictions; ·regulatory requirements that may adversely affect our ability to operate in foreign jurisdictions, sell certainproducts or repatriate profits to the United States; ·the complexity and necessity of using foreign representatives and consultants; 22 Table of Contents·the complexities of operating a business in an international location through a subsidiary or joint venturestructure that may include foreign business partners, subcontractors and suppliers; ·the complexity of shipping our products internationally through multiple jurisdictions with varying legalrequirements; ·difficulties in enforcing agreements and collecting receivables through foreign legal systems and other relevantlegal issues, including fewer legal protections for intellectual property; ·potential fluctuations in foreign economies and in the value of foreign currencies and interest rates; ·potential preferences by prospective customers to purchase from local (non‑U.S.) sources; ·general economic and political conditions in the markets in which we operate; ·laws or regulations relating to non‑U.S. military contracts that favor purchases from non‑U.S. manufacturers overU.S. manufacturers; ·the imposition of tariffs, embargoes, export controls and other trade restrictions; and ·different and changing legal and regulatory requirements, including those pertaining to anti-corruption, anti-boycott, data protection and privacy, employment law, intellectual property and contracts in the jurisdictions inwhich we currently operate or may operate in the future. Negative developments in any of these areas in one or more countries could result in a reduction in demand for ourproducts, the cancellation or delay of orders already placed, threats to our intellectual property, difficulty in collectingreceivables and a higher cost of doing business, any of which could negatively impact our business, financial condition orresults of operations. While we have adopted policies and procedures to facilitate compliance with laws and regulationsapplicable to our international sales, our failure, or the failure by our employees or others working on our behalf, to complywith such laws and regulations may result in administrative, civil or criminal liabilities, including suspension or debarmentfrom government contracts or suspension of our export privileges. Moreover, our sales, including sales to customers outsidethe United States, substantially all are denominated in U.S. dollars, and downward fluctuations in the value of foreigncurrencies relative to the U.S. dollar may make our products more expensive than other products, which could harm ourbusiness. We could be prohibited from shipping our products to certain countries if we are unable to obtain U.S. governmentauthorization regarding the export of our products, or if current or future export laws limit or otherwise restrict ourbusiness. In addition, failure to comply with export laws could result in fines, export restrictions and other sanctions andpenalties. We must comply with U.S. and other laws regulating the export of our products. In some cases, explicitauthorization from the relevant U.S. government authorities is needed to export our products. The export regulations and thegoverning policies applicable to our business are subject to change. We cannot provide assurance that such exportauthorizations will be available for our products in the future. Compliance with these laws has not significantly limited ouroperations or our sales in the recent past, but could significantly limit them in the future. We maintain an export complianceprogram but there are risks that our compliance controls may be ineffective. We have voluntarily disclosed export violationsto the U.S. Department of State, a number of which are currently under review by the department. The State Department hasimposed significant fines, penalties and sanctions, including suspension of export privileges, on companies that haveviolated the export laws. If the State Department determines that the conduct in our voluntary disclosures warrants theimposition of significant fines, penalties or sanctions, it could have a material adverse impact on our business, operations andfinancial condition and limit or prevent us from being able to sell our products in certain international jurisdictions. 23 Table of ContentsIf we are unable to manage the increasing complexity of our business or achieve or manage our expected growth, ourbusiness could be adversely affected. The complexity of our business has increased significantly over the last several years. We have expanded thenumber of business areas being pursued, shifting from primarily a U.S. government focused business to a business thatincludes substantial international product sales and added commercial services and formed a joint venture with SoftBankCorp. to develop HAPS UAS. This increased complexity and our expected growth has placed, and will continue to place, astrain on our management and our administrative, operational and financial infrastructure. We anticipate further growth ofheadcount and facilities will be required to address expansion in our product offerings and the geographic scope of ourcustomer base. However, if we are unsuccessful in our efforts, our business could decline. Our success will depend in partupon the ability of our senior management to manage our increased complexity and expected growth effectively. To do so,we must continue to hire, train, manage and integrate a significant number of qualified managers and engineers. If our newemployees perform poorly, or if we are unsuccessful in hiring, training, managing and integrating these new employees, orretaining these or our existing employees, then our business may experience declines. To support our expected growth, we must continue to improve our operational, financial and managementinformation systems. If we are unable to manage our growth while maintaining our quality of service, or if new systems thatwe implement to assist in managing our growth do not produce the expected benefits, then our business, prospects, financialcondition or operating results could be adversely affected. Any efforts to expand our offerings beyond our current markets may not succeed, which could negatively impact ouroperating results. Until recently, we have focused on selling our small UAS to the U.S. military. We have, however, expanded oursmall UAS sales into other government and commercial markets and formed a joint venture with SoftBank Corp. to developHAPS UAS for global communication and remote sensing applications. Our efforts to expand our product offerings beyondour traditional markets may divert management resources from existing operations and require us to commit significantfinancial resources to unproven businesses that may not generate additional sales, either of which could significantly impairour operating results. The markets in which we compete are characterized by rapid technological change, which requires us to develop newproducts and product enhancements, and could render our existing products obsolete. Continuing technological changes in the market for our products could make our products less competitive orobsolete, either generally or for particular applications. Our future success will depend upon our ability to develop andintroduce a variety of new capabilities and enhancements to our existing product offerings, as well as introduce a variety ofnew product offerings, to address the changing needs of the markets in which we offer our products. Delays in introducingnew products and enhancements, the failure to choose correctly among technical alternatives or the failure to offerinnovative products or enhancements at competitive prices may cause existing and potential customers to purchase ourcompetitors’ products. If we are unable to devote adequate resources to develop new products or cannot otherwise successfully developnew products or enhancements that meet customer requirements on a timely basis, our products could lose market share, ourrevenue and profits could decline, and we could experience operating losses. We expect to incur substantial research and development costs and devote significant resources to identifying andcommercializing new products and services, which could significantly reduce our profitability and may never result inrevenue to us. Our future growth depends on penetrating new markets, adapting existing products to new applications, andintroducing new products and services that achieve market acceptance. We plan to incur substantial research anddevelopment costs as part of our efforts to design, develop and commercialize new products and services and enhanceexisting products. We spent $26.4 million, or 10% of our revenue, in our fiscal year ended April 30, 2018 on research anddevelopment activities. We believe that there are significant investment opportunities in a number of business areas.24 Table of ContentsBecause we account for research and development as an operating expense, these expenditures will adversely affect ourearnings in the future. Further, our research and development programs may not produce successful results, and our newproducts and services may not achieve market acceptance, create additional revenue or become profitable, which couldmaterially harm our business, prospects, financial results and liquidity. Failure to obtain necessary regulatory approvals from the FAA or other governmental agencies, or limitations put on theuse of small UAS in response to public privacy concerns, may prevent us from expanding the sales of our small UAS tonon‑military customers in the United States. The regulation of small UAS for commercial use in the United States is undergoing substantial change and theultimate treatment is uncertain. In 2006, the FAA issued a clarification of its existing policies stating that, in order to engagein commercial use of small UAS in the U.S. National Airspace System, a public operator must obtain a COA from the FAA, orfly in restricted airspace. The FAA’s COA approval process requires that the public operator certify the airworthiness of theaircraft for its intended purpose, that a collision with another aircraft or other airspace user is extremely improbable, that thesmall unmanned aircraft system complies with appropriate cloud and terrain clearances and that the operator or spotter of thesmall unmanned aircraft system is generally within one half‑mile laterally and 400 feet vertically of the small unmannedaircraft system while in operation. Furthermore, the FAA’s clarification of existing policy stated that the rules forradio‑controlled hobby aircraft do not apply to public or commercial use of small UAS. On February 14, 2012, the FAA Modernization and Reform Act of 2012 was enacted, establishing various deadlinesfor the FAA to allow expanded use of small UAS for both public and commercial applications. On June 21, 2016, the FAAreleased its final rules regarding the routine use of certain small UAS (under 55 pounds) in the U.S. National Airspace Systempursuant to the act. The rules, which became effective in August 2016, provided safety regulations for small UAS conductingnon‑recreational operations and contain various limitations and restrictions for such operations, including a requirement thatoperators keep UAS within visual-line-of-sight and prohibiting flights over unprotected people on the ground who are notdirectly participating in the operation of the UAS. We cannot assure you that these new rules will result in the expanded useof our small UAS by law enforcement or other non‑military government agencies or commercial entities and we may not beable to expand our sales of small UAS beyond our military customers, which could harm our business prospects. In addition, there exists public concern regarding the privacy implications of U.S. commercial and law enforcementuse of small UAS. This concern has included calls to develop explicit written policies and procedures establishing usagelimitations. We cannot assure you that the response from regulatory agencies, customers and privacy advocates to theseconcerns will not delay or restrict the adoption of small UAS by non‑military customers. Our products and services are complex and could have unknown defects or errors, which may give rise to claims against us,diminish our brand or divert our resources from other purposes. Our UAS rely on complex avionics, sensors, user‑friendly interfaces and tightly‑integrated, electromechanicaldesigns to accomplish their missions. Despite testing, our products have contained defects and errors and may in the futurecontain defects, errors or performance problems when first introduced, when new versions or enhancements are released, oreven after these products have been used by our customers for a period of time. These problems could result in expensive andtime‑consuming design modifications or warranty charges, delays in the introduction of new products or enhancements,significant increases in our service and maintenance costs, exposure to liability for damages, damaged customer relationshipsand harm to our reputation, any of which could materially harm our results of operations and ability to achieve marketacceptance. In addition, increased development and warranty costs could be substantial and could reduce our operatingmargins. The existence of any defects, errors, or failures in our products or the misuse of our products could also lead toproduct liability claims or lawsuits against us. A defect, error or failure in one of our UAS could result in injury, death orproperty damage and significantly damage our reputation and support for our UAS in general. We anticipate this risk willgrow as our UAS begin to be used in U.S. domestic airspace and urban areas. We also remain liable for warranty and productliability claims for our EV charging systems and power cycling and test systems sold prior the closing of the transactioncontemplated by the Purchase Agreement, which products have the potential to cause injury, death or25 Table of Contentsproperty damage in the event that they are misused, malfunction or fail to operate properly due to unknown defects or errors. Although we maintain insurance policies, we cannot provide assurance that this insurance will be adequate toprotect us from all material judgments and expenses related to potential future claims or that these levels of insurance will beavailable in the future at economical prices or at all. A successful product liability claim could result in substantial cost to us.Even if we are fully insured as it relates to a claim, the claim could nevertheless diminish our brand and divert management’sattention and resources, which could have a negative impact on our business, financial condition and results of operations. If critical components or raw materials used to manufacture our products become scarce or unavailable, then we may incurdelays in manufacturing and delivery of our products, which could damage our business. We obtain hardware components, various subsystems and systems from a limited group of suppliers. We do not havelong‑term agreements with any of these suppliers that obligate them to continue to sell components, subsystems, systems orproducts to us. Our reliance on these suppliers involves significant risks and uncertainties, including whether our supplierswill provide an adequate supply of required components, subsystems, or systems of sufficient quality, will increase prices forthe components, subsystems or systems and will perform their obligations on a timely basis. In addition, certain raw materials and components used in the manufacture of our products are periodically subjectto supply shortages, and our business is subject to the risk of price increases and periodic delays in delivery. Particularly, themarket for electronic components is experiencing increased demand, creating substantial uncertainty regarding our suppliers’continued production of key components for our products. If we are unable to obtain components from third party suppliersin the quantities and of the quality that we require, on a timely basis and at acceptable prices, then we may not be able todeliver our products on a timely or cost effective basis to our customers, which could cause customers to terminate theircontracts with us, increase our costs and seriously harm our business, results of operations and financial condition. Moreover,if any of our suppliers become financially unstable, or otherwise unable or unwilling to provide us with raw materials orcomponents, then we may have to find new suppliers. It may take several months to locate alternative suppliers, if required,or to redesign our products to accommodate components from different suppliers. We may experience significant delays inmanufacturing and shipping our products to customers and incur additional development, manufacturing and other costs toestablish alternative sources of supply if we lose any of these sources or are required to redesign our products. We cannotpredict if we will be able to obtain replacement components within the time frames that we require at an affordable cost, if atall. Our earnings and profit margins may decrease based on the mix of our contracts and programs and other factors related toour contracts. In general, we perform our production work under fixed‑price contracts and our repair and customer‑funded researchand development work under cost‑plus‑fee contracts. Under fixed‑price contracts, we perform services under a contract at astipulated price. Under cost‑plus‑fee contracts, which are subject to a contract ceiling amount, we are reimbursed forallowable costs and paid a fee, which may be fixed or performance based. We typically experience lower profit margins undercost‑plus‑fee contracts than under fixed‑price contracts, though fixed‑price contracts involve higher risks. In general, if thevolume of services we perform under cost‑plus‑fee contracts increases relative to the volume of services we perform underfixed‑price contracts, we expect that our operating margin will decline. In addition, our earnings and margins may decreasedepending on the costs we incur in contract performance, our achievement of other contract performance objectives and thestage of our performance at which our right to receive fees, particularly under incentive and award fee contracts, is finallydetermined. We use estimates in accounting for many of our programs and changes in our estimates could adversely affect our futurefinancial results. Contract accounting requires judgments relative to assessing risks, including risks associated with estimatingcontract revenues and costs, assumptions for schedule and technical issues, customer‑directed delays and reductions inscheduled deliveries, and unfavorable resolutions of claims and contractual matters. Due to the size and nature of many26 Table of Contentsof our contracts, the estimation of total revenues and cost at completion is complicated and subject to many variables. Forexample, we must make assumptions regarding the length of time to complete the contract because costs also includeexpected increases in wages and prices for materials; consider whether the intent of entering into multiple contracts waseffectively to enter into a single project in order to determine whether such contracts should be combined or segmented;consider incentives or penalties related to performance on contracts in estimating sales and profit rates, and record them whenthere is sufficient information for us to assess anticipated performance; and use estimates of award fees in estimating sales andprofit rates based on actual and anticipated awards. Because of the significance of the judgments and estimation processesdescribed above, it is likely that materially different amounts could be recorded if we used different assumptions or if theunderlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may adverselyaffect our future results of operations and financial condition. Cost overruns on our contracts could subject us to losses, decrease our operating margins and adversely affect our futurebusiness. Fixed‑price contracts (including both government and commercial contracts) represented approximately 80% of ourrevenue for the fiscal year ended April 30, 2018. If we fail to anticipate technical problems, estimate costs accurately orcontrol costs during our performance of fixed‑price contracts, then we may incur losses on these contracts because we absorbany costs in excess of the fixed price. Under cost‑plus‑fee contracts, if costs exceed the contract ceiling or are not allowableunder the provisions of the contract or applicable regulations, then we may not be able to obtain reimbursement for all suchcosts. Under time and materials contracts, we are paid for labor at negotiated hourly billing rates and for certain expenses.Because many of our contracts involve advanced designs and innovative technologies, we may experience unforeseentechnological difficulties and cost overruns. Under each type of contract, if we are unable to control the costs we incur inperforming under the contract, then our financial condition and results of operations could be materially adversely affected.Cost overruns also may adversely affect our ability to sustain existing programs and obtain future contract awards. Our senior management and key employees are important to our customer relationships and overall business. We believe that our success depends in part on the continued contributions of our senior management and keyemployees. We rely on our executive officers, senior management and key employees to generate business and executeprograms successfully. In addition, the relationships and reputation that members of our management team and keyemployees have established and maintain with government defense personnel contribute to our ability to maintain goodcustomer relations and to identify new business opportunities. We do not have employment agreements with any of ourexecutive officers or key employees, and these individuals could terminate their employment with us at any time. The loss ofany of our executive officers, members of our senior management team or key employees could significantly delay or preventthe achievement of our business objectives and could materially harm our business and customer relationships and impairour ability to identify and secure new contracts and otherwise manage our business. We must recruit and retain highly‑skilled employees to succeed in our competitive business. We depend on our ability to recruit and retain employees who have advanced engineering and technical servicesskills and who work well with our customers. These employees are in great demand and are likely to remain a limitedresource in the foreseeable future. If we are unable to recruit and retain a sufficient number of these employees, then ourability to maintain our competitiveness and grow our business could be negatively affected. In addition, because of thehighly technical nature of our products, the loss of any significant number of our existing engineering personnel could havea material adverse effect on our business and operating results. Moreover, some of our U.S. government contracts containprovisions requiring us to staff a program with certain personnel the customer considers key to our successful performanceunder the contract. In the event we are unable to provide these key personnel or acceptable substitutes, the customer mayterminate the contract. 27 Table of ContentsOur business may be dependent upon our employees obtaining and maintaining required security clearances, as well as ourability to obtain security clearances for the facilities in which we perform sensitive government work. Certain of our U.S. government contracts require our employees to maintain various levels of security clearances,and we are required to maintain certain facility security clearances complying with DoD requirements. The DoD has strictsecurity clearance requirements for personnel who work on classified programs. Obtaining and maintaining securityclearances for employees involves a lengthy process, and it is difficult to identify, recruit and retain employees who alreadyhold security clearances. If our employees are unable to obtain security clearances in a timely manner, or at all, or if ouremployees who hold security clearances are unable to maintain the clearances or terminate employment with us, then acustomer requiring classified work could terminate the contract or decide not to renew it upon its expiration. In addition, weexpect that many of the contracts on which we will bid will require us to demonstrate our ability to obtain facility securityclearances and employ personnel with specified types of security clearances. To the extent we are not able to obtain facilitysecurity clearances or engage employees with the required security clearances for a particular contract, we may not be able tobid on or win new contracts, or effectively rebid on expiring contracts. Our future profitability may be dependent upon achieving cost reductions and projected economies of scale fromincreasing manufacturing quantities of our products. Failing to achieve such reductions in manufacturing costs andprojected economies of scale could materially adversely affect our business. We have limited experience manufacturing small UAS and tactical missile systems in high volume. We do not knowwhether or when we will be able to develop efficient, low‑cost manufacturing capabilities and processes that will enable us tomanufacture (or contract for the manufacture of) these products in commercial quantities while meeting the volume, speed,quality, price, engineering, design and production standards required to successfully market our products. Our failure todevelop such manufacturing processes and capabilities in locations that can efficiently service our markets could have amaterial adverse effect on our business, financial condition, results of operations and prospects. Our future profitability is, inpart, dependent upon achieving increased savings from volume purchases of raw materials and component parts, achievingacceptable manufacturing yield and capitalizing on machinery efficiencies. We expect our suppliers to experience a sharpincrease in demand for their products. As a result, we may not have reliable access to supplies that we require or be able topurchase such materials or components at cost effective prices. There is no assurance that we will ever be in a position torealize any material, labor and machinery cost reductions associated with higher purchasing power and higher productionlevels. Failure to achieve these cost reductions could adversely impact our business and financial results. We face significant risks in overseeing our outsourcing of manufacturing processes as well as in the management of ourinventory, and failure to properly oversee our manufacturing processes or to effectively manage our inventory levels mayresult in product recalls or supply imbalances that could harm our business. We have contracted for the manufacture of our Quantix UAS with contract manufacturers. We sell these unitsdirectly and through dealers. We face significant risks if our contract manufacturers do not perform as expected. If we fail toeffectively oversee the manufacturing process, including the work performed by our contract manufacturers, we could benegatively impacted by product recalls, poorly performing products and higher than anticipated warranty costs. In addition, we also maintain a variety of parts and components in inventory to allow us to customize our UASproducts for specific customer requirements, which parts are subject to obsolescence and expiration. Due to the long‑leadtime for obtaining certain UAS product components and the manufacturing cycles, we need to make forecasts of demand andcommit significant resources towards manufacturing our products. As such, we are subject to significant risks in managingthe inventory needs of our business during the year, including estimating the appropriate demand for our products. Shouldorders and market conditions differ significantly from our estimates, our future results of operations could be materiallyadversely affected. In the future, we may be required to record write‑downs of finished products and materials on‑hand and/oradditional charges for excess purchase commitments as a result of future changes in our sales forecasts or customer orders. 28 Table of ContentsDue to the volatile and flammable nature of certain components of our products and equipment, fires or explosions maydisrupt our business or cause significant injuries, which could adversely affect our financial results. The development and manufacture of certain of our products involves the handling of a variety of explosive andflammable materials as well as high power equipment. From time to time, these activities may result in incidents that couldcause us to temporarily shut down or otherwise disrupt some manufacturing processes, causing production delays andresulting in liability for workplace injuries and/or fatalities. We have safety and loss prevention programs that requiredetailed reviews of process changes and new operations, along with routine safety audits of operations involving explosivematerials, to mitigate such incidents, as well as a variety of insurance policies, however our insurance coverage may beinadequate to cover all claims and losses related to such incidents. We may experience such incidents in the future, whichcould result in production delays or otherwise have a material adverse effect on our business and financial condition. The operation of UAS in urban environments may be subject to risks, such as accidental collisions and transmissioninterference, which may limit demand for our UAS in such environments and harm our business and operating results. Urban environments may present certain challenges to the operators of UAS. UAS may accidentally collide withother aircraft, persons or property, which could result in injury, death or property damage and significantly damage thereputation of and support for UAS in general. As the usage of UAS has increased, particularly by military customers, thedanger of such collisions has increased. Furthermore, the incorporation of our DDL technology into our UAS has increasedthe number of vehicles which can operate simultaneously in a given area and with this increase has come an increase in therisk of accidental collision. In addition, obstructions to effective transmissions in urban environments, such as largebuildings, may limit the ability of the operator to utilize the aircraft for its intended purpose. The risks or limitations ofoperating UAS in urban environments may limit their value in such environments, which may limit demand for our UAS andconsequently materially harm our business and operating results. As a manufacturer of commercial UAS, we are subject to various government regulations and may be subject to additionalregulations in the future, violation of which could subject us to sanctions or otherwise harm our business. As a manufacturer of consumer products, we are subject to significant government regulations, including, in theUnited States, those issued under the Consumer Products Safety Act, as well as those issued under product safety andconsumer protection statutes in our international markets. Failure to comply with any applicable product safety or consumerprotection regulation could result in sanctions that could have a negative impact on our business, financial condition andresults of operations. Governments and regulatory agencies in the markets where we manufacture and sell products may enact additionalregulations relating to product safety and consumer protection in the future, and may also increase the penalties for failure tocomply with product safety and consumer protection regulations. In addition, one or more of our customers might requirechanges in our products, such as the non‑use of certain materials, in the future. Complying with any such additionalregulations or requirements could impose increased costs on our business. Similarly, increased penalties for non‑compliancecould subject us to greater expenses in the event any of our products were found to not comply with such regulations. Suchincreased costs or penalties could harm our business. We could be the subject of future product liability suits or product recalls, which could harm our business. We may be subject to involuntary product recalls or may voluntarily conduct a product recall. The costs associatedwith any future product recalls could be significant. In addition, any product recall, regardless of direct costs of the recall,may harm consumer perceptions of our products and have a negative impact on our future revenues and results of operations. In addition to government regulation, products that have been or may be developed by us may expose us topotential liability from personal injury or property damage claims by the users of such products. There can be no assurancethat a claim will not be brought against us in the future. While we maintain insurance coverage for product29 Table of Contentsliability claims, our insurance may be inadequate to cover any such claims. Any successful claim could significantly harmour business, financial condition and results of operations. Further, we remain responsible for non-warranty costs of any recallof products we manufactured, sold or services prior to closing of the transaction with Webasto. Our quarterly operating results may vary widely. Our quarterly revenue, cash flow and operating results have and may continue to fluctuate significantly in the futuredue to a number of factors, including the following: ·fluctuations in revenue derived from government contracts, including cost‑plus‑fee contracts and contracts witha performance‑based fee structure; ·the size and timing of orders from military and other governmental agencies, including increased purchaserequests from government customers for equipment and materials in connection with the U.S. government’sfiscal year end, which may affect our quarterly operating results; ·the mix of products that we sell in the period; ·seasonal fluctuations in customer demand for some of our products or services; ·unanticipated costs incurred in the introduction of new products; ·fluctuations in the adoption of our products in new markets; ·our ability to win additional contracts from existing customers or other contracts from new customers; ·cancellations, delays or contract amendments by our U.S. governmental agency and foreign governmentcustomers; ·changes in policy or budgetary measures that adversely affect our U.S. governmental agency and foreigngovernment customers; ·the cost of complying with various regulatory requirements applicable to our business and the potentialpenalties or sanctions that could be imposed for non‑compliance; and ·our ability to obtain the necessary export licenses for sales of our products and services to internationalcustomers. Changes in the volume of products and services provided under existing contracts and the number of contractscommenced, completed or terminated during any quarter may cause significant variations in our cash flow from operationsbecause a relatively large amount of our expenses are fixed. We incur significant operating expenses during the start‑up andearly stages of large contracts and typically do not receive corresponding payments in that same quarter. We may also incursignificant or unanticipated expenses when contracts expire or are terminated or are not renewed. In addition, payments dueto us from government agencies may be delayed due to billing cycles or as a result of failures of governmental budgets togain congressional and presidential approval in a timely manner. Shortfalls in available external research and development funding could adversely affect us. We depend on our research and development activities to develop the core technologies used in our UAS productsand for the development of our future products. A portion of our research and development activities depends on funding bycommercial companies and the U.S. government. U.S. government and commercial spending levels can be impacted by anumber of variables, including general economic conditions, specific companies’ financial performance and competition forU.S. government funding with other U.S. government‑sponsored programs in the30 Table of Contentsbudget formulation and appropriation processes. To the extent that these external sources of funding are reduced oreliminated, company funding for research and development could be reduced. Any reductions in available research anddevelopment funding could harm our business, financial condition and operating results. Our work for the U.S. government and international governments may expose us to security risks. As a U.S. government contractor, we face various security threats, including cyber security attacks on ourinformation technology infrastructure, attempts to gain access to our proprietary, financial, banking or classified informationas well as threats to the physical security of our facilities and employees. Although we utilize various procedures andcontrols to monitor and mitigate these threats, there can be no assurance that these procedures and controls will be sufficientto prevent disruptions, the unauthorized release of confidential technical, financial or banking information or corruption ofdata. Accordingly, any significant operational delays, or any destruction, manipulation or improper use of our data,information systems or networks could adversely affect our financial results and damage the reputation for our products andservices. Previous cyber-attacks directed at us have not materially impacted our business or financial results, but the impactof future incidents cannot be predicted due to the evolving nature and complexity of cyber-attacks. If we or our partners aresubject to data security breaches, we may have a loss in sales or increased costs arising from the restoration orimplementation of additional security measures, either of which could materially and adversely affect our business andfinancial results. Additionally, expenses resulting from cyber security attacks and other security risks may not be fullyinsured or otherwise mitigated, which could harm our financial results. In addition, we work in international locations where there are high security risks, which could result in harm to ouremployees and contractors or substantial costs. Some of our services are performed in or adjacent to high‑risk locations, suchas Iraq and Afghanistan, where the country or location is experiencing political, social or economic issues, or war or civilunrest. In those locations where we have employees or operations, we may incur substantial costs to maintain the safety ofour personnel. Despite these precautions, the safety of our personnel in these locations may continue to be at risk, and wemay in the future be negatively impacted by the loss of employees and contractors, which could harm our business andoperating results. We may not be able to obtain capital when desired on favorable terms, if at all, or without dilution to our stockholders. We operate in emerging and rapidly evolving markets, which makes our prospects difficult to evaluate. It is possiblethat we may not generate sufficient cash flow from operations or otherwise have the capital resources to meet our futurecapital needs. If this occurs, then we may need additional financing to pursue our business strategies, including to: ·hire additional engineers and other personnel; ·develop new or enhance existing products; ·enhance our operating infrastructure; ·fund working capital requirements; ·acquire complementary businesses or technologies; or ·otherwise respond to competitive pressures. If we raise additional funds through the issuance of equity or convertible debt securities, the percentage ownershipof our stockholders could be significantly diluted, and these newly‑issued securities may have rights, preferences orprivileges senior to those of existing stockholders. We cannot assure you that additional financing will be available on termsfavorable to us, or at all. Our former line of credit contained, and future debt financing may contain, covenants or otherprovisions that limit our operational or financial flexibility. In addition, certain of our customers require that we obtainletters of credit to support our obligations under some of our contracts.31 Table of Contents Our investment portfolio includes investments in auction rate securities. Failures in the auctions for these securities affectour liquidity, coupled with deterioration in credit ratings of issuers of such securities and/or third parties insuring suchinvestments may require us to adjust the carrying value of our investment through an impairment of earnings. As of April 30, 2018, our $2.1 million of long‑term investments recorded at fair value consisted entirely of auctionrate municipal bonds with maturities that range from approximately 1 to 16 years. These investments have characteristicssimilar to short‑term investments, because at pre‑determined intervals, generally ranging from 30 to 35 days, there is a newauction process at which the interest rates for these securities are reset to current interest rates. At the end of such period, wechoose to roll‑over our holdings or redeem the investments for cash. A market maker facilitates the redemption of thesecurities and the underlying issuers are not required to redeem the investment within 365 days. Since fiscal 2008, we have experienced failed auctions of our auction rate securities and there is no assurance thatauctions on the remaining auction rate securities in our investment portfolio will succeed in the future. As a result, our abilityto liquidate our investments in the near term may be limited, and our ability to recover the carrying value of our investmentsmay be limited. An auction failure means that the parties wishing to sell securities were not able to do so. As of June 15,2018, including the securities involved in failed auctions, we held approximately $1.9 million of these auction ratesecurities, all of which carry investment grade ratings. These investments are subject to general credit, liquidity, market andinterest rate risks, which may be exacerbated by problems in the global credit markets. These and other related factors haveaffected various sectors of the financial markets and caused credit and liquidity issues. If the issuers of these securities areunable to successfully close future auctions or their credit ratings deteriorate, we may in the future be required to record animpairment charge on these investments. We currently believe these securities are not permanently impaired, primarily due tothe government backing of the underlying securities. However, it could take until the final maturity of the underlying notes(up to 16 years) to realize our remaining investments’ purchase price of $2.0 million. Based on our ability to access our cashand cash equivalents, expected operating cash flows, and our other sources of cash, we do not anticipate that the current lackof liquidity on these investments will affect our ability to continue to operate our business in the ordinary course, howeverwe can provide no assurance as to when these investments will again become liquid or as to whether we may ultimately haveto recognize an impairment charge with respect to these investments. Our cash may be subject to a risk of loss and we may be exposed to fluctuations in the market values of our portfolioinvestments and in interest rates. Our assets include a significant amount of cash and investments. We adhere to an investment policy set by ourBoard of Directors which aims to preserve our financial assets, maintain adequate liquidity and maximize returns. We believethat our cash is held in institutions whose credit risk is minimal and that the value and liquidity of our deposits are accuratelyreflected in our consolidated financial statements as of April 30, 2018. We currently invest the majority of our cash in U.S.government securities, U.S. government agency securities, municipal bonds and high-grade corporate bonds, the performanceof which are subject to additional market risks related to their respective issuers. Nearly all of our cash and bank deposits arenot insured by the Federal Deposit Insurance Corporation, or the FDIC. Therefore, our cash and any bank deposits that wenow hold or may acquire in the future may be subject to risks, including the risk of loss or of reduced value or liquidity. Inthe future, should we determine that there is a decline in value of any of our portfolio securities which is not temporary innature, this would result in a loss being recognized in our consolidated statements of operations. Unstable market and economic conditions may have serious adverse consequences on our business, financial condition andstock price. Global credit and financial markets have experienced extreme disruptions in recent years, including severelydiminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases inunemployment rates and uncertainty about economic stability. There can be no assurance that renewed deterioration in creditand financial markets and confidence in economic conditions will not occur. Our general business strategy may be32 Table of Contentsadversely affected by any economic downturn, volatile business environment or continued unpredictable and unstablemarket conditions. If the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt orequity financing more difficult, more costly and more dilutive. Failure to secure any necessary financing in a timely mannerand on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price andcould require us to delay or abandon implementing business initiatives. These events and the continuing market upheavalscould adversely affect our business in a number of ways, including: Potential Deferment of Purchases and Orders by Customers: Uncertainty about current and future global economicconditions may cause governments, including the U.S. government, which is our largest customer, consumers and businessesto modify, defer or cancel purchases in response to tighter credit, decreased cash availability and declining consumerconfidence. Accordingly, future demand for our products could differ materially from our current expectations. Additionally,if customers are not successful in generating sufficient revenue or are precluded from securing financing, they may not beable to pay, or may delay payment of, accounts receivable that are owed to us. Any inability of current and/or potentialcustomers to pay us for our products may adversely affect our earnings and cash flow. Negative Impact from Increased Financial Pressures on Key Suppliers: Our ability to meet customers’ demandsdepends, in part, on our ability to obtain timely and adequate delivery of quality materials, parts and components from oursuppliers. Certain of our hardware components and various subsystems are available only from a limited group of suppliers. Ifcertain key suppliers were to become capacity constrained or insolvent as a result of a market downturn, then we may have tofind new suppliers. We may experience significant delays in manufacturing and shipping our products to customers and incuradditional development, manufacturing and other costs to establish alternative sources of supply if we lose any of thesesources or are required to redesign our products. We cannot predict if we will be able to obtain replacement componentswithin the time frames that we require at an affordable cost, if at all. In addition, credit constraints of key suppliers couldresult in accelerated payment of accounts payable by us, impacting our cash flow. Customers’ Inability to Obtain Financing to Make Purchases from Us and/or Maintain Their Business: Some of ourcustomers may require substantial financing in order to fund their operations and make purchases from us. The inability ofthese customers to obtain sufficient credit to finance purchases of our products, or otherwise meet their payment obligationsto us could adversely impact our financial condition and results of operations. In addition, if a market downturn results ininsolvencies for our customers, it could adversely impact our financial condition and results of operations. Potential future acquisitions could be difficult to integrate, divert the attention of key personnel, disrupt our business,dilute stockholder value and impair our financial results. We intend to consider strategic acquisitions that would add to our customer base, technological capabilities orsystem 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 personnelof the target company and realizing the anticipated synergies of the combined businesses; ·difficulties in supporting and transitioning customers, if any, of the target company; ·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 haverealized 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; ·potential loss of key employees, customers and strategic alliances from either our current business or the targetcompany’s business;33 Table of Contents ·assumption of unanticipated problems or latent liabilities, such as problems with the quality of the targetcompany’s products or its regulatory compliance; 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 topotential impairments in the future that could harm our financial results. In addition, if we finance acquisitions by issuingequity, or securities convertible into equity, then our existing stockholders may be diluted, which could lower the marketprice of our common stock. If we finance acquisitions through debt, then such future debt financing may contain covenantsor 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 anysuch acquisitions, and we may incur costs in excess of what we anticipate. The failure to successfully evaluate and executeacquisitions or investments or otherwise adequately address these risks could materially harm our business and financialresults. Environmental laws and regulations and unforeseen costs could impact our future earnings. The manufacture and sale of our products in certain states and countries may subject us to environmental and otherregulations. For example, we obtain a significant number of our electronics components from companies located in East Asia,where environmental rules may be less stringent than in the United States. Over time, the countries where these companies arelocated may adopt more stringent environmental regulations, resulting in an increase in our manufacturing costs. Given theincreasing focus on environmental compliance by regulators and the general public, any incidence of non‑compliance couldresult in damage to our reputation beyond the fines and other sanctions that could be imposed. Furthermore, certainenvironmental laws, including the U.S. Comprehensive, Environmental Response, Compensation and Liability Act of 1980,impose strict, joint and several liability on current and previous owners or operators of real property for the cost of removal orremediation of hazardous substances and impose liability for damages to natural resources. These laws often impose liabilityeven if the owner or operator did not know of, or was not responsible for, the release of such hazardous substances. Theseenvironmental laws also assess liability on persons who arrange for hazardous substances to be sent to disposal or treatmentfacilities when such facilities are later found to be contaminated. Such persons can be responsible for cleanup costs even ifthey never owned or operated the contaminated facility. Although we have never been named a responsible party at acontaminated site, we could be named a potentially responsible party in the future. We cannot assure you that such existinglaws or future laws will not have a material adverse effect on our future earnings or results of operations. Our business is subject to federal, state and international laws regarding data protection and privacy, as well asconfidentiality obligations under various agreements, and a privacy breach could damage our reputation, expose us tolitigation risk and adversely affect our business. In connection with our business, we receive, collect, process and retain certain sensitive and confidential customerinformation. As a result, we are subject to increasingly rigorous federal, state and international laws regarding privacy anddata protection. We also execute confidentiality agreements with various parties under which we are required to protect theirconfidential information. Compliance with these agreements and constantly evolving laws may cause us to incur significantcosts or require changes to our business practices, which could reduce our revenue. If we fail to comply with these privacyand data protection laws, proceedings may be brought against us by governmental entities or others or penalties may beimposed on us, either of which could have a material adverse effect on our business, results of operations and financialcondition. In addition, we could be subject to damages if we breach the confidentiality obligations in our agreements. Whilewe rely, in part, on security services and software provided by outside vendors to protect sensitive and confidential customerinformation, there is no guarantee that the protections that we, or our outside vendors have implemented will prevent securitybreaches. In addition, we have access to certain of our customers’ proprietary systems that contain sensitive information andare liable to such customers for damages caused by or employees’ and agents’ misuse of or access to such systems, includingdamages resulting from security breaches to such customers’ systems caused by us. Any actual, threatened or perceivedsecurity breach that could result34 Table of Contentsin misappropriation, loss or other unauthorized disclosure of sensitive or confidential customer information could harm ourreputation and relationship with customers and potential customers, expose us to litigation risk and liability and adverselyaffect our business. Compliance with the SEC’s conflict minerals regulations may increase our costs and adversely impact the supply‑chain forour UAS products. In August 2012, the SEC adopted disclosure rules regarding a company’s use of conflict minerals in its productswith substantial supply chain verification requirements in the event that the conflict minerals come from, or could have comefrom, the Democratic Republic of the Congo or adjoining countries. These rules and verification requirements will imposeadditional costs on us and on our suppliers, including costs related to determining the source of conflict minerals used in ourproducts, which will adversely affect our results of operations. We are dependent on information supplied by our first tiersuppliers in conducting due diligence into the origins of conflict minerals in our products and in complying with our SECreporting obligations. To the extent that information we receive from our suppliers is inaccurate or inadequate, we may notbe able to determine whether our products are conflict mineral‑free. We may face challenges in satisfying our customers whomay require that our products be certified as conflict mineral‑free, which could place us at a competitive disadvantage andcould harm our business. These regulations could also have the effect of limiting the pool of suppliers from which we sourceitems containing conflict minerals, and we may be unable to obtain conflict‑free minerals at competitive prices, if at all,which could increase our costs and adversely affect our results of operations. Our business and operations are subject to the risks of earthquakes and other natural catastrophic events. Our corporate headquarters, research and development and manufacturing operations are located in SouthernCalifornia, a region known for seismic activity and wild fires. A significant natural disaster, such as an earthquake, fire orother catastrophic event, could severely affect our ability to conduct normal business operations, and as a result, our futureoperating results could be materially and adversely affected. We self-insure a portion of our health insurance program which may expose us to unexpected costs and negatively affectour results of operations. We are self-insured for employee medical claims, subject to individual and aggregate stop loss insurance policies.We estimate a liability for claims filed and incurred but not reported based upon recent claims experience and an analysis ofthe average period of time between the occurrence of a claim and the time it is reported to and paid by us. However,unanticipated changes in assumptions and management estimates underlying our recorded liabilities for medical claimscould result in materially different amounts of expense than expected under our health insurance program, which could havean adverse material impact on our financial condition and results of operations. Risks Related to Our U.S. Government Contracts We are subject to extensive government regulation, and our failure to comply with applicable regulations could subject usto penalties that may restrict our ability to conduct our business. As a contractor to the U.S. government, we are subject to and must comply with various government regulations thatimpact our revenue, operating costs, profit margins and the internal organization and operation of our business. The mostsignificant regulations and regulatory authorities affecting our business include the following: ·the Federal Acquisition Regulations and supplemental agency regulations, which comprehensively regulate theformation and administration of, and performance under, U.S. government contracts; ·the Truth in Negotiations Act, which requires certification and disclosure of all factual cost and pricing data inconnection with contract negotiations; 35 Table of Contents·the False Claims Act and the False Statements Act, which impose penalties for payments made on the basis offalse facts provided to the government and on the basis of false statements made to the government,respectively; ·the Foreign Corrupt Practices Act, which prohibits U.S. companies from providing anything of value to aforeign official to help obtain, retain or direct business, or obtain any unfair advantage; ·the National Telecommunications and Information Administration and the Federal CommunicationsCommission, which regulate the wireless spectrum allocations upon which UAS depend for operation and datatransmission in the United States; ·the Federal Aviation Administration, which regulates the use of airspace for all aircraft, including UASoperation in the United States; ·the International Traffic in Arms Regulations, which regulate the export of controlled technical data, defensearticles and defense services and restrict from which countries we may purchase materials and services used inthe production of certain of our products; and ·laws, regulations and executive orders restricting the use and dissemination of information classified fornational security purposes or determined to be “controlled unclassified information” and the exportation ofcertain products and technical data. Also, we need special security clearances and regulatory approvals to continue working on certain of our projectswith the U.S. government. Classified programs generally will require that we comply with various executive orders, federallaws and regulations and customer security requirements that may include restrictions on how we develop, store, protect andshare information, and may require our employees and facilities to obtain government security clearances. Our failure tocomply with applicable regulations, rules and approvals or misconduct by any of our employees could result in theimposition of fines and penalties, the loss of security clearances, the loss of our government contracts or our suspension ordebarment from contracting with the U.S. government generally, any of which could harm our business, financial conditionand results of operations. We are also subject to certain regulations of comparable government agencies in other countries,and our failure to comply with these non‑U.S. regulations could also harm our business, financial condition or results ofoperations. Our business could be adversely affected by a negative audit or investigation by the U.S. government. U.S. government agencies, primarily the DCAA and the DCMA, routinely audit and investigate governmentcontractors. These agencies review a contractor’s performance under its contracts, cost structure and compliance withapplicable laws, regulations and standards. These agencies also may review the adequacy of, and a contractor’s compliancewith, its internal control systems and policies, including the contractor’s purchasing, quality, accounting, property,estimating, compensation and management information systems. Like most government contractors, our contracts are audited and reviewed on a continual basis by the DCMA andthe DCAA. The indirect costs we incur in performing government contracts have been audited on an annual basis. TheDCMA, disallowed a portion of the our executive compensation and other costs included in our fiscal 2006, 2007 and 2008incurred cost claims and sought interest for all three years and penalties for fiscal 2006, based on the disallowed costs. Weappealed these cost disallowances to the Armed Services Board of Contract Appeals. For fiscal 2006, as a result of partialsettlements and a decision of the Armed Services Board of Contract Appeals in March 2016, the government’s remainingclaims were dismissed with prejudice. All of the government’s claims related to our 2007 and 2008 incurred cost claims weresettled as of October 2015 by payment to the government of $50,000 and the government’s claims related to our 2009incurred cost claims were settled as of October 2015 without the payment of any consideration. The audit of our 2010incurred cost claim was settled in April 2016 without payment of any consideration. Our incurred cost claims for fiscal years2011 through 2014 were accepted as submitted during the fiscal year ended April 30, 2017. No consideration was paid. Inaddition, non‑audit reviews or investigations by the government may still be conducted on all of our government contracts.36 Table of Contents Any costs found to be improperly allocated to a specific cost reimbursement contract will not be reimbursed, whilesuch costs already reimbursed must be refunded. If an audit or investigation of our business were to uncover improper orillegal activities, then we could be subject to civil and criminal penalties and administrative sanctions, including terminationof contracts, suspension of payments, fines and suspension or debarment from doing business with the U.S. government. Wecould experience serious harm to our reputation if allegations of impropriety or illegal acts were made against us, even if theallegations were inaccurate. In addition, responding to governmental audits or investigations may involve significantexpense and divert management attention. If any of the foregoing were to occur, our financial condition and operating resultscould be materially adversely affected. Moreover, if any of our administrative processes and business systems are found not to comply with the applicablerequirements, we may be subjected to increased government scrutiny or required to obtain additional governmentalapprovals that could delay or otherwise adversely affect our ability to compete for or perform contracts. In December 2015,DCMA concluded that our purchasing system was not approved. In an April 2016 follow-up review the DCMA approved ourpurchasing system. An unfavorable outcome to such an audit or investigation by the DCAA, U.S. Department of Justice orDOJ, or other government agency, could materially adversely affect our competitive position, affect our ability to obtain newgovernment business, and obtain the maximum price for our products and services, and result in a substantial reduction ofour revenues. If we were suspended or debarred from contracting with the federal government generally, or any specific agency, ifour reputation or relationship with government agencies were impaired, or if the government otherwise ceased doingbusiness with us or significantly decreased the amount of business it does with us, our revenue and operating results could bematerially harmed. For example, in February 2010, we were notified by the DOJ that it had initiated a civil investigation intoour cost charging practices with respect to government contracts. We resolved these claims with the DOJ in October 2013.Under the settlement agreement, we reimbursed the government for an amount erroneously charged to the government in ourfiscal 2006 incurred cost claim submittal. Some of our contracts with the U.S. government allow it to use inventions developed under the contracts and to disclosetechnical data to third parties, which could harm our ability to compete. Some of our contracts allow the U.S. government to use, royalty‑free, or have others use, inventions developed underthose contracts on behalf of the government. Some of the contracts allow the federal government to disclose technical datawithout constraining the recipient on how those data are used. The ability of third parties to use patents and technical datafor government purposes creates the possibility that the government could attempt to establish alternative suppliers or tonegotiate with us to reduce our prices. The potential that the government may release some of the technical data withoutconstraint creates the possibility that third parties may be able to use this data to compete with us, which could have amaterial adverse effect on our business, results of operations or financial condition. U.S. government contracts are generally not fully funded at inception and contain certain provisions that may beunfavorable to us, which could prevent us from realizing our contract backlog and materially harm our business andresults of operations. U.S. government contracts typically involve long lead times for design and development, and are subject tosignificant changes in contract scheduling. Congress generally appropriates funds on a fiscal year basis even though aprogram may continue for several years. Consequently, programs are often only partially funded initially, and additionalfunds are committed only as Congress makes further appropriations. The termination or reduction of funding for agovernment program would result in a loss of anticipated future revenue attributable to that program. The actual receipt of revenue on awards included in backlog may never occur or may change because a programschedule could change or the program could be canceled, or a contract could be reduced, modified or terminated early. In addition, U.S. government contracts generally contain provisions permitting termination, in whole or in part, atthe government’s convenience or for contractor default. Since a substantial majority of our revenue is dependent on theprocurement, performance and payment under our U.S. government contracts, the termination of one or more critical37 Table of Contentsgovernment contracts could have a negative impact on our results of operations and financial condition. Termination arisingout of our default could result in damage to our reputation, expose us to liability and have a material adverse effect on ourability to re‑compete for future contracts and orders. Moreover, several of our contracts with the U.S. government do notcontain a limitation of liability provision, creating a risk of responsibility for indirect, incidental damages and consequentialdamages. These provisions could cause substantial liability for us, especially given the use to which our products may beput. U.S. government contracts are subject to a competitive bidding process that can consume significant resources withoutgenerating any revenue. U.S. government contracts are frequently awarded only after formal, protracted competitive bidding processes and,in many cases, unsuccessful bidders for U.S. government contracts are provided the opportunity to protest contract awardsthrough various agency, administrative and judicial channels. We derive significant revenue from U.S. government contractsthat were awarded through a competitive bidding process. Much of the UAS business that we expect to seek in theforeseeable future likely will be awarded through competitive bidding. Competitive bidding presents a number of risks,including the following: ·the need to bid on programs in advance of the completion of their design, which may result in unforeseentechnological difficulties and cost overruns; ·the substantial cost and managerial time and effort that must be spent to prepare bids and proposals for contractsthat may not be awarded to us; ·the need to estimate accurately the resources and cost structure that will be required to service any contract weare awarded; and ·the expense and delay that may arise if our competitors protest or challenge contract awards made to us pursuantto competitive bidding, and the risk that any such protest or challenge could result in the delay of our contractperformance, the distraction of management, the resubmission of bids on modified specifications, or intermination, reduction or modification of the awarded contract. We may not be provided the opportunity to bid on contracts that are held by other companies and are scheduled toexpire if the government extends the existing contract. If we are unable to win particular contracts that are awarded through acompetitive bidding process, then we may not be able to operate for a number of years in the market for goods and servicesthat are provided under those contracts. If we are unable to win new contract awards over any extended period consistently,then our business and prospects will be adversely affected. We are subject to procurement rules and regulations, which increase our performance and compliance costs under our U.S.government contracts. We must comply with, and are affected by, laws and regulations relating to the formation, administration andperformance of U.S. government contracts. These laws and regulations, among other things, require certification anddisclosure of all cost and pricing data in connection with contract negotiation, define allowable and unallowable costs andotherwise govern our right to reimbursement under certain cost‑based U.S. government contracts, and restrict the use anddissemination of classified information and the exportation of certain products and technical data. These requirements,although customary in U.S. government contracts, increase our performance and compliance costs. These costs mightincrease in the future, reducing our margins, which could have a negative effect on our financial condition. Although webelieve we have procedures in place to comply with these regulations and requirements, the regulations and requirements arecomplex and change frequently. Failure to comply with these regulations and requirements under certain circumstancescould lead to suspension or debarment from U.S. government contracting or subcontracting for a period of time and couldhave a negative effect on our reputation and ability to receive other U.S. government contract awards in the future. 38 Table of ContentsRisks Related to Our Intellectual Property If we fail to protect, or incur significant costs in defending or enforcing our intellectual property and other proprietaryrights, our business, financial condition and results of operations could be materially harmed. Our success depends, in large part, on our ability to protect our intellectual property and other proprietary rights. Werely primarily on patents, trademarks, copyrights, trade secrets and unfair competition laws, as well as license agreements andother contractual provisions, to protect our intellectual property and other proprietary rights. However, a significant portionof our technology is not patented, and we may be unable or may not seek to obtain patent protection for this technology. Inaddition, the U.S. government has licenses under certain of our patents and certain other intellectual property that aredeveloped or used in performance of government contracts, and it may use or authorize others to use such patents andintellectual property for government and other purposes. Moreover, existing U.S. legal standards relating to the validity,enforceability and scope of protection of intellectual property rights offer only limited protection, may not provide us withany competitive advantages, and our rights may be challenged by third parties. The laws of countries other than the UnitedStates may be even less protective of our intellectual property rights. Accordingly, despite our efforts, we may be unable toprevent third parties from infringing upon or misappropriating our intellectual property or otherwise gaining access to ourtechnology. Unauthorized third parties may try to copy or reverse engineer our products or portions of our products orotherwise obtain and use our intellectual property. Moreover, many of our employees have access to our trade secrets andother intellectual property. If one or more of these employees leave our employment to work for one of our competitors, thenthey may disseminate this proprietary information, which may as a result damage our competitive position. If we fail toprotect our intellectual property and other proprietary rights, then our business, results of operations or financial conditioncould be materially harmed. From time to time, we have initiated lawsuits to protect our intellectual property and otherproprietary rights. Pursuing these claims is time consuming and expensive and could adversely impact our results ofoperations. In addition, affirmatively defending our intellectual property rights and investigating whether any of our productsor services violate the rights of others may entail significant expense. Our intellectual property rights may be challenged byothers or invalidated through administrative processes or litigation. If we resort to legal proceedings to enforce ourintellectual property rights or to determine the validity and scope of the intellectual property or other proprietary rights ofothers, then the proceedings could result in significant expense to us and divert the attention and efforts of our managementand technical employees, even if we prevail. We may be sued by third parties for alleged infringement of their proprietary rights, which could be costly, time‑consumingand limit our ability to use certain technologies in the future. We may become subject to claims that our technologies infringe upon the intellectual property or other proprietaryrights of third parties. Defending against, or otherwise addressing, any such claims, whether they are with or without merit,could be time‑consuming and expensive, and could divert our management’s attention away from the execution of ourbusiness plan. Moreover, any settlement or adverse judgment resulting from these claims could require us to pay substantialamounts or obtain a license to continue to use the disputed technology, or otherwise restrict or prohibit our use of thetechnology. We cannot assure you that we would be able to: obtain from the third party asserting the claim a license oncommercially reasonable terms, if at all; develop alternative technology on a timely basis, if at all; or obtain a license to use asuitable alternative technology to permit us to continue offering, and our customers to continue using, our affected product.An adverse determination also could prevent us from offering our products to others. Infringement claims asserted against usmay have a material adverse effect on our business, results of operations or financial condition. Risks Relating to Securities Markets and Investment in Our Stock The price of our common stock may fluctuate significantly. The market prices for securities of emerging technology companies have historically been highly volatile, and themarket has from time to time experienced significant price and volume fluctuations that are unrelated to the39 Table of Contentsoperating performance of particular companies. The market price of our common stock may fluctuate significantly inresponse to a number of factors, most of which we cannot control, including the following: ·U.S. government spending levels, both generally and by our particular customers; ·the volume of operational activity by the U.S. military; ·delays in the payment of our invoices by government payment offices, resulting in potentially reduced earningsduring a particular fiscal quarter; ·announcements of new products or technologies, commercial relationships or other events relating to us or ourindustry or our competitors; ·failure of any of our key products to gain market acceptance; ·variations in our quarterly operating results; ·perceptions of the prospects for the markets in which we compete; ·changes in general economic conditions; ·changes in securities analysts’ estimates of our financial performance; ·regulatory developments in the United States and foreign countries; ·fluctuations in stock market prices and trading volumes of similar companies; ·news about the markets in which we compete or regarding our competitors; ·terrorist acts or military action related to international conflicts, wars or otherwise; ·sales of large blocks of our common stock, including sales by our executive officers, directors and significantstockholders; and ·additions or departures of key personnel. In addition, the equity markets in general, and NASDAQ in particular, have experienced extreme price and volumefluctuations that have often been unrelated or disproportionate to the operating performance of companies. Further, themarket prices of securities of emerging technology companies have been particularly volatile. These broad market andindustry factors may affect the market price of our common stock adversely, regardless of our operating performance. In thepast, following periods of volatility in the market price of a company’s securities, securities class action litigation often hasbeen instituted against that company. This type of litigation, if instituted against us, could result in substantial costs and adiversion of management’s attention and resources. Our management, whose interests may not be aligned with yours, is able to exert significant influence over all mattersrequiring stockholder approval. As of June 20, 2018, our directors, executive officers and their affiliates collectively beneficially owned 2,813,865shares, or approximately 12%, of our total outstanding shares of common stock. Accordingly, our directors and executiveofficers as a group may be able to exert significant influence over matters requiring stockholder approval, including theelection of directors. The interests of our directors and executive officers may not be fully aligned with yours. Although thereis no agreement among our directors and executive officers with respect to the voting of their shares, this concentration ofownership may delay, defer or even prevent a change in control of our company, and make40 Table of Contentstransactions more difficult or impossible without the support of all or some of our directors and executive officers. Thesetransactions might include proxy contests, tender offers, mergers or other purchases of common stock that could give you theopportunity to realize a premium over the then‑prevailing market price for shares of our common stock. Delaware law and anti‑takeover provisions in our organizational documents may discourage our acquisition by a thirdparty, which could make it more difficult to acquire us and limit your ability to sell your shares at a premium. Our certificate of incorporation and bylaws contain certain provisions that reduce the probability of a change ofcontrol or acquisition of our company, even if such a transaction would be beneficial to our stockholders. These provisionsinclude, but are not limited to: ·The ability of our board of directors to issue preferred stock in one or more series of with such rights, obligationsand preferences as the board may determine, without further vote or action by our stockholders; ·Advanced notice procedures for stockholders to nominate candidates for election to the board of directors andfor stockholders to submit proposals for consideration at a meeting of stockholders; ·The absence of cumulative voting rights for our stockholders; ·The classification of our board of directors, which effectively prevents stockholders from electing a majority ofthe directors at any one annual meeting of stockholders; ·The limitation that directors may be removed only for cause by the affirmative vote of the holders of 66/3% ofthe total voting power of all of our outstanding securities entitled to vote in the election of directors, votingtogether as a single class; and ·Restrictions on the ability of our stockholders to call a special meeting of stockholders. We are also subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits“business combinations” between a publicly‑held Delaware corporation and an “interested stockholder,” which is generallydefined as a stockholder who becomes a beneficial owner of 15% or more of a Delaware corporation’s voting stock for athree‑year period following the date that such stockholder became an interested stockholder. This statute, as well as theprovisions in our organizational documents, could have the effect of delaying, deterring or preventing certain potentialacquisitions or a change in control of us. Item 1B. Unresolved Staff Comments. None. Item 2. Properties. All of our facilities are leased. Our corporate headquarters are located in Monrovia, California where we leaseapproximately 36,000 square feet under an agreement expiring in June 2024. We have several other leased facilities inCalifornia, Alabama and Virginia that are used for administration, research and development, logistics and manufacturingand have a total of approximately 375,000 square feet. Such leases expire between the end of 2018 and 2025. We believethat our facilities are adequate to meet our needs for the foreseeable future. Effective March 28, 2018, we entered into a lease agreement to lease approximately 94,280 square feet of space inMoorpark, California to serve as a new facility for the design, engineering, testing, and manufacturing of unmanned aircraftsystems. As of April 30, 2018, the lease term had not commenced and we had no operations at the facility. As of April 30, 2018 our business had significant operations at the following locations: ·UAS: Simi Valley, California; and Huntsville, Alabama41 2Table of Contents ·EES: Monrovia, California; and Simi Valley, California. In conjunction with the closing of the purchaseagreement, we will enter into sub-lease agreements with the purchaser for all or portions of these EES facilities. ·Corporate functions: Monrovia, California; and Simi Valley, California Item 3. Legal Proceedings. On April 18, 2018, a former employee of AeroVironment, Mark Anderson, filed a lawsuit against us and WahidNawabi, our President and Chief Executive Officer, in the Superior Court of the State of California for the County of LosAngeles. Mr. Anderson’s claims include whistle blower retaliation, race discrimination and wrongful termination related tothe termination of his employment with the Company. Mr. Anderson is seeking special damages, general damages, punitivedamages, attorneys’ fees and other relief the court deems just and proper. We believe the complaint contains legal claims thatare without merit. We will defend ourselves vigorously once we are served with the complaint. We are subject to lawsuits, government investigations, audits and other legal proceedings from time to time in theordinary course of our business. It is not possible to predict the outcome of any legal proceeding with any certainty. Theoutcome or costs we incur in connection with a legal proceeding could adversely impact our operating results and financialposition. Item 4. Mine Safety Disclosure. Not applicable. 42 Table of Contents PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities. Common Stock The following table sets forth, for the periods indicated, the high and low sales prices for our common stock fromMay 1, 2016 through April 30, 2018. The following quotations reflect inter‑dealer prices, without retail mark‑up, mark‑downor commission, and may not represent actual transactions. Fiscal Year Ended April 30, 2018 2017 High Low High Low First Quarter $40.10 $28.13 $32.44 $26.02 Second Quarter $55.75 $36.71 $30.08 $22.16 Third Quarter $58.99 $41.53 $29.42 $23.40 Fourth Quarter $58.06 $41.60 $29.96 $25.42 On June 20, 2018, the closing sales price of our common stock as reported on the NASDAQ Global Select Marketwas $57.90 per share. As of June 20, 2018, there were 94 holders of record of our common stock. Dividends To date we have retained all earnings for use in the operation and expansion of our business and do not anticipatepaying any cash dividends in the foreseeable future. Any future determination related to dividend policy will be made at thediscretion of our board of directors and will depend upon, among other factors, our results of operations, financial condition,capital requirements, capital allocation policy, expected return on invested capital, contractual restrictions and such otherfactors as our board of directors deems relevant. 43 Table of ContentsStock Price Performance Graph The following graph shows a comparison of cumulative returns on our common stock, based on the market price ofthe common stock, with the cumulative total returns of companies in the Russell 2000 Index and the SPADE Defense Index. The following table shows the value of $100 invested on April 30, 2013 in AeroVironment, Inc., the Russell 2000Index and the SPADE Defense Index. Performance Graph Table ($) April 30, April 30 April 30, April 30, April 30 April 30, 2013 2014 2015 2016 2017 2018 AeroVironment Stock 100 174 132 149 148 282 Russell 2000 Index 100 119 129 119 148 164 SPADE Defense Index 100 136 156 156 193 242 The stock price performance shown on the graph above is not necessarily indicative of future price performance.Factual material was obtained from sources believed to be reliable, but we are not responsible for any errors or omissionscontained therein. No portions of this graph shall be deemed incorporated by reference into any filing under the SecuritiesAct, or the Exchange Act through any general statement incorporating by reference in its entirety the report in which thisgraph appears, except to the extent that we specifically incorporate this graph or a portion of it by reference. In addition, thisgraph shall not be deemed filed under either the Securities Act or the Exchange Act. Issuer Purchases of Equity Securities On September 24, 2015, we announced that on September 23, 2015 our Board of Directors authorized a sharerepurchase program (the “Share Repurchase Program”), pursuant to which we may repurchase up to $25 million of ourcommon stock from time to time, in amounts and at prices we deem appropriate, subject to market conditions and otherconsiderations. Share repurchases may be executed through open market transactions or negotiated purchases and may44 Table of Contentsbe made under a Rule 10b5-1 plan. There is no expiration date for the program. The Share Repurchase Program does notobligate us to acquire any particular amount of common stock and may be suspended at any time by our Board ofDirectors. We did not repurchase any shares during the fiscal year ended April 30, 2018. As of April 30, 2018, approximately$21.2 million remained authorized for future repurchases under this program. Item 6. Selected Consolidated Financial Data. The following selected financial data should be read in conjunction with our consolidated financial statements. Theinformation set forth below is not necessarily indicative of results of future operations, and should be read in conjunctionwith Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and theconsolidated financial statements and notes thereto included in Item 8, “Financial Statements and Supplementary Data” ofthis Annual Report in order to understand fully factors that may affect the comparability of the financial data presentedbelow. Year Ended April 30, 2018 2017 2016 2015 2014 (In thousands, except per share data) Consolidated Income Statement Data: Revenue $271,052 $228,940 $233,738 $220,951 $208,810 Net income from continuing operations attributable toAeroVironment $22,576 $16,633 $15,393 $11,682 $25,659 Earnings per common share from continuingoperations attributable to AeroVironment: Basic $0.97 $0.72 $0.67 $0.51 $1.14 Diluted $0.95 $0.72 $0.67 $0.50 $1.10 Weighted average common shares outstanding (basic): 23,471 23,059 22,936 22,869 22,354 Weighted average common shares outstanding(diluted): 23,814 23,308 23,153 23,146 22,719 Balance Sheet Data Total assets $472,911 $432,500 $410,393 $397,467 $384,954 Capital lease obligations, current portion $161 $288 $390 $ — $ — Capital lease obligations, net of current portion $ — $161 $449 $ — $ — Other long-term obligations $2,274 $2,083 $2,339 $1,712 $4,546 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Introduction The following discussion of our financial condition and results of operations should be read in conjunction with our“Selected Consolidated Financial Data” and our consolidated financial statements and notes thereto included herein asItem 8. This discussion contains forward‑looking statements. Refer to “Forward‑Looking Statements” on page 2 and “RiskFactors” beginning on page 19, for a discussion of the uncertainties, risks and assumptions associated with these statements. On June 1, 2018, we entered into an Asset Purchase Agreement (“the Purchase Agreement”) with Webasto ChargingSystems, Inc. (“Webasto”) pursuant to which we agreed to sell, and Webasto agreed to acquire, substantially all of the assetsof our Efficient Energy Systems (the “EES Business”) and to assume certain liabilities related to the EES Business. Theclosing of the transactions contemplated by the Purchase Agreement is subject to certain closing conditions, including: (i)the accuracy of each party’s representations and warranties (subject to customary materiality45 Table of Contentsqualifiers), (ii) each party’s compliance with its covenants and agreements contained in the Purchase Agreement (subject tocustomary materiality qualifiers), (iii) the execution by the parties of certain ancillary agreements and (iv) other customaryclosing conditions. We anticipate that the transaction will close within our first quarter of fiscal 2019. As of April 30, 2018,we determined that the EES Business met the criterion for classification as an asset held for sale and represents a strategicshift in in our operations. Therefore, the assets and liabilities and the results of operations of the EES Business are reported inthis Annual Report as discontinued operations for all periods presented. Overview We design, develop, produce, support and operate a technologically‑advanced portfolio of products. We supplyunmanned aircraft systems (“UAS”) and related services to organizations within the U.S. Department of Defense (“DoD”) andto international allied governments, and tactical missile systems and related services primarily to organizations within theU.S. Government. We derive the majority of our revenue from these business areas and we believe that the markets for thesesolutions have significant growth potential. Additionally, we believe that some of the innovative potential products in ourresearch and development pipeline will emerge as new growth platforms in the future, creating additional marketopportunities. The success we have achieved with our current products and services stems from our investment in research anddevelopment and our ability to invent and deliver advanced solutions, utilizing our proprietary technologies, to help ourgovernment, commercial and consumer customers operate more effectively and efficiently. We develop these highlyinnovative solutions by working very closely with our key customers and solving their most important challenges related toour areas of expertise. Our core technological capabilities, developed through more than 45 years of innovation, includelightweight aerostructures, power electronics, electric propulsion systems, efficient electric power generation, conversion,and storage systems, high‑density energy packaging, miniaturization, DDL, aircraft payloads, controls integration, systemsintegration and engineering optimization coupled with professional field service capabilities. Our UAS business focuses primarily on the design, development, production, marketing, support and operation ofinnovative UAS and tactical missile systems and the delivery of UAS-related services that provide situational awareness,remote sensing, multi‑band communications, force protection and other information and mission effects to increase the safetyand effectiveness of our customers’ operations. Revenue We generate our revenue primarily from the sale, support and operation of our small UAS and tactical missilesystems. Support for our small UAS customers includes training, spare parts, product repair, product replacement, and thecustomer‑contracted operation of our small UAS by our personnel. We refer to these support activities, in conjunction withcustomer‑funded research and development (“R&D”), as our services operation. We derive most of our small UAS revenuefrom fixed‑price and cost‑plus‑fee contracts with the U.S. government. Cost of Sales Cost of sales consists of direct costs and allocated indirect costs. Direct costs include labor, materials, travel,subcontracts and other costs directly related to the execution of a specific contract. Indirect costs include overhead expenses,fringe benefits and other costs that are not directly charged to a specific contract. Gross Margin Gross margin is equal to revenue minus cost of sales. We use gross margin as a financial metric to help us understandtrends in our direct costs and allocated indirect costs when compared to the revenue we generate. Selling, General and Administrative Our selling, general and administrative expenses, or SG&A, include salaries and other expenses related to selling,marketing and proposal activities, and other administrative costs. Some SG&A expenses relate to market and46 Table of Contentsbusiness development activities that support both ongoing business areas as well as new and emerging market areas. Theseactivities can be directly associated with developing requirements for and applications of capabilities created in our R&Dactivities. SG&A is an important financial metric that we analyze to help us evaluate the contribution of our selling,marketing and proposal activities to revenue generation. Research and Development Expense R&D, is an integral part of our business model. We normally conduct significant internally funded R&D. Our R&Dactivities focus specifically on creating capabilities that support our existing product portfolio as well as new solutions. Other Income and Expenses Other income and expenses includes interest income, interest expense, amortization of capital lease payments,changes in fair value of certain financial investments, gains/losses on sale of available‑for‑sale equity securities, and gainsresulting from the purchase of a controlling interest in an entity formerly accounted for under the equity method. Income Tax Expense Our effective tax rates are lower than the statutory rates primarily due to research and development tax creditspartially offset by the impact of the Tax Cut and Jobs Act of 2017. Equity Method Investment Activity, Net of Tax Equity method investment activity, net of tax, includes equity method gain or loss related to the HAPSMobile, Inc.joint venture we formed in December 2017 with Softbank Corp, and our investment in Altoy Savunma Sanayi ve HavacilikAnonim Sirketi (“Altoy”) prior to obtaining a controlling interest on February 1, 2017. Loss from Discontinued Operations, Net of Tax On June 1, 2018, we entered into the Purchase Agreement with Webasto pursuant to which we agreed to sell, andWebasto agreed to acquire, substantially all of the assets of our EES Business and to assume certain liabilities related to theEES Business. We anticipate that the transaction will close within our first quarter of fiscal 2019. As of April 30, 2018, wedetermined that the EES Business met the criterion for classification as an asset held for sale and represents a strategic shift inin our operations. Therefore, the assets and liabilities and the results of operations of the EES Business are reported in thisAnnual Report as discontinued operations for all periods presented. Net Loss Attributable to Noncontrolling Interests Net loss attributable to noncontrolling interests includes the 15% interest in the income or losses of our Turkishjoint venture, Altoy. We acquired a controlling interest in Altoy on February 1, 2017. Critical Accounting Policies and Estimates Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses ourconsolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States. When we prepare these consolidated financial statements, we are required to make estimates andassumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities atthe date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some ofour accounting policies require that we make subjective judgments, including estimates that involve matters that areinherently uncertain. Our most critical estimates include those related to revenue recognition, inventories and reserves forexcess and obsolescence, self‑insured liabilities, accounting for stock‑based awards, and income taxes. We base our estimatesand judgments on historical experience and on various other factors that we believe to be reasonable under thecircumstances, the results of which form the basis for our judgments about the carrying values47 Table of Contentsof assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimatesunder different assumptions or conditions. We believe the following critical accounting estimates affect our more significant judgments and estimates used inpreparing our consolidated financial statements. Please see Note 1 to our consolidated financial statements, which areincluded in Item 8 “Financial Statements and Supplementary Data” of this Annual Report, for our Organization andSignificant Accounting Policies. There have been no material changes made to the critical accounting estimates during theperiods presented in the consolidated financial statements. Revenue Recognition Significant management judgments and estimates must be made and used in connection with the recognition ofrevenue in any accounting period. Material differences in the amount of revenue in any given period may result if thesejudgments or estimates prove to be incorrect or if management’s estimates change on the basis of development of thebusiness or market conditions. Management judgments and estimates have been applied consistently and have been reliablehistorically. We believe that there are two key factors which impact the reliability of management’s estimates. The first ofthose key factors is that the terms of our contracts are typically less than six months. The short‑term nature of such contractsreduces the risk that material changes in accounting estimates will occur on the basis of market conditions or other factors.The second key factor is that we have hundreds of contracts in any given accounting period, which reduces the risk that anyone change in an accounting estimate on one or several contracts would have a material impact on our consolidated financialstatements or our two reporting segments’ measures of profit. The substantial majority of our 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 servicesaccording to customer specifications. These contracts may be fixed price or cost‑reimbursable. We consider all contracts fortreatment in accordance with authoritative guidance for contracts with multiple deliverables. Revenue from product sales not under contractual arrangement is recognized at the time title and the risk andrewards of ownership pass, which typically occurs when the products are shipped and collection is reasonably assured. Revenue and profits on fixed‑price contracts are recognized using percentage‑of‑completion methods of accounting.Revenue and profits on fixed‑price production contracts, whose units are produced and delivered in a continuous orsequential process, are recorded as units are delivered based on their selling prices, or the units‑of‑delivery method. Revenueand profits on other fixed‑price contracts with significant engineering as well as production requirements are recorded basedon the ratio of total actual incurred costs to date to the total estimated costs for each contract, or the cost‑to‑cost method.Under percentage‑of‑completion methods of accounting, a single estimated total profit margin is used to recognize profit foreach contract over its entire period of performance, which can exceed one year. Accounting for revenue and profits on afixed‑price contract requires the preparation of estimates of (1) the total contract revenue, (2) the total costs at completion,which is equal to the sum of the actual incurred costs to date on the contract and the estimated costs to complete thecontract’s statement of work and (3) the measurement of progress towards completion. The estimated profit or loss atcompletion on a contract is equal to the difference between the total estimated contract revenue and the total estimated costat completion. Under the units‑of‑delivery method, sales on a fixed‑price type contract are recorded as the units are deliveredduring the period based on their contractual selling prices. Under the cost‑to‑cost method, sales on a fixed‑price type contractare recorded at amounts equal to the ratio of actual cumulative costs incurred divided by total estimated costs at completion,multiplied by (A) the total estimated contract revenue, less (B) the cumulative sales recognized in prior periods. The profitrecorded on a contract in any period using either the units‑of‑delivery method or cost‑to‑cost method is equal to (X) thecurrent estimated total profit margin multiplied by the cumulative sales recognized, less (Y) the amount of cumulative profitpreviously recorded for the contract. In the case of a contract for which the total estimated costs exceed the total estimatedrevenue, a loss arises, and a provision for the entire loss is recorded in the period that it becomes evident. The unrecoverablecosts on a loss contract that are expected to be incurred in future periods are recorded in the program cost. 48 Table of ContentsRevenue and profits on cost‑reimbursable type contracts are recognized as costs are incurred on the contract, at anamount equal to the costs plus the estimated profit on those costs. The estimated profit on a cost‑reimbursable contract isgenerally fixed or variable based on the contractual fee arrangement. 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 oftenrequired as work progresses under a contract, as experience is gained and as more information is obtained, even though thescope of work required under the contract may not change, or if contract modifications occur. The impact of revisions inprofit estimates for all types of contracts are recognized on a cumulative catch‑up basis in the period in which the revisionsare made. During the fiscal years ended April 30, 2018, 2017 and 2016, changes in accounting estimates on fixed‑pricecontracts recognized using the percentage of completion method of accounting are presented below. Amounts representingcontract change orders or claims are included in revenue only when they can be reliably estimated and their realization isprobable. Incentives or penalties and awards applicable to performance on contracts are considered in estimating revenue andprofit rates, and are recorded when there is sufficient information to assess anticipated contract performance. For the years ended April 30, 2018, 2017 and 2016, favorable and unfavorable cumulative catch‑up adjustmentsincluded in cost of sales were as follows (in thousands): Year Ended April 30, 2018 2017 2016 Gross favorable adjustments $1,195 $464 $479 Gross unfavorable adjustments (847) (318) (210) Net adjustments $348 $146 $269 For the year ended April 30, 2018, favorable cumulative catch‑up adjustments of $1.2 million were primarily due tofinal cost adjustments on 14 contracts, which individually were not material. For the same period, unfavorable cumulativecatch‑up adjustments of $0.8 million were primarily related to higher than expected costs on 5 contracts, which individuallywere not material. For the year ended April 30, 2017, favorable cumulative catch‑up adjustments of $0.5 million were primarily due tofinal cost adjustments on 52 contracts, which individually were not material. For the same period, unfavorable cumulativecatch‑up adjustments of $0.3 million were primarily related to higher than expected costs on 9 contracts, which individuallywere not material. For the year ended April 30, 2016, favorable cumulative catch‑up adjustments of $0.5 million were primarily due tofinal cost adjustments on 19 contracts, which individually were not material. For the same period, unfavorable cumulativecatch‑up adjustments of $0.2 million were primarily related to higher than expected costs on 15 contracts, whichindividually were not material. Inventories and Reserve for Excess and Obsolescence Our policy for valuation of inventory, including the determination of obsolete or excess inventory, requires us toperform a detailed assessment of inventory at each balance sheet date, which includes a review of, among other factors, anestimate of future demand for products within specific time horizons, valuation of existing inventory, as well as productlifecycle and product development plans. Inventory reserves are also provided to cover risks arising from slow‑moving items.We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the costof inventory and the estimated market value based on assumptions about future demand and market conditions. We may berequired to record additional inventory write‑downs if actual market conditions are less favorable than those projected by ourmanagement. 49 Table of ContentsSelf‑Insured Liability We are self‑insured for employee medical claims, subject to individual and aggregate stop‑loss policies. We estimatea liability for claims filed and incurred but not reported based upon recent claims experience and an analysis of the averageperiod of time between the occurrence of a claim and the time it is reported to and paid by us. We perform an annualevaluation of this policy and have determined that for all prior years during which this policy has been in effect there havebeen cost advantages to this policy, as compared to obtaining commercially available employee medical insurance.However, actual results may differ materially from those estimated and could have a material impact on our consolidatedfinancial statements. Impairment of Long‑Lived Assets We review the recoverability of long‑lived assets whenever events or changes in circumstances indicate that thecarrying amount of such assets may not be recoverable. The estimated future cash flows are based upon, among other things,assumptions about expected future operating performance, and may differ from actual cash flows. If the sum of the projectedundiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down tothe estimated fair value in the period in which the determination is made. Intangible Assets – Acquired in Business Combinations We perform valuations of assets acquired and liabilities assumed on each acquisition accounted for as a businesscombination and allocate the purchase price of each acquired business to our respective net tangible and intangible assets.Acquired intangible assets include: customer relationships and trade names. We use valuation techniques to value theseintangibles assets, with the primary technique being a discounted cash flow analysis. A discounted cash flow analysisrequires us to make various assumptions and estimates including projected revenue, gross margins, operating costs, growthrates, useful lives and discount rates. Intangible assets are amortized over their estimated useful lives using the straight-linemethod which approximates the pattern in which the economic benefits are consumed. Long‑Term Incentive Awards For our outstanding long-term incentive plans as of April 30, 2018, we grant long-term incentive awards and weestablish a target payout at the beginning of each performance period. The actual payout at the end of the performance periodis calculated based upon our achievement of such targets. Payouts are made in cash and restricted stock units. Upon vestingof the restricted stock units, we have the discretion to settle the restricted stock units in cash or stock. The cash component of the award is accounted for as a liability. The equity component is accounted for as a stock-based liability as the restricted stock units may be settled in cash or stock. At each reporting period, we reassess theprobability of achieving the performance targets. The estimation of whether the performance targets will be achieved requiresjudgment, and to the extent actual results or updated estimates differ from our current estimates, the cumulative effect oncurrent and prior periods of those changes will be recorded in the period estimates are revised. Income Taxes We are required to estimate our income taxes, which includes estimating our current income taxes as well asmeasuring the temporary differences resulting from different treatment of items for tax and accounting purposes. We currentlyhave significant deferred assets, which are subject to periodic recoverability assessments. Realizing our deferred tax assetsprincipally depends on our achieving projected future taxable income. We may change our judgments regarding futureprofitability due to future market conditions and other factors, which may result in recording a valuation allowance againstthose deferred tax assets. We have various foreign subsidiaries to conduct or support our business outside the United States. We do notprovide for U.S. income taxes on undistributed earnings for our foreign subsidiaries as management expects the foreignearnings will be indefinitely reinvested in such foreign jurisdictions.50 Table of Contents We followed the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”), which provides additionalclarification regarding the application of ASC Topic 740 in situations where we do not have the necessary informationavailable, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of the TaxCuts and Jobs Act of 2017 (the “Tax Act”) for the reporting period in which the Act was enacted. SAB 118 provides for ameasurement period beginning in the reporting period that includes the Act’s enactment date and ending when the Companyhas obtained, prepared, and analyzed the information needed in order to complete the accounting requirements but in nocircumstances should the measurement period extend beyond one year from the enactment date. Fiscal Periods Our fiscal year ends on April 30. Due to our fixed year end date of April 30, our first and fourth quarters each consistof approximately 13 weeks. The second and third quarters each consist of exactly 13 weeks. Our first three quarters end on aSaturday. Results of Operations The following table sets forth certain historical consolidated income statement data expressed in dollars (inthousands) and as a percentage of revenue for the periods indicated. Certain amounts may not sum due to rounding. Fiscal Year Ended April 30, 2018 2017 2016 Revenue $271,052 100% $228,940 100% $233,738 100%Cost of sales 162,164 60% 133,755 58% 128,164 55%Gross margin 108,888 40% 95,185 42% 105,574 45%Selling, general and administrative 50,826 19% 47,642 21% 50,463 22%Research and development 26,433 10% 28,465 12% 35,040 15%Income from continuing operations 31,629 12% 19,078 8% 20,071 9%Interest income, net 2,240 1% 1,618 1% 1,032 —%Other (expense) income, net (49) —% 172 —% (2,589) (1)%Income from continuing operations before income taxes 33,820 12% 20,868 9% 18,514 8%Income tax expense 10,177 4% 4,138 2% 2,983 —%Equity method investment activity, net of tax (1,283) —% (119) —% (138) —%Net income from continuing operations 22,360 8% 16,611 7% 15,393 7%Loss from discontinued operations, net of tax (2,508) (1)% (4,154) (2)% (6,427) (3)%Net income 19,852 7% 12,457 5% 8,966 4%Net loss attributable to noncontrolling interest 216 —% 22 —% — —%Net income attributable to AeroVironment $20,068 7% $12,479 5% $8,966 4% Fiscal Year Ended April 30, 2018 Compared to Fiscal Year Ended April 30, 2017 Revenue. Revenue for the fiscal year ended April 30, 2018 was $271.1 million, as compared to $228.9 million forthe fiscal year ended April 30, 2017, representing an increase of $42.2 million, or 18%. The increase in revenue was due to anincrease in product deliveries of $35.7 million and an increase in customer-funded R&D work of $8.2 million, partially offsetby a decrease in service revenue of $1.7 million. The increase in product deliveries was primarily due to an increase inproduct deliveries of small UAS to international customers and to customers within the U.S. government and productdeliveries of tactical missile systems to customers within the U.S. government. The increase in customer-funded R&D wasprimarily associated with our design and development agreement with HAPSMobile, partially offset51 Table of Contentsby a decrease in tactical missile systems and tactical missile system variant programs. The decrease in service revenue wasprimarily due to a decrease in sustainment activities in support of tactical missile system product deliveries. Cost of Sales. Cost of sales for the fiscal year ended April 30, 2018 was $162.2 million, as compared to $133.8million for the fiscal year ended April 30, 2017, representing an increase of $28.4 million, or 21%. The increase in cost ofsales was a result of an increase in product cost of sales of $23.0 million and an increase in service costs of sales of $5.4million. The increase in product costs was primarily due to the increase in product deliveries. The increase in service costs ofsales was primarily due to the increase in service revenue. As a percentage of revenue, cost of sales increased from 58% to60%, primarily due to an unfavorable mix in both products and services and an increase in inventory reserve charges. Gross Margin. Gross margin for the fiscal year ended April 30, 2018 was $108.9 million, as compared to $95.2million for the fiscal year ended April 30, 2017, representing an increase of $13.7 million, or 14%. The increase in grossmargin was primarily due to an increase in product margins of $12.7 million and an increase in service margins of $1.0million. The increase in product margins was primarily due to the increase in product deliveries. The increase in servicesmargins was primarily due to the increase in customer-funded R&D revenue. As a percentage of revenue, gross margindecreased from 42% to 40%, primarily due to an unfavorable mix in both products and services and an increase in inventoryreserve charges. Selling, General and Administrative. SG&A expense for the fiscal year ended April 30, 2018 was $50.8 million, or19% of revenue, compared to SG&A expense of $47.6 million, or 21% of revenue, for the fiscal year ended April 30, 2017.The increase in SG&A expense was primarily due to an increase in bonus expense associated with our fiscal 2018 financialresults, the recording of impairment charges related to the identifiable intangible assets and goodwill of Altoy during thethree months ended October 28, 2017, an increase in bad debt expense and an increase in legal expenses, partially offset by adecrease in sales commission expense as a result of a decrease in the number of international small UAS contracts underwhich we utilized sales agents. Research and Development. R&D expense for the fiscal year ended April 30, 2018 was $26.4 million, or 10% ofrevenue, compared to R&D expense of $28.5 million, or 12% of revenue, for the fiscal year ended April 30, 2017. R&Dexpense decreased primarily due to decreased development activities for certain strategic initiatives. Interest Income, net. Interest income, net for the fiscal year ended April 30, 2018 was $2.2 million, compared to$1.6 million for the fiscal year ended April 30, 2017. The increase in interest income was primarily due to an increase in theaverage interest rates earned on our investments portfolio. Other Income (Expense), net. Other expense, net for the fiscal year ended April 30, 2018 was $49,000, as comparedto other income, net of $0.2 million for the fiscal year ended April 30, 2017. Income Taxes. Our effective income tax rate was 30.1% for the fiscal year ended April 30, 2018, as compared to19.8% for the fiscal year ended April 30, 2017. The provision for income taxes for the fiscal year ended 2018 included theimpact of the Tax Cut and Jobs Act of 2017, inclusive of a reduction in the blended fiscal year 2018 federal statutory tax ratefrom 35% to 30.4% and an estimated $3.4 million one-time expense resulting from the remeasurement of our deferred taxassets and liabilities. Equity method investment activity, net of tax. Equity method investment activity, net of tax for the fiscal yearended April 30, 2018 was a loss of $1.3 million, as compared to equity method investment activity, net of tax loss of $0.1million for the fiscal year ended April 30, 2017. The increase was due to the equity method loss associated with ourinvestment in the HAPSMobile joint venture formed in December 2017. Equity method investment activity, net of tax for thefiscal year ended April 30, 2017 related to our investment in Altoy prior to obtaining a controlling interest in February 2017. Loss from discontinued operations, net of tax. Loss from discontinued operations, net of tax for the fiscal yearended April 30, 2018 was a loss of $2.5 million as compared to a loss from discontinued operations, net of tax of $4.252 Table of Contentsmillion for the fiscal year ended April 30, 2017. The loss from discontinued operations, net of tax relates to the results of ourEES Business. Fiscal Year Ended April 30, 2017 Compared to Fiscal Year Ended April 30, 2016 Revenue. Revenue for the fiscal year ended April 30, 2017 was $228.9 million, as compared to $233.7 million forthe fiscal year ended April 30, 2016, representing a decrease of $4.8 million, or 2%. The decrease in revenue was primarilydue to a decrease in customer‑funded R&D of $9.9 million and a decrease in product deliveries of $2.4 million, partiallyoffset by an increase in service revenue of $7.5 million. The decrease in customer‑funded R&D was primarily associated withtactical missile system variant programs. The decrease in product deliveries was primarily due to a decrease in productdeliveries of small UAS, partially offset by an increase in product deliveries of tactical missile systems. The increase inservice revenue was primarily due to an increase in services associated with tactical missile systems and an increase insustainment activities in support of small UAS for our international customers. In fiscal 2017, we continued to experienceexpansion in small UAS product deliveries and related services to international customers and in tactical missile systemproduct deliveries and related services to customers within the U.S. Government. Cost of Sales. Cost of sales for the fiscal year ended April 30, 2017 was $133.8 million, as compared to$128.2 million for the fiscal year ended April 30, 2016, representing an increase of $5.6 million, or 4%. As a percentage ofrevenue, cost of sales increased from 55% to 58%. The increase in cost of sales was a result of an increase in product cost ofsales of $3.9 million and an increase in service costs of sales of $1.7 million, both of which were impacted by the reservereversal of $3.2 million for the settlement of prior year government incurred cost audits recorded in the second quarter offiscal 2016 as well as an increase in sustaining engineering activities in support of our existing products, partially offset bydecreases in customer-funded R&D and decreases in product deliveries. Gross Margin. Gross margin for the fiscal year ended April 30, 2017 was $95.2 million, as compared to$105.6 million for the fiscal year ended April 30, 2016, representing a decrease of $10.4 million, or 10%. As a percentage ofrevenue, gross margin decreased from 45% to 42%. The decrease in gross margin was a result of a decrease in product marginof $6.3 million and a decrease in service margin of $4.1 million, both of which were impacted by the reserve reversal of $3.2million for the settlement of prior year government incurred cost audits recorded in the second quarter of fiscal 2016. Selling, General and Administrative. SG&A expense for the fiscal year ended April 30, 2017 was $47.6 million, or21% of revenue, compared to SG&A expense of $50.5 million, or 22% of revenue, for the fiscal year ended April 30, 2016.The decrease in SG&A expense was primarily due to a decrease in bid and proposal costs and a decrease in professionalservices expenses, partially offset by an increase in sales commission expense as a result of our increased international smallUAS revenues. Research and Development. R&D expense for the fiscal year ended April 30, 2017 was $28.5 million, or 12% ofrevenue, compared to R&D expense of $35.0 million, or 15% of revenue, for the fiscal year ended April 30, 2016. R&Dexpense decreased primarily due to decreased development activities for certain strategic initiatives. Interest Income, net. Interest income, net for the fiscal year ended April 30, 2017 was $1.6 million, compared to$1.0 million for the fiscal year ended April 30, 2016. The increase in interest income was primarily due to an increase in theaverage interest rates earned on our investments portfolio. Other Income (Expense), net. Other income, net for the fiscal year ended April 30, 2017 was $0.2 million, ascompared to other expense, net of $2.6 million for the fiscal year ended April 30, 2016. The increase in other income wasprimarily due to the recording of an other-than-temporary impairment loss on our CybAero equity securities during the firstquarter of fiscal 2016. Other income, net for the fiscal year ended April 30, 2017 also included a gain of $0.6 million relatedto the acquisition of a controlling interest in our Turkish Joint Venture, Altoy. 53 Table of ContentsIncome Taxes. Our effective income tax rate was 19.8% for the fiscal year ended April 30, 2017, as compared to16.1% for the fiscal year ended April 30, 2016. The increase in the effective tax rate was primarily a result of an increase inincome before taxes and a decrease in tax credits as a result of federal legislation permanently reinstating the federal researchand development tax credit retroactive to January 2015 during fiscal year 2016, partially offset by a reversal of a reserve of$1.0 million for uncertain tax positions due to the settlement of prior fiscal year audits recorded in the first quarter of fiscal2017. Equity method investment activity, net of tax. Equity method investment activity, net of tax for the fiscal yearended April 30, 2017 and April 30, 2016 was a loss of $0.1 million. The losses related to the equity method investment in ourTurkish Joint Venture, Altoy prior to obtaining a controlling interest in February 2017. Loss from discontinued operations, net of tax. Loss from discontinued operations, net of tax for the fiscal yearended April 30, 2017 was a loss of $4.2 million as compared to loss from discontinued operations, net of tax of $6.4 millionfor the fiscal year ended April 30, 2016. Loss from discontinued operations, net of tax relates to the results of our EESBusiness. Liquidity and Capital Resources We currently have no material cash commitments, except for normal recurring trade payables, accrued expenses andongoing research and development costs, all of which we anticipate funding through our existing working capital and fundsprovided by operating activities. The majority of our purchase obligations are pursuant to funded contractual arrangementswith our customers. We believe that our existing cash, cash equivalents, cash provided by operating activities and otherfinancing sources will be sufficient to meet our anticipated working capital, capital expenditure and debt servicerequirements, if any, during the next twelve months. There can be no assurance, however, that our business will continue togenerate cash flow at current levels. If we are unable to generate sufficient cash flow from operations, then we may berequired to sell assets, reduce capital expenditures or obtain additional financing. We anticipate that existing sources ofliquidity 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 productdevelopment efforts, introducing new products and enhancing existing products, and marketing acceptance and adoption ofour products and services. Our future capital requirements, to a certain extent, are also subject to general conditions in oraffecting the defense industry and are subject to general economic, political, financial, competitive, legislative andregulatory factors that are beyond our control. Moreover, to the extent that existing cash, cash equivalents, cash fromoperations, and cash from short‑term borrowing are insufficient to fund our future activities, we may need to raise additionalfunds through public or private equity or debt financing. In addition, we may also need to seek additional equity funding ordebt 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 incurredcosts and fees monthly as work progresses, and therefore working capital investment is minimal. On fixed‑price contracts, wetypically are paid as we deliver products, and working capital is needed to fund labor and expenses incurred during the leadtime from contract award until contract deliveries begin. 54 Table of ContentsCash Flows The following table provides our cash flow data from continuing operations for the periods ended: Fiscal Year Ended April 30, 2018 2017 2016 (In thousands) Net cash provided by (used in) operating activities $70,436 $(7,995) $6,047 Net cash used in investing activities $(6,397) $(36,516) $(15,950) Net cash provided by (used in) financing activities $2,020 $3,470 $(3,096) Cash Provided by Operating Activities. Net cash provided by operating activities for the fiscal year ended April 30,2018 increased by $78.4 million to $70.4 million, compared to net cash used in operating activities of $8.0 million for thefiscal year ended April 30, 2017. This increase in net cash provided by operating activities was primarily due to an increasein the cash provided as a result of changes in operating assets and liabilities of $63.7 million largely resulting from decreasesin accounts receivable due to year over year timing differences in revenue and related collections, and decreases in inventoryprimarily due to year over year timing differences in purchases to support anticipated product deliveries, an increase in non-cash expenses of $8.9 million, primarily due to the $3.4 million charge resulting from the remeasurement of our deferred taxassets and liabilities, an increase in stock-based compensation, and the equity method loss associated with the our HAPS JV,and an increase in net income from continuing operations of $5.7 million. Net cash used in operating activities for the fiscal year ended April 30, 2017 increased by $14.0 million to $8.0million, compared to net cash provided by operating activities of $6.0 million for the fiscal year ended April 30, 2016. Thisincrease in net cash used in operating activities was primarily due to an increase in the use of cash as a result of changes inoperating assets and liabilities of $14.4 million largely resulting from increases in inventory primarily due to year over yeartiming differences in purchases to support anticipated product deliveries, partially offset by an increase in net income of $1.2million. Cash Used in Investing Activities. Net cash used in investing activities decreased by $30.1 million to $6.4 millionfor the fiscal year ended April 30, 2018, compared to net cash used in investing activities of $36.5 million for the fiscal yearended April 30, 2017. The decrease in net cash used in investing activities was primarily due to lower net purchases ofheld‑to‑maturity investments of $33.4 million, partially offset by the investment in our HAPSMobile joint venture. Duringthe fiscal years ended April 30, 2018, 2017 and 2016, we used cash to purchase property and equipment totaling$9.6 million, $9.0 million and $6.1 million, respectively. Net cash used in investing activities increased by $20.5 million to $36.5 million for the fiscal year ended April 30,2017, compared to net cash used in investing activities of $16.0 million for the fiscal year ended April 30, 2016. The increasein net cash used in investing activities was primarily due to higher net purchases of held to maturity investments of $16.9million and an increase in capital expenditures of $2.9 million. During the fiscal years ended April 30, 2017, and 2016, weused cash to purchase property and equipment totaling $9.0 million and $6.1 million, respectively. Cash Provided by (Used in) Financing Activities. Net cash provided by financing activities decreased by$1.5 million to $2.0 million for the fiscal year ended April 30, 2018, compared to net cash provided by financing activities of$3.5 million for the fiscal year ended April 30, 2017. The decrease was primarily due to a decrease in the cash provided fromthe exercise of employee stock options of $1.2 million. Net cash provided by financing activities increased by $6.6 million to $3.5 million for the fiscal year ended April30, 2017, compared to net cash used in financing activities of $3.1 million for the fiscal year ended April 30, 2016. Theincrease was primarily due to a decrease in the purchase and retirement of common stock of $3.8 million and an increase incash provided from the exercise of employee stock options of $2.7 million. 55 Table of ContentsContractual Obligations The following table describes our commitments to settle contractual obligations as of April 30, 2018: Payments Due By Period Less Than More Than Total 1 Year 1 to 3 Years 3 to 5 Years 5 Years (In thousands) Operating lease obligations $21,199 $4,940 $8,646 $5,699 $1,914 Capital lease obligations 161 161 — — — Purchase obligations(1) 48,236 48,236 — — — Total $69,596 $53,337 $8,646 $5,699 $1,914 (1)Consists of all cancelable and non‑cancelable purchase orders as of April 30, 2018.(2)Not included in the table above is an additional capital contribution of 209,500,000 yen (approximately $1,900,000) inor around January 2019 required under our HAPSMobile Inc. Joint Venture Agreement. Off‑Balance Sheet Arrangements As of April 30, 2018 we had no off‑balance sheet arrangements as defined in Item 303(a)(4) of the SEC’sRegulation S‑K. Inflation Our operations have not been, and we do not expect them to be, materially affected by inflation. Historically, wehave been successful in adjusting prices to our customers to reflect changes in our material and labor costs. Recently Adopted Accounting Standards In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This ASU does not apply to inventory that ismeasured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, whichincludes inventory that is measured using first-in, first-out (FIFO) or average cost. This ASU eliminates from U.S. GAAP therequirement to measure inventory at the lower of cost or market. Market under the previous requirement could bereplacement cost, net realizable value, or net realizable value less a normal profit margin. Entities within the scope of thisupdate will now be required to measure inventory at the lower of cost and net realizable value. Net realizable value is theestimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, andtransportation. Subsequent measurement is unchanged for inventory using LIFO or the retail inventory method. Our adoptionof ASU 2015-11 effective May 1, 2017 did not have a material impact on its consolidated financial statements. In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Testfor Goodwill Impairment, which simplifies the test for goodwill impairment by removing Step 2 from the goodwillimpairment test. If goodwill impairment is realized, the amount recognized will be the amount by which the carrying amountexceeds the reporting unit’s fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated tothat reporting unit. ASU 2017-04 must be applied on a prospective basis and will become effective for public entities in thefirst quarter of the year ending July 31, 2020, with early adoption available. We elected to early adopt the standard duringthe three months ended October 28, 2017. Our adoption of ASU 2017-04 did not have a material impact on our consolidatedfinancial statements. New Accounting Standards 56 Table of ContentsIn January 2017, the FASB issued ASU 2017-01, Business Combinations – Clarifying the definition of a business(Topic 805). This ASU clarifies the definition of a business with the objective of providing a more robust framework toevaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidancewill be effective for fiscal years beginning after December 15, 2017, including interim periods within that fiscal year, withearly adoption permitted. The amendments are to be applied prospectively to business combinations that occur after theeffective date.In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receiptsand Cash Payments (Topic 230). This ASU adds and clarifies guidance on the classification of certain cash receipts andpayments in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017 andinterim periods therein, with early adoption permitted. We are evaluating the potential impact of this adoption on ourconsolidated financial statements.In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires the lessee to recognize theassets and liabilities for the rights and obligations created by leases with terms of 12 months or more. The guidance iseffective for fiscal years beginning after December 15, 2018 and interim periods therein, with early adoption permitted. Weare evaluating the potential impact of this adoption on our consolidated financial statements. We currently do not hold alarge number of leases that are classified as operating leases under the existing lease standard, with the only significant leasesbeing our various property leases. We are evaluating the potential impact of this adoption on our consolidated financialstatements.In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The newstandard was originally effective for reporting periods beginning after December 15, 2016 and early adoption was notpermitted. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606)-Deferral ofthe Effective Date. This update approved a one-year delay of the effective date to reporting periods beginning after December15, 2017, while permitting companies to voluntarily adopt the new standard as of the original effective date. Since theissuance of ASU 2014- 09, the FASB has issued several amendments to provide additional supplemental guidance on certainaspects of the original pronouncement. The core principle of ASU 2014-09 is to recognize revenue upon the transfer of goodsor services to customers at an amount that reflects the consideration expected to be received. In adopting the guidance,companies are permitted to select between two transition methods: (1) a full retrospective transition method with theapplication of the new guidance to each prior reporting period presented, or (2) a retrospective transition method thatrecognizes the cumulative effect on prior periods at the date of adoption together with additional footnote disclosures.Contracts for product deliveries of our tactical missile systems that we have historically recognized revenue as therelated products were delivered will recognize revenue under the new standard over time as costs are incurred. In addition,services performed under contracts for both our tactical missile systems and small UAS that we have historically recognizedrevenue upon customer acceptance will recognize revenue under the new standard over time using an appropriate measure ofprogress, which is generally as costs are incurred. The new standard will not change the total amount of revenue recognizedon these contracts, it will only accelerate the timing of when the revenue is recognized, resulting in an increase to unbilledreceivables. The timing of cost of sales recognition for these contracts will also be accelerated, resulting in a decrease ininventories.The new standard will not have a significant impact to revenue recognition for product deliveries of our small UASfamily of systems that have historically recognized revenue as the related products were delivered. Under the new standardwe will recognize revenue for these contracts at a point in time when the products transfer to the customer.The new standard will not have a significant impact to revenue recognition for our customer-funded research anddevelopment contracts that we have historically recognized revenue based on percentage of completion. Under the newstandard we will recognize revenue for these contracts over time as costs are incurred which approximates percentage ofcompletion.We will adopt ASU 2014-09 in the first quarter of 2019 using the full retrospective transition method which willrequire our fiscal year 2016 and 2017 financial statements to be revised. As described above, certain contracts under the newstandard will recognize revenue as costs are incurred (or other appropriate measure of progress as applicable) as57 Table of Contentscompared to as units are delivered under ASC 605 – Revenue Recognition, which will result in an increase in revenue fromcontinuing operations of approximately $4.2 million in fiscal year 2017. The revision will also result in a cumulativeadjustment from continuing operations to increase retained earnings by approximately $0.7 million and $1.8 million for thefiscal years ended April 30, 2016 and 2017, respectively.The majority of the contracts in our discontinued EES business are product purchase order, bill and shiparrangements that we have historically recognized revenue as the related products were delivered. We do not anticipate asignificant impact to revenue recognition under the new standard.Due to the significant amount of revenues that occurred during the fourth quarter of fiscal 2018, we are continuingto assess the impact of adopting the new standard to our fiscal 2018 financial statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Interest Rate Risk It is our policy not to enter into interest rate derivative financial instruments. We do not currently have anysignificant interest rate exposure. Foreign Currency Exchange Rate Risk Since a significant part of our sales and expenses are denominated in U.S. dollars, we have not experiencedsignificant foreign exchange gains or losses to date. We occasionally engage in forward contracts in foreign currencies tolimit our exposure on non‑U.S. dollar transactions.58 Table of Contents Item 8. Financial Statements and Supplementary Data. AeroVironment, Inc.Audited Consolidated Financial StatementsIndex to Consolidated Financial Statements and Supplementary Data Page Report of Independent Registered Public Accounting Firm 60 Consolidated Balance Sheets at April 30, 2018 and 2017 61 Consolidated Statements of Income for the Years Ended April 30, 2018, 2017 and 2016 62 Consolidated Statements of Comprehensive Income for the Years Ended April 30, 2018, 2017 and 2016 63 Consolidated Statements of Stockholders’ Equity for the Years Ended April 30, 2018, 2017 and 2016 64 Consolidated Statements of Cash Flows for the Years Ended April 30, 2018, 2017 and 2016 65 Notes to Consolidated Financial Statements 66 Quarterly Results of Operations (Unaudited) 95 Supplementary Data Financial Statement Schedule: Schedule II—Valuation and Qualifying Accounts 97 All other schedules are omitted because they are not applicable, not required or the information required isincluded in the Consolidated Financial Statements, including the notes thereto. 59 Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of AeroVironment, Inc. and subsidiaries Opinion on the Financial StatementsWe have audited the accompanying consolidated balance sheets of AeroVironment, Inc. and subsidiaries (the Company) asof April 30, 2018 and 2017, and the related consolidated statements of income, comprehensive income, stockholders' equity,and cash flows for each of the three years in the period ended April 30, 2018, and the related notes and financial statementschedule listed in the index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion,the consolidated financial statements present fairly, in all material respects, the consolidated financial position of theCompany at April 30, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in theperiod ended April 30, 2018, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)(PCAOB), the Company’s internal control over financial reporting as of April 30, 2018, based on criteria established inInternal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission(2013 framework) and our report dated June 26, 2018 expressed an unqualified opinion thereon. Basis for OpinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinionon these financial statements based on our audits. We are a public accounting firm registered with the PCAOB and arerequired to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether dueto error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financialstatements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures includedexamining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits alsoincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating theoverall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Ernst & Young LLP We have served as the Company’s auditor since 1999. Los Angeles, CaliforniaJune 26, 2018 60 Table of ContentsAEROVIRONMENT, INC.CONSOLIDATED BALANCE SHEETS(In thousands except share data) April 30, 2018 2017 Assets Current assets: Cash and cash equivalents $143,517 $79,904 Short-term investments 113,649 119,971 Accounts receivable, net of allowance for doubtful accounts of $1,080 at April 30, 2018 and$104 at April 30, 2017 56,813 68,719 Unbilled receivables and retentions (inclusive of related party unbilled receivables of $3,145 at April 30,2018) 13,076 14,120 Inventories, net 38,640 40,908 Prepaid expenses and other current assets 5,103 5,533 Current assets of discontinued operations 28,349 24,930 Total current assets 399,147 354,085 Long-term investments 40,656 42,096 Property and equipment, net 19,219 15,962 Deferred income taxes 11,168 15,089 Other assets 2,721 2,010 Long-term assets of discontinued operations — 3,258 Total assets $472,911 $432,500 Liabilities and stockholders’ equity Current liabilities: Accounts payable $21,340 $15,896 Wages and related accruals 16,851 10,947 Income taxes payable 4,085 1,418 Customer advances 2,145 2,057 Other current liabilities 6,892 8,444 Current liabilities of discontinued operations 9,184 9,301 Total current liabilities 60,497 48,063 Deferred rent 1,536 1,719 Capital lease obligations - net of current portion — 161 Other non-current liabilities 622 184 Deferred tax liability 67 116 Liability for uncertain tax positions 49 64 Commitments and contingencies Stockholders’ equity: Preferred stock, $0.0001 par value: Authorized shares—10,000,000; none issued or outstanding at April 30, 2018 and April 30, 2017 — — Common stock, $0.0001 par value: Authorized shares—100,000,000 Issued and outstanding shares—23,908,736 shares at April 30, 2018 and 23,630,419 at April 30, 2017 2 2 Additional paid-in capital 170,139 162,150 Accumulated other comprehensive loss (21) (127) Retained earnings 239,997 219,929 Total AeroVironment stockholders' equity 410,117 381,954 Noncontrolling interest 23 239 Total equity 410,140 382,193 Total liabilities and stockholders’ equity $472,911 $432,500 See accompanying notes to consolidated financial statements.61 Table of ContentsAEROVIRONMENT, INC.CONSOLIDATED STATEMENTS OF INCOME(In thousands except share and per share data) Year Ended April 30, 2018 2017 2016 Revenue: Product sales $195,330 $159,630 $162,032 Contract services (inclusive of related party revenue of $29,597 for theyear ended April 30, 2018) 75,722 69,310 71,706 271,052 228,940 233,738 Cost of sales: Product sales 111,990 88,963 85,089 Contract services 50,174 44,792 43,075 162,164 133,755 128,164 Gross margin: Product sales 83,340 70,667 76,943 Contract services 25,548 24,518 28,631 108,888 95,185 105,574 Selling, general and administrative 50,826 47,642 50,463 Research and development 26,433 28,465 35,040 Income from continuing operations 31,629 19,078 20,071 Other income (expense): Interest income, net 2,240 1,618 1,032 Other (expense) income, net (49) 172 (2,589) Income from continuing operations before income taxes 33,820 20,868 18,514 Provision (benefit) for income taxes 10,177 4,138 2,983 Equity method investment activity, net of tax (1,283) (119) (138) Net income from continuing operations 22,360 16,611 15,393 Loss from discontinued operations, net of tax (2,508) (4,154) (6,427) Net income 19,852 12,457 8,966 Net loss attributable to noncontrolling interest 216 22 — Net income attributable to AeroVironment $20,068 $12,479 $8,966 Net income (loss) per share attributable to AeroVironment - Basic Continuing operations $0.97 $0.72 $0.67 Discontinued operations (0.11) (0.18) (0.28) Net income per share attributable to AeroVironment - Basic $0.86 $0.54 $0.39 Net income (loss) per share attributable to AeroVironment - Diluted Continuing operations $0.95 $0.72 $0.67 Discontinued operations (0.11) (0.18) (0.28) Net income per share attributable to AeroVironment - Diluted $0.84 $0.54 $0.39 Weighted-average shares outstanding: Basic 23,471,241 23,059,045 22,936,413 Diluted 23,813,772 23,307,738 23,153,493 See accompanying notes to consolidated financial statements.62 Table of Contents AEROVIRONMENT, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) Year Ended April 30, 2018 2017 2016 Net income $19,852 $12,457 $8,966 Other comprehensive income: Change in foreign currency translation adjustments 36 - - Unrealized gain on investments, net of deferred tax expense of $25, $43, and $18for the fiscal years ended 2018, 2017, and 2016 respectively 70 74 27 Total comprehensive income 19,958 12,531 8,993 Net loss attributable to noncontrolling interest 216 22 — Comprehensive income attributable to AeroVironment $20,174 $12,553 $8,993 See accompanying notes to consolidated financial statements.63 Table of ContentsAEROVIRONMENT, INC.CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(In thousands except share data) Accumulated Additional Other Total Non- Common Stock Paid-In Retained Comprehensive AeroVironment Controlling Shares Amount Capital Earnings Loss Equity Interest Total Balance at April 30, 2015 23,314,640 2 148,293 201,975 (1,358) 348,912 — 348,912 Net income — — — 8,966 — 8,966 — 8,966 Unrealized gain on investments — — — — 27 27 — 27 Reclassifications out of accumulatedother comprehensive loss — — — 1,130 1,130 — 1,130 Stock options exercised 84,881 — 1,122 — — 1,122 — 1,122 Restricted stock awards 191,548 — — — — — — — Restricted stock awards forfeited (46,753) — — — — — — — Tax withholding payment related tonet share settlement of equity awards (1,130) — (29) — — (29) — (29) Reclassification from share-basedliability compensation to equity — 228 — — 228 — 228 Tax benefit from stock-basedcompensation — — 98 — — 98 — 98 Purchases of common stock forretirement (183,261) — (3,756) — (3,756) — (3,756) Stock-based compensation — — 4,562 — — 4,562 — 4,562 Balance at April 30, 2016 23,359,925 2 154,274 207,185 (201) 361,260 — 361,260 Adoption of ASU 2016-09 — — 265 — 265 — 265 Net income (loss) — — — 12,479 — 12,479 (22) 12,457 Unrealized gain on investments — — — — 74 74 — 74 Stock options exercised 204,130 — 3,865 — — 3,865 — 3,865 Restricted stock awards 126,557 — — — — — — — Restricted stock awards forfeited (60,017) — — — — — — — Tax withholding payment related tonet share settlement of equity awards (176) — (5) — — (5) — (5) Reclassification from share-basedliability compensation to equity — — 307 — — 307 — 307 Business acquisition — — — — — — 261 261 Stock-based compensation — — 3,709 — — 3,709 — 3,709 Balance at April 30, 2017 23,630,419 2 162,150 219,929 (127) 381,954 239 382,193 Net income (loss) — — — 20,068 — 20,068 (216) 19,852 Unrealized gain on investments — — — — 70 70 — 70 Foreign currency translation — — — — 36 36 — 36 Stock options exercised 153,211 — 2,705 — — 2,705 — 2,705 Restricted stock awards 140,787 — — — — — — — Restricted stock awards forfeited (6,834) — — — — — — — Tax withholding payment related tonet share settlement of equity awards (8,847) — (397) — — (397) — (397) Reclassification from share-basedliability compensation to equity — — 384 — — 384 — 384 Stock based compensation — — 5,297 — — 5,297 — 5,297 Balance at April 30, 2018 23,908,736 $ 2 $170,139 $239,997 $(21) $410,117 $23 $410,140 See accompanying notes to consolidated financial statements. 64 Table of ContentsAEROVIRONMENT, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS(In thousands) Year Ended April 30, 2018 2017 2016 Operating activities Net income $19,852 $12,457 $8,966 Loss from discontinued operations, net of tax (2,508) (4,154) (6,427) Net income from continuing operations 22,360 16,611 15,393 Adjustments to reconcile net income to cash provided by (used in) operating activities: Depreciation and amortization 5,982 5,054 3,855 Loss from equity method investments 1,283 119 138 Impairment of available-for-sale securities — — 2,186 Impairment of long-lived assets 255 46 — Provision for doubtful accounts 977 48 18 Impairment of intangible assets and goodwill 1,021 — — (Gains) losses on foreign currency transactions (87) 284 63 Loss on sale of equity securities — — 219 Deferred income taxes 3,835 (52) (2,912) Gain on business acquisition — (584) — Stock-based compensation 4,956 3,392 4,002 Tax benefit from exercise of stock options — — 161 Excess tax benefit from exercise of stock options — — (39) Loss (Gain) on disposition of property and equipment 20 44 — Amortization of held-to-maturity investments 1,424 2,382 3,875 Changes in operating assets and liabilities: Accounts receivable 11,211 (19,608) (20,645) Unbilled receivables and retentions 903 4,667 (1,555) Inventories 2,268 (19,225) 480 Prepaid expenses and other assets 419 (1,484) 439 Accounts payable 5,736 545 (2,851) Other liabilities 7,872 (233) 3,221 Net cash provided by (used in) operating activities of continuing operations 70,436 (7,994) 6,047 Investing activities Acquisition of property and equipment (9,563) (9,017) (6,121) Equity method investments (3,267) — (295) Business acquisitions, net of cash acquired — (430) — Redemptions of held-to-maturity investments 227,663 121,522 84,433 Purchases of held-to-maturity investments (221,680) (148,991) (94,954) Proceeds from the sale of property and equipment — — — Redemptions of available-for-sale investments 450 400 987 Net cash used in investing activities from continuing operations (6,397) (36,516) (15,950) Financing activities Purchase and retirement of common stock — — (3,756) Principal payments of capital lease obligations (288) (390) (472) Excess tax benefit from stock-based compensation — — 39 Tax withholding payment related to net settlement of equity awards (397) (5) (29) Exercise of stock options 2,705 3,865 1,122 Net cash provided by (used in) financing activities from continuing operations 2,020 3,470 (3,096) Discontinued operations Operating activities of discontinued operations (1,227) (2,505) (5,496) Investing activities of discontinued operations (1,219) (838) (628) Financing activities of discontinued operations — — — Net cash used in discontinued operations (2,446) (3,343) (6,124) Net increase (decrease) in cash and cash equivalents 63,613 (44,383) (19,123) Cash and cash equivalents at beginning of period 79,904 124,287 143,410 Cash and cash equivalents at end of period $143,517 $79,904 $124,287 Supplemental disclosures of cash flow information Cash paid, net during the period for: Income taxes $1,813 $1,804 $1,576 Non-cash activities Unrealized gain on investments, net of deferred tax expense of $25, $43, and $18, respectively $70 $74 $27 Reclassification from share-based liability compensation to equity $384 $307 $228 Forfeiture of vested stock-based compensation $ — $ — $86 Acquisitions of property and equipment financed with capital lease obligation $ — $ — $932 Change in foreign currency translation adjustments $36 $ — $ — Acquisitions of property and equipment included in accounts payable $379 $724 $1,045 See accompanying notes to consolidated financial statements. 65 Table of ContentsAEROVIRONMENT, INC. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. Organization and Significant Accounting Policies Organization AeroVironment, Inc., a Delaware corporation, is engaged in the design, development, production, support andoperation of unmanned aircraft systems (“UAS”) for various industries and governmental agencies. Significant Accounting Policies Principles of Consolidation The accompanying consolidated financial statements include the accounts of AeroVironment, Inc. and itswholly‑owned subsidiaries: AeroVironment Rhode Island, LLC, Skytower Inc., AeroVironment International PTE. LTD.,AeroVironment, Inc. (Afghanistan), as well as the Company’s Turkish joint venture, Altoy Savunma Sanayi ve HavacilikAnonim Sirketi (“Altoy”) (collectively referred to herein as the “Company”). The Company increased its ownership in Altoyto a controlling interest on February 1, 2017. As a result of the increase in ownership, the consolidated financial statementsinclude the balance sheet and results of operations of Altoy from February 1, 2017 forward. Prior to this date, the Company'sinvestment in Altoy was accounted for under the equity method. Refer to Note 19 - Business Acquisitions for further details.All intercompany balances and transactions have been eliminated in consolidation. In April 2016, the Company dissolved AV S.r.l. Italy, AILC, Inc. and AeroVironment Massachusetts, LLC the resultsof which were not material to the consolidated financial statements. In July 2016, the Company dissolved Charger Bicycles,LLC, the results of which were not material to the consolidated financial statements. In October 2016, the Companydissolved Skytower, LLC and Regenerative Fuel Cell Systems, LLC, the results of which were not material to theconsolidated financial statements. In February 2018, the Company dissolved AeroVironment GmbH, the results of whichwere not material to the consolidated financial statements. On June 1, 2018, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) with WebastoCharging Systems, Inc. (“Webasto”) pursuant to which the Company agreed to sell, and Webasto agreed to acquire,substantially all of the assets of the Company’s EES business segment (the “EES Business”) and to assume certain liabilitiesrelated to the EES Business. As of April 30, 2018, we determined that the EES Business met the criterion for classification asan asset held for sale and represents a strategic shift in in our operations. Therefore, the assets and liabilities and the results ofoperations of the EES Business are reported in this Annual Report as discontinued operations for all periods presented. Investments in Companies Accounted for Using the Equity or Cost Method Investments in other non‑consolidated entities are accounted for using the equity method or cost basis dependingupon the level of ownership and/or the Company’s ability to exercise significant influence over the operating and financialpolicies of the investee. When the equity method is used, investments are recorded at original cost and adjusted periodicallyto recognize the Company’s proportionate share of the investees’ net income or losses after the date of investment. When netlosses from an investment accounted for under the equity method exceed its carrying amount, the investment balance isreduced to zero and additional losses are not provided for as the Company is not obligated to provide additional capital. TheCompany resumes accounting for the investment under the equity method if the entity subsequently reports net income andthe Company’s share of that net income exceeds the share of net losses not recognized during the period the equity methodwas suspended. When an investment accounted for using the equity method issues its own shares, the subsequent reduction in theCompany’s proportionate interest in the investee is reflected in equity as an adjustment to paid‑in‑capital. The66 Table of ContentsCompany evaluates its investments in companies accounted for by the equity or cost method for impairment when there isevidence or indicators that a decrease in value may be other than temporary. In December of 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 policiesof HAPSMobile, the Company’s investment is accounted as an equity method investment. The Company has presented itsproportion of HAPSMobile’s net loss in “Equity method investment activity, net of tax” in the consolidated statement ofoperations. The carrying value of the investment in HAPSMobile was recorded in “Other assets, long-term.” Refer to Note 8 –Equity Method Investments for further details. Segments Operating segments are defined as components of an enterprise about which separate financial information isavailable that is evaluated regularly by the Chief Operating Decision Maker (“CODM”) in deciding how to allocate resourcesand 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”), ona consolidated basis for the Company’s continuing operations. Accordingly, the Company operates its business as a singlereportable segment. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles inthe United States requires management to make estimates and assumptions. These estimates and assumptions affect thereported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenue and expenses during the reporting period. Significant estimates made bymanagement include, but are not limited to, valuation of: inventory, available‑for‑sale securities, deferred tax assets andliabilities, useful lives of property, plant and equipment, medical and dental liabilities, warranty liabilities, long-termincentive plan liabilities and estimates of anticipated contract costs and revenue utilized in the revenue recognition process.Actual results could differ from those estimates. Reclassifications Certain prior year amounts have been reclassified to conform to the current year presentation. Equity method lossesassociated with the Company’s investment in Altoy for the fiscal year ended 2017 and 2016 have been reclassified fromother income (expense), net to equity method investment activity, net of tax on the consolidated statement of operations. Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less at the time ofpurchase to be cash equivalents. The Company’s cash equivalents are comprised of money market funds, certificates ofdeposit of major financial institutions, and U.S. Treasury bills. Investments The Company’s investments are accounted for as held‑to‑maturity and available‑for‑sale and reported at amortizedcost and fair value, respectively. 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 identificationbasis and credited or charged to income. Premium and discount on investments are amortized and accreted using the interestmethod and charged or credited to investment income.67 Table of Contents Management determines the appropriate classification of securities at the time of purchase and re‑evaluates suchdesignation as of each balance sheet date. Investments are considered to be impaired when a decline in fair value is judged to be other‑than‑temporary. On aquarterly basis, the Company considers available quantitative and qualitative evidence in evaluating potential impairmentof its investments. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, generalmarket conditions, the duration and extent to which the fair value is less than cost, and its intent and ability to hold theinvestment to maturity. The Company also considers potential adverse conditions related to the financial health of the issuerbased on rating agency actions. Once a decline in fair value is determined to be other‑than‑temporary, an impairment chargeis recorded in earnings and a new cost basis in the investment is established. Fair Values of Financial Instruments Fair values of cash and cash equivalents, accounts receivable, unbilled receivables, retentions and accounts payableapproximate cost due to the short period of time to maturity. Concentration of Credit Risk Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash,cash equivalents, municipal bonds, U.S. government securities, U.S. government-guaranteed agency securities, U.S.Government sponsored agency debt securities, highly rated commercial paper, highly rated corporate bonds, and accountsreceivable. The Company currently invests the majority of its cash in municipal bonds, U.S. government securities, U.S.government-guaranteed agency securities, U.S. Government sponsored agency debt securities and highly rated corporatebonds. The Company’s revenue and accounts receivable are with a limited number of corporations and governmentalentities. In the aggregate, 54%, 63% and 79% of the Company’s revenue came from agencies of the U.S. government for theyears ended April 30, 2018, 2017 and 2016, respectively. These agencies accounted for 49% and 45% of the accountsreceivable balances at April 30, 2018 and 2017, respectively. One such agency, the U.S. Army, accounted for 19%, 21% and26% of the Company’s consolidated revenue for the years ended April 30, 2018, 2017 and 2016, respectively. The Companyperforms ongoing credit evaluations of its commercial customers and maintains an allowance for potential losses. Accounts Receivable, Unbilled Receivables and Retentions Accounts receivable represents primarily U.S. government and Foreign government, and to a lesser extentcommercial receivables, net of allowances for doubtful accounts. Unbilled receivables represent costs in excess of billings onincomplete contracts and, where applicable, accrued profit related to government long‑term contracts on which revenue hasbeen recognized, but for which the customer has not yet been billed. Retentions represent amounts withheld by customers until contract completion. At April 30, 2018 and 2017, theretention balances were $1,411,000 and $1,537,000, respectively. The Company determines the allowance for doubtfulaccounts based on historical customer experience and other currently available evidence. When a specific account is deemeduncollectible, the account is written off against the allowance. The allowance for doubtful accounts reflects the Company’sbest estimate of probable losses inherent in the accounts receivable balance; such losses have historically been withinmanagement’s expectations. An account is deemed past due based on contractual terms rather than on how recently paymentshave been received. Inventories Inventories are stated at the lower of cost (using the weighted average costing method) or net realizable value.Inventory write‑offs and write‑down provisions are provided to cover risks arising from slow‑moving items or technologicalobsolescence and for market prices lower than cost. The Company periodically evaluates the quantities on hand relative tocurrent and historical selling prices and historical and projected sales volume. Based on this evaluation, provisions are madeto write inventory down to its net realizable value.68 Table of Contents Long‑Lived Assets Property and equipment are carried at cost. Depreciation of property and equipment, including amortization ofleasehold improvements, are provided using the straight‑line method over the following estimated useful lives: Machinery and equipment 2 - 7 years Computer equipment and software 2 - 5 years Furniture and fixtures 3 - 7 years Leasehold improvements Lesser of useful life or term of lease The Company finances the purchase of certain IT equipment and perpetual software licenses with capital leasearrangements. The assets and liabilities under capital leases are recorded at the lesser of the present value of aggregate futureminimum lease payments, including estimated bargain purchase options, or the fair value of the asset under lease. Assetsunder capital leases are depreciated using the straight-line method over the lesser of the estimated useful life of the asset orthe term of the lease. Maintenance, repairs and minor renewals are charged directly to expense as incurred. Additions and betterments toproperty and equipment are capitalized at cost. When the Company disposes of assets, the applicable costs and accumulateddepreciation and amortization thereon are removed from the accounts and any resulting gain or loss is included in selling,general and administrative (“SG&A”) expense in the period incurred. The Company reviews the recoverability of its long‑lived assets whenever events or changes in circumstancesindicate that the carrying amount of such assets may not be recoverable. The estimated future cash flows are based upon,among other things, assumptions about expected future operating performance, and may differ from actual cash flows. If thesum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets willbe written down to the estimated fair value in the period in which the determination is made. There were no events or changesin circumstances that would indicate that the carrying amount of the assets may not be recoverable during the fiscal yearsended April 30, 2018, 2017 and 2016. Intangibles Assets — Acquired in Business Combinations The Company performs valuations of assets acquired and liabilities assumed on each acquisition accountedfor as a business combination and allocates the purchase price of the acquired business to the respective net tangible andintangible assets. Acquired intangible assets include customer relationships and trade names. The Company determines theappropriate useful life by performing an analysis of expected cash flows based on historical experience of the acquiredbusinesses. Intangible assets are amortized over their estimated useful lives using the straight-line method whichapproximates the pattern in which the economic benefits are consumed. The Company monitors conditions related to these assets to determine whether events and circumstances warrant a revisionto the remaining amortization period. The Company tests its intangible assets with finite lives for potential impairmentwhenever management concludes events or changes in circumstances indicate that the carrying amount may not berecoverable. The original estimate of an asset's useful life and the impact of an event or circumstance on either an asset'suseful life or carrying value involve significant judgment. Product Warranty The Company accrues an estimate of its exposure to warranty claims based upon both current and historical productsales data and warranty costs incurred. Product warranty reserves are recorded in other current liabilities. 69 Table of ContentsAccrued Sales Commissions As of April 30, 2018 and 2017, the Company accrued sales commissions in other current liabilities of $1,293,000and $4,555,000, respectively. Self‑Insurance Liability The Company is self-insured for employee medical claims, subject to individual and aggregate stop loss policies.The Company estimates a liability for claims filed and incurred but not reported based upon recent claims experience and ananalysis of the average period of time between the occurrence of a claim and the time it is reported to and paid by theCompany. As of April 30, 2018 and 2017, the Company estimated and recorded a self-insurance liability in wages andrelated accruals of approximately $1,003,000 and $1,133,000, respectively.Income Taxes Deferred income tax assets and liabilities are computed annually for differences between the financial statement andincome tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. The provision forincome taxes reflects the taxes to be paid for the period and the change during the period in the deferred income tax assetsand liabilities. The Company records a valuation allowance to reduce the deferred tax assets to the amount of future taxbenefit that is more likely than not to be realized. For uncertain tax positions, the Company determines whether it is “morelikely than not” that a tax position will be sustained upon examination by the appropriate taxing authorities before any partof the benefit can be recorded in the financial statements. For those tax positions where it is “not more likely than not” that atax benefit will be sustained, no tax benefit is recognized. Where applicable, associated interest and penalties are alsorecorded. On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was signed into law making significantchanges to the Internal Revenue Code. Changes include, but are not limited to, a corporate tax rate decrease from 35% to21% effective for tax years beginning after December 31, 2017, repeal of the corporate alternative minimum tax, repeal of thededuction for domestic production activities, and limitation on the deductibility of certain executive compensation. In accordance with U.S. GAAP as determined by ASC 740, Income Taxes, the Company is required to record theeffects of tax law changes in the period enacted. As the Company has an April 30 fiscal year end, its U.S. federal corporateincome tax rate will be blended in fiscal 2018, resulting in a statutory federal rate of approximately 30.4% (eight months at35% and four months at 21%), and will be 21% for subsequent fiscal years. The Company remeasured its existing deferredtax assets and liabilities at the rate the Company expects to be in effect when those deferred taxes will be realized (30.4% ifin 2018 or 21% thereafter) and recorded a one-time deferred tax expense of approximately $3,400,000 during the year endedApril 30, 2018. The Company followed the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”), which providesadditional clarification regarding the application of ASC Topic 740 in situations where the Company does not have thenecessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income taxeffects of the Tax Act for the reporting period in which the Act was enacted. SAB 118 provides for a measurement periodbeginning in the reporting period that includes the Act’s enactment date and ending when the Company has obtained,prepared, and analyzed the information needed in order to complete the accounting requirements but in no circumstancesshould the measurement period extend beyond one year from the enactment date. The $3,400,000 expense for the one-time deferred tax remeasurement is a provisional estimate of the impact of theTax Act. In addition, the Company has estimated that it will not have an income tax payable as a result of the one-timedeemed repatriation transition tax on unrepatriated foreign earnings. These amounts are considered provisional because theyuse estimates for which final tax computations or returns have not been completed and because estimated amounts may beimpacted by future regulatory and accounting guidance if and when issued. 70 Table of ContentsThe Company’s financial statements do not reflect the impact of certain aspects of the Tax Act as the Company didnot have the necessary information available, prepared, or analyzed (including computations), or because sufficient guidancehas not been issued in order to determine an actual or provisional amount for the tax effects of the Act. To date, these aspectsinclude the new compensation related provisions under section 162(m) and the state income tax conformity to the Tax Act. Customer Advances and Amounts in Excess of Cost Incurred The Company receives advances, performance‑based payments and progress payments from customers that mayexceed costs incurred on certain contracts, including contracts with agencies of the U.S. government. These advances areclassified as advances from customers and will be offset against billings. Revenue Recognition The substantial majority of the Company’s revenue is generated pursuant to written contractual arrangements todesign, develop, manufacture and/or modify complex products, and to provide related engineering, technical and otherservices according to the specifications of the buyers (customers). These contracts may be fixed‑price or cost‑reimbursable.The Company considers all contracts for treatment in accordance with authoritative guidance for contracts with multipledeliverables. Revenue arrangements with multiple deliverables should be divided into separate units of accounting if thedeliverables have value to the customer on a stand‑alone basis; there is objective and reliable evidence of the fair value ofthe undelivered item(s); and, if the arrangement includes a general right of return, delivery or performance of the undelivereditem(s) is considered probable and substantially in the control of the vendor. The Company occasionally enters intoarrangements that consist of installation and repair contracts associated with hardware sold by the Company. Sucharrangements consist of separate contractual arrangements and are divided into separate units of accounting where thedelivered item has value to the customer on a stand‑alone basis and there is objective and reasonable evidence of the fairvalue of the installation contract. Consideration is allocated among the separate units of accounting based on their relativefair values. Product sales revenue is composed of revenue recognized on contracts for the delivery of production hardware andrelated activities. Contract services revenue is composed of revenue recognized on contracts for the provision of services,including repairs, training, engineering design, development and prototyping activities. Revenue from cost‑plus‑fee contracts are recognized on the basis of costs incurred during the period plus the feeearned. Revenue from fixed‑price contracts are recognized on the percentage‑of‑completion method. Contract costs includeall direct material and labor costs and those indirect costs related to contract performance. Unbilled receivables representcosts incurred and related profit on contracts not yet billed to customers, and are invoiced in subsequent periods. Product sales revenue is recognized on the percentage‑of‑completion method or upon transfer of title to thecustomer, which is generally upon shipment. Shipping and handling costs incurred are included in cost of sales. Revenue and profits on fixed‑price production contracts, where units are produced and delivered in a continuous orsequential process, are recorded as units are delivered based on their selling prices (the “units‑of‑delivery method”). Revenueand profits on other fixed‑price contracts with significant engineering as well as production requirements are recorded basedon the ratio of total actual incurred costs to date to the total estimated costs for each contract (the “cost‑to‑cost method”).Accounting for revenue and profits on a fixed‑price contract requires the preparation of estimates of (1) the total contractrevenue, (2) the total costs at completion, which is equal to the sum of the actual incurred costs to date on the contract andthe estimated costs to complete the contract’s statement of work and (3) the measurement of progress towards completion.The estimated profit or loss at completion on a contract is equal to the difference between the total estimated contractrevenue and the total estimated cost at completion. Under the units‑of‑delivery method, sales on a fixed‑price type contractare recorded as the units are delivered during the period based on their contractual selling prices. Under the cost‑to‑costmethod, sales on a fixed‑price type contract are recorded at amounts equal to the ratio of71 Table of Contentsactual cumulative costs incurred divided by total estimated costs at completion, multiplied by (i) the total estimated contractrevenue, less (ii) the cumulative sales recognized in prior periods. The profit recorded on a contract in any period using eitherthe units‑of‑delivery method or cost‑to‑cost method is equal to (i) the current estimated total profit margin multiplied by thecumulative sales recognized, less (ii) the amount of cumulative profit previously recorded for the contract. In the case of acontract for which the total estimated costs exceed the total estimated revenue, a loss arises, and a provision for the entire lossis recorded in the period that it becomes evident. The unrecoverable costs on a loss contract that are expected to be incurredin future periods are recorded in the program cost. Significant management judgments and estimates must be made and used in connection with the recognition ofrevenue in any accounting period. Material differences in the amount of revenue in any given period may result if thesejudgments or estimates prove to be incorrect or if management’s estimates change on the basis of development of thebusiness, market conditions or other factors. Management judgments and estimates have been applied consistently and havebeen reliable historically. The Company believes that there are two key factors which impact the reliability of management’sestimates. The first of those key factors is that the terms of the Company’s contracts are typically less than six months. Theshort‑term nature of such contracts reduces the risk that material changes in accounting estimates will occur on the basis ofmarket conditions or other factors. The second key factor is that the Company has hundreds of contracts in any givenaccounting period, which reduces the risk that any one change in an accounting estimate on one or several contracts wouldhave a material impact on the Company’s consolidated financial statements or its two reporting segments’ measures of profit.Changes in estimates are recognized using the cumulative catch‑up method of accounting. This method recognizes, in thecurrent period, the cumulative effect of the changes on current and prior periods. Stock‑Based Compensation Stock‑based compensation is measured at the grant date based on the fair value of the award and is recognized asexpense over the requisite service period, which is generally the vesting period of the respective award. No compensationcost is ultimately recognized for awards for which employees do not render the requisite service and are forfeited. Long‑Term Incentive Awards For long‑term incentive awards outstanding as of April 30, 2018, the awards include time-based awards which vestequally over three years and performance-based awards which vest based on the achievement of a target payout established atthe beginning of each performance period. The actual payout at the end of the performance period is calculated based uponthe Company’s achievement of such targets. Payouts are made in cash and restricted stock units. Upon vesting of therestricted stock units, the Company has the discretion, but not an obligation, to settle the restricted stock units in cash orstock. The cash component of the award is accounted for as a liability. The equity component is accounted for as astock‑based liability, as the restricted stock units may be settled in cash or stock. At each reporting period, the Companyreassesses the probability of achieving the performance targets. The estimation of whether the performance targets will beachieved requires judgment, and, to the extent actual results or updated estimates differ from the Company’s currentestimates, the cumulative effect on current and prior periods of those changes will be recorded in the period estimates arerevised. Research and Development Internally funded research and development costs (“IRAD”), sponsored by the Company relate to both U.S.government products and services and those for commercial and foreign customers. IRAD costs for the Company arerecoverable and allocable under government contracts in accordance with U.S. government procurement regulations. Customer‑funded research and development costs are incurred pursuant to contracts (revenue arrangements) toperform research and development activities according to customer specifications. These costs are direct contract costs andare expensed to cost of sales when the corresponding revenue is recognized, which is generally as the research anddevelopment services are performed. Revenue from customer‑funded research and development was approximately72 Table of Contents$51,848,000, $43,615,000 and $53,546,000 for the years ended April 30, 2018, 2017 and 2016, respectively. The relatedcost of sales for customer‑funded research and development totaled approximately $36,415,000, $29,790,000 and$34,786,000 for the years ended April 30, 2018, 2017 and 2016, respectively. In January 2017, the Company executed a cost sharing Other Transaction Agreement type contract funded by the USFederal Government to perform certain system design, development and functional testing activities specific to a newprototype UAS on a best-efforts basis. The total estimated costs of the project are approximately $14,200,000, of which theCompany is responsible for funding $6,100,000. The remaining $8,100,000 will be reimbursed to the Company as theactivities are performed. The term of the agreement is through October 2018. The Company has determined that the contractmeets the criteria of ASC 912-730-05 Contractors – Federal Government and, therefore, all reimbursements are recorded as anoffset to research and development expense in the consolidated statements of operations. Reimbursements under the contractwere $4,188,000 and $233,000 for the fiscal years ended April 30, 2018 and 2017, respectively. Lease Accounting The Company accounts for its leases and subsequent amendments as operating leases or capital leases for financialreporting purposes. Certain operating leases contain rent escalation clauses, which are recorded on a straight‑line basis overthe initial term of the lease with the difference between the rent paid and the straight‑line rent recorded as a deferred rentliability. Lease incentives received from landlords are recorded as deferred rent liabilities and are amortized on a straight‑linebasis over the lease term as a reduction to rent expense. Deferred rent liabilities were approximately $1,536,000 and$1,719,000 as of April 30, 2018 and 2017, respectively. Advertising Costs Advertising costs are expensed as incurred. Advertising expenses included in SG&A expenses were approximately$526,000, $227,000 and $232,000 for the years ended April 30, 2018, 2017 and 2016, respectively. Foreign Currency Transactions Foreign currency transaction gains and losses are charged or credited to earnings as incurred. For the fiscal yearsended April 30, 2018, 2017 and 2016, foreign currency transaction gains and losses that are included in other income(expense) in the accompanying statements of operations were $87,000, $(284,000), and $(63,000), respectively. Earnings Per Share Basic earnings per share are computed using the weighted‑average number of common shares outstanding andexcludes any anti‑dilutive effects of options, restricted stock and restricted stock units. The dilutive effect of potentialcommon shares outstanding is included in diluted earnings per share. 73 Table of ContentsThe reconciliation of diluted to basic shares is as follows: Year Ended April 30, 2018 2017 2016 Numerator for basic and diluted earnings (loss) per share: Continuing operations attributable to AeroVironment $22,576,000 $16,633,000 $15,393,000 Discontinued operations, net of tax (2,508,000) (4,154,000) (6,427,000) Net income attributable to AeroVironment $20,068,000 $12,479,000 $8,966,000 Denominator for basic earnings per share: Weighted average common shares 23,471,241 23,059,045 22,936,413 Dilutive effect of employee stock options, restricted stock and restrictedstock units 342,531 248,693 217,080 Denominator for diluted earnings per share 23,813,772 23,307,738 23,153,493 During the years ended April 30, 2018, 2017 and 2016, certain options, shares of restricted stock and restricted stockunits were not included in the computation of diluted earnings per share because their inclusion would have beenanti‑dilutive. The number of options, restricted stock and restricted stock units which met this anti‑dilutive criterion wasapproximately 22,000, 86,000 and 22,000 for the years ended April 30, 2018, 2017 and 2016, respectively. Recently Adopted Accounting Standards In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This ASU does not apply to inventory that ismeasured using last-in, first-out (LIFO) or the retail inventory method. The amendments apply to all other inventory, whichincludes inventory that is measured using first-in, first-out (FIFO) or average cost. This ASU eliminates from U.S. GAAP therequirement to measure inventory at the lower of cost or market. Market under the previous requirement could bereplacement cost, net realizable value, or net realizable value less a normal profit margin. Entities within the scope of thisupdate will now be required to measure inventory at the lower of cost and net realizable value. Net realizable value is theestimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, andtransportation. Subsequent measurement is unchanged for inventory using LIFO or the retail inventory method. TheCompany’s adoption of ASU 2015-11 effective May 1, 2017 did not have a material impact on its consolidated financialstatements. In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Testfor Goodwill Impairment, which simplifies the test for goodwill impairment by removing Step 2 from the goodwillimpairment test. If goodwill impairment is realized, the amount recognized will be the amount by which the carrying amountexceeds the reporting unit’s fair value; however, the loss recognized cannot exceed the total amount of goodwill allocated tothat reporting unit. ASU 2017-04 must be applied on a prospective basis and will become effective for public entities in thefirst quarter of the year ending July 31, 2020, with early adoption available. The Company elected to early adopt thestandard during the three months ended October 28, 2017. The Company’s adoption of ASU 2017-04 did not have a materialimpact on its consolidated financial statements. Recently Issued Accounting Standards In January 2017, the FASB issued ASU 2017-01, Business Combinations – Clarifying the definition of a business(Topic 805). This ASU clarifies the definition of a business with the objective of providing a more robust framework toevaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The guidancewill be effective for fiscal years beginning after December 15, 2017, including interim periods within that fiscal year, withearly adoption permitted. The amendments are to be applied prospectively to business combinations that occur after theeffective date.74 Table of ContentsIn August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows - Classification of Certain Cash Receiptsand Cash Payments (Topic 230). This ASU adds and clarifies guidance on the classification of certain cash receipts andpayments in the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017 andinterim periods therein, with early adoption permitted. The Company is evaluating the potential impact of this adoption onits consolidated financial statements.In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires the lessee to recognize theeffective for fiscal years beginning after December 15, 2018 and interim periods therein, with early adoption permitted. TheCompany is evaluating the potential impact of this adoption on its consolidated financial statements. The Companycurrently does not hold a large number of leases that are classified as operating leases under the existing lease standard, withthe only significant leases being the Company’s various property leases. The Company is evaluating the potential impact ofthis adoption on its consolidated financial statements.In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The newstandard was originally effective for reporting periods beginning after December 15, 2016 and early adoption was notpermitted. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606)-Deferral ofthe Effective Date. This update approved a one-year delay of the effective date to reporting periods beginning after December15, 2017, while permitting companies to voluntarily adopt the new standard as of the original effective date. Since theissuance of ASU 2014- 09, the FASB has issued several amendments to provide additional supplemental guidance on certainaspects of the original pronouncement. The core principle of ASU 2014-09 is to recognize revenue upon the transfer of goodsor services to customers at an amount that reflects the consideration expected to be received. In adopting the guidance,companies are permitted to select between two transition methods: (1) a full retrospective transition method with theapplication of the new guidance to each prior reporting period presented, or (2) a retrospective transition method thatrecognizes the cumulative effect on prior periods at the date of adoption together with additional footnote disclosures.Contracts for product deliveries of the Company’s tactical missile systems that have historically recognized revenueas the related products were delivered will recognize revenue under the new standard over time as costs are incurred. Inaddition, services performed under contracts for both the Company’s tactical missile systems and small UAS that havehistorically recognized revenue upon customer acceptance will recognize revenue under the new standard over time using anappropriate measure of progress, which is generally as costs are incurred. The new standard will not change the total amountof revenue recognized on these contracts, it will only accelerate the timing of when the revenue is recognized, resulting in anincrease to unbilled receivables. The timing of cost of sales recognition for these contracts will also be accelerated, resultingin a decrease in inventories.The new standard will not have a significant impact to revenue recognition for product deliveries of the Company’ssmall UAS family of systems that have historically recognized revenue as the related products were delivered. Under the newstandard the Company will recognize revenue for these contracts at a point in time when the products transfer to thecustomer.The new standard will not have a significant impact to revenue recognition for the Company’s customer-fundedresearch and development contracts that we have historically recognized revenue based on percentage of completion. Underthe new standard the Company will recognize revenue for these contracts over time as costs are incurred which approximatespercentage of completion. The Company is adopting ASU 2014-09 in the first quarter of 2019 using the full retrospective transition methodwhich will require its fiscal year 2016 and 2017 financial statements to be revised. As described above, certain contractsunder the new standard will recognize revenue as costs are incurred (or other appropriate measure of progress as applicable)as compared to as units are delivered under ASC 605 – Revenue Recognition, which will result in an increase in revenuefrom continuing operations of approximately $4.2 million in fiscal year 2017. The revision will also result in a cumulativeadjustment from continued operations to increase retained earnings by approximately $0.7 million and $1.8 million for thefiscal years ended April 30, 2016 and 2017, respectively.75 Table of ContentsThe majority of the Company’s contracts in its discontinued EES business are product purchase order, bill and shiparrangements that have historically recognized revenue as the related products were delivered. The Company does notanticipate a significant impact to revenue recognition under the new standard. Due to the significant amount of revenues that occurred during the fourth quarter of fiscal 2018, the Company iscontinuing to assess the impact of adopting the new standard to its fiscal 2018 financial statements. 76 Table of Contents2. Discontinued Operations On June 1, 2018, the Company entered into the Purchase Agreement with Webasto pursuant to which the Company agreedto sell, and Webasto agreed to acquire, substantially all of the assets of the EES Business and to assume certain liabilitiesrelated to the EES Business. The Company anticipates that the transaction will close within its first quarter of fiscal 2019. Asof April 30, 2018, the Company determined that the EES Business met the criterion for classification as an asset held for saleand represents a strategic shift in in our operations. Therefore, the assets and liabilities and the results of operations of theEES Business are reported as discontinued operations for all periods presented. The table below presents the statements ofoperations data for the EES Business. Year Ended April 30, 2018 2017 2016Net sales$37,899 $35,933 $30,360Cost of sales 30,890 29,008 23,831Gross margin: 7,009 6,925 6,529Selling, general and administrative 7,825 8,895 9,614Research and development 3,526 4,577 7,251Other (expense) income, net (27) 7 28Loss from discontinued operations before income taxes (4,369) (6,540) (10,308)Benefit for income taxes (1,861) (2,386) (3,881)Net loss from discontinued operations$(2,508) $(4,154) $(6,427) The major classes of assets and liabilities included in discontinued operations related to the EES Business arepresented in the table below. April 30, 2018 2017Carrying amount of assets classified as discontinued operations Current assets: Accounts receivable, net of allowance for doubtful accounts of $139 at April 30, 2018 and$187 at April 30, 2017$6,348 $5,642Inventories, net 18,716 19,168Prepaid expenses and other current assets 185 120Property and equipment, net 3,100 —Total current assets classified as discontinued operations 28,349 24,930Property and equipment, net — 3,258Total non-current assets classified as discontinued operations — 3,258Total assets classified as discontinued operations$28,349 $28,188Carrying amount of liabilities classified as discontinued operations Current liabilities: Accounts payable$5,121 $4,388Wages and related accruals 1,946 2,019Customer advances 918 1,260Other current liabilities 1,199 1,634Total current liabilities 9,184 9,301Total liabilities classified as discontinued operations$9,184 $9,301 77 Table of Contents 3. Investments Investments consist of the following: April 30, 2018 2017 (In thousands) Short-term investments: Held-to-maturity securities: Municipal securities $35,344 $47,437 U.S. government securities 31,620 14,515 Corporate bonds 46,685 55,519 Certificates of deposit — 2,500 Total held-to-maturity and short-term investments $113,649 $119,971 Long-term investments: Held-to-maturity securities: Municipal securities $2,046 $8,942 U.S. government securities 27,356 22,540 Corporate bonds 9,112 8,117 Total held-to-maturity investments 38,514 39,599 Available-for-sale securities: Auction rate securities 2,142 2,497 Total available-for-sale investments 2,142 2,497 Total long-term investments $40,656 $42,096 Held‑To‑Maturity Securities As of April 30, 2018 and 2017, the balance of held‑to‑maturity securities consisted of state and local governmentmunicipal securities, U.S. government securities, corporate bonds and certificates of deposit. Interest earned from theseinvestments is recorded in interest income. 78 Table of ContentsThe amortized cost, gross unrealized losses, and estimated fair value of the held‑to‑maturity investments as ofApril 30, are as follows (in thousands): April 30, 2018 April 30, 2017 Gross Gross Gross Gross Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value Municipal securities $37,390 $ 9 $(36) $37,363 $56,379 $30 $(21) $56,388 U.S. governmentsecurities 58,976 — (367) 58,609 37,055 2 (41) 37,016 Corporate bonds 55,797 2 (71) 55,728 63,636 9 (85) 63,560 Certificates of deposit — — — — 2,500 1 — 2,501 Total held-to-maturityinvestments $152,163 $11 $(474) $151,700 $159,570 $42 $(147) $159,465 The amortized cost and fair value of the Company’s held‑to‑maturity securities by contractual maturity at April 30,2018, are as follows: Cost Fair Value Due within one year $113,649 $113,443 Due after one year through five years 38,514 38,257 Total $152,163 $151,700 Available‑For‑Sale Securities Auction Rate Securities As of April 30, 2018 and 2017, the entire balance of available‑for‑sale auction rate securities consisted of twoinvestment grade auction rate municipal bonds with maturities ranging from 1 to 16 years. These investments havecharacteristics similar to short‑term investments, because at pre‑determined intervals, generally ranging from 30 to 35 days,there is a new auction process at which the interest rates for these securities are reset to current interest rates. At the end ofsuch period, the Company chooses to roll‑over its holdings or redeem the investments for cash. A market maker facilitates theredemption of the securities and the underlying issuers are not required to redeem the investment within 365 days. Interestearned from these investments is recorded in interest income. During the fourth quarter of the fiscal year ended April 30, 2008, the Company began experiencing failed auctionson some of its auction rate securities. A failed auction occurs when a buyer for the securities cannot be obtained and themarket maker does not buy the security for its own account. The Company continues to earn interest on the investments thatfailed to settle at auction, at the maximum contractual rate until the next auction occurs. In the event the Company needs toaccess funds invested in these auction rate securities, the Company may not be able to liquidate these securities at the fairvalue recorded on April 30, 2018 until a future auction of these securities is successful or a buyer is found outside of theauction process. As a result of the failed auctions, the fair values of these securities are estimated utilizing a discounted cash flowanalysis as of April 30, 2018 and 2017. The analysis considers, among other items, the collateralization underlying thesecurity investments, the creditworthiness of the counterparty, the timing of expected future cash flows, and the expectationof the next time the security is expected to have a successful auction. Based on the Company’s ability to access its cash and cash equivalents, expected operating cash flows, and othersources of cash, the Company does not anticipate the current lack of liquidity on these investments will affect its ability tooperate the business in the ordinary course. The Company believes the current lack of liquidity of these investments istemporary and expects that the securities will be redeemed or refinanced at some point in the future. The79 Table of ContentsCompany will continue to monitor the value of its auction rate securities at each reporting period for a possible impairment ifa further decline in fair value occurs. The auction rate securities have been in an unrealized loss position for more than12 months. The Company has the ability and the intent to hold these investments until a recovery of fair value, which may bematurity and as of April 30, 2018, it did not consider these investments to be other‑than‑temporarily impaired. The amortized cost, gross unrealized losses, and estimated fair value of the available‑for‑sale auction rate securitiesare as follows (in thousands): April 30, 2018 2017 Auction rate securities Amortized cost $2,250 $2,700 Gross unrealized losses (108) (203) Fair value $2,142 $2,497 The amortized cost and fair value of the Company’s auction rate securities by contractual maturity at April 30, 2018are as follows (in thousands): Cost Fair Value Due after one through five years $250 $252 Due after 10 years 2,000 1,890 Total $2,250 $2,142 Equity Securities At April 30, 2015, the entire balance of available-for-sale equity securities consisted of 618,042 CybAero AB(“CybAero”) common shares. The shares were classified as available-for-sale. These shares were initially acquired on August11, 2014, when the Company converted a convertible bond into CybAero common shares. The convertible bond was in theamount of 10 million SEK and was converted into 1,062,699 common shares of CybAero at the conversion price of 9.41 SEKper share. When the Company converted the bond on August 11, 2014, the fair value per share was 37.50 SEK which becamethe new cost basis going forward, with all subsequent changes in fair value being recorded to other comprehensive income. At August 1, 2015, the Company reviewed these shares for impairment based on criteria that included the extent towhich the investment’s carrying value exceeds its related market value, the duration of the market decline, uncertainty as tothe recovery period due to sustained losses of the investee and the Company’s intent to hold its investment until recovery. Inthe three months ended August 1, 2015, the Company determined it was in its best interests to liquidate the remaining sharesheld. As a result, during the three months ended August 1, 2015, the Company recorded an other-than-temporary-impairmentloss of $2,186,000 related to the Company’s investment in the CybAero shares which was recorded to other (expense), net inthe consolidated statement of operations. As a result of recording the impairment charge, the investment’s fair value becameits new cost basis. In August 2015, the Company sold its remaining shares in CybAero in a private sale at the price of 12.00 SEK pershare, resulting in proceeds of approximately $777,000. During the fiscal year ended April 30, 2016, the Company realizedgains on the sale of CybAero shares of $207,000, based on the difference between the original conversion price of 9.41 SEKper share and the sales price at the time of sale, inclusive of the final sale of all shares. 80 Table of Contents4. 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 theprincipal or most advantageous market for the asset or liability in an orderly transaction between market participants on themeasurement 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 inactive 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 marketsfor similar assets or liabilities, inputs other than quoted prices that are observable, and inputs that are derivedprincipally 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 April 30, 2018, were as follows (inthousands): 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 Auction rate securities $— $— $2,142 $2,142 Total $ — $ — $2,142 $2,142 The following table provides a reconciliation between the beginning and ending balances of items measured at fairvalue on a recurring basis in the table above that used significant unobservable inputs (Level 3) (in thousands): Fair Value Measurements Using Significant Unobservable Inputs Description (Level 3) Balance at May 1, 2017 $2,497 Transfers to Level 3 — Total gains (realized or unrealized) Included in earnings — Included in other comprehensive income 95 Purchases, issuances and settlements, net (450) Balance at April 30, 2018 $2,142 The amount of total gains or (losses) for the period included inearnings attributable to the change in unrealized gains or losses relating toassets still held at April 30, 2018 $ — The auction rate securities are valued using a discounted cash flow model. The analysis considers, among otheritems, the collateralization underlying the security investments, the creditworthiness of the counterparty, the timing ofexpected future cash flows, and the estimated date upon which the security is expected to have a successful auction. As ofApril 30, 2018, the inputs used in the Company’s discounted cash flow analysis included current coupon rates of 2.8%,estimated redemption periods of 1 to 16 years and discount rates of 3.6% to 9.8%. The discount rates were based81 Table of Contentson market rates for municipal bond securities, as adjusted for a risk premium to reflect the lack of liquidity of theseinvestments. 5. Inventories, net Inventories consist of the following: April 30, 2018 2017 (In thousands) Raw materials $12,020 $12,664 Work in process 15,995 14,618 Finished goods 14,578 16,382 Inventories, gross 42,593 43,664 Reserve for inventory excess and obsolescence (3,953) (2,756) Inventories, net $38,640 $40,908 6. Intangibles Intangibles are included in other assets on the balance sheet. The components of intangibles are as follows: April 30, Impairment April 30, 2017 Charges 2018 (In thousands) Licenses $818 $ - $818 Customer relationships 1,600 (867) 733 Trademarks and tradenames 60 (32) 28 Other 3 - 3 Intangibles, gross 2,481 $(899) 1,582 Less accumulated amortization (658) (954) Intangibles, net $1,823 $628 The Company tests identifiable intangible assets and goodwill for impairment in the fourth quarter of each fiscalyear unless there are interim indicators that suggest that it is more likely than not that either the identifiable intangible assetsor goodwill may be impaired. Due to the current political situation within Turkey and the increased uncertainty in therelations between the U.S. and Turkey, the Company significantly lowered its cash flow expectations for its Altoy operations.As a result of the decline in the Company’s cash flow forecast, the Company performed an interim assessment of impairmentof Altoy’s long-lived assets, excluding goodwill during the three months ended October 28, 2017. Based on the analysis, theCompany determined that the fair value of Altoy had declined below its carrying value, excluding goodwill. As a result, theCompany performed an additional analysis to determine the amount of the impairment loss and recorded an impairment losstotaling $899,000, which is included in selling, general and administrative expense on the consolidated statements ofoperations. The fair value of the Altoy asset group was determined based on a discounted cash flow model reflective of therevised cash flow estimates. The weighted average amortization period at April 30, 2018 and 2017 was three years and six years, respectively.Amortization expense for the years ended April 30, 2018, 2017 and 2016 was $296,000, $139,000 and $80,000, respectively. The customer relationships, trademarks and tradenames, and other intangible assets were recognized in conjunctionwith the Company’s acquisition of a controlling interest in its Altoy joint venture on February 1, 2017. Refer to Note 19 -Business Combinations for further details. 82 Table of ContentsEstimated amortization expense for the next five years is as follows: Year ending April 30, (In thousands) 2019 $275 2020 255 2021 98 2022 — 2023 — $628 7. Property and Equipment, net Property and equipment, net consist of the following: April 30, 2018 2017 (In thousands) Leasehold improvements $10,541 $9,506 Machinery and equipment 40,377 37,287 Furniture and fixtures 2,094 1,857 Computer equipment and software 31,895 26,682 Construction in process 3,359 4,467 Property and equipment, gross 88,266 79,799 Less accumulated depreciation and amortization (69,047) (63,837) Property and equipment, net $19,219 $15,962 Depreciation expense for the years ended April 30, 2018, 2017 and 2016 was $5,676,000, $4,939,000 and$3,799,000, respectively. At April 30, 2018 and 2017, property and equipment includes computer equipment and softwareunder capital leases with a cost basis of $1,836,000 and $1,836,000 and accumulated depreciation of $1,687,000 and$1,433,000, respectively. Depreciation of computer equipment and software under capital leases was $201,000 and $375,000for the fiscal years ended April 30, 2018 and 2017 respectively. 8. Investments in Companies Accounted for Using the Equity Method In December of 2017, the Company and Softbank formed a joint venture, HAPSMobile. HAPSMobile is a Japanesecorporation that is 5% owned by the Company and 95% owned by SoftBank and is governed by a Joint Venture Agreement(the “JVA”). The Company purchased its 5% stake in HAPSMobile for 210,000,000 yen ($1,860,000) effective as ofDecember 27, 2017 and 150,000,000 yen ($1,407,000) on April 17, 2018. Under the JVA, the Company committed to makean additional capital contribution of 209,500,000 yen (approximately $1,900,000) in or around January 2019 to maintain its5% ownership stake. Additionally under the JVA, the Company may purchase additional shares of HAPSMobile, at the sameper share price for the purchase of its original 5% stake, to increase its ownership percentage of HAPSMobile up to 19% priorto the first flight test of the prototype aircraft produced under a design and development agreement between HAPSMobileand the Company. As the Company has the ability to exercise significant influence over the operating and financial policies ofHAPSMobile, the Company’s investment is accounted as an equity method investment. At April 30, 2018, the Companyrecorded 5% of the net loss of HAPSMobile, or $1,283,000, in “Equity method investment activity, net of tax” in the83 Table of Contentsconsolidated statements of income. At April 30, 2018, the carrying value of the investment in HAPSMobile was $2,020,000and was recorded in “Other assets, long-term.” In March of 2014, the Company purchased 49% of the outstanding common stock of Altoy, a Turkish corporationfounded in February 2014. During the years ended April 30, 2017 and 2016, the Company recorded 49% of the net loss ofAltoy, or $119,000 and $138,000, respectively, in “Equity method investment activity, net of tax” in the consolidatedstatements of income. At April 30, 2016, the carrying value of the investment in Altoy was $386,000 and was recorded in“Other assets, long‑term.” On February 1, 2017, the Company acquired an additional 36% interest in Altoy, increasing the Company’s totalownership interest to 85%, for total cash consideration of $625,000. As a result of the Company obtaining a controllinginterest in Altoy, Altoy has been consolidated into the consolidated financial statements of the Company as of the date of theacquisition. Refer to Note 19 - Business Acquisitions. 9. Warranty Reserves Warranty reserve activity is summarized as follows: April 30, 2018 2017 (In thousands) Beginning balance $1,947 $3,094 Warranty expense 1,884 187 Changes in estimates related to pre-existing warranties — 1,651 Warranty costs settled (1,741) (2,985) Ending balance $2,090 $1,947 During the fiscal year ended April 30, 2017, the Company revised its estimates based on the results of additionalengineering studies and recorded incremental warranty reserve charges totaling $1,651,000 related to the estimated costs torepair a component of certain small UAS that were delivered in prior periods. At April 30, 2018 and 2017, there were zero and$441,000 remaining estimated warranty costs related to the repair of the impacted small UAS, respectively. As of April 30,2018 and 2017, a total of $2,198,000 and $1,762,000 of costs related to this warranty have been incurred, respectively. 10. Employee Savings Plan The Company has an employee 401(k) savings plan covering all eligible employees. The Company expensedapproximately $2,953,000, $2,603,000 and $2,546,000 in contributions to the plan for the years ended April 30, 2018, 2017and 2016, respectively. 11. Severance Charges During the fiscal year ended April 30, 2017, the Company recorded severance costs totaling $1,262,000. Of thistotal, approximately $850,000 was due to two officers who left the Company during the fiscal year ended April 30, 2017. Theremaining severance costs were due to certain strategic headcount reductions consisting entirely of severance payments. Ofthe total, approximately $555,000 was recorded to cost of sales and $707,000 was recorded to SG&A. Of the total,approximately $127,000 was in accrued wages and related accruals at April 30, 2017. During the fiscal year ended April 30, 2016, the Company made certain strategic headcount reductions with a totalcost of approximately $702,000, consisting entirely of severance payments. The Company recorded this charge during itsfourth fiscal quarter ended April 30, 2016. Of the total, approximately $300,000 was recorded to cost of sales and $402,000was recorded to SG&A. Of the total, approximately $642,000 was in accrued wages and related accruals at April 30,2016. All amounts were paid out prior to April 30, 2017.84 Table of Contents 12. Stock‑Based Compensation For the years ended April 30, 2018, 2017 and 2016, the Company recorded stock‑based compensation expense ofapproximately $4,956,000, $3,392,000 and $4,002,000, respectively. On January 14, 2007, the stockholders of the Company approved the 2006 Equity Incentive Plan, or 2006 Plan,effective January 21, 2007, for officers, directors, key employees and consultants. On September 29, 2011, the stockholdersof the Company approved an amendment and restatement of the 2006 Plan, or Restated 2006 Plan. Under the Restated 2006Plan, incentive stock options, nonqualified stock options, restricted stock awards, stock appreciation right awards,performance share awards, performance stock unit awards, dividend equivalents awards, stock payment awards, deferred stockawards, restricted stock unit awards, other stock‑based awards, performance bonus awards or performance‑based awards maybe granted at the discretion of the compensation committee, which consists of outside directors. A maximum of 4,884,157shares of stock may be issued pursuant to awards under the Restated 2006 Plan. The maximum number of shares of commonstock with respect to one or more awards that may be granted to any one participant during any twelve month period is2,000,000. A maximum of $5,000,000 may be paid in cash to any one participant as a performance‑based award during anytwelve month period. The exercise price for any incentive stock option shall not be less than 100% of the fair market valueon the date of grant. Vesting of awards is established at the time of grant. The Company had an equity incentive plan, or 2002 Plan, for officers, directors and key employees. Under the 2002Plan, incentive stock options or nonqualified stock options were granted, as determined by the administrator at the time ofgrant. Stock purchase rights were also granted under the 2002 Plan. Options under the 2002 Plan were granted at their fairmarket value (as determined by the board of directors). The options became exercisable at various times over a five-yearperiod from the grant date. The 2002 Plan was terminated on the effective date of the 2006 Plan. Awards outstanding underthe 2002 Plan remain outstanding and exercisable; no additional awards may be made under the 2002 Plan. The Company had a 1992 nonqualified stock option plan, or 1992 Plan, for certain officers and key employees.Options under the 1992 Plan were granted at their fair market value (as determined by the board of directors) at the date ofgrant and became exercisable at various times over a five-year period from the grant date. The 1992 Plan expired in August2002. The fair value of stock options granted was estimated at the grant date using the Black‑Scholes option pricingmodel with the following weighted average assumptions for the years ended April 30, 2018, 2017 and 2016: Year Ended April 30, 2018 2017 2016 Expected term (in years) — — 6.00 Expected volatility —% —% 36.14%Risk-free interest rate —% —% 1.88%Expected dividend — — — Weighted average fair value at grant date $ — $ — $10.18 No options were granted during the fiscal years ended April 30, 2018 and 2017. The expected term of stock options represents the weighted average period the Company expects the stock optionsto remain outstanding, based on the Company’s historical exercise and post‑vesting cancellation experience and theremaining contractual life of its outstanding options. The expected volatility is based on historical volatility for the Company’s stock. 85 Table of ContentsThe risk free interest rate is based on the implied yield on a U.S. Treasury zero‑coupon bond with a remaining termthat approximates the expected term of the option. The expected dividend yield of zero reflects that the Company has not paid any cash dividends since inception anddoes not anticipate paying cash dividends in the foreseeable future. Information related to the stock option plans at April 30, 2018, 2017 and 2016, and for the years then ended is asfollows: Restated 2006 Plan 2002 Plan 1992 Plan Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at April 30, 2015 652,117 23.96 44,993 7.57 78,604 0.59 Options granted 128,000 26.83 — — — — Options exercised (43,000) 21.81 (31,161) 5.70 (10,000) 0.59 Options canceled (58,318) 25.98 (8) 2.13 — — Outstanding at April 30, 2016 678,799 24.46 13,824 11.79 68,604 0.59 Options granted — — — — — — Options exercised (167,310) 22.32 (9,601) 11.79 (25,189) 0.59 Options canceled (64,865) 26.76 (4,223) 11.79 — — Outstanding at April 30, 2017 446,624 24.93 — — 43,415 0.59 Options granted — — — — — — Options exercised (107,598) 23.80 — — (25,113) 0.59 Options canceled — — — — — — Outstanding at April 30, 2018 339,026 25.29 — — 18,302 0.59 Options exercisable at April 30, 2018 256,012 $24.81 — $ — 18,302 $0.59 The total intrinsic value of all options exercised during the years ended April 30, 2018, 2017 and 2016 wasapproximately $2,407,000, $1,747,000, and $1,198,000, respectively. The intrinsic value of all options outstanding at April30, 2018 and 2017 was $10,890,000 and $2,840,000, respectively. The intrinsic value of all exercisable options at April 30,2018 and 2017 was $8,587,000 and $2,454,000, respectively. A summary of the status of the Company’s non‑vested stock options as of April 30, 2018 and the year then ended isas follows: Weighted Average Grant Date Non-vested Options Options Fair Value Non-vested at April 30, 2017140,118$10.76Granted — —Expired — —Canceled — —Vested(57,104)10.45Non-vested at April 30, 201883,014$10.97 86 Table of ContentsAs of April 30, 2018, there was approximately $7,045,000 of total unrecognized compensation cost related tonon‑vested share‑based compensation awards granted under the equity plans. That cost is expected to be recognized over anapproximately two‑year period or a weighted average period of approximately 1.9 years. The weighted average fair value of options issued for the year ended April 30, 2016 was $10.18. No options weregranted during the fiscal years ended April 30, 2018 and 2017. The total fair value of shares vesting during the years endedApril 30, 2018, 2017 and 2016 was $3,328,000, $2,942,000 and $2,495,000, respectively. Proceeds from all option exercises under all stock option plans for the years ended April 30, 2018, 2017 and 2016were approximately $2,576,000, $3,863,000 and $1,121,000, respectively. The tax benefit realized from stock‑basedcompensation during the years ended April 30, 2018, 2017 and 2016 was approximately $0, $0, and $98,000, respectively. The following tabulation summarizes certain information concerning outstanding and exercisable options atApril 30, 2018: Options Outstanding Weighted Average Options Exercisable Remaining Weighted Weighted As of Contractual Average As of Average April 30, Life In Exercise April 30, Exercise Range of Exercise Prices 2018 Years Price 2018 Price $0.59-19.16 72,302 4.23 $13.78 72,302 $13.78 19.17-26.24 58,500 4.86 20.54 48,500 20.71 26.25-26.99 80,000 7.15 26.70 32,000 26.70 27.00-27.99 50,000 5.56 27.27 40,000 27.27 28.00-32.19 96,526 4.59 29.90 81,512 29.65 $0.59-32.19 357,328 5.27 $24.02 274,314 $23.20 The remaining weighted average contractual life of exercisable options at April 30, 2018 was 4.88 years. Information related to the Company’s restricted stock awards at April 30, 2018 and for the year then ended is asfollows: Restated 2006 Plan Weighted Average Grant Date Shares Fair Value Unvested stock at April 30, 2017 339,145 $26.27 Stock granted 131,332 37.71 Stock vested (133,886) 25.25 Stock canceled (4,016) 26.10 Unvested stock at April 30, 2018 332,575 $31.20 13. Long‑Term Incentive Awards During the three months ended July 29, 2017, the Company granted awards under its amended and restated 2006Equity Incentive Plan (the “Restated 2006 Plan”) to key employees (“Fiscal 2018 LTIP”). Awards under the Fiscal 2018 LTIPconsist of: (i) time-based restricted stock awards which vest in equal tranches in July 2018, July 2019 and87 Table of ContentsJuly 2020, and (ii) performance-based restricted stock units (“PRSUs”) which vest based on the Company’s achievement ofrevenue and operating income targets for the three-year period ending April 30, 2020. At the award date, target achievementlevels for each of the financial performance metrics were established for the PRSUs, at which levels the PRSUs would vest at100% for each such metric. Threshold achievement levels for which the PRSUs would vest at 50% for each such metric andmaximum achievement levels for which such awards would vest at 200% for each such metric were also established. Theactual payout for the PRSUs at the end of the performance period will be calculated based upon the Company’s achievementof the established revenue and operating income targets for the performance period. Settlement of the PRSUs will be made infully vested shares of common stock. During the fiscal year ended April 30, 2018, the Company recorded $269,000 ofcompensation expense related to the Fiscal 2018 LTIP. At April 30, 2018, the maximum compensation expense that may berecorded for the performance-based portion of the Fiscal 2018 LTIP is $2,660,000. During the three months ended July 29, 2017, the Company also granted awards under the Restated 2006 Plan tokey employees (“Fiscal 2017 LTIP”). Awards under the Fiscal 2017 LTIP consist of: (i) time-based restricted stock awardswhich vest in equal tranches in July 2017, July 2018 and July 2019, and (ii) PRSUs which vest based on the Company’sachievement of revenue and operating income targets for the three-year period ending April 30, 2019. At the award date,target achievement levels for each of the financial performance metrics were established for the PRSUs, at which levels thePRSUs would vest at 100% for each such metric. Threshold achievement levels for which the PRSUs would vest at 50% foreach such metric and maximum achievement levels for which such awards would vest at 200% for each such metric were alsoestablished. The actual payout for the PRSUs at the end of the performance period will be calculated based upon theCompany’s achievement of the established revenue and operating income targets for the performance period. Settlement ofthe PRSUs will be made in fully-vested shares of common stock. During the fiscal year ended April 30, 2018, the Companyrecorded $159,000 of compensation expense related to the Fiscal 2017 LTIP. At April 30, 2018, the maximum compensationexpense that may be recorded for the performance-based portion of the Fiscal 2017 LTIP is $2,440,000. During the year ended April 30, 2016, the Company granted a three-year performance award under the Restated2006 Plan to key employees (“Fiscal 2016 LTIP”). The performance period for each three-year award is the three-year periodending April 30, 2018. A target payout was established at the award date. The actual payout at the end of the performanceperiod will be calculated based upon the Company’s achievement of revenue and gross margin for the performance period.Payouts will be made in cash and restricted stock units. Upon vesting of the restricted stock units, the Company has thediscretion to settle the restricted stock units in cash or stock. No compensation cost has been recognized for this award as theCompany did not achieve the performance conditions. At each reporting period, the Company reassesses the probability of achieving the performance targets. Theestimation of whether the performance targets will be achieved requires judgment, and, to the extent actual results or updatedestimates differ from the Company’s current estimates, the cumulative effect on current and prior periods of those changeswill be recorded in the period estimates are revised. 14. Income Taxes The components of income before income taxes are as follows (in thousands): Year Ended April 30, 2018 2017 2016 Domestic $33,854 $20,954 $18,433 Foreign (34) (86) 81 Income from continuing operations before income taxes 33,820 20,868 18,514 Equity method investment activity (1,283) (119) (138) Total income from continuing operations before income taxes $32,537 $20,749 $18,376 88 Table of ContentsThe Company expects any foreign earnings to be reinvested in such foreign jurisdictions and, therefore, no deferredtax liabilities for U.S. income taxes on undistributed earnings are recorded. The foreign subsidiaries do not have anyundistributed earnings. A reconciliation of income tax expense computed using the U.S. federal statutory rates to actual income tax expense(benefit) is as follows: Year Ended April 30, 2018 2017 2016 U.S. federal statutory income tax rate 30.4% 34.0% 35.0%State and local income taxes, net of federal benefit (2.0) (1.9) (5.3) R&D and other tax credits (6.7) (11.7) (19.2) Valuation allowance 4.7 4.1 7.3 Foreign rate differential 0.1 — — Uncertain tax position adjustment — — — Return to provision adjustments (0.1) (0.3) 2.1 Permanent items (6.9) (3.6) (3.1) Tax Act 10.0 — — Other 0.6 (0.8) (0.7) Effective income tax rate 30.1% 19.8% 16.1% The components of the provision (benefit) for income taxes are as follows (in thousands): Year Ended April 30, 2018 2017 2016 Current: Federal $6,363 $3,745 $5,388 State 925 215 406 Foreign — — — 7,288 3,960 5,794 Deferred: Federal 3,272 (66) (2,814) State (331) 279 3 Foreign (52) (35) — 2,889 178 (2,811) Total income tax expense (benefit) $10,177 $4,138 $2,983 89 Table of ContentsSignificant components of the Company’s deferred income tax assets and liabilities are as follows (in thousands): April 30, 2018 2017 Deferred income tax assets: Accrued expenses $5,771 $7,074 Allowances, reserves, and other 2,100 1,801 Unrealized loss on securities 25 74 Net operating loss and credit carry-forwards 12,361 11,854 Intangibles basis 94 43 Total deferred income tax assets 20,351 20,846 Deferred income tax liabilities: Other — (29) Fixed asset basis (682) (428) Total deferred income tax liabilities (682) (457) Valuation allowance (8,568) (5,416) Net deferred tax assets $11,101 $14,973 At April 30, 2018 and 2017 the Company recorded a valuation allowance of $8,568,000 and $5,416,000,respectively, against state R&D credits as the Company is currently generating more tax credits than it will utilize in futureyears and against foreign net operating losses that are not more likely than not to be utilized. The valuation allowanceincreased by $3,152,000 and $905,000 for April 30, 2018 and April 30, 2017, respectively. At April 30, 2018 the Company had state credit carryforwards of $20,760,000 that do not expire and federal taxcredit carryforwards of $5,098,000 that expire in 2035. At April 30, 2018, the Company had multiple state net operating loss carryforwards and had foreign losses ofapproximately $10,000 and $1,125,000, respectively. The state net operating loss carryforwards begin to expire in 2023.$1,051,000 of the foreign loss carryforwards begin to expire in 2019 with the remainder having an indefinite carryforward. At April 30, 2018 and 2017, the Company had approximately $11,170,000 and $9,856,000, respectively, ofunrecognized tax benefits all of which would impact the Company’s effective tax rate if recognized. The Company estimatesthat $411,000 of its unrecognized tax benefits will decrease in the next twelve months due to statute of limitation expiration. The following table summarizes the activity related to the Company’s gross unrecognized tax benefits for the yearsended April 30, 2018 and 2017 (in thousands): April 30, 2018 2017 Balance as of May 1 $9,856 $9,905 Increases related to prior year tax positions 228 3 Decreases related to prior year tax positions — (26) Increases related to current year tax positions 1,347 901 Decreases related to lapsing of statute of limitations (261) (927) Balance as of April 30, $11,170 $9,856 90 Table of ContentsThe Company records interest and penalties on uncertain tax positions to income tax expense. As of April 30, 2018and 2017, the Company had accrued approximately $16,000 and $16,000, respectively, of interest and penalties related touncertain tax positions. The Company is currently under audit by various state jurisdictions but does not anticipate anymaterial adjustments from these examinations. The tax years 2015 to 2017 remain open to examination by the IRS for federalincome taxes. The tax years 2011 to 2017 remain open for major state taxing jurisdictions. During the fiscal year ended April 30, 2018, the Company recorded a reversal of a $261,000 reserve, including therelated interest, for uncertain tax positions due to the lapse of prior year statue. On December 22, 2017, the Tax Act was signed into law making significant changes to the Internal Revenue Code.Changes include, but are not limited to, a corporate tax rate decrease from 35% to 21% effective for tax years beginning afterDecember 31, 2017, repeal of the corporate alternative minimum tax, repeal of the deduction for domestic productionactivities, and limitation on the deductibility of certain executive compensation. In accordance with GAAP as determined by ASC 740, Income Taxes, the Company is required to record the effectsof tax law changes in the period enacted. As the Company has a April 30 fiscal year end, its U.S. federal corporate income taxrate will be blended in fiscal 2018, resulting in a statutory federal rate of approximately 30.4% (8 months at 35% and 4months at 21%), and will be 21% for subsequent fiscal years. The Company remeasured its existing deferred tax assets andliabilities at the rate the Company expects to be in effect when those deferred taxes will be realized (30.4% if in 2018 or 21%thereafter) and recorded a one-time deferred tax expense of approximately $3,400,000 for fiscal year April 30, 2018. The Company followed the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”), which providesadditional clarification regarding the application of ASC Topic 740 in situations where the Company does not have thenecessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income taxeffects of the Tax Act for the reporting period in which the Act was enacted. SAB 118 provides for a measurement periodbeginning in the reporting period that includes the Act’s enactment date and ending when the Company has obtained,prepared, and analyzed the information needed in order to complete the accounting requirements but in no circumstancesshould the measurement period extend beyond one year from the enactment date. The $3,400,000 expense for the one-time deferred tax remeasurement is a provisional estimate of the impact of theTax Act. In addition, the Company has estimated that it will not have an income tax payable as a result of the one-timedeemed repatriation transition tax on unrepatriated foreign earnings. These amounts are considered provisional because theyuse estimates for which final tax computations or returns have not been completed and because estimated amounts may beimpacted by future regulatory and accounting guidance if and when issued. The Company’s financial statements do not reflect the impact of certain aspects of the Tax Act as the Company didnot have the necessary information available, prepared, or analyzed (including computations), or because sufficient guidancehas not been issued in order to determine an actual or provisional amount for the tax effects of the Tax Act. To date, theseaspects include the new state income tax conformity to the Tax Act which the Company is continuing to evaluate theprovisions and as a result, has not included an estimate of the tax expense or benefit related to these items in the Company’sconsolidated financial statements for the fiscal year ended April 30, 2018. 91 Table of Contents15. Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss are as follows (in thousands): TotalAccumulated TotalAccumulated Other Other Available-for-Sale Foreign Currency Comprehensive Comprehensive Securities TranslationAdjustments Loss Loss Total accumulated other comprehensive loss balance as ofApril 30, 2017 $(127) $ — $(127) $(127) Changes in foreign currency translation adjustments,net of $0 taxes — 36 36 36 Unrealized gains, net of $25 of taxes 70 — 70 70 Total accumulated other comprehensive loss balance as ofApril 30, 2018 $(57) $36 $(21) $(21) 16. Changes in Accounting Estimates During the years ended April 30, 2018, 2017 and 2016, the Company revised its estimates at completion of variousfixed-price contracts which resulted in cumulative catch up adjustments during the year in which the change in estimateoccurred. The change in estimate was a result of the Company changing the total costs required to complete the contracts dueto having more accurate cost information as work progressed in subsequent periods on the various contracts. The changes inestimates resulted in cumulative catch-up adjustments to income from continuing operations for the years ended April 30,2018, 2017 and 2016 that were not material. Refer also to Note 9 – Warranty Reserves for further details of change in warranty estimates during the fiscal yearended April 30, 2017. 17. Related Party Transactions Pursuant to a consulting agreement, the Company paid a board member approximately $48,000, $80,000 and$96,000 for fiscal years ended April 30, 2018, 2017 and 2016, respectively, for consulting services independent of his boardservice. Concurrent with the formation of HAPSMobile, the Company executed a Design and Development Agreement (the“DDA”) with HAPSMobile. Under the DDA, the Company will use its best efforts, up to a maximum net value of$75,789,000, to design and build prototype solar powered high altitude aircraft and ground control stations for HAPSMobileand 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 andSoftBank of $29,597,000 for the year ended April 30, 2018. At April 30, 2018, the Company had unbilled related partyreceivables from HAPSMobile of $3,145,000 recorded in “Unbilled receivables and retentions” on the consolidated balancesheet. During the year ended April 30, 2018, the Company purchased a 5% stake in accordance with the JVA. Refer to Note 8– Equity Method Investments for further details. 92 Table of Contents18. Commitments and Contingencies Commitments The Company’s operations are conducted in leased facilities. The Company finances the purchase of certain ITequipment and perpetual software licenses under capital lease arrangements. Following is a summary of non‑cancelableoperating and capital lease commitments: April 30, 2018 (In thousands) Operatingleases Capitalleases2019 $4,940$1612020 4,774 —2021 3,872 —2022 3,421 —2023 2,278 —Thereafter 1,914 — $21,199 161Less: amounts representing interest —Present value of capital lease obligations 161Less: Current portion (161)Long-term portion of capital lease obligations $ — Rental expense under operating leases was approximately $4,011,000, $3,849,000 and $4,077,000 for the yearsended April 30, 2018, 2017 and 2016, respectively. Not included in the table above is an additional capital contribution of 209,500,000 yen (approximately$1,900,000) in or around January 2019 required under the Company’s HAPSMobile Inc. Joint Venture Agreement – refer tofootnote 8 – Investments in Companies Accounted for Using the Equity Method. Contingencies The Company is subject to legal proceedings and claims which arise out of the ordinary course of its business.Although adverse decisions or settlements may occur, the Company, in consultation with legal counsel, believes that thefinal disposition of such matters will not have a material adverse effect on the consolidated financial position, results ofoperations or cash flows of the Company. At April 30, 2018 and 2017, the Company had outstanding letters of credit totaling $6,389,000 and $1,935,000,respectively. Contract Cost Audits Payments to the Company on government cost reimbursable contracts are based on provisional, or estimatedindirect rates, which are subject to an annual audit by the Defense Contract Audit Agency (“DCAA”). The cost audits resultin the negotiation and determination of the final indirect cost rates that the Company may use for the period(s) audited. Thefinal rates, if different from the provisional rates, may create an additional receivable or liability for the Company. For example, during the course of its audits, the DCAA may question the Company’s incurred costs, and if theDCAA believes the Company has accounted for such costs in a manner inconsistent with the requirements under FederalAcquisition Regulations, the DCAA auditor may recommend to the Company’s administrative contracting officer to disallowsuch 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 materialdisallowances for incurred costs in the future. 93 Table of ContentsThe Company’s revenue recognition policy calls for revenue recognized on all cost reimbursable governmentcontracts to be recorded at actual rates unless collectability is not reasonably assured. During the fiscal year ended April 30,2017, the Company settled rates for its incurred cost claims with the DCAA for fiscal years 2011 through 2014 withoutpayment of any consideration. At April 30, 2018, the Company had $77,000 reserved for incurred cost claim audits. At April30, 2017, the Company had no reserves for incurred cost claim audits. 19. Business Acquisitions On February 1, 2017, the Company completed the acquisition of 36% of the common shares of Altoy for cashconsideration of $625,000, which increased its interest from 49% to 85% and provided the Company with control overAltoy. As a result, Altoy became a consolidated subsidiary of the Company on the date of the acquisition. Altoy aims tomarket and distribute small UAS in Turkey. The Company previously accounted for its 49% interest in Altoy as an equitymethod investment. As a result of the acquisition, the Company is expected to expand the sales of its small UAS and relatedservices in Turkey.The following table summarizes the consideration transferred to acquire Altoy and the amounts of identified assetsacquired and liabilities assumed at the acquisition date, as well as the fair value of the noncontrolling interest in Altoy at theacquisition date (in thousands): Customer relationships $1,600 Goodwill 122 Trademark and trade names 60 Deferred tax liability (332) Other assets and liabilities assumed 286 Total net identified assets acquired $1,736 Fair value of consideration transferred: Cash $625 Fair value of the Company's investment in Altoy prior to the acquisition 851 Fair value of the noncontrolling interest in Altoy 260 Total $1,736 As a result of the Company obtaining control over Altoy, the Company’s previously held 49% interest wasremeasured to fair value, resulting in a gain of $584,000 which has been recognized in “other income (loss), net” on theconsolidated statement of income. The fair value of the noncontrolling interest of $260,000 and the fair value of the previously held equity interest of$851,000 in Altoy, immediately prior to the acquisition, were estimated by applying an income approach. These fair valuemeasurements of the noncontrolling interest and the previously held equity interest are based on significant inputs notobservable in the market, and thus represent Level 3 measurements. The goodwill is attributable to the workforce of Altoy and expected future customers in the Turkeymarket. Goodwill is not tax deductible for tax purposes. All of the goodwill was assigned to the Company’s UAS segment. The Company tests identifiable intangible assets and goodwill for impairment in the fourth quarter of each fiscalyear unless there are interim indicators that suggest that it is more likely than not that either the identifiable intangible assetsor goodwill may be impaired. Due to the current political situation within Turkey and the increased uncertainty in therelations between the U.S. and Turkey, the Company significantly lowered its cash flow expectations for its Altoy operations.As a result of the decline in the Company’s cash flow forecast, the Company performed an interim assessment of impairmentof Altoy’s long-lived assets, excluding goodwill during the three months ended October 28,94 Table of Contents2017. Based on the analysis, the Company determined that the fair value of Altoy had declined below its carrying value,excluding goodwill. As a result, the Company performed additional analysis to determine the amount of the impairment lossand recorded an impairment loss totaling $899,000 during the three months ended October 28, 2017, which is included inselling, general and administrative expense on the consolidated statements of operations. The fair value of the Altoy assetgroup was determined based on a discounted cash flow model reflective of the revised cash flow estimates. Supplemental Pro Forma Information (unaudited) Altoy contributed revenues of $0 and a net loss of $122,000 to the Company for the period from February 1, 2017 toApril 30, 2017. The following unaudited pro forma summary presents consolidated information of the Company as if thebusiness combination had occurred on May 1, 2015 (in thousands): Fiscal year ended April 30, 2017 2016 Revenue $229,287 $233,941 Net income from continuing operations $15,808 $15,595 Net income attributable to AeroVironment $15,888 $15,666 The Company did not have any material, nonrecurring pro forma adjustments directly attributable to the businesscombination included in the reported pro forma revenue and earnings. These pro forma amounts have been calculated after applying the Company’s accounting policies and adjusting theresults of Altoy to reflect the additional amortization that would have been charged assuming the fair value adjustments tointangible assets had been applied from May 1, 2015, with the consequential tax effects. The Company incurred approximately $74,000 of acquisition-related costs. These expenses are included in selling,general and administrative expense on the Company’s consolidated income statement for the fiscal year ended April 30,2017 and are reflected in pro forma net income for the fiscal year ended April 30, 2016, in the table above. The unaudited pro forma supplemental information is based on estimates and assumptions which the Companybelieves are reasonable and are not necessarily indicative of the results that have been realized had the acquisitions beenconsolidated in the tables above as of May 1, 2015. 20. Geographic Information Sales to non‑U.S. customers accounted for 46%, 37% and 29% of revenue for each of the fiscal years ended April30, 2018, 2017 and 2016, respectively. 21. Subsequent Events In May 2018 the Company entered into a settlement agreement to dismiss its claims against MicaSense Inc. andformer AeroVironment employees, Gabriel Torres, Justin McAllister, and Jeff McBride. The terms and amount of thesettlement agreement are confidential. The settlement has not been recorded in the Company’s consolidated financialstatements as the amount was not realized or realizable as of April 30, 2018. 22. Quarterly Results of Operations (Unaudited) The following tables present selected unaudited consolidated financial data for each of the eight quarters in thetwo‑year period ended April 30, 2018. In the Company’s opinion, this unaudited information has been prepared on the samebasis as the audited information and includes all adjustments (consisting of only normal recurring adjustments) necessary fora fair statement of the financial information for the period presented. The Company’s fiscal year ends on95 Table of ContentsApril 30. Due to the fixed year end date of April 30, the first and fourth quarters each consist of approximately 13 weeks. Thesecond and third quarters each consist of exactly 13 weeks. The first three quarters end on a Saturday. Three Months Ended July 29, 2017 October 28,2017 January 27,2018 April 30,2018 (In thousands except per share data) Year ended April 30, 2018 Revenue $36,250 $63,988 $53,433 $117,381 Gross margin $10,095 $28,693 $17,920 $52,180 Net (loss) income from attributable to AeroVironment fromcontinuing operations $(3,364) $6,689(1)$(960)(2)$20,211 Net (loss) income per share attributable to AeroVironment fromcontinuing operations—basic(5) $(0.14) $0.29 $(0.05) $0.86 Net (loss) income per share attributable to AeroVironment fromcontinuing operations—diluted(5) $(0.14) $0.28 $(0.05) $0.85 Three Months Ended July 30, October 29, January 28, April 30, 2016 2016 2017 2017 (In thousands except per share data) Year ended April 30, 2017 Revenue $30,496 $40,829 $41,895 $115,720 Gross margin $5,905 $15,041 $16,797 $57,442 Net (loss) income from attributable to AeroVironment fromcontinuing operations $(8,381)(3)$(2,603) $(852) $28,469(4)Net (loss) income per share attributable to AeroVironment fromcontinuing operations—basic(5) $(0.37) $(0.11) $(0.03) $1.23 Net (loss) income per share attributable to AeroVironment fromcontinuing operations—diluted(5) $(0.37) $(0.11) $(0.03) $1.21 (1)Includes an impairment loss of $1.0 million related to the Company’s intangible assets and goodwill acquired in theacquisition of a controlling interest in the Company’s Turkish Joint Venture, Altoy, recorded to selling, general andadministrative expense in the consolidated statement of operations.(2)Includes a one-time expense of $3.1 million resulting from the remeasurement of deferred tax assets and liabilitiesrelated to the Tax Cut and Jobs Act.(3)Includes the reversal of a $1.0 million reserve, including the related interest, for uncertain tax positions due to thesettlement of prior fiscal year tax audits.(4)Includes a gain of $0.6 million related to the acquisition of a controlling interest in our Turkish Joint Venture, Altoy,which was recorded to other income (expense), net in the consolidated statement of operations.(5)Earnings per share is computed independently for each of the quarters presented. The sum of the quarterly earnings pershare may not equal the total earnings per share computed for the year due to rounding. 96 Table of ContentsSUPPLEMENTARY DATA SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS Additions Balance at Charged to Charged to Balance at Beginning Costs and Other End of Description of Period Expenses Accounts Deductions Period (In thousands) Allowance for doubtful accounts for the year ended April 30: 2016 $224 $158 $— $(326) $56 2017 $56 $56 $ — $(8) $104 2018 $104 $976 $ — $ — $1,080 Warranty reserve for the year ended April 30: 2016 $1,687 $3,589 $(424) $(1,758) $3,094 2017 $3,094 $1,838 $ — $(2,985) $1,947 2018 $1,947 $1,884 $ — $(1,741) $2,090 Reserve for inventory excess and obsolescence for the yearended April 30: 2016 $1,826 $2,762 $— $(2,046) $2,542 2017 $2,542 $1,115 $ — $(901) $2,756 2018 $2,756 $2,758 $ — $(1,561) $3,953 Reserve for self-insured medical claims for the year endedApril 30: 2016 $1,053 $7,668 $— $(7,742) $979 2017 $979 $7,037 $ — $(6,883) $1,133 2018 $1,133 $9,100 $ — $(9,230) $1,003 97 Table of Contents Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. Not applicable. Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures We maintain disclosure controls and procedures that are designed to ensure that information required to bedisclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified inthe SEC’s rules and forms, and that such information is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding requireddisclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls andprocedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desiredcontrol objectives, and management is required to apply its judgment in evaluating the cost‑benefit relationship of possiblecontrols and procedures. As required by Rule 13a‑15(b) under the Exchange Act, we have carried out an evaluation, underthe supervision and with the participation of our management, including our Chief Executive Officer and our Chief FinancialOfficer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing,our Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, ourdisclosure controls and procedures were effective and were operating at a reasonable level. Management’s Report on Internal Control Over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting.Internal control over financial reporting is defined in Rules 13a‑15(f) and 15d‑15(f) promulgated under the Exchange Act asa process designed by, or under the supervision of, our principal executive and principal financial officers and effected byour board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accountingprinciples and includes those policies and procedures that: ·Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions anddispositions of the assets of the Company; ·Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, and that receipts and expenditures ofthe Company are being made only in accordance with authorizations of management and directors of theCompany; and ·Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use ordisposition of the Company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detectmisstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures maydeteriorate. Under the supervision and with the participation of management, including our principal executive and financialofficers, we assessed our internal control over financial reporting as of April 30, 2018, based on criteria for effective internalcontrol over financial reporting established in Internal Control—Integrated Framework, issued by the Committee ofSponsoring Organizations of the Treadway Commission (2013 framework) (COSO). Based on this assessment, managementconcluded that the Company maintained effective internal control over financial reporting as of April 30, 2018 based on thespecified criteria. 98 Table of ContentsThe effectiveness of our internal control over financial reporting as of April 30, 2018 has been audited by Ernst &Young LLP, an independent registered public accounting firm, as stated in their report which is included herein. Changes in Internal Control over Financial Reporting There were no changes in our internal control over financial reporting or in other factors identified in connectionwith the evaluation required by paragraph (d) of Exchange Act Rules 13a‑15 or 15d‑15 that occurred during the quarterended April 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control overfinancial reporting. Item 9B. Other Information. None. 99 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of AeroVironment, Inc. and subsidiaries Opinion on Internal Control over Financial ReportingWe have audited AeroVironment, Inc. and subsidiaries’ internal control over financial reporting as of April 30, 2018, basedon criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations ofthe Treadway Commission (2013 framework) (the COSO criteria). In our opinion, AeroVironment, Inc. and subsidiaries (theCompany) maintained, in all material respects, effective internal control over financial reporting as of April 30, 2018, basedon the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)(PCAOB), the consolidated balance sheets of the Company as of April 30, 2018 and 2017, the related consolidatedstatements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the periodended April 30, 2018, and the related notes and financial statement schedule listed in the index at Item 15(a) and our reportdated June 26, 2018 expressed an unqualified opinion thereon. Basis for OpinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting including in the accompanying Management’sReport on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internalcontrol over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and arerequired to be independent with respect to the Company in accordance with the U.S. federal securities laws and theapplicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and performthe audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained inall material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a materialweakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk,and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides areasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial ReportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding thereliability of financial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes those policies andprocedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded asnecessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and thatreceipts and expenditures of the company are being made only in accordance with authorizations of management anddirectors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. 100 Table of ContentsBecause of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequatebecause of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLPLos Angeles, CaliforniaJune 26, 2018 101 Table of Contents PART III Item 10. Directors, Executive Officers, and Corporate Governance. Certain information required by Item 401 and Item 405 of Regulation S‑K will be included in the definitive proxystatement for our 2017 Annual Meeting of Stockholders, which will be filed no later than 120 days after April 30, 2018, andthat information is incorporated by reference herein. Codes of Ethics We have adopted a Code of Business Conduct and Ethics, or Code of Conduct. The Code of Conduct is posted onour website, http://investor.avinc.com. We intend to disclose on our website any amendments to, or waivers of, the Code ofConduct covering our Chief Executive Officer, Chief Financial Officer and/or Controller promptly following the date of suchamendments or waivers. A copy of the Code of Conduct may be obtained upon request, without charge, by contacting ourSecretary at (626) 357‑9983 or by writing to us at AeroVironment, Inc., Attn: Secretary, 800 Royal Oaks Drive, Suite 210,Monrovia, California 91016. The information contained on or connected to our website is not incorporated by reference intothis Annual Report and should not be considered part of this or any reported filed with the SEC. No family relationships exist among any of our executive officers or directors. There have been no material changes to the procedures by which security holders may recommend nominees to ourboard of directors. The information required by Item 407(d)(4) and (5) of Regulation S‑K will be included in the definitive proxystatement for our 2018 Annual Meeting of Stockholders, and that information is incorporated by reference herein. Item 11. Executive Compensation. The information required by Item 402 and Item 407(e)(4) and (5) of Regulation S‑K will be included in thedefinitive proxy statement for our 2018 Annual Meeting of Stockholders, and that information is incorporated by referenceherein. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by Item 201(d) and Item 403 of Regulation S‑K will be included in the definitive proxystatement for our 2018 Annual Meeting of Stockholders, and that information is incorporated by reference herein. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by Item 404 and Item 407(a) of Regulation S‑K will be included in the definitive proxystatement for our 2018 Annual Meeting of Stockholders, and that information is incorporated by reference herein. Item 14. Principal Accounting Fees and Services. The information required by Item 14 of Form 10-K will be included in the definitive proxy statement for our 2018Annual Meeting of Stockholders, and that information is incorporated by reference herein. 102 Table of Contents PART IV Item 15. Exhibits, Financial Statement Schedules. (a)The following are filed as part of this Annual Report: 1. Financial Statements The following consolidated financial statements are included in Item 8: ·Report of Independent Registered Public Accounting Firm ·Consolidated Balance Sheets at April 30, 2018 and 2017 ·Consolidated Statements of Income for the Years Ended April 30, 2018, 2017 and 2016 ·Consolidated Statements of Comprehensive Income for the Years Ended April 30, 2018, 2017 and 2016 ·Consolidated Statements of Stockholders’ Equity for the Years Ended April 30, 2018, 2017 and 2016 ·Consolidated Statements of Cash Flows for the Years Ended April 30, 2018, 2017 and 2016 ·Notes to Consolidated Financial Statements 2. Financial Statement Schedules The following Schedule is included in Item 8: ·Schedule II—Valuation and Qualifying Accounts All other schedules have been omitted since the required information is not present, or not present in amountssufficient to require submission of the schedule, or because the information required is included in the consolidated financialstatements or the Notes thereto. 3. Exhibits See Item 15(b) of this report below. (b)Exhibits ExhibitNumber Exhibit3.1(1) Amended and Restated Certificate of Incorporation of AeroVironment, Inc.3.3 (2) Third Amended and Restated Bylaws of AeroVironment, Inc.4.1(3) Form of AeroVironment, Inc.’s Common Stock Certificate10.1#(4) Form of Director and Executive Officer Indemnification Agreement10.2#(3) AeroVironment, Inc. Nonqualified Stock Option Plan10.3#(3) Form of Nonqualified Stock Option Agreement pursuant to the AeroVironment, Inc. Nonqualified StockOption Plan10.4#(3) AeroVironment, Inc. Directors’ Nonqualified Stock Option Plan10.5#(3) Form of Directors’ Nonqualified Stock Option Agreement pursuant to the AeroVironment, Inc. Directors’Nonqualified Stock Option Plan10.6#(3) AeroVironment, Inc. 2002 Equity Incentive Plan10.7#(3) Form of AeroVironment, Inc. 2002 Equity Incentive Plan Stock Option Agreement103 Table of ContentsExhibitNumber Exhibit10.8#(3) AeroVironment, Inc. 2006 Equity Incentive Plan10.9#(5) AeroVironment, Inc. 2006 Equity Incentive Plan, as amended and restated effective September 29, 201110.10#(6) AeroVironment, Inc. 2006 Equity Incentive Plan, as amended and restated effective September 30, 201610.11#(3) Form of Stock Option Agreement pursuant to the AeroVironment, Inc. 2006 Equity Incentive Plan10.12#(3) Form of Performance Based Bonus Award pursuant to the AeroVironment, Inc. 2006 Equity Incentive Plan10.13#(7) Form of Long‑Term Compensation Award Grant Notice and Long‑Term Compensation Award Agreementpursuant to the AeroVironment, Inc. 2006 Equity Incentive Plan10.14#(2) Form of Restricted Stock Award Grant Notice and Restricted Stock Award Agreement pursuant to theAeroVironment, Inc. 2006 Equity Incentive Plan10.15#(6) Form of Performance Restricted Stock Unit Award Grant Notice and Performance Restricted Stock Unit AwardAgreement pursuant to the AeroVironment, Inc. 2006 Equity Incentive Plan10.16(8) Standard Industrial/Commercial Single‑Tenant Lease, dated February 12, 2007, between AeroVironment, Inc.and OMP Industrial Moreland, LLC, for the property located at 85 Moreland Road, Simi Valley, California,including the addendum thereto10.17(6) First Amendment to Lease Agreement dated October 10, 2011 and Second Amendment to Lease Agreementdated June 2, 2017 by and between AeroVironment, Inc. and Simi Valley-NCR, LLC for the property locatedat 85 Moreland Road, Simi Valley, California10.18(9) Standard Industrial/Commercial Single‑Tenant Lease, dated March 3, 2008, between AeroVironment, Inc. andHillside Associates III, LLC, for the property located at 900 Enchanted Way, Simi Valley, California,including the addendum thereto10.19(9) Standard Industrial/Commercial Single‑Tenant Lease, dated April 21, 2008, between AeroVironment, Inc. andHillside Associates II, LLC, for the property located at 994 Flower Glen Street, Simi Valley, California,including the addendum thereto10.20(10) First Amendment to Lease Agreement (900 Enchanted Way, Simi Valley, CA 93065) dated as of December 1,2013, by and between the Company and Hillside III LLC, and related agreements10.21(10) First Amendment to Lease Agreement (994 Flower Glen Street, Simi Valley, CA 93065) dated as ofDecember 1, 2013, by and between the Company and Hillside II LLC, and related agreements10.22(10) Lease Agreement (996 Flower Glen Street, Simi Valley, CA 93065) dated as of December 1, 2013, by andbetween the Company and Hillside II LLC, and related agreements10.23(11) Standard Multi-Tenant Office Lease — Gross, dated September 24, 2015, between AeroVironment, Inc. andMonrovia Technology Campus LLC for property at 800 Royal Oaks Dr. Monrovia, California, includingaddendums thereto10.24 Lease dated March 28, 2018 between AeroVironment, Inc. and Princeton Avenue Holdings, LLC for propertylocated at 14501 Princeton Avenue, Moorpark, California, including addendums thereto10.25#(3) Retiree Medical Plan10.26†(12) Award Contract, dated March 1, 2011, between AeroVironment, Inc. and United States Army ContractingCommand10.27†(13) Contract modification P00015 dated September 5, 2013 under the base contract with the US ArmyContracting Command—Redstone Arsenal (Missile) dated August 30, 201210.28†(14) Contract modification P00074 dated September 27, 2016 under the base contract with the US ArmyContracting Command — Redstone Arsenal (Missile) dated August 30, 201210.29(15) Consulting Agreement, dated February 5, 2015, between Jikun Kim and AeroVironment, Inc. 104 Table of ContentsExhibitNumber Exhibit10.30#(16) Offer Letter, dated June 15, 2015 from AeroVironment, Inc. to Raymond D. Cook10.31#(17) Form of Severance Protection Agreement dated as of December 10, 2015, by and between AeroVironment, Inc.and each non-CEO executive officer10.32(17) Form of Director Letter Agreement by and between AeroVironment, Inc. and each non-employee director10.33#(18) Separation Agreement by and between AeroVironment, Inc. and Cathleen Cline dated as of April 28, 201610.34(18) Consulting Agreement by and between AeroVironment, Inc. and Cathleen Cline dated as of April 28, 201610.35(19) Severance Agreement and General Release by and between AeroVironment, Inc. and Raymond Cook dated asof December 19, 201610.36(4) Severance Protection Agreement dated as of May 2, 2016, by and between AeroVironment, Inc. and WahidNawabi10.37#(6) Amended and Restated Severance Protection Agreement dated as of June 26, 2017, by and betweenAeroVironment, Inc. and Teresa Covington10.38(4) Consulting Agreement by and between AeroVironment, Inc. and Charles R. Holland executed as of March 7,201610.39(4) Task Order #FY16-001 to Consulting Agreement by and between AeroVironment, Inc. and Charles R. Hollandexecuted as of March 7, 201610.40 Amendment No. 1 dated November 28, 2016, Amendment No. 2 dated June 7, 2017, and Amendment No. 3dated April 23, 2018 to Standard Consulting Agreement and corresponding Task Orders by and betweenAeroVironment, Inc. and Charles R. Holland10.41#(20) Amended and Restated Severance Protection Agreement by and between AeroVironment, Inc. and MelissaBrown dated as of March 5, 201810.42†(20) Joint Venture Agreement by and between AeroVironment, Inc. and SoftBank Corp. dated as of December 1,201710.43†(20) Design and Development Agreement by and between AeroVironment, Inc. and HAPSMobile, Inc. dated as ofDecember 27, 201710.44†(20) Intellectual Property License Agreement by and among AeroVironment, Inc., SoftBank Corp. andHAPSMobile, Inc. dated as of December 27, 2017.21.1 Subsidiaries of AeroVironment, Inc.23.1 Consent of Ernst & Young LLP, independent registered public accounting firm24.1 Power of Attorney (incorporated by reference to the signature page of this Annual Report)31.1 Certification Pursuant to Rule 13a‑14(a) or Rule 15d‑14(a) of the Securities Exchange Act of 193431.2 Certification Pursuant to Rule 13a‑14(a) or Rule 15d‑14(a) of the Securities Exchange Act of 193432.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes‑OxleyAct of 2002101.INS XBRL Instance Document101.SCH XBRL Taxonomy Extension Schema Document101.CAL XBRL Taxonomy Calculation Linkbase Document101.DEF XBRL Taxonomy Extension Definition Linkbase Document101.LAB XBRL Taxonomy Label Linkbase Document101.PRE XBRL Taxonomy Presentation Linkbase Document(1)Incorporated by reference herein to the exhibits to the Company’s Quarterly Report on Form 10‑Q filed March 9,2007 (File No. 001‑33261). (2)Incorporated by reference herein to the exhibits to the Company’s Annual Report on Form 10-K filed July 1, 2015(File No. 001-33261). (3)Incorporated by reference herein to the exhibits to the Company’s Registration Statement on Form S‑1 (FileNo. 333‑137658). 105 Table of Contents(4)Incorporated by reference herein to the exhibits to the Company’s Annual Report on Form 10 K filed on June 29,2016 (File No. 001 33261).(5)Incorporated by reference to the exhibits to the Company’s Form 8‑K filed on October 5, 2011 (File No. 001‑33261).(6)Incorporated by reference herein to the exhibits to the Company’s Annual Report on Form 10-K filed June 28, 2017(File No. 001-33261). (7)Incorporated by reference herein to the exhibits to the Company’s Current Report on Form 8‑K filed July 28, 2010(File No. 001‑33261). (8)Incorporated by reference herein to the exhibits on the Company’s Annual Report on Form 10‑K filed June 29, 2007(File No. 001‑33261). (9)Incorporated by reference herein to the exhibits to the Company’s Annual Report on Form 10‑K filed June 26, 2008(File No. 001‑33261). (10)Incorporated by reference herein to the exhibits to the Company’s Quarterly Report on Form 10‑Q filed March 5,2014 (File No. 001‑33261). (11)Incorporated by reference herein to the exhibits to the Company's Quarterly Report on Form 10-Q filed December 9,2015 (File No. 001-33261). (12)Incorporated by reference herein to the exhibits to the Company’s Annual Report on Form 10‑K filed on June 21,2011 (File No. 001‑33261). (13)Incorporated by reference herein to the exhibits to the Company’s Quarterly Report on Form 10‑Q filedNovember 27, 2013 (File No. 001‑33261). (14)Incorporated by reference herein to the exhibits to the Company’s Quarterly Report on Form 10 Q filed December 7,2016 (File No. 001 33261). (15)Incorporated by reference herein to the exhibits to the Company’s Current Report on Form 8‑K filed February 5,2015 (File No. 001‑33261). (16)Incorporated by reference herein to the exhibits to the Company's Current Report on Form 8-K filed July 7, 2015(File No. 001-33261). (17)Incorporated by reference herein to the exhibits to the Company's Quarterly Report on Form 10-Q filed March 9,2016 (File No. 001-33261). (18)Incorporated by reference herein to the exhibits to the Company's Current Report on Form 8-K filed May 4, 2016(File No. 001-33261). (19)Incorporated by reference herein to the exhibits to the Company’s Current Report on Form 8-K filed December 20,2016 (File No. 001-33261). (20)Incorporated by reference herein to the exhibits to the Company’s Quarterly Report on Form 10-Q filed March 7,2018 (File No. 001-33261). †Confidential treatment has been granted for portions of this exhibit. 106 Table of Contents#Indicates management contract or compensatory plan. (c)Not applicable. 107 Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AEROVIRONMENT, INC. Date: June 26, 2018 /s/ Wahid Nawabi By:Wahid Nawabi Its:Chief Executive Officer and President (Principal Executive Officer) POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose signature appears below herebyconstitutes and appoints Wahid Nawabi and Teresa Covington, each of them acting individually, as his attorney‑in‑fact, eachwith full power of substitution, for him in any and all capacities, to sign any and all amendments to this Annual Report onForm 10‑K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securitiesand Exchange Commission, granting unto said attorneys‑ in‑fact, and each of them, full power and authority to do andperform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents andpurposes as he might or could do in person, hereby ratifying and confirming our signatures as they may be signed by our saidattorney‑in‑fact and any and all amendments to this Annual Report on Form 10‑K. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the Registrant and in the capacities and on the dates indicated. Name Title Date /s/ Wahid Nawabi President, Chief June 26, 2018Wahid Nawabi Executive Officer and Director (Principal Executive Officer) /s/ Teresa P. Covington Senior Vice President and June 26, 2018Teresa P. Covington Chief Financial Officer (Principal Financial and Accounting Officer) /s/ Timothy E. Conver Chairman June 26, 2018Timothy E. Conver /s/ Edward R. Muller Director June 26, 2018Edward R. Muller /s/ Arnold L. Fishman Director June 26, 2018Arnold L. Fishman /s/ Stephen F. Page Director June 26, 2018Stephen F. Page /s/ Charles R. Holland Director June 26, 2018Charles R. Holland /s/ Catharine Merigold Director June 26, 2018Catharine Merigold /s/ Charles Thomas Burbage Director June 26, 2018Charles Thomas Burbage 108Exhibit 10.24 Basic Lease Information14501 Princeton Avenue, Moorpark, CAThe following is a summary of lease information that is referred to in the Lease (as defined below). To the extent there is anyconflict between the provisions of this summary and any more specific provision of the Lease, such more specific provision shall control.LEASE EFFECTIVE DATE: March 28, 2018 LANDLORD: PRINCETON AVENUE HOLDINGS, LLC,a California limited liability company ADDRESS OF LANDLORD: c/o Nearon Enterprises101 Ygnacio Valley RoadSuite 450Walnut Creek, CA 94596With a copy to:CBRE8521 Fallbrook Avenue, Suite 150West Hills, CA 91304Attn: Property Manager TENANT: AEROVIRONMENT, INC.,a Delaware corporation ADDRESS OF TENANT: At the Premises With a copy to:AeroVironment, Inc.900 Innovators WaySimi Valley, CA 93065Attn: General Counsel GUARANTOR: None PREMISES: Suite 200, as depicted on Exhibit A-2 attached hereto, containing approximately 94,280square feet of floor area. BUILDING: 14501 Princeton Avenue, Moorpark, CA 93021 TERM: Approximately sixty three (63) months, commencing on the Commencement Date, subjectto extension in accordance with the Extension Option for one (1) thirty six (36) monthperiod. COMMENCEMENT DATE: Upon the Substantial Completion of Landlord’s Work. EXPIRATION DATE: The last day of the calendar month in which the day that is sixty three (63) months after theCommencement Date occurs.-i-AEROVIRONMENT14501 PRINCETON AVENUE BASE RENT: (i) For the period commencing on theCommencement Date (subject to Paragraph 5(d))through the day immediately preceding the first day ofthe calendar month in which the first (1st) annualanniversary of the Commencement Date occurs (the“1-Year Anniversary”); $70,710.00 (per month);$848,520.00 (per year); (ii) For the period commencing on the 1‑YearAnniversary through the day immediately precedingthe first day of the calendar month in which the second(2nd) annual anniversary of the Commencement Dateoccurs (the “2‑Year Anniversary”); $72,477.75 (per month);$869,733.00 (per year); (iii) For the period commencing on the 2‑YearAnniversary through the day immediately precedingthe first day of the calendar month in which the third(3rd) annual anniversary of the Commencement Dateoccurs (the “3‑Year Anniversary”); $74,289.69 (per month);$891,476.33 (per year); (iv) For the period commencing on the 3‑YearAnniversary through the day immediately precedingthe first day of the calendar month in which the fourth(4th) annual anniversary of the Commencement Dateoccurs (the “4‑Year Anniversary”); $76,164.94 (per month);$913,763.23 (per year); (v) For the period commencing on the 4‑YearAnniversary through the day immediately precedingthe first day of the calendar month in which the fifth(5th) annual anniversary of the Commencement Dateoccurs (the “5‑Year Anniversary”); $78,050.61 (per month);$936,607.31 (per year); (vi) For the period commencing on the 5‑YearAnniversary through the day immediately precedingthe last day of the sixty third (63rd) calendar month ofthe Term $80,001.87 (per month);$90,022.44 (per year); PERMITTED USE: Designing, engineering, testing and manufacturing of unmanned aircraft systems, andother related administrative activities as well as any and all other allowable industrialand/or office uses, subject to Paragraph 6 of the Lease. TENANT’S PERCENTAGE SHARE: 65.48% (based on a fraction, the numerator of which is the square footage of the Premises(approximately 94,280 square feet), and the denominator of which is the square footage ofthe Building (approximately 143,973 square feet)).-ii-AEROVIRONMENT14501 PRINCETON AVENUE SECURITY DEPOSIT: None. UNRESERVED PARKING SPACES A number equal to Tenant’s Percentage Share of parking stalls located in the CommonAreas adjacent to the Premises in a location to be agreed by Landlord and Tenant. LANDLORD’S BROKER: Lee & Associates LA North Ventura, Inc. TENANT’S BROKER: Cresa. ATTACHMENTS: Exhibit A-1Exhibit A-2Exhibit BExhibit CExhibit DExhibit D-1Exhibit D-2Exhibit ERider No. 1– ––––––– Site PlanPremises PlanOperating Expenses and TaxesRules And RegulationsWork LetterBase Landlord Work Space PlanFull Scope Space PlanCommencement LetterEarly Termination/Extension Option -iii-AEROVIRONMENT14501 PRINCETON AVENUE TABLE OF CONTENTS1.LEASE EFFECTIVE DATE AND PARTIES.12.PREMISES, COMMON AREAS AND PARKING.13.TERM.24.DELIVERY OF POSSESSION.25.RENT.36.USE.57.OPERATING EXPENSES.68.RULES AND REGULATIONS.79.ASSIGNMENT AND SUBLETTING.710.LIABILITY OF LANDLORD.811.MAINTENANCE AND REPAIRS.912.SERVICES.1013.ALTERATIONS.1014.INSURANCE, INDEMNIFICATION AND EXCULPATION.1215.DESTRUCTION.1416.ENTRY.1517.EVENTS OF DEFAULT.1518.TERMINATION UPON DEFAULT.1519.CONTINUATION AFTER DEFAULT.1620.OTHER RELIEF.1621.ATTORNEYS’ FEES.1622.NOTICES.1723.EMINENT DOMAIN.1724.LATE CHARGE/RETURNED CHECKS.1825.SECURITY DEPOSIT.1826.SIGNAGE.1827.ESTOPPEL CERTIFICATE.1828.SURRENDER.1829.HOLDING OVER.1930.SUBORDINATION.1931.INABILITY TO PERFORM.1932.MISCELLANEOUS.1933.BROKER.2134.ROOF EQUIPMENT.2135.EARLY TERMINATION.RIDER NO. 136.EXTENSION OPTION.RIDER NO. 1 -iv-AEROVIRONMENT14501 PRINCETON AVENUE 1. LEASE EFFECTIVE DATE AND PARTIES.This Lease (this “Lease”) is dated as of the Lease Effective Date provided in the Basic Lease Information, which shall be thedate upon which this Lease is fully executed by each of Landlord and Tenant. PRIOR TO THE DATE THIS LEASE IS EXECUTEDBY LANDLORD AND TENANT, THE TERMS OF THIS LEASE SHALL NOT BE BINDING ON LANDLORD OR TENANT AND,UNTIL SIGNED BY LANDLORD, THIS DOCUMENT SHALL BE CONSTRUED ONLY AS AN OFFER BY TENANT TO LEASETHE PREMISES. UNTIL SIGNED BY LANDLORD, LANDLORD SHALL HAVE NO OBLIGATION OF ANY KIND TO ANY OFTHE PARTIES INVOLVED IN MAKING THIS OFFER TO LEASE THE PREMISES.This Lease is made and entered into as of the Lease Effective Date provided in the Basic Lease Information by and betweenPrinceton Avenue Holdings, LLC, a California limited liability company (“Landlord”), and AeroVironment, Inc., a Delaware limitedliability company (“Tenant”).2. PREMISES, COMMON AREAS AND PARKING.(a) Landlord does hereby lease to Tenant, and Tenant does hereby lease from Landlord, for the Term (as defined below) and subject tothe covenants and conditions hereinafter set forth, to all of which Landlord and Tenant agree, those certain premises (“Premises”)identified in the Basic Lease Information and outlined on Exhibit A-2 attached to this Lease and hereby made a part hereof, and located inthe Building identified in the Basic Lease Information. The Premises, the Building, the Common Areas (defined below), the land uponwhich the same are located, along with all other buildings and improvements thereon or thereunder, are herein collectively referred to asthe “Project” and are depicted on the Site Plan attached as Exhibit A-1 to this Lease and hereby made a part hereof. Tenant shall have theright to use, in common with others (to the extent not otherwise restricted by this Lease), all areas and facilities inside or outside theBuilding and/or within the exterior boundary line of the Project that are provided and designated by Landlord from time to time for thegeneral non-exclusive use of Landlord, Tenant and other occupants of the Project, and their respective employees, suppliers, shippers,customers, contractors and invitees, including but not limited to the existing parking areas (to the extent not otherwise restricted by thisLease), loading and unloading areas, trash areas, roadways, sidewalks, walkways, ramps, driveways and landscaped areas (the “CommonAreas”). Landlord may add to, remove and/or eliminate Common Areas from time to time in its sole discretion, provided Tenant’s use ofand access to the Premises is not materially adversely affected and Tenant’s parking rights hereunder are not materially diminished. Theexterior walls of the Building and any space in the Premises and the ceiling plenum used for shafts, stacks, pipes, conduits, ducts, electricor other utilities, or other Building facilities, and the use thereof and access thereto through the Premises for the purposes of operation,maintenance and repairs, are reserved to Landlord.(b) The rentable square footage of the Premises and of the Building has been determined in accordance with BOMA’s StandardMethod of Measuring Floor Area in Office Buildings (ANSI/BOMA Z.65.1–1996), as modified by Landlord for uniform use in theBuilding. Tenant’s Percentage Share has been determined by taking the quotient arrived at by dividing the number of rentable square feetof the Premises provided in the Basic Lease Information by the number of the rentable square feet of the Building determined inaccordance with the BOMA Standard, and multiplying said quotient by 100. Tenant acknowledges that the rentable square footage underthe BOMA Standard includes a common area “load factor” added to the usable square footage of the Premises. The square footage figurescontained in this Lease shall be final and binding on the parties.(c) So long as no uncured Event of Default (as defined in Paragraph 17 below) has been declared hereunder and subject to the ProjectRules (as defined in Paragraph 8), Tenant shall be entitled to the non-exclusive use of a number of automobile parking spaces equal toTenant’s Percentage Share located in those portions of the Common Areas designated from time to time by Landlord for parking (the"Parking Facility"). Tenant shall not use more parking spaces than said number. Said parking spaces may be used for parking (provided,overnight parking is expressly precluded) of Tenant’s trucks, trailers and full-size passenger automobiles. Tenant shall not permit or allowany vehicles that belong to or are controlled by Tenant or Tenant's employees, suppliers, shippers, customers, contractors or invitees to beloaded, unloaded, or parked in areas other than those designated by Landlord for such activities. If Tenant permits or allows any of theprohibited activities described in this Lease or in any Project Rules then in effect, Landlord shall have the right, without notice, in additionto such other rights and remedies that it may have, to remove or tow away the vehicle involved and charge the cost to Tenant, which costshall be immediately payable by Tenant upon demand by Landlord. Neither Landlord nor any of Landlord’s employees, agents or1AEROVIRONMENT14501 PRINCETON AVENUE representatives shall have any liability or responsibility to Tenant or any other party parking in the Parking Facility for any loss or damagethat may be occasioned by or may arise out of such parking, including, without limitation, loss of property or damage to person or propertyfrom any cause whatsoever, other than to the extent arising from the gross negligence or willful misconduct of Landlord. Tenant, inconsideration of the parking privileges hereby conferred on Tenant, waives any and all liabilities against Landlord and any of Landlord’semployees, agents and representative, by reason of occurrences in the Parking Facility and the driveway access and entrances thereto, otherthan to the extent arising from the gross negligence or willful misconduct of Landlord or any of Landlord’s employees, agents orrepresentatives. From time to time, Tenant may perform testing activities for unmanned aircraft vehicles and components thereof in theparking lot, but shall not use parking spaces in excess of the amount allocated to Tenant in this Section 2(c). Tenant shall provideLandlord and other tenants with 2 business days’ prior written notice prior to any testing being performed in the parking lot and willminimize impacts to other tenants due to testing activity, and any such activity shall be subject to reasonable rules and restrictions as maybe required by Landlord, which rules and restrictions shall be mutually agreed upon by Landlord and Tenant prior any such testing.(d) Landlord shall have the right, in Landlord’s sole discretion, from time to time, to:(i) Make changes to the Common Areas, including, without limitation, changes in the location, size, shape andappearance thereof, including but not limited to the driveways entrances, parking spaces, parking areas loading and unloading areas,ingress, egress, direction of traffic, landscaped areas and walkways;(ii) Close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to thePremises remains available;(iii) Designate other land and improvements outside the boundaries of the Project to be a part of the Common Areas,provided that such other land and improvements have a reasonable and functional relationship to the Project;(iv) Add additional buildings and improvements to the Common Areas;(v) Use the Common Areas while engaged in making additional improvements, repairs or alterations to the Project,or any portion thereof; and(vi) Perform such other acts and make such other changes in, to or with respect to the Common Areas and Project asLandlord may, in the exercise of sound business judgment deem to be appropriate.3. TERM.(a) The term of this Lease (“Term”) shall be for the period identified in the Basic Lease Information. The Term shall commence on theCommencement Date, and shall end on the Expiration Date.(b) Landlord and Tenant each shall, promptly after the Commencement Date has been determined, execute and deliver to the other awritten statement in the form attached hereto as Exhibit E (the “Commencement Letter”), setting forth (i) the Commencement Date and theExpiration Date; and (ii) the other matters referenced in such Commencement Letter. The enforceability of this Lease shall not be affectedand the term of this Lease shall commence on the Commencement Date and end on the Expiration Date, whether or not theCommencement Letter is executed.4. DELIVERY OF POSSESSION.(a) Upon Substantial Completion of the Landlord’s Work as set forth in Exhibit D hereto, Landlord shall deliver possession of thePremises to Tenant, and Tenant shall accept the same, in its “AS IS” condition, subject to all recorded matters and governmentalregulations, and without any warranties of any kind, including without limitation, any warranty of condition, or compliance with law, orthat the Premises or any Building Systems (as defined in Paragraph 11(a) below) are suitable for Tenant’s use; provided, however, thatnotwithstanding the foregoing, Landlord shall warrant the Landlord’s Work for a period of six (6) months after the Commencement Date,and Landlord warrants that, upon delivery of possession of the Premises, that the Premises and restrooms are in compliance with the FederalAmericans with Disabilities Act and applicable municipal code requirements.2AEROVIRONMENT14501 PRINCETON AVENUE Tenant agrees that, except for the Landlord’s Work set forth in Exhibit D and as otherwise set forth in this Section 4(a), Landlord has noobligation and has made no promise to alter, remodel, improve, or repair the Premises or any part thereof or to repair, bring into compliancewith Applicable Laws, or improve any condition existing in the Premises as of the Commencement Date. Tenant agrees that neitherLandlord nor any of Landlord’s employees or agents has made any representation or warranty as to the present or future suitability of thePremises for the conduct of Tenant’s business therein. Any improvements or personal property located in the Premises are deliveredwithout any representation or warranty from Landlord, either express or implied, of any kind, including merchantability or suitability for aparticular purpose. Tenant acknowledges that the Premises has not undergone inspection by a Certified Access Specialist (CASp), asdefined in California Civil Code Section 55.52, and, except as set forth above in this Section 4(a), Landlord is not providing anyrepresentations or warranties regarding whether the Premises, the Common Area or any other portion of the Project meets all applicableconstruction-related accessibility standards. Landlord hereby notifies Tenant pursuant to California Civil Code Section 1938 that: “ACertified Access Specialist (CASp) can inspect the subject premises and determine whether the subject premises comply with all of theapplicable construction-related accessibility standards under state law. Although state law does not require a CASp inspection of thesubject premises, the commercial property owner or lessor may not prohibit the lessee or tenant from obtaining a CASp inspection of thesubject premises for the occupancy or potential occupancy of the lessee or tenant, if requested by the lessee or tenant. The parties shallmutually agree on the arrangements for the time and manner of the CASp inspection, the payment of the fee for the CASp inspection, andthe cost of making any repairs necessary to correct violations of construction-related accessibility standards within thepremises.” Landlord and Tenant hereby agree that notwithstanding anything in this Lease or California Civil Code Section 1938 to thecontrary, (i) Tenant may, at its option and at its sole cost, cause a CASp to inspect the Premises and determine whether the Premisescomplies with all of the applicable construction-related accessibility standards under state law, (ii) the parties shall mutually coordinateand reasonably approve of the timing of any such CASp inspection so that Landlord may, at its option, have a representative presentduring such inspection, and (iii) if Tenant elects to perform a CASp inspection: (A) Tenant shall ensure that such inspection performedshall be limited solely to the Premises and not the Common Areas, (B) such inspection shall be performed at Tenant’s sole cost andexpense, (C) if the CASp inspection finds the Premises (or any other property covered by the inspection) to be non-compliant, then Tenantshall remedy any violations found to exist at its sole cost and expense and in accordance with the terms and conditions of this Lease by nolater than the date that is sixty (60) days after the results of the CASp inspection are received regardless of whether or not Tenant terminatesthis Lease pursuant to any termination right set forth herein, if any, and (D) Tenant shall be responsible for obtaining and providing toLandlord a copy of the CASp compliance certificate confirming the correction of any such violations noted in the CASp inspection report.(b) In the event of the inability of Landlord to deliver possession of the Premises at the time for the commencement of the Term forany reason whatsoever, neither Landlord nor its agents shall be liable for any damage caused thereby, nor shall this Lease thereby becomevoid or voidable, nor shall the Term be in any way extended, but in such event Tenant shall not be liable for any rent until such time asLandlord can deliver possession. Landlord shall use commercially reasonable efforts to deliver to Tenant access to the warehouse portionof the Premises on or before April 30, 2018. Notwithstanding anything to the contrary in this Lease, if Landlord does not deliver access tothe warehouse portion of the Premises by April 30, 2018, and such delay is not attributable to force majeure or Tenant Delay (as defined inExhibit D, Section 4), then Tenant shall have the option to terminate this Lease by providing thirty (30) days prior written notice thereofto Landlord; provided that if Landlord delivers access to of the warehouse portion of the Premises prior to expiration of such thirty (30)day notice period, then such termination election shall be deemed rescinded and null, void and of no force or effect.5. RENT.(a) Tenant shall pay to Landlord the following amounts as rent for the Premises:(i) During the Term, commencing on the Commencement Date, Tenant shall pay to Landlord, as base monthly rent,the respective amounts of monthly rent specified in the Basic Lease Information (the “Base Rent”). If the Commencement Date shouldoccur on a day other than the first day of a calendar month, or if the Expiration Date should occur on a day other than the last day of acalendar month, then the Base Rent for such fractional month shall be prorated upon a daily basis based upon a thirty (30) daymonth. Base Rent is due and payable monthly, in advance, on the first day of each calendar month, except that Tenant shall pay toLandlord an amount equal to Seventy One Thousand Three Hundred Fifteen and 25/100 Dollars ($71,315.25), as prepaid Base Rent to beapplied (until exhausted) against the first obligation of Tenant to pay Base Rent under this Lease. If the3AEROVIRONMENT14501 PRINCETON AVENUE Commencement Date occurs on a day other than the first day of a calendar month, Base Rent for the period from the Commencement Datethrough the end of said calendar month shall be due and payable on the Commencement Date, and the Base Rent payable upon executionof this Lease shall be credited against the Base Rent due for the First Month as of the first day of the First Month.(ii) During each calendar year or part thereof, Tenant shall pay to Landlord, as additional monthly rent, Tenant’sPercentage Share (as provided in the Basic Lease Information) of all Operating Expenses (as defined in Exhibit B hereto) paid or incurredby Landlord in such calendar year or part thereof. Payments on account of Tenant’s Percentage Share of Operating Expenses, determinedin accordance with Paragraph 7(a), are due and payable monthly together with the payment of Base Rent.(iii) During each calendar year or part thereof, Tenant shall pay to Landlord, as additional monthly rent, Tenant’sPercentage Share of all Property Taxes (as defined in Exhibit B hereto) paid or incurred by Landlord in such calendar year or part thereof;provided, however, that Tenant shall not be required to pay any Property Taxes incurred or paid by Landlord during the Term that relate toa period prior to the Commencement Date. Payments on account of Tenant’s Percentage Share of Property Taxes, determined inaccordance with Paragraph 7(a), are due and payable monthly together with the payment of Base Rent.(iv) Throughout the Term, Tenant shall pay, as additional rent, all other amounts of money and charges required tobe paid by Tenant under this Lease, whether or not such amounts of money or charges are designated “additional rent.” As used in thisLease, “rent” shall mean and include all Base Rent, additional monthly rent as described in Paragraphs 5(a)(ii) and (iii) above, and anyother additional amount payable by Tenant in accordance with this Lease.(b) Rent shall be paid to Landlord in lawful money of the United States of America at the following address: Nearon PropertyManagement, 101 Ygnacio Valley Road, Suite 450, Walnut Creek, California 94596, Attn: Property Manager, or at such other place asLandlord may designate in writing in advance, free from all claims, demands, or set-offs against Landlord of any kind or characterwhatsoever.(c) Adjustments in Base Rent specified in the Basic Lease Information shall be determined on a Lease Year basis. As used herein, theterm “Lease Year” shall mean a twelve (12) calendar month period; provided, however that the first Lease Year of the Term shall, except asmay otherwise be expressly provided in this Lease, commence on the Commencement Date and run through the day immediatelypreceding the first day of the month in which the one year anniversary of the Commencement Date occurs, with each successive Lease Yearspecified in the Basic Lease Information to run for a period of the next succeeding twelve (12) months, other than and except for the finalLease Year specified in the Base Lease Information which shall commence as hereinabove provided and which shall run through theExpiration Date notwithstanding the actual number of days included in said period.(d) Notwithstanding the provisions of Paragraph 5(a) above, subject to the terms of this Paragraph 5(d), and conditioned on no Eventof Default (as defined in Paragraph 17 below) having been declared under this lease because of a monetary default by Tenant, Base Rentshall be entirely abated for each of the first (1st), second (2nd) and third (3rd) complete calendar months of the Term (the foregoing monthsbeing the “Rent Abatement Period”). For the avoidance of doubt, the collective amount of Base Rent that shall be abated under the firstsentence of this Paragraph 5(d) shall be Two Hundred Thirteen Thousand Nine Hundred Forty Five and 75/100 Dollars ($213,945.75) (the“Abated Rent”). Notwithstanding the foregoing, if an Event of Default shall at any time be declared under this Lease because of amonetary default by Tenant, then (i) the foregoing rent abatement shall be deemed revoked, prospectively, as to any period remaining inthe Rent Abatement Period, (ii) if Landlord elects to terminate this Lease as a result of such Event of Default then the unamortized portionof the Abated Rent (i.e., for purposes of such calculation, Abated Rent shall be amortized on a straight-line basis over the initial Term ofthe Lease and Tenant shall be credited with having paid the monthly amortized portion of Abated Rent on a monthly basis so that all suchAbated Rent shall be credited as paid in full on the expiration of the initial Term of this Lease) shall become immediately due and payableupon demand by Landlord, and without impairing any other rights and remedies of Landlord resulting from said Event of Default and (ii)notwithstanding anything to the contrary contained in the Basic Lease Information, the Base Rent payable by Tenant during the RentAbatement Period shall be deemed to be Seventy One Thousand Three Hundred Fifteen and 25/100 Dollars ($71,315.25 ) per month.4AEROVIRONMENT14501 PRINCETON AVENUE 6. USE.(a) The Premises shall be used for the purposes identified in the Basic Lease Information (except as limited by Paragraph 6(b) below),and, subject to the terms of this Lease, uses incidental thereto, and shall be used for no other purpose without the prior written consent ofLandlord, which consent, provided the same is consistent with the character of the Project, shall not be unreasonably withheld, but shallotherwise be in the sole discretion of Landlord. Notwithstanding anything in the foregoing to the contrary, in the case of public unrest, ageneral state of emergency or other circumstances rendering such action advisable in Landlord’s opinion, Landlord reserves the right toprevent access to the Building during the continuance of the same by such action as Landlord may deem appropriate, including closingdoors and such action shall not relieve Tenant of, or result in any abatement of, any obligations of Tenant under this Lease.(b) Tenant shall not use the Premises or permit anything to be done in or about the Premises or the Building or any other portion ofthe Project which will in any way conflict with any present or future law, statute, ordinance, code, rule, regulation, requirement, license,permit, certificate, judgment, decree, order or direction of any present or future governmental or quasi-governmental authority, agency,department, board, panel or court (singularly and collectively “Applicable Laws”). Landlord makes no representation or warranty that thePermitted Use as set forth in the Basic Lease Information is in compliance with Applicable Laws which govern the Premises or Project,including without limitation any zoning regulations. Tenant shall, at its expense, promptly comply with all Applicable Laws (including,without limitation, the Federal Americans with Disabilities Act (as it affects Tenant’s operations within the Premises), and with therequirements of any board of fire insurance underwriters or other similar bodies now or hereafter constituted, relating to or affecting thecondition, use or occupancy of the Premises. It is the intent of the parties to allocate to Tenant the cost of compliance of any and allApplicable Laws, regardless of the existing condition of the Premises, the cost of compliance or the foreseeability of the enactment orapplication of the Applicable Laws to the Premises. Notwithstanding the foregoing, Tenant shall not be required to make structuralchanges to the Premises unless they arise or are required because of or in connection with Tenant’s specific use of the Premises, or the typeof business conducted by Tenant in the Premises, or Tenant’s Alterations, or Tenant’s acts or omissions.(c) Supplementing the provisions of Paragraph 6(b) above, Tenant shall not use or permit the generation, possession, storage, use,transportation, or disposal of any Hazardous Substances in, on or from the Premises, other than the use of any ordinary and customarymaterials in minimal quantities reasonably required to be used by Tenant in the normal course of Tenant’s business as permitted under theterms of Paragraph 6(a) above, and so long as such use does not expose the Premises, the Building or any other part of the Project orneighboring properties to any meaningful risk of contamination or damage or expose Landlord to any liability therefor. The term“Hazardous Substances” as used in this Lease shall mean any product, substance, chemical, material or waste whose presence, nature,quantity and/or intensity of existence, use, manufacture, disposal, transportation, spill, release or effect, either by itself or in combinationwith other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, theenvironment or the Premises, or (ii) regulated or monitored by any federal, state or local governmental or quasi-governmental authority,agency, department, board, panel or court under any Applicable Laws. In addition to, and without limiting, the obligation of Tenant toindemnify Landlord pursuant to this Lease, Tenant shall, at its sole cost and expense, promptly take all actions required by any federal,state or local governmental agency or political subdivision, or that Landlord deems necessary for Landlord to make full economic use ofthe Premises or any portion of the Building, which requirements or necessity arises from the handling by Tenant or any employee,contractor, agent, or invitee of Hazardous Substances upon, about, above or beneath the Premises or any portion of the Building,including, without limitation, taking all actions necessary to restore the Premises or any portion of the Building to the condition existingprior to the introduction of Hazardous Substances, notwithstanding any less stringent standards or remediation allowable under ApplicableLaws. Tenant shall nevertheless obtain Landlord’s written approval prior to undertaking any actions required by this Section, whichapproval shall not be unreasonably withheld so long as such actions would not potentially have a material adverse long-term or short-termeffect on the Premises or any portion of the Building. Landlord shall have the right at all reasonable times to inspect the Premises and toconduct tests and investigations to determine whether Tenant is in compliance with the foregoing provisions, the costs of all suchinspections, tests and investigations to be borne by Landlord unless a noncompliance is discovered, in which event in addition to all otherremedies hereunder and at law, Tenant shall reimburse Landlord for the costs of all such inspections, tests and investigations.5AEROVIRONMENT14501 PRINCETON AVENUE 7. OPERATING EXPENSES.The additional monthly rent payable pursuant to Paragraphs 5(a)(ii) and (iii) hereof shall be calculated and paid in accordancewith the following procedures:(a) On or before the first day of each calendar year during the Term, or as soon thereafter as practicable, Landlord shall give Tenantwritten notice of Landlord’s reasonable estimate of the amounts payable by Tenant under Paragraphs 5(a)(ii) and (iii) hereof for the ensuingcalendar year. On or before the first day of each month during such ensuing calendar year, Tenant shall pay to Landlord one-twelfth(1/12) of such estimated amounts. If such notice is not given for any calendar year, Tenant shall continue to pay on the basis of the prioryear’s estimate until the month after such notice is given, and subsequent payments by Tenant shall be based on Landlord’s currentestimate, adjusted, as determined by Landlord, so that the subsequent monthly installments payable by Tenant hereunder through the endof the calendar year reimburse Landlord for all amounts payable by Tenant under Paragraphs 5(a)(ii) and (iii) hereof. If at any time itappears to Landlord that the amounts payable under Paragraphs 5(a)(ii) and (iii) hereof for the current calendar year will vary fromLandlord’s estimate, Landlord may, by giving written notice to Tenant, revise Landlord’s estimate for such year, and subsequent paymentsby Tenant for such year shall be based on such revised estimate.(b) As soon after such date as practicable, Landlord shall give Tenant a written statement of the amounts payable under Paragraphs5(a)(ii) and (iii) hereof for such calendar year certified by Landlord. If such statement shows an amount owing by Tenant that is less thanthe estimated payments for such calendar year previously made by Tenant, provided no Event of Default shall then exist under this Leaseor if this Lease has previously been terminated or the Term expired, no Event of Default shall have existed under this Lease as of saidtermination or expiration date, Landlord shall, at its option, either refund or credit the excess to Tenant within thirty (30) days of the dateof such statement. If such statement shows an amount owing by Tenant that is more than the estimated payments for such calendar yearpreviously made by Tenant, Tenant shall pay the deficiency to Landlord within thirty (30) days after delivery of such statement andpayment of such deficiency shall be a condition precedent to Tenant’s rights to inspect Landlord’s books pursuant to Paragraph 7(d)below. Failure by Landlord to give any notice or statement to Tenant under this Paragraph 7 shall not waive Landlord’s right to receive, orTenant’s obligation to pay, the amounts payable by Tenant under Paragraphs 5(a)(ii) and (iii) hereof.(c) If the Term ends on a day other than the last day of a calendar year, the amounts payable by Tenant under Paragraphs 5(a)(ii) and(iii) hereof applicable to the calendar year in which such Term ends shall be prorated according to the ratio which the number of days insuch calendar year to and including the end of the Term bears to three hundred sixty (360). Termination of this Lease shall not affect theobligation of Tenant pursuant to Paragraph 7(b) hereof to be performed after such termination.(d) So long as no uncured Event of Default has occurred hereunder, and not more often than once per calendar year, Tenant shall havethe right, at its sole cost and expense, to inspect the books of Landlord directly relating to Operating Expenses and Property Taxes, aftergiving a minimum of fifteen (15) day’s prior written notice to Landlord. Tenant shall conduct its inspection of Landlord’s books duringthe business hours of Landlord at Landlord’s office specified on the Basic Lease Information, for the purpose of verifying the informationin such statement. Tenant shall have no right to copy any of Landlord’s books or remove such books from the location maintained byLandlord. Tenant shall use a certified public accountant with reasonable experience in reviewing such commercial real property operatingexpenses and property taxes to conduct its inspection of Landlord’s books and in no event shall Tenant have the right to pay suchaccountant on a contingency fee basis. If Tenant shall have availed itself of its right to inspect the books and records, and whether or notTenant disputes the accuracy of the information set forth in such books and records, Tenant shall nevertheless pay the amount set forth inLandlord’s statement and continue to pay the amounts required by the provisions of Paragraph 7(b), pending resolution of saiddispute. Any default in the payment of such charges by Tenant shall be deemed an Event of Default (as hereinafter defined) under thisLease. If Tenant’s inspection of Landlord’s books reveals that the aggregate amount of Operating Expenses paid or incurred by Landlordin the calendar year being reviewed, plus the aggregate amount of Property Taxes paid or incurred by Landlord in the calendar year beingreviewed (collectively, the "Reviewed Expenses") are overstated, then Landlord shall within thirty (30) days after the completion of theinspection elect to either reimburse or credit Tenant for any and all overcharges; or if the Reviewed Expenses for any calendar year are notoverstated, then Tenant shall within thirty (30) days after the completion of the inspection pay to Landlord the amount (if any) by whichTenant has underpaid Tenant’s Share of Operating Expenses and/or Property Taxes for the6AEROVIRONMENT14501 PRINCETON AVENUE thcalendar year being reviewed. If Tenant’s inspection of Landlord’s books discloses a liability for a refund in excess of the greater of (i) fivepercent (5%) of Tenant’s Percentage Share of the Operating Expenses and Property Taxes previously reported, and (ii) Five Thousand and00/100 Dollars ($5,000.00), the reasonable cost of such inspection (not to exceed $5,000) shall be borne by Landlord; otherwise the cost ofsuch inspection shall be paid by Tenant. If Tenant fails to notify Landlord of Tenant’s election to inspect Landlord’s books within ninety(90) days of Tenant’s receipt of Landlord’s statement, Landlord’s statement shall be deemed final and binding on Tenant and Tenant shallhave no further right to inspect Landlord's books with respect to the Operating Expenses and Property Taxes for the calendar year for whichthe Landlord's statement pertains.8. RULES AND REGULATIONS.Tenant shall faithfully observe and comply with the Rules and Regulations attached to this Lease as Exhibit C and made a parthereof, and such other reasonable rules and regulations as Landlord may from time to time adopt for the safety, care and cleanliness of theProject, the facilities thereof, or the preservation of good order therein (collectively, the “Project Rules”). Landlord reserves the right fromtime to time in its sole discretion to make all reasonable additions and modifications to the Project Rules. Any additions andmodifications to the Project Rules shall be binding on Tenant when delivered to Tenant. Landlord shall not be liable to Tenant forviolation of any such Project Rules, or for the breach of any covenant or condition in any lease, by any other tenant in the Building. In theevent of any conflict between this Lease and the Project Rules, the terms of this Lease shall govern. A waiver by Landlord of any rule orregulation for any other tenant shall not constitute nor be deemed a waiver of the rule or regulation for this Tenant. Landlord shall enforcethe Project Rules against all tenants in a uniform and non-discriminatory manner.9. ASSIGNMENT AND SUBLETTING.(a) Tenant shall not assign, mortgage or hypothecate this Lease, or any interest therein, or permit the use of the Premises by any personor persons other than the Tenant, or sublet the Premises, or any part thereof, without the prior written consent of Landlord, which consent,subject to Landlord’s right of termination in accordance with Paragraph 9(b) below, shall not be unreasonably withheld. For purposes ofthis Paragraph 9, an assignment shall not include an assignment for security purposes, which shall only be permitted with the prior consentof Landlord in its sole and absolute discretion. Consent to any such assignment or sublease shall not operate, as a waiver of the necessityfor consent to any subsequent assignment or sublease, and the terms of such consent shall be binding upon any person holding by, underor through Tenant.(b) If Tenant desires to assign its interest in this Lease or to sublease all or any part of the Premises, Tenant shall notify Landlord inwriting at least thirty (30) days in advance of the proposed transaction. This notice shall be accompanied by: (i) a statement setting forththe name and business of the proposed assignee or subtenant; (ii) a copy of the proposed form of assignment or sublease (and any collateralagreements) setting forth all of the material terms and the financial details of the sublease or assignment; and (iii) financial statements andany other information concerning the proposed assignment or sublease which Landlord may reasonably request. If Tenant proposes toassign this Lease or sublet any portion of the Premises, Landlord shall have the right, in its sole and absolute discretion, to terminate thisLease in the event of a proposed assignment, or to terminate the effectiveness of this Lease with respect to any portion of the Premisesproposed by Tenant for sublease, on written notice to Tenant within thirty (30) days after receipt of Tenant’s notice and the informationdescribed above or the receipt of any additional information requested by Landlord. If Landlord elects to terminate this Lease, in the eventof a proposed assignment, or to terminate the effectiveness of this Lease with respect to any portion of the Premises proposed by Tenant forsublease, this Lease, or the effectiveness of this Lease with respect to any portion of the Premises proposed by Tenant for sublease, shallterminate as of the effective date of the proposed assignment or commencement of the term of the proposed sublease as set forth in Tenant’snotice, and Landlord shall have the right (but no obligation) to enter into a direct lease with the proposed assignee or subtenant. Tenantmay withdraw its request for Landlord’s consent at any time prior to, or within seven (7) days after, Landlord delivers a written notice oftermination, whereupon Landlord’s election to terminate shall be null and void.(c) If Landlord elects not to terminate this Lease, in the event of a proposed assignment, or elects not to terminate the effectiveness ofthis Lease with respect to any portion of the Premises proposed by Tenant for sublease, pursuant to Paragraph 9(b) above, Landlord shallnot unreasonably withhold its consent to an assignment or subletting.7AEROVIRONMENT14501 PRINCETON AVENUE (d) Each permitted assignee, transferee or subtenant, other than Landlord, shall assume and be deemed to have assumed this Lease andshall be and remain liable jointly and severally with Tenant for the payment of the rent and for the due performance or satisfaction of all ofthe provision, covenants, conditions and agreements herein contained on Tenant’s part to be performed or satisfied. Regardless ofLandlord’s consent, no subletting or assignment shall release or alter Tenant’s obligation or primary liability to pay the rent and performall other obligations under this Lease. No permitted assignment or sublease shall be binding on Landlord unless such assignee, subtenantor Tenant shall deliver to Landlord a counterpart of such assignment or sublease which contains a covenant of assumption by the assigneeor subtenant, but the failure or refusal of the assignee or subtenant to execute such instrument of assumption shall not release or dischargethe assignee or subtenant from its liability as set forth above.(e) Notwithstanding the foregoing provisions of this Section 9, the assignment or subletting by Tenant of all or any portion of thisLease or the Premises to (i) a parent or subsidiary of Tenant, or (ii) any person or entity which controls, is controlled by or under commoncontrol with Tenant, or (iii) any entity which purchases all or substantially all of the assets of Tenant, or (iv) any entity into which Tenantis merged or consolidated (all such persons or entities described in (i), (ii), (iii) and (iv) being sometimes hereinafter referred to as"Affiliates" or a “Permitted Transferee” and any such assignment or subletting being a “Permitted Transfer”) shall not be subject toLandlord's prior consent or right to terminate in Subsection 9(b) above or to receive any share of consideration pursuant to Subsection 9(f)below, provided that:(1) any such Affiliate was not formed as a subterfuge to avoid the obligations of this Section 21;(2) Tenant gives Landlord notice of any such assignment or sublease to an Affiliate at least ten (10) days prior to the effectivedate of such assignment or sublease;(3) the successor of Tenant and Tenant have as of the effective date of any such assignment or sublease a tangible net worthand net income, in the aggregate, computed in accordance with generally accepted accounting principles (but excluding goodwillas an asset), which is sufficient to meet the Tenant's obligations under this Lease;(4) any such assignment or sublease shall be subject and subordinate to all of the terms and provisions of this Lease, and suchassignee or sublessee shall assume, in a written document reasonably satisfactory to Landlord and delivered to Landlord upon orprior to the effective date of such assignment or sublease, all the obligations of Tenant under this Lease with respect to thePremises which is the subject of such Permitted Transfer (other than the amount of Base Rent or Operating Expenses payable byTenant with respect to a sublease); and(5) Tenant shall remain fully liable for all obligations to be performed by Tenant under this Lease.(f) Any notice by Tenant to Landlord pursuant to this Paragraph 9 of a proposed assignment or sublease shall be accompanied by apayment of One Thousand Dollars ($1,000) as a non-refundable fee for the processing of Tenant’s request for Landlord’s consent. Inaddition to said fee, Tenant shall reimburse Landlord for reasonable attorneys’ fees incurred by Landlord in connection with such reviewand the preparation of documents in connection therewith. Tenant shall pay to Landlord monthly on or before the first (1st) of each monthfifty percent (50%) of the rent or other consideration received from such assignee(s) or subtenant(s) over and above the concurrentunderlying rent payable by Tenant to Landlord for that portion of the Premises being assigned or sublet, and after deduction for theamortized portion of the reasonable expenses actually paid by Tenant to unrelated third parties for brokerage commissions, legal fees,tenant improvements to the Premises, or design fees incurred as a direct consequence of the assignment or sublease. Tenant shall furnishLandlord with a true signed copy of such assignment(s) or sublease(s) and any supplementary agreements or amendments thereto, withinfive (5) days after their respective execution.10. LIABILITY OF LANDLORD.It is expressly understood and agreed that the obligations of Landlord under this Lease shall be binding upon Landlord and itssuccessors and assigns and any future owner of the Building only with respect to events occurring during its and their respective ownershipof the Building. In the event of any conveyance of title to the Project (or any portion thereof in which the Building is located), then thegrantor or transferor shall be relieved of all liability with respect to Landlord’s obligations to be performed under this Lease after the dateof such conveyance.8AEROVIRONMENT14501 PRINCETON AVENUE In addition, Tenant agrees to look solely to Landlord’s interest in the Building and the rent and other income therefrom and any casualtyor condemnation proceeds actually received with respect to the Building for recovery of any judgment against Landlord arising inconnection with this Lease, it being agreed that neither Landlord nor any successor or assign of Landlord nor any future owner of theBuilding, nor any partner, shareholder, or officer of any of the foregoing shall ever be personally liable for any such judgment.11. MAINTENANCE AND REPAIRS.(a) Subject to reimbursement pursuant to Paragraph 7 hereof, (i) Landlord shall maintain and repair the Common Areas, the roof,structural and exterior elements of the Building and the mechanical, electrical, telecommunication, vertical transportation, plumbing, andother equipment, facilities and systems located within or serving the Premises or the Project (collectively, the “Building Systems”), andkeep such areas, elements and systems in good order and condition, consistent with the standards of other comparable buildings in thevicinity of the Building; and (ii) Landlord shall repair and maintain the heating, ventilating and air conditioning system (the “HVAC”)exclusively servicing the Premises, including contracting with a service company for the service and maintenance thereof. In the eventthat the HVAC requires replacement during the Term of this Lease, as determined by Landlord in its reasonable discretion, the cost of suchreplacement HVAC shall be borne solely by Tenant; provided, however, the cost of replacement HVAC will be amortized over its usefullife in accordance with generally accepted accounting principles and Tenant shall only be liable for that portion of the cost that is payableduring the Term of this Lease, as may be extended. Subject to Subsection 14(e) below, any damage in or to any such areas, elements orsystems caused by Tenant or any agent, officer, employee, contractor, licensee or invitee of Tenant shall be repaired by Landlord atTenant’s expense and Tenant shall pay to Landlord, upon billing by Landlord, as additional rent, the cost of such repairs incurred byLandlord.(b) Tenant shall, at all times during the Term of this Lease and at Tenant’s sole cost and expense, maintain and repair the Premises andevery part thereof and all equipment (including, without limitation, any kitchen equipment), and any fixtures and improvements therein,and keep all of the foregoing clean and in good working order and operating condition, ordinary wear and tear and damage thereto by fireor other casualty excepted. All repairs and replacements made by or on behalf of Tenant shall be made and performed at Tenant’s cost andexpense and at such time and in such manner as Landlord may reasonably designate, by contractors or mechanics reasonably approved byLandlord and so that the same shall be at least equal in quality, value, character and utility to the original work or installation beingrepaired or replaced, normal wear and tear excepted. Tenant hereby waives all rights under California Civil Code Section 1941 and allrights to make repairs at the expense of Landlord or in lieu thereof to vacate the Premises as provided by California Civil CodeSection 1942 or any other law, statute or ordinance now or hereafter in effect.(c) Tenant’s installation of telephone lines, cables, and other electronic telecommunications services and equipment shall be subjectto the terms and conditions of Paragraph 13 of this Lease. Upon the expiration or earlier termination of this Lease, Tenant shall remove, atits sole cost and expense, all of Tenant’s telecommunications lines and cabling designated by Landlord for removal.(d) Tenant shall not alter, modify, add to or disturb any telecommunications wiring or cabling in the Building other than locatedexclusively in the Premises, without Landlord’s prior written consent. By its acceptance of possession of the Premises, Tenant shall bedeemed to have agreed that the existing number and type of lines designated for service to or presently serving the Premises, as the casemay be, is adequate for Tenant’s occupancy. Any and all telecommunications equipment and cabling serving Tenant and the Premises andconnecting to or from the intermediate distribution frame (“IDF”) shall be located solely in the Premises, and Tenant shall only bepermitted to access the IDF with the prior written consent of Landlord and for purposes of confirming interconnection with the Building’sriser facilities. Landlord reserves the right to limit the number of local exchange carriers and competitive alternative telecommunicationsproviders (collectively “TSPs”) having access to the Building’s riser system and infrastructure, to install a cable distribution/risermanagement system to which Tenant and all TSPs shall connect, and to charge TSPs for the use of Landlord’s telecommunications risersystem and infrastructure; provided, however, in all cases, Landlord will provide Building and riser access to at least one TSP for dial tonetelecommunications service to tenants of the Building.9AEROVIRONMENT14501 PRINCETON AVENUE 12. SERVICES.(a) Tenant shall make arrangements directly with the applicable utility companies for, and shall pay directly for, all water, gas, heat,light, power, telephone, broadband or cable, security, alarm and other utilities and services supplied to the Premises or to Tenant, togetherwith any taxes thereon. If any such services are not separately metered to the Premises, Tenant shall pay a reasonable proportion to bedetermined by Landlord of all charges jointly metered with other premises in the Building.(b) Tenant shall not make connection to utilities except by or through existing outlets and shall not install or use machinery orequipment in or about the Premises that uses water, lighting or power, or otherwise suffer or permit any act, that causes extra burden uponthe utilities or any Building services over that consumed or used by a general industrial tenant in the Building. Landlord may requireTenant to reimburse Landlord for any excess expenses or costs that may arise out of a breach of this subparagraph by Tenant. Landlordmay, in its sole discretion, install at Tenant’s expense supplemental equipment and/or separate metering applicable to Tenant’s excessusage or loading.(c) Tenant acknowledges that Landlord does not provide an attendant, or access control or screening services at the Project, and thataccess to the Building during other than business hours may be restricted by “card-key” access through identification cards initially givenby Landlord to Tenant. Tenant shall be solely responsible for the distribution and collection of Building access cards to current andformer employees, and shall not distribute such cards to contractors, vendors and other invitees. Responsibility for developing accesscontrol and employee and visitor screening procedures and policies with respect to the Premises is delegated solely to Tenant.(d) Tenant shall, at Tenant’s sole cost and expense, provide janitorial services to the Premises. All janitorial services shall be of astandard that is substantially equivalent to the services provided in similar industrial buildings in the City of Moorpark.(e) Subject to Landlord’s provision of janitorial services and waste removal for the Common Areas, Tenant shall provide for anynecessary additional garbage, waste and refuse removal from the Premises at its sole cost and expense.(f) There shall be no abatement of rent and Landlord shall not be liable in any respect whatsoever for the inadequacy, stoppage,interruption or discontinuance of any utility or service due to riot, strike, labor dispute, breakdown, accident, repair, in cooperation withgovernmental request or directions, or any other cause whatsoever, unless caused solely by the gross negligence or willful misconduct ofLandlord or its employees or agents. Any interruption or discontinuance of service shall not be deemed an eviction or disturbance ofTenant’s use and possession of the Premises, or any part thereof, nor shall it render Landlord liable to Tenant for any injury, loss or damageby abatement of rent or otherwise, nor shall it relieve Tenant from performance of Tenant’s obligations under this Lease. Landlord reservesthe right, without liability to Tenant, to limit, restrict or exclude access to the Building or portions of the Project under circumstances thatwould not otherwise constitute a casualty subject to Paragraph 15, and to otherwise reduce or disrupt services to the Building due to causesbeyond the control of Landlord, including, without limitation, evacuation or damage to any surrounding areas or nearby structures (evenwhen there is no physical damage to the Building), the presence of biological or other airborne agents in the Building, or instances ofpublic excitement or unrest. Landlord shall not be liable to Tenant for interference with Tenant’s use and enjoyment of the Premises as aconsequence of such lack of access or services, and any such event shall be treated in the same manner as a utility interruption under thisParagraph 12(d). Notwithstanding anything in the foregoing to the contrary, if there is an interruption of utility services that results inTenant’s inability to reasonably use the Premises (and Tenant does not use the Premises) for more than three (3) consecutive business days,and such interruption results from the gross negligence or misconduct of Landlord or its contractors, then, commencing at the expiration ofsuch three (3) business day period, then the Base Rent and additional rent shall be abated with respect to the affected portion of Tenant’sPremises from the date of such interruption until the earlier of (i) such services have been restored, and (ii) Tenant commences use of thePremises; provided that, if such interruption is within Landlord’s reasonable control to restore, Landlord shall promptly commence anddiligently pursue such restoration.13. ALTERATIONS.(a) Except for non-structural and/or cosmetic changes which do not affect building systems and are not visible from the exterior of theBuilding (such as paint and carpet) and which do not exceed Fifty Thousand Dollars10AEROVIRONMENT14501 PRINCETON AVENUE ($50,000.00) per project (“Minor Alterations”) (and which may be made without Landlord’s consent), Tenant shall make no alterations,improvements or additions in or to the Premises or any part thereof (individually and collectively, “Alterations”) without giving Landlordprior notice of the proposed Alterations and obtaining Landlord’s prior written consent thereto, which consent, except as hereinafterprovided, shall not be unreasonably withheld or delayed; provided, however, Landlord may withhold its consent in its sole discretion ifany proposed Alterations would adversely affect any of the structural elements of the Building, the Building’s electrical, plumbing,heating, telecommunications, mechanical or life safety systems, or involve any permanently affixed signage visible from or to be attachedto the exterior of the Premises. Any and all work by Tenant shall be performed only by contractors approved by Landlord and, where theprior consent of Landlord is required, upon the approval by Landlord of fully detailed and dimensioned plans and specificationspertaining to the work in question, to be prepared and submitted by Tenant at its sole cost and expense. Landlord’s approval or consent toany such work shall not impose any liability upon Landlord, and no action taken by Landlord in connection with such approval,including, without limitation, attending construction meetings of Tenant’s contractors, shall render Tenant the agent of Landlord forpurposes of constructing any Alterations. In addition, Tenant acknowledges and agrees that no Alterations have been expressly orimpliedly required as a condition to the execution of this Lease for the use of the Premises permitted under this Lease or in lieu of paymentof rent.(b) Tenant shall at its sole cost and expense obtain all necessary approvals and permits pertaining to any Alterations. Tenant shall beresponsible for any additional alterations and improvements required by law to be made by Landlord to or in the Building as a result ofany alterations, additions or improvements to the Premises made by or for Tenant. All alterations, additions, fixtures (other than tradefixtures) and improvements, including, but not limited to carpeting, other floor coverings, built-in shelving, bookcases, paneling and built-in security systems (excluding any leased system) made in or upon the Premises either by or for Tenant and affixed to or forming a part ofthe Premises, shall immediately upon installation become Landlord’s property free and clear of all liens and encumbrances. On or beforethe expiration or sooner termination of this Lease, Tenant shall remove all Alterations in accordance with the provisions of Paragraph 28below. At the time Tenant requests Landlord’s approval of the installation or construction of any Alterations, Landlord shall informTenant which Alterations, if any, Landlord shall require to be removed upon the expiration or any sooner termination of this Lease. In theevent Landlord fails to so inform Tenant which Alterations, if any, that Landlord shall require to be removed, then Landlord shall bedeemed to have required that all such Alterations be removed upon the expiration or any sooner termination of this Lease.(c) Tenant shall keep the Premises and the Building and the rest of the Project free from any mechanics’ liens, vendors liens or anyother liens arising out of any work performed, materials furnished or obligations incurred by Tenant, and agrees to defend, indemnify andhold harmless Landlord from and against any such lien or claim or action thereon, together with costs of suit and reasonable attorneys’ feesincurred by Landlord in connection with any such claim or action. Before commencing any work or alteration, addition or improvement tothe Premises which requires Landlord’s consent, Tenant shall give Landlord at least ten (10) business days’ written notice of the proposedcommencement of work (to afford Landlord an opportunity to post appropriate notices of non-responsibility). In the event that there shallbe recorded against the Premises or the Building or any other portion of the Project, or the property of which the Premises is a part anyclaim or lien arising out of any such work performed, materials furnished or obligations incurred by Tenant and such claim or lien shall notbe removed, bonded over or discharged by Tenant within ten (10) days of written notice from Landlord, Landlord shall have the right butnot the obligation to pay and discharge said lien by bond or otherwise without regard to whether such lien shall be lawful or correct. Anyreasonable costs, including attorney’s fees incurred by Landlord, shall be paid by Tenant within ten (10) days after demand by Landlord.(d) Except in the case of Minor Alterations or other alterations which do not require Landlord’s supervision (which include, but arenot limited to, non-structural and/or cosmetic changes which do not affect building systems), Tenant shall pay to Landlord a projectadministration fee equal to three percent (3%) of the cost of such Alterations to compensate Landlord for the administrative costs incurredand the Building services provided by Landlord in the supervision and coordination of the work.(e) Notwithstanding anything to the contrary set forth in this Lease, and subject to the following terms and conditions of thisParagraph 13(e), Tenant shall have the right to complete any or all of Tenant Improvements (as defined below), and obtain reimbursementfor the costs and expenses incurred by Tenant in the design, permitting and construction of the Tenant Improvements (the “TIReimbursement”). Tenant may also elect to apply all or a11AEROVIRONMENT14501 PRINCETON AVENUE portion of the TI Reimbursement amount (as set forth in subsection (ii) below) to Tenant’s reimbursement obligations for the SupplementalLandlord Work under Exhibit D, Section 1(b).(i) “Tenant Improvements” shall include any or all of the following improvements made on or about the Premises at thedirection of Tenant.(ii) The TI Reimbursement shall in no event exceed an amount equal to One Hundred Fifty Thousand and 00/100 Dollars($150,000.00).(iii) For the avoidance of doubt, if any of the Tenant Improvements would be considered Alterations under this Lease, thenTenant shall comply with the terms of this Lease related to Alterations, including, without limitation, obtaining Landlord’s prior writtenconsent thereto (as set forth in Paragraph 13(a) above).(iv) Landlord will disburse the TI Reimbursement for actual Tenant Improvements within thirty (30) days of Tenant’scompletion of such Tenant Improvements, and delivery of the following material/documents, and provided Tenant is not then in defaultunder any provision of this Lease and has opened for business in the Premises: (i) a contractors lien waiver and release form from itsgeneral contractor certifying that all Tenant Improvements have been paid for in the form of a AIA G706A; (ii) two (2) full sets of as builtdrawings showing all of the Tenant Improvements in the Premises; (iii) subcontractor’s and materialmen’s full and complete lien releasesfor all work performed or materials delivered to the Premises including conditional and unconditional lien releases from all personsarguably with mechanic’s lien rights; (iv) unconditional lien releases upon final payment; (v) Landlord’s certification that TenantImprovements complies with the requirements of the Lease and all laws; and (vi) such other further documentation as reasonably requiredby Landlord.(v) All TI Reimbursement Requests must be received by Landlord on or before the end of the sixth (6th) month after theCommencement Date (the “TI Reimbursement Deadline”), and Tenant hereby waives its right to any TI Reimbursement for which Landlordhas not received a TI Reimbursement Request by the TI Reimbursement Deadline.(vi) Notwithstanding anything in this Lease to the contrary, if any Event of Default (as defined below) has occurred, then, inaddition to all other rights and remedies granted to Landlord pursuant to this Lease, Landlord shall not be obligated to disburse anyamount of the TI Reimbursement to Tenant.14. INSURANCE, INDEMNIFICATION AND EXCULPATION.(a) Tenant shall, at Tenant’s expense, obtain and keep in force during the Term of this Lease a policy of Commercial General Liabilityinsurance utilizing an Insurance Services Office standard form with Broad Form General Liability Endorsement (CL00011188), orequivalent, in an amount not less than Two Million Dollars ($2,000,000.00) combined single limit per occurrence/aggregate of bodilyinjury and property damage, and shall insure Tenant against liability arising out of the use, occupancy or maintenance of the Premises. Landlord, Landlord’s property manager, and any lender(s) whose names have been provided to Tenant in writing shall be named asadditional insureds, as respects the negligence of the Tenant. The policy shall not contain any intra-insured exclusions as between insuredpersons or organizations, but shall include coverage for liability assumed under this Lease as an “insured contract” for the performance ofTenant’s indemnity obligations under this Lease. Compliance with the above requirements shall not, however, limit the liability of Tenantnor relieve Tenant of any obligation hereunder. All insurance to be carried by Tenant shall be primary to and not contributory with anysimilar insurance carried by Landlord, whose insurance shall be considered excess insurance only.(b) (i) Tenant at its cost shall either by separate policy or by endorsement to a policy already carried by Tenant, maintainproperty insurance coverage on all of Tenant’s personal property and Alterations in, on, or about the Premises. Such insurance shall be fullreplacement cost coverage. Landlord shall be named as a loss payee under said policy with respect to any permanently affixedAlterations. The proceeds from any such insurance shall be used by Tenant for the replacement and/or restoration of Tenant’s personalproperty and Alterations.(ii) Tenant shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburseTenant for direct or indirect loss of earnings attributable to all perils commonly insured against by12AEROVIRONMENT14501 PRINCETON AVENUE prudent lessees in the business of Tenant or attributable to prevention of access to the Premises as a result of such perils.(iii) Workers’ Compensation and Employers’ Liability insurance covering injury, disease or death of employees inthe course of employment. The Workers’ Compensation will meet the state requirement for coverage and the employers’ liability will havelimits not less than $1,000,000. Such policy shall contain an endorsement where the insurer waives its right to subrogation.(iv) Business Auto Liability covering owned, non-owned and hired vehicles with a limit of not less than $1,000,000per accident(c) Insurance required hereunder shall be in companies duly licensed to transact business in the state where the Premises are located,and maintaining during the policy term a “General Policyholders Rating” of at least A, VIII, as set forth in the most current issue of “Best’sInsurance Guide.” Tenant shall cause to be delivered to Landlord, no later than the Commencement Date, and from time to time uponLandlord’s request certificates evidencing the existence and amounts of, the insurance required to be maintained by Tenant hereunder. Nodeductible (including any self-insured retention) under any policy of insurance carried by Tenant shall exceed Twenty Five ThousandDollars ($25,000.00). No such policy shall be cancelable except after fifteen (15) days prior written notice to Landlord. Tenant shallwithin thirty (30) days after the renewal of such policies, furnish Landlord with evidence of renewals evidencing renewal thereof, orLandlord may order such insurance and charge the cost thereof to Tenant, which amount shall be payable by Tenant to Landlord upondemand.(d) Landlord shall at all times during the Term maintain:(i) all-risk property insurance coverage, including equipment breakdown, on the Landlord’s property (including,but not limited to, the Building, improvements, machinery and equipment and any personal property in the CommonAreas) for the full replacement cost thereof and with commercially reasonable deductibles. Landlord shall not beobligated to insure any furniture, equipment, trade fixtures, machinery, goods, or supplies which Tenant may keep ormaintain in the Premises or any Alteration, addition or improvement which Tenant may make upon the Premises. Inaddition, Landlord may secure and maintain rental income insurance.(ii) Commercial general liability insurance with limits not less than $5,000,000 per occurrence and aggregate. Suchinsurance shall be in addition to, and not in lieu of, insurance required to be maintained by Tenant. The policy shall(i) name Tenant as additional insured thereunder; and (ii) specifically provide that the insurance afforded by suchpolicy for the benefit of the additional insured shall be primary, and any insurance carried by the additional insuredshall be excess and non-contributing. Such insurance can be included within an umbrella coverage maintained byLandlord covering additional properties.(iii) Workers’ Compensation and Employers’ Liability insurance covering injury, disease or death of employees inthe course of employment. The Workers’ Compensation will meet the state requirement for coverage and theemployers’ liability will have limits not less than $1,000,000. Such policy shall contain an endorsement where theinsurer waives its right to subrogation. Landlord may elect to self-insure for this coverage, if allowed in the state ofoperation.(e) Without affecting any other rights or remedies of the parties, Tenant and Landlord each hereby agree to cause the insurancecompanies issuing their respective first party insurance to waive any subrogation rights that such insurers may have against Landlord andTenant, respectively, as long as the insurance is not invalidated by such waiver. If such waivers of subrogation are contained in theirrespective insurance policies, Landlord and Tenant each waive, release and relieve the other, and waive their entire right to recoverdamages (whether in contract or in tort) against the other, for loss of or damage to the waiving party’s property arising out of or incident tothe perils required to be insured against under this Paragraph 14.(f) Except for instances of Landlord’s negligence or willful misconduct, Tenant shall indemnify, protect, defend and hold harmlessthe Premises, Landlord, Landlord’s master or ground lessor, any lenders, Landlord’s partners and members, and each of their officers,directors, shareholders, managers, employees, agents and representatives from and against any and all claims, loss of rents and/or damages,costs, liens, judgments, penalties,13AEROVIRONMENT14501 PRINCETON AVENUE permits, attorney’s and consultant’s fees, expenses and/or liabilities arising out of, involving, or in dealing with, (i) the occupancy of thePremises by Tenant, (ii) the conduct of Tenant’s business, (iii) any act, omission or neglect of Tenant, its agents, contractors, employees orinvitees, and/or (iv) any default or breach by Tenant in the performance in a timely manner of any obligation on Tenant’s part to beperformed under this Lease. The foregoing shall include, but not be limited to, the defense or pursuit of any claim or any action orproceeding involved therein, and whether or not (in the case of claims made against Landlord) litigated and/or reduced to judgment, andwhether well founded or not. In case any action or proceeding is brought against Landlord by reason of any of the foregoing matters,Tenant upon notice from Landlord shall defend the same at Tenant’s expense by counsel reasonably satisfactory to Landlord and Landlordshall cooperate with Tenant in such defense. Landlord need not have first paid any such claim in order to be so indemnified. Theforegoing indemnification obligations shall survive the expiration or earlier termination of this Lease to and until the last date permittedby law for the bringing of any claim with respect to which indemnification may be claimed under this Paragraph 14.(g) Except for instances of Tenant’s negligence or willful misconduct, Landlord shall indemnify, protect, defend and hold harmlessTenant, Tenant’s lenders, Tenant’s partners and members, and each of their officers, directors, shareholders, managers, employees, agentsand representatives from and against any and all claims, loss of rents and/or damages, costs, liens, judgments, penalties, permits, attorney’sand consultant’s fees, expenses and/or liabilities arising out of (i) the gross negligence or willful misconduct of Landlord, its employees,agents or contractors and/or (ii) any default or breach by the Landlord in the performance in a timely manner of any obligation onLandlord’s part to be performed under this Lease. In case any action or proceeding is brought against Tenant by reason of any of theforegoing matters, Landlord upon notice from Tenant shall defend the same at Landlord’s expense by counsel reasonably satisfactory toTenant and Tenant shall cooperate with Landlord in such defense. Tenant need not have first paid any such claim in order to be soindemnified. The foregoing indemnification obligations shall survive the expiration or earlier termination of this Lease to and until thelast date permitted by law for the bringing of any claim with respect to which indemnification may be claimed under this Paragraph 14.(h) Tenant hereby releases Landlord from, and Landlord shall not be liable for, and any all claims for injury or damage to the personor goods, wares, merchandise or other property of Tenant, Tenant’s employees, contractors, invitees, customers, or any other person in orabout the Premises, Building or Project, from any cause, and whether said injury or damage results from conditions arising on the Premisesor on other portions of the Building or Project (including, without limitation the parking facilities), or from other sources or places, andregardless of whether the cause of such damage or injury or the means of repairing the same is accessible or not, unless caused by the grossnegligence or willful misconduct of Landlord or any of its employees, contractors or agents. Landlord shall not be liable for any damagesarising from any act, omission or neglect of any other lessee of Landlord. Notwithstanding Landlord’s active or passive negligence orbreach of this Lease, Landlord shall under no circumstances be liable for injury to Tenant’s business or for any loss of income or profittherefrom.15. DESTRUCTION.(a) In the event of a partial destruction of the Premises during the Term from any cause, Landlord shall forthwith repair the same(except as otherwise provided in this Paragraph 15 as to a casualty occurring during the last twelve (12) months of the Term), providedsuch repairs can be made within one hundred twenty (120) days under the laws and regulations of State, county, federal or municipalauthorities, but such partial destruction shall not annul or void this Lease, except that Tenant shall be entitled to a proportional abatementin rent while such repairs are being made, such proportionate abatement to be based upon the amount of square footage in the Premisesdamaged and the length of time said area is not either actually being used by Tenant for business purposes or is not in a conditionhabitable for general industrial use. If such repairs cannot be made within one hundred twenty (120) days of such casualty, or if thecasualty occurs during the last twelve (12) months of the Term and would result in any rent abatement for a period greater than thirty(30) days, Landlord may, at its option, elect to make such repairs within a reasonable time, this Lease continuing in full force and effectand the rent to be proportionately abated as provided hereinabove. In the event that Landlord does not so elect to make such repairs whichcannot be made in one hundred twenty (120) days or which results from a casualty occurring during the last twelve (12) months of the term,within a reasonable time following the casualty (but in no event not less than sixty (60) days), this Lease may be terminated at the optionof either party. In respect to any partial destruction which Landlord is obligated to repair or may elect to repair under the terms of thisParagraph 15, Tenant waives the provisions of California Civil Code Sections 1932(2) and 1933(4). In the event that any portion of theBuilding other than the Premises is destroyed to the extent of ten percent (10%) or more of the replacement cost of the14AEROVIRONMENT14501 PRINCETON AVENUE Building, Landlord may elect to terminate this Lease, whether the Premises be injured or not; provided, however, that if Landlord’s lendermakes insurance proceeds available to Landlord in an amount sufficient to complete restoration of the Building, then Landlord may notterminate this Lease unless the Building is destroyed to the extent of thirty percent (30%) or more of the replacement cost of theBuilding. A total destruction of the Building shall terminate this Lease.(b) If the Premises are to be repaired or restored by Landlord under this Paragraph 15, Landlord shall repair or restore, at Landlord’scost, the Premises itself and any and all permanently affixed improvements in the Premises constructed or provided by Landlord as of thecommencement of the Term, together with any permanently affixed Alterations approved by Landlord (unless at the time of constructionLandlord informs Tenant that Tenant will be required to remove the same at the end of the Term). In no event shall Landlord repair,replace or restore any of Tenant’s property.16. ENTRY.Landlord, Landlord’s agents, employees, contractors and designated representatives, and the holders of any mortgages, deeds oftrust or ground leases on the Premises shall have the right to enter the Premises at any time in the case of an emergency, and otherwise atreasonable times upon at least one business day’s prior notice, for the purpose of inspecting the condition of the Premises, performing anyservices required of Landlord by this Lease, showing the same to prospective purchasers, lenders or, during the last twelve months of theTerm, lessees, making such alterations, repairs and improvements to the Premises or to the Project as Landlord may deem reasonable ordesirable, and for verifying compliance by Tenant with this Lease. Any such entry shall be without any rebate of rent to Tenant for anyloss of occupancy or quiet enjoyment of the Premises, or damage, injury or inconvenience thereby occasioned. Notwithstanding theforegoing, in any such entry into the Premises Landlord shall use commercially reasonable good faith efforts not to unreasonably disturbTenant’s business activities conducted within the Premises.17. EVENTS OF DEFAULT.(a) The occurrence of any one or more of the following events (each, an “Event of Default”) shall constitute a breach of this Lease byTenant: (i) if Tenant shall default in its obligation to pay any rent or other payment(s) due hereunder and such failure continues for morethan five (5) days after written notice from Landlord; or (ii) if Tenant shall fail to perform or observe any other term hereof (except asotherwise provided in this Paragraph 17) or of the Project Rules described in Paragraph 8 hereof to be performed or observed by Tenant,such failure shall continue for more than twenty (20) days after notice thereof from Landlord, and Tenant shall not within such periodcommence with due diligence and dispatch the curing of such default, or, having so commenced, thereafter shall fail or neglect toprosecute or complete with due diligence the curing of such default; or (iii) any assignment or subletting in violation of the terms of thisLease; or (iv) the failure of Tenant to maintain insurance coverages required by this Lease and/or to provide evidence of such coverageswithin five (5) business days after request therefor from Landlord; or (v) Tenant’s failure to timely execute and deliver, when requested, anestoppel certificate in accordance with the terms of this Lease; or (vi) the taking of any action leading to, or the actual dissolution orliquidation of Tenant, if Tenant is other than an individual; or (vii) if within sixty (60) days after the commencement of any proceedingagainst Tenant seeking any reorganization, arrangement, composition, readjustment, liquidation, dissolution or similar relief under anypresent or future statute, law or regulation, such proceeding shall not have been dismissed or if this Lease or any estate of Tenant hereundershall be levied upon under any attachment or execution and such attachment or execution is not vacated within thirty (30) days afternotice to Tenant.(b) Any notice required to be given by Landlord under this Lease shall, in each case, be in lieu of, and not in addition to, any noticerequired to be given under California Code of Civil Procedure Sections 1161 through 1162, or any other applicable unlawful detainerstatutes, to the extent the substance thereof is given in compliance therewith and the notice is served as provided in this Lease, and anytime periods provided under such statutes shall run concurrently with the time periods contained in any notice provided under this Lease.18. TERMINATION UPON DEFAULT.In any notice given pursuant to any one or more Events of Default, Landlord in its sole discretion may elect to declare a forfeitureof this Lease as provided in Section 1161 of the California Code of Civil Procedure, and provided that Landlord’s notice states such anelection, Tenant’s right to possession shall terminate and this Lease shall terminate, unless on or before the date specified in such notice allarrears of rent and all other sums payable by15AEROVIRONMENT14501 PRINCETON AVENUE Tenant under this Lease, and all costs and expenses incurred by or on behalf of Landlord hereunder, including reasonable attorneys’ fees,incurred in connection with such default, shall have been paid by Tenant and all other breaches of this Lease by Tenant at the timeexisting shall have been fully remedied to the satisfaction of Landlord. Upon such termination, Landlord may recover from Tenant (a) theworth at the time of award of the unpaid rent which had been earned at the time of termination; (b) the worth at the time of award of theamount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rentloss that Tenant proves could reasonably have been avoided; (c) the worth at the time of award of the amount by which the unpaid rent forthe balance of the Term after the time of award exceeds the amount of such rent loss that Tenant proves could be reasonably avoided; and(d) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant’s failure to perform itsobligations under this Lease or which in the ordinary course of things would be likely to result therefrom. The “worth at the time of award”of the amount referred to in clauses (a) and (b) above is computed by allowing interest at the discount rate of the Federal Reserve Bank ofSan Francisco plus four percent (4%) per annum at date of termination, but in no event in excess of the maximum rate of interest permittedby law. The worth at the time of award of the amount referred to in clause (c) above is computed by discounting such amount at thediscount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent (1%). For the purpose of determiningunpaid rent under clause (c) above, the monthly rent reserved in this Lease shall be deemed to be the sum of the Base Rent and the amountslast payable by Tenant as reimbursement of expenses pursuant to Paragraphs 5(a)(ii) and (iii) hereof for the calendar year in whichLandlord terminated this Lease as provided herein. Tenant waives any rights of redemption or relief from forfeiture under California Codeof Civil Procedure Sections 1174 and 1179, or under any other applicable present or future law, if Tenant is evicted or Landlord takespossession of the Premises by reason of any Event of Default.19. CONTINUATION AFTER DEFAULT.Even though Tenant has breached this Lease and/or abandoned the Premises, this Lease shall continue in effect for so long asLandlord does not terminate Tenant’s right to possession as provided in Paragraph 18 hereof, and Landlord may enforce all its rights andremedies under this Lease, including the right to recover rent as it becomes due under this Lease. In such event, Landlord may exercise allof the rights and remedies of a landlord under Section 1951.4 of the California Civil Code (which provides that a landlord may continue alease in effect after a tenant’s breach and abandonment and recover rent as it becomes due, if the tenant has the right to sublet or assign,subject only to reasonable limitations), or any successor statute. Acts of maintenance or preservation or efforts to relet the Premises or theappointment of a receiver upon initiative of Landlord to protect Landlord’s interest under this Lease shall not constitute a termination ofTenant’s right to possession.20. OTHER RELIEF.The remedies provided for in this Lease are in addition to any other remedies available to Landlord at law or in equity, by statuteor otherwise. Landlord’s failure to take advantage of any default or breach of covenant on the part of Tenant shall not be, or be construedas a waiver thereof, nor shall any custom or practice which may grow up between the parties in the course of administering this instrumentbe construed to waive or to lessen the right of Landlord to insist upon the performance by Tenant of any term, covenant or conditionhereof, or to exercise any rights given Landlord on account of any such default. A waiver of a particular breach or default shall not bedeemed to be a waiver of the same or any other subsequent breach or default. The acceptance of rent hereunder shall not be, nor beconstrued to be, a waiver of any breach of any term, covenant or condition of this Lease.In no event shall either party be liable to the other for any punitive or consequential damages, except in the case of a holdoverpursuant to Section 29 below and nothing herein shall be construed to limit a party’s indemnification obligations under this Lease.21. ATTORNEYS’ FEES.If as a result of any breach or default on the part of Tenant under this Lease Landlord uses the services of an attorney in order tosecure compliance with this Lease, Tenant shall reimburse Landlord upon demand as additional rent for reasonable attorneys’ fees andexpenses incurred by Landlord, whether or not formal legal proceedings are instituted. Should either party bring an action against theother party, by reason of or alleging the failure of the other party to comply with any or all of its obligations hereunder, or to seekenforcement of any of the terms of this Lease, whether for declaratory or other relief, then the party which prevails in such action (includingthose incurred in connection with any matters on appeal) shall be entitled to its reasonable attorneys’ fees, expert witness fees anddisbursements, and all other reasonable costs and expenses related to such action, in addition to all16AEROVIRONMENT14501 PRINCETON AVENUE other recovery or relief. The “party which prevails in such action” (a) as used in the context of proceedings in the Bankruptcy Court,means the prevailing party in an adversary proceeding or contested matter, or any other action taken by the non‑bankruptcy party which isreasonably necessary to protect its rights under this Agreement, and (b) as used in the context of proceedings in any court other than theBankruptcy Court, shall mean the party that prevails in obtaining a remedy or relief which most nearly reflects the remedy or relief whichthe party sought, so that, for example, the party which prevails may be a party which is ordered to pay $100 where the obligation to pay$80 was undisputed and the other party claimed that it was entitled to $1,000.22. NOTICES.All approvals, consents and other notices given by Landlord or Tenant under this Lease shall be properly given only if made inwriting and either deposited in the United States mail, postage prepaid, certified with return receipt requested, or delivered by hand (whichmay be through a messenger or recognized delivery, courier or air express service) and addressed to Landlord at the address of Landlordspecified in the Basic Lease Information or at such other place as Landlord may from time to time designate in a written notice to Tenant,and addressed to Tenant at the address of Tenant specified in the Basic Lease Information and, after the Commencement Date, at thePremises, together with a copy to such other address as Tenant may from time to time designate in a written notice to Landlord. Suchapprovals, consents and other notices shall be effective on the date of receipt (evidenced by the certified mail receipt), if mailed, or on thedate of hand delivery, if hand delivered. If any such approval, consent or other notice is not received or cannot be delivered due to achange in the address of the receiving party of which notice was not previously given to the sending party or due to a refusal to accept bythe receiving party, such request, approval, consent, notice or other communication shall be effective on the date delivery isattempted. Tenant hereby appoints as its agent to receive the service of all default notices and notice of commencement of unlawfuldetainer proceedings the person in charge of or apparently in charge of or occupying the Premises at the time, and, if there is no suchperson, then such service may be made by attaching the same on the door of the Premises and such service shall be effective for allpurposes under this Lease. Landlord shall provide a copy of any such notices at the address indicated on the23. EMINENT DOMAIN.If all or any part of the Premises shall be taken as a result of the exercise of the power of eminent domain or agreement in lieuthereof, this Lease shall terminate as to the part so taken as of the date of taking, and, in the case of a partial taking of a substantial portionof the Premises, Landlord shall have the right to terminate this Lease as to the balance of the Premises by giving written notice to Tenantwithin sixty (60) days after such date. Common Areas taken shall be excluded from the Common Areas usable by Tenant and no reductionof base rent shall occur with respect thereto or by reason thereof. In the event of any taking, Landlord shall be entitled to any and allcompensation, damages, income, rent, awards, or interest therein which may be paid or made in connection therewith, and, except ashereinafter expressly provided, Tenant waives and relinquishes to Landlord any and all claims for the value of any unexpired Term of thisLease or otherwise. Notwithstanding the foregoing, Tenant shall have the right to make a separate claim against any such condemningauthority for compensation specifically and separately awarded Tenant for Tenant’s personal property and moving costs. In the event of apartial taking of the Premises which does not result in a termination of this Lease, the Base Rent thereafter to be paid shall be equitablyreduced. If all or any part of the Building shall be taken as a result of the exercise of the power of eminent domain, and, in the case of apartial taking, Landlord determines that the remainder of the Building is not suitable for the continued operation as a multi-tenantindustrial building, Landlord shall have the right to terminate this Lease by giving written notice to Tenant within sixty (60) days of thedate when the possession is required. If all or any material part of the Premises shall be taken as a result of the exercise of the power ofeminent domain, and, in the case of a partial taking, Tenant determines in tis good faith, reasonable business judgment that the remainderof the Premises is not suitable for the Permitted Use, Tenant shall have the right to terminate this Lease by giving written notice toLandlord within sixty (60) days of the date when the possession is required. Without obligation to Tenant, Landlord may agree to transferto any condemnor all or any portion of the Project sought by such condemnor, free from this Lease and the rights of Tenant hereunder,without first requiring that any action or proceeding be instituted or, if instituted, pursued to a judgment. Landlord and Tenant herebywaive the provisions of California Code of Civil Procedure Sections 1265.110 through 1265.160 to the extent that such provisions areinconsistent with the terms of this Lease.17AEROVIRONMENT14501 PRINCETON AVENUE 24. LATE CHARGE/RETURNED CHECKS.Rent or other payments due under this Lease which remain unpaid when due shall bear interest from and after the date saidamount was due at the discount rate of the Federal Reserve Bank of San Francisco on the date said amount was due, plus four percent (4%)per annum, but in no event in excess of the maximum rate of interest permitted by law. Tenant acknowledges that late payment by Tenantto Landlord of such rent or other payments will cause Landlord to incur costs not contemplated by this Lease, the exact amount of suchcosts being extremely difficult and impracticable to fix. Therefore, if on more than one (1) occasion during any twelve (12) month periodduring the Term, any installment of rent or other payment due from Tenant is not received by Landlord by the fifth (5th) day of the monthwhen due, Tenant shall pay to Landlord an additional sum of four percent (4%) of the overdue amount as a late charge. Said late chargeshall be due as of the sixth (6th) day of the month in question. If any check for payment by Tenant to Landlord of Base Rent or other sumsdue hereunder is returned to Landlord by Tenant’s bank for any reason, a returned check charge (“NSF charge”) will be added in theamount of Fifty Dollars ($50.00), in addition to any sums due hereunder including late charges, to compensate Landlord for the costsassociated with processing such dishonored check. The parties agree that the foregoing late charges and NSF charge represent a fair andreasonable estimate of the costs Landlord will incur because of said late or dishonored payment. Acceptance of said charges by Landlordshall not constitute a waiver of Tenant’s default for the overdue amount, nor prevent Landlord from exercising the other rights andremedies granted Landlord under this Lease.25. SECURITY DEPOSIT.Intentionally omitted.26. SIGNAGE.Tenant shall not place or permit to be placed any lights, decorations, banners, signs, window or door lettering, advertising media,or any other item that can be viewed from the exterior of the Premises without obtaining Landlord’s prior written consent, which may bewithheld in Landlord’s sole discretion, and shall be subject to any applicable laws and regulations of the City of Moorpark, Landlord’ssignage program at the Project (if any), and any other covenants, conditions and/or restrictions affecting the Project and/or the Building. Ifany such items are installed without Landlord’s consent, or are not timely removed, Landlord shall have the right (but not the obligation)to remove any or all of such items and/or repair any such damage or injury, all at Tenant’s sole cost and expense.27. ESTOPPEL CERTIFICATE.Within ten (10) days after notice from Landlord, Tenant shall execute and deliver to Landlord a certificate stating (a) that thisLease is unmodified and in full force and effect (or, if there have been modifications, that this Lease is in full force and effect, as modified,and stating the date and nature of each modification), (b) the date, if any, to which rental and other sums payable hereunder have beenpaid, (c) that no notice has been received by Tenant of any default which has not been cured, except as to defaults specified in saidcertificate and (d) such other matters as may be reasonably requested by Landlord. In the event Tenant does not respond to Landlord’srequest in a timely manner, Landlord may send Tenant a second notice that states that Tenant’s failure to provide the estoppel certificate toLandlord within three (3) business days after Tenant receives Landlord’s second notice shall be an Event of Default under this Lease andthat such failure will be deemed an acknowledgment by Tenant that statements included in the estoppel certificate are true and correctwithout exception. Tenant’s failure to timely deliver an estoppel certificate in accordance with this Paragraph 27 shall be deemed anEvent of Default in accordance with Paragraph 17 of this Lease.28. SURRENDER.On or before the expiration or sooner termination of this Lease, Tenant shall remove all of Tenant’s property and all alterations,additions, fixtures and improvements therein or thereto except those which Landlord has confirmed in writing should be left in place; andfully repair any damage to the Premises, the Building or other portions of the Project caused by the removal of any of the items providedherein. Upon the expiration or earlier termination of this Lease, Tenant shall not be required to remove any clean room laboratories whichexisted on the Premises upon Landlord’s initial delivery of possession thereof to Tenant, and shall not be financially responsible forLandlord’s removal of any such laboratories after the expiration or earlier termination of this Lease. Subject to the foregoing, Tenant shallsurrender the Premises at the expiration or earlier termination of the tenancy herein18AEROVIRONMENT14501 PRINCETON AVENUE created broom clean, and in the same condition as received, reasonable use and wear thereof and damage by the act of God, casualty or bythe elements excepted. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a mergerand shall at the option of Landlord, terminate all of any existing subleases or subtenancies, or may, at the option of Landlord, operate as anassignment to it of any or all such subleases or subtenancies. Tenant’s obligations under this Paragraph 28 shall survive the termination ofthis Lease.29. HOLDING OVER.If, without objection by Landlord, Tenant holds possession of the Premises after expiration of the Term of this Lease, Tenant shallbecome a tenant from month to month upon the terms herein specified but at a Base Rent equal to one hundred fifty percent (150%) of theBase Rent in effect at the expiration of the Term of this Lease, payable in advance on or before the first day of each month. Such month-to-month tenancy may be terminated by either Landlord or Tenant by giving thirty (30) days’ written notice of termination to the other at anytime. If Tenant fails to surrender the Premises upon the expiration or termination of this Lease except as hereinabove provided, Tenanthereby indemnifies and agrees to hold Landlord harmless from all costs, loss, expense or liability, including without limitation, costs, realestate brokers claims and attorneys’ fees, arising out of or in connection with any delay by Tenant in surrendering and vacating thePremises, including, without limitation, any claims made by any succeeding tenant based on any delay and any liabilities arising out of orin connection with these claims. Nothing in this Paragraph 29 shall be deemed to permit Tenant to retain possession of the Premises afterthe expiration or sooner termination of the Term.30. SUBORDINATION.Provided Landlord obtains from any applicable lender a commercially reasonable subordination, non-disturbance and attornmentagreement which provides that Tenant’s occupancy of the Premises will not be disturbed so long as no Event of Default is continuing, thisLease shall be subordinate to any ground lease, master lease, mortgage, deed of trust, or any other hypothecation for security now or laterplaced upon the Building or the Project and to any advances made on the security of it or Landlord’s interest in it, and to all renewals,modifications, consolidations, replacements, and extensions of it. However, if any mortgagee, trustee, master lease or ground lessor electsto have this Lease prior to the lien of its mortgage or deed of trust or prior to its master lease or ground lease, and gives notice of that toTenant, this Lease shall be deemed prior to the mortgage, deed of trust, master lease or ground lease, whether this Lease is dated prior orsubsequent to the date of the mortgage, deed of trust, master lease or ground lease, or the date of recording of it. In the event any mortgageor deed of trust to which this Lease is subordinate is foreclosed or a deed in lieu of foreclosure is given to the mortgagee or beneficiary,Tenant shall attorn to the purchaser at the foreclosure sale or to the grantee under the deed in lieu of foreclosure. In the event oftermination of any master lease or ground lease to which this Lease is subordinate, Tenant shall attorn to the master lessor or groundlessor. Tenant agrees to execute any documents, in form and substance reasonably acceptable to Tenant, required to effectuate thesubordination, to make this Lease prior to the lien of any mortgage or deed of trust, master lease or ground lease, or to evidence theattornment provided such documents affirm Tenant’s tenancy of the Premises will not be disturbed so long as Tenant is not in default.31. INABILITY TO PERFORM.Neither Landlord nor Tenant shall be in default hereunder nor shall Landlord be liable to Tenant or Tenant be liable to Landlordfor any loss or damages if such party is unable to fulfill any of its obligations, or is delayed in doing so, if the inability or delay is causedby reason of accidents, strike, labor troubles, acts of God, or any other cause, whether similar or dissimilar, which is beyond the reasonablecontrol of Landlord or Tenant. The foregoing sentence shall not be deemed to apply to Tenant’s obligation to pay rent hereunder.32. MISCELLANEOUS.(a) The words “Landlord” and “Tenant” as used herein shall include the plural as well as the singular. Words used in masculinegender include the feminine and neuter. If there be more than one Tenant, the obligations hereunder imposed on Tenant shall be joint andseveral. Subject to the provisions hereof relating to assignment and subletting, this Lease is intended to and does bind the heirs, executors,administrators, successors and assigns of any and all of the parties hereto. Each provision of this Lease to be observed or performed byTenant shall be deemed both a covenant and a condition. Time is of the essence of this Lease.19AEROVIRONMENT14501 PRINCETON AVENUE (b) If Tenant is a corporation or limited liability company, Tenant and each person executing this Lease on behalf of Tenantrepresents and warrants to Landlord that (a) Tenant is duly incorporated or formed, as the case may be and validly existing under the lawsof its state of incorporation or formation, (b) Tenant is qualified to do business in California, (c) Tenant has the full right, power andauthority to enter into this Lease and to perform all of Tenant’s obligations hereunder, and (d) each person signing this Lease on behalf ofthe corporation or company is duly and validly authorized to do so. If Landlord is a corporation or limited liability company, Landlordand each person executing this Lease on behalf of Landlord represents and warrants to Tenant that (a) Landlord is duly incorporated orformed, as the case may be and validly existing under the laws of its state of incorporation or formation, (b) Landlord is qualified to dobusiness in California, (c) Landlord has the full right, power and authority to enter into this Lease and to perform all of Landlord’sobligations hereunder, and (d) each person signing this Lease on behalf of the corporation or company is duly and validly authorized to doso.(c) There are no oral agreements between Landlord and Tenant affecting this Lease, and this Lease supersedes and cancels any and allprevious negotiations, arrangements, brochures, agreements and understandings, if any, between Landlord and Tenant or displayed byLandlord to Tenant with respect to the subject matter of this Lease or the Building or any other portion of the Project. No party has beeninduced to enter into this Lease by, nor is any party relying on, any representation or warranty outside those expressly set forth in thisLease. Notwithstanding the preparation of this Lease by Landlord or its agent, all of the provisions of this Lease have been freelynegotiated by the parties hereto, and each of the parties has had the opportunity to be represented by counsel in connection with thenegotiation and execution of this Lease. Accordingly, the parties agree that there shall be no presumption or implication against eitherparty with respect to the meaning or interpretation of this Lease, and any presumption against the drafter implied by law is herebywaived. Any amendment or modification of this Lease is ineffective to modify, waive, or terminate this Lease, in whole or in part, unlesssuch agreement is in writing, signed by the parties to this Lease.(d) Any provision of this Lease which shall be held invalid, void or illegal shall in no way affect, impair or invalidate any of the otherprovisions hereof and such other provisions shall remain in full force and effect.(e) The obstruction of Tenant’s view, air, or light by any structure erected in the vicinity of the Building, whether by Landlord or thirdparties, shall in no way affect this Lease or impose any liability upon Landlord.(f) To the extent permitted by law, Tenant hereby waives trial by jury in any action, proceeding or counterclaim brought by either ofthe parties hereto on any matters whatsoever arising out of or in any way connected with this Lease.(g) This Lease shall be governed by the laws of the State of California applicable to transactions to be performed wholly therein.(h) Tenant acknowledges that the financial capability of Tenant to perform its obligations under this Lease is material to Landlordand that Landlord would not enter into this Lease but for its belief, based on its review of the financial statements of Tenant and any personguarantying the obligations of Tenant under this Lease delivered to Landlord prior to the Lease Effective Date, that Tenant is capable ofperforming such financial obligations. If Tenant ceases filing Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K with theU.S. Securities and Exchange Commission during the Term, Landlord may request, and Tenant shall provide Landlord within ten (10)business days of Landlord’s request, Tenant’s and any such guarantor’s current financial statements, and such other information discussingthe financial worth of Tenant and any such guarantor reasonably requested by Landlord, which statements and information Landlord shalluse solely for purposes of this Lease and in connection with the ownership, management, financing and disposition of theBuilding. Tenant hereby represents, warrants and certifies to Landlord that all financial statements delivered to Landlord by Tenant orsuch guarantor: (a) are true and correct in all material respects at the time delivered to Landlord, (b) are prepared in accordance with arecognized standard of accounting consistently applied that fairly presents the financial condition and results of the operations of Tenantor such guarantor, as applicable, and (c) with respect to any financial statements delivered to Landlord prior to the effective date of thisLease, are true and correct as of the effective date of this Lease.(i) Tenant represents, warrants and covenants that Tenant is in compliance with the requirements of Executive Order No. 13224, 66Fed. Reg. 49079 (September 25, 2001) (the “Order”), and other similar requirements contained in the rules and regulations of the Office ofForeign Asset Control, Department of the Treasury (“OFAC”), and in enabling legislation or other Executive Orders in respect thereof (theOrder and such other rules, regulations, legislation or orders are collectively called the “Orders”). Without limiting the generality of theforegoing, Tenant20AEROVIRONMENT14501 PRINCETON AVENUE represents, warrants and covenants that Tenant: (i) is listed on the Specially Designated Nationals and Blocked Persons List maintained byOFAC pursuant to the Order and/or on any other list of terrorists or terrorist organizations maintained pursuant to any of the rules andregulations of OFAC pursuant to any other applicable Orders (such lists being collectively referred to as the “Lists”); (ii) is a person whohas been determined by competent authority to be subject to the prohibitions contained in the Orders; or (iii) is owned or controlled by,nor acts for or on behalf of, any person on the Lists or any other persons who have been determined by competent authority to be subject tothe prohibitions contained in the Orders. Tenant agrees to execute such certificates as may be reasonably requested by Landlord from timeto time to enable Landlord to comply with the Orders and/or any anti-money laundering laws as relates to this Lease.33. BROKER.Tenant represents and warrants to Landlord that Tenant has had no dealings with any broker, finder, or similar person who is ormight be entitled to a commission or other fee in connection with the execution of this Lease, except for Landlord’s Broker and Tenant’sBroker. Landlord shall pay the commission due Landlord’s Broker and Tenant’s Broker pursuant to a separate agreement betweenLandlord and Landlord’s Broker. Landlord and Tenant shall each indemnify, defend, protect and hold the other harmless from and againstany and all claims and damages and for any and all costs and expenses (including reasonable attorneys’ fees and costs) resulting fromclaims that may be asserted against the other party by any broker, agent or finder not disclosed herein.34. ROOF EQUIPMENT.Subject to Landlord’s approval of the plans and specifications related thereto, Landlord shall permit Tenant to install, operate,maintain and remove at Tenant’s sole expense one or more satellite dishes, cellular antennae related equipment (each, “RooftopEquipment”) on the roof of the Building, all in locations mutually acceptable to Landlord and Tenant. Any such Rooftop Equipmentinstalled pursuant to this Section shall be so installed in an aesthetically pleasing manner and Tenant shall exercise all reasonable steps toshield or screen such items from public view so as to minimize any risks that the items create or constitute a nuisance. Landlord andTenant agree that the Rooftop Equipment shall constitute an Alteration; provided, however, that notwithstanding anything to the contraryin this Lease, (i) removal of the Rooftop Equipment at the end of the Lease Term shall be governed by the terms of this Section 34; (ii)Landlord shall not be required to maintain property insurance covering loss of the Rooftop Equipment; and (iii) Tenant shall not berequired to pay any supervisory or other construction fee to Landlord or Landlord’s property manager in connection with installation orremoval of the Rooftop Equipment. Landlord makes no warranties or representations to Tenant as to the permissibility of RooftopEquipment on the Building under Applicable Laws. In no event shall installation of Rooftop Equipment require any roof penetrations orvoid any roof warranty. Upon the expiration or earlier termination of this Lease, at Tenant’s sole cost and expense, Tenant shall remove orcause to be removed the Rooftop Equipment and repair or cause to be repaired any damage caused by such removal.Without limiting the terms of any other indemnity set forth in this Lease, Tenant hereby agrees to indemnify and hold Landlord,its agents, employees, contractors and representatives, harmless from and against any and all cost, claims, damages (including, but notlimited to, any damage to the Building, the roof or Landlord's property), causes of action and liability which may arise by reason of anyoccurrence attributable to or arising out of Tenant's installation, maintenance, repair, operation or removal of any Rooftop Equipment,including without limitation, any claim or cause of action for injury to or death of any person or damage to any property arising therefromand Tenant agrees to defend any claim or demand against Landlord, its agents or employees arising out of any such occurrence. Tenantshall, upon thirty (30) days prior written notice from Landlord, reimburse Landlord for all costs and expenses incurred by Landlord as aresult of Tenant's operation of any Rooftop Equipment, including damages to the Building and the furnishing of electric power for theoperation of the same. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK] 21AEROVIRONMENT14501 PRINCETON AVENUE IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the date first above written.TENANT: LANDLORD: AEROVIRONMENT, INC., PRINCETON AVENUE HOLDINGS, LLC,a Delaware corporation a California limited liability company By:/s/ Kirk J. Flittie By:Nearon Enterprises,Name:Kirk J. Flittie a California corporationIts:VP & GM, UAS Its:Designated Manager By:/s/ Anthony Perino Anthony Perino, President 22AEROVIRONMENT14501 PRINCETON AVENUE EXHIBIT A-1SITE PLAN A-1-1AEROVIRONMENT14501 PRINCETON AVENUE EXHIBIT A-2 PREMISES PLAN A-2-1  A-2-2 EXHIBIT BOPERATING EXPENSES AND TAXESA. As used in this Lease, “Operating Expenses” shall mean, without duplication, all costs and expenses paid or incurred byLandlord in connection with the ownership, management, operation, maintenance and repair of the Building and/or the Project(individually and collectively, as used in this Exhibit, the “Building”), and in providing services in accordance with this Lease, includingthe following: salaries, wages, other compensation, taxes and benefits (including payroll, social security, workers’ compensation,unemployment, disability and similar taxes and payments) for all personnel engaged in the management, operation, maintenance or repairof the Building; uniforms provided to such personnel; premiums and other charges for all property, earthquake, rental value, liability andother insurance carried by Landlord, together with the amount of any deductible under such policy; water and sewer charges or fees;license, permit and inspection fees; electricity, water, heating, ventilation, air conditioning, gas, fuel, steam and other utilities; sales, useand excise taxes on goods and services purchased by Landlord; telephone, delivery, postage, stationery supplies and other expenses;management fees (not to exceed 2.5% of then applicable Base Rent) and expenses; repairs to and maintenance of the Building (includingthe contribution to and replenishment of reserves maintained by Landlord for the payment of such expenses), including Building Systemsand accessories thereto and repair and replacement of worn out or broken equipment, facilities, parts and installations; window cleaning,security, guard, extermination, water treatment, garbage and waste disposal, rubbish removal, plumbing and other services; inspection orservice contracts for electrical, mechanical and other Building equipment and systems; supplies, tools, materials and equipment;accounting, legal and other professional fees and expenses (excluding legal fees, accounting, and other professional fees and expensesincurred by Landlord relating to disputes with specific tenants or the negotiation, interpretation or enforcement of specific leases);painting of any of the public or Common Areas of the Project, including, without limitation, the Building exterior and any interiorportions thereof, and the cost of maintaining the sidewalks, landscaping and other common areas of the Project; the cost of parking arearepair, restoration and maintenance, including, without limitation, resurfacing, restriping and cleaning; the cost, amortized over the usefullife as reasonably determined by Landlord, according to generally accepted accounting principles, of all furniture, fixtures, draperies,carpeting and personal property furnished by Landlord in the Common Areas or in the Building office (if any); all costs and expensesresulting from compliance with any laws, ordinances, rules, regulations or orders applicable to the Building; all costs and expenses ofcontesting by appropriate legal proceedings brought in good faith on any matter concerning the amount or validity of any Property Taxes;the cost, reasonably amortized as determined by Landlord, according to generally accepted accounting principles, of all capitalimprovements made to the Building to reduce any item of Operating Expenses, or that constitute a replacement of a Building System, orthat are required by any law, ordinance, rule, regulation or order; charges and assessments on the Project pursuant to any applicablecovenants, conditions and restrictions encumbering the Project; and such other usual costs and expenses which are paid by other landlordsfor the on-site operation, servicing, maintenance and repair of comparable industrial buildings in the Ventura County, California area. Anycapital expenses incurred by Landlord in connection with the foregoing shall be amortized on a straight-line basis over the useful life ofthe relevant item in accordance with generally accepted accounting principles, consistently applied, and as generally practiced in the realestate industry (“GAAP”).Notwithstanding anything contained in the Lease or the foregoing list of Operating Expenses, no expenses incurred for the following shallbe included in Operating Expenses for any expense year: Property Taxes; depreciation on the Building (except as described above) costsof tenants’ improvements (including permit, license and inspection fees); real estate brokers’ commissions, interest, payments of loanprincipal and expenses related to a financing or refinancing of the Building; the cost of services provided to tenants materially in excess ofservices customarily provided to Tenant, whether or not Landlord is entitled to reimbursement therefor; Landlord’s legal costs andexpenses in connection with any lease dispute, or litigation with any tenant, or Landlord’s costs in maintaining Landlord’s corporate orlimited liability company status; expenses for which Landlord is reimbursed or indemnified (either by an insurer, condemnor, tenant orotherwise); expenses incurred in leasing or procuring tenants (including, without limitation, lease commissions, legal expenses, andexpenses of renovating space for tenants); interest on, and amortization of, mortgages or deeds of trust; any rents under any ground,overriding and/or underlying leases; costs of selling, financing and/or mortgaging any of Landlord’s interest in the Building or Projectincluding, without limitation, mortgage or recording taxes, points, commissions, legal fees and commitment fees; any sums paid to aperson, firm, corporation or other entity related to Landlord which are in excess of the market amount; compensation, bonuses, salaries,administrative wages and benefits of officers, directors, and executive personnel,B-1 property manager and leasing agents of Landlord or personnel of Landlord above the level of Building manager; legal and otherprofessional fees, court costs, and other expenses incurred in preparing, negotiating and executing leases, amendments, terminations andextensions or in resolving any disputes with tenants or other occupants or enforcing lease obligations; auditing fees other than auditingfees in connection with the preparation of statements required to reconcile Operating Expenses; cost of any work or service performed forany specific tenant (including Tenant) at such tenant's cost; and/or charges for electricity, HVAC, any other utilities or for janitorial orcleaning for which Landlord is entitled to reimbursement from any specific tenant other than through Operating Expenses; services orbenefits provided to some tenants but not to Tenant; the costs of developing the site or correcting defects and/or latent defects in theoriginal construction of the Building or in the Building equipment and/or costs to correct any damage caused by subsurface or soilconditions; cost of any repair made by Landlord to remedy damage caused by, or resulting from the gross negligence or willful orintentional acts of Landlord, its agents, servants, contractors, or employees; costs to remove asbestos or Hazardous Materials (as defined byall applicable environmental laws) from the Building except for routine removal of Hazardous Materials commonly present in a Buildingcomparable to that of the Building, such as but not limited to office and cleaning supplies and motor oil deposits; the cost of any additionsto the Building; costs to retrofit or reinforce the Building or the Premises to comply with existing (as of the Effective Date) laws, rules,codes or regulation related to earthquake safety, floor control and/or handicapped access; fines or penalties incurred by Landlord due toLandlord's violation of any applicable governmental Law, requirement or order; any late fees, penalties, interest charges or similar feesincurred by Landlord; except to the extent permitted in the preceding paragraph, lease payments for rented equipment, the cost of whichequipment would constitute a capital expenditure if the equipment were purchased; the cost of complying with the Americans WithDisabilities Act in effect (and as interpreted) as of the Effective Date, whether such costs are classified as capital items or expenses undergenerally accepted accounting principles; charitable or political contributions; gift and corporate taxes of Landlord; and capitalexpenditures as determined in accordance with GAAP, including, but not limited to, costs incurred by Landlord for improvements orreplacements (including structural additions), repairs, equipment and tools which are of a “capital” nature and/or which are considered“capital” improvements or replacements under GAAP, except as otherwise provided in paragraph A above.B. Actual Operating Expenses for each calendar year shall be adjusted, if necessary, to equal Landlord’s reasonable estimateof Operating Expenses for a full calendar year with the total area of the Building occupied during such full calendar year; provided,however, Landlord shall not in any year collect in excess of one hundred percent (100%) of the actual Operating Expenses paid or incurredby Landlord in any calendar year.C. Landlord reserves the right to, in good faith, establish classifications for the equitable allocation of Operating Expensesthat are incurred for the direct benefit of specific types of tenants or users in the Building (“Cost Pools”). Landlord’s reasonabledetermination of such allocations in a manner consistent with the terms and conditions of this section shall be final and binding onTenant. Tenant acknowledges that the allocation of Operating Expenses among Cost Pools does not affect all Operating Expenses, and islimited to specific items that are incurred or provided to tenants of Cost Pools which Landlord determines, in good faith, it would beinequitable to share, in whole or in part, among tenants of other Cost Pools in the Building.D. As used in this Lease, “Property Taxes” shall mean all taxes, assessments, excises, levies, fees and charges (and any tax,assessment, excise, levy, fee or charge levied wholly or partly in lieu thereof or as a substitute therefor or as an addition thereto) of everykind and description, general or special, ordinary or extraordinary, foreseen or unforeseen, secured or unsecured, that are levied, assessed,charged, confirmed or imposed by any public or government authority on or against, or otherwise with respect to, the Building or any partthereof or any personal property used in connection with the Building, or any charge or fee imposed by any federal, state or localgovernment, district or agency for fire protection, public transportation, housing, trash removal, sidewalk, street maintenance or otherpublic service(s). Property Taxes shall not include net income (measured by the income of Landlord from all sources or from sources otherthan solely rent), franchise, documentary transfer, inheritance or capital stock taxes of Landlord, unless levied or assessed against Landlordin whole or in part in lieu of, as a substitute for, or as an addition to any Property Taxes.E. In addition to all rent and other charges to be paid by Tenant under the Lease, Tenant shall reimburse Landlord upondemand for all taxes, assessments, excises, levies, fees and charges including all payments related to the cost of providing facilities orservices, whether or not now customary or within the contemplation of Landlord and Tenant, that are payable by Landlord and levied,assessed, charged, confirmed or imposed by any public or government authority upon, or measured by, or reasonably attributable to (i) thecost orB-2 value of Tenant’s equipment, furniture, fixtures and other personal property located in the Premises or the cost or value of any leaseholdimprovements made in or to the Premises by or for Tenant, regardless of whether title to such improvements is vested in Tenant orLandlord, (ii) any rent payable under this Lease, including any gross income tax or excise tax levied by any public or governmentauthority with respect to the receipt of any such rent, (iii) the possession, leasing, operation, management, maintenance, alteration, repair,use or occupancy by Tenant of the Premises, or (iv) this transaction or any document to which Tenant is a party creating or transferring aninterest or an estate in the Premises. All taxes, assessments, excises, levies, fees and charges payable by Tenant under this Exhibit shall bedeemed to be, and shall be paid as, additional rent. B-3 EXHIBIT C RULES AND REGULATIONS OF14501 PRINCETON AVENUE, MOORPARK, CA ROOFNeither Tenant nor any agent, employee, contractor, invitee or licensee of Tenant shall go upon the roof of the Building, except aspermitted by Landlord in accordance with the Lease.SIGNSNo sign, placard, picture, name, advertisement or notice visible from the exterior of the Premises shall be inscribed, painted,affixed or otherwise displayed by Tenant on any part of the Building or the Premises without the prior written consent ofLandlord. Landlord will adopt and furnish to tenants general guidelines relating to signs inside the Building. Tenant agrees to conform tosuch guidelines. All approved signs or lettering shall be printed, painted, affixed or inscribed at the expense of Tenant by a personapproved by Landlord.KEYSLandlord will furnish Tenant without charge with two (2) keys to each door lock provided in the Premises by Landlord. Landlordmay make a reasonable charge for any additional keys. Tenant, upon the termination of this Lease, shall deliver to Landlord all keys todoors in the Building.NO NUISANCESTenant shall not use or keep in the premises or the building any kerosene, gasoline or inflammable or combustible fluid ormaterial other than limited quantities thereof reasonably necessary for the operation or maintenance of tenant’s equipment. Tenant shallnot use any method of heating or air conditioning other than that supplied by landlord. Tenant shall not use or keep or permit to be usedor kept any foul or noxious gas or substance in the premises, or permit or suffer the premises to be occupied or used in a manner offensiveor objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations, or interfere in any way with othertenants or those having business in the Building, nor shall any animals be brought or kept in the premises or the Building (other thanservice animals).ACCESS TO BUILDINGIn the case of invasion, mob, riot, public excitement or other circumstances rendering such action advisable in Landlord’sopinion, Landlord reserves the right to prevent access to the Building during the continuance of the same by such action as Landlord maydeem appropriate, including closing doors. Tenant assumes all risks from theft or vandalism and agrees to keep the Premises locked as maybe required.USE OF NAME OF BUILDINGTenant shall not use the name of the Building for any purpose other than as an address of the business to be conducted by Tenantin the Premises. Landlord shall have the right to change the name, address or title of the Project or the Building.BATHROOMSThe toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which theywere constructed, no foreign substance of any kind whatsoever shall be thrown therein, and the expense of any breakage, stoppage ordamage resulting from the violation of this rule shall be paid by Tenant if caused by Tenant or its agents, employees, contractors, inviteesor licensees.TRASH REMOVALTenant shall not make, suffer or permit litter, except in appropriate receptacles for that purpose. Tenant shall store all its trash andgarbage within the Premises. No material shall be placed in the trash boxes or receptaclesC-1 if such material is of such nature that it may not be disposed of in the ordinary and customary manner of removing and disposing ofindustrial building trash and garbage in the city or county in which the Building is located without being in violation of any law orordinance governing such disposal. Tenant shall crush and flatten all boxes, cartons and containers. Tenant shall pay extra charges forany unusual trash disposal.NO SOLICITINGCanvassing, soliciting, distribution of handbills or any other written material and peddling in the Building are prohibited, andTenant shall cooperate to prevent the same.NO SMOKINGThere shall be NO SMOKING in the Building or in the immediate area of the entrances to the Building as designated by Landlord.PARKING RULES1. Tenant shall use the parking facilities of the Project only for the parking of automobiles used by Tenant’s employeeswhile the employees are working in the Premises and for use by Tenant’s licensees and invitees while visiting the Premises. Except asexpressly designated in writing by Landlord, parking is on an unreserved, first-come basis.2. Automobile parking areas (except as provided below) shall be used only for parking by vehicles no longer than full size,passenger automobiles herein called “Permitted Size Vehicles”. Vehicles other than Permitted Size Vehicles are herein referred to as“Oversized Vehicles”. Tenant shall be permitted to park Oversized Vehicles used in Tenant’s business in the automobile parking areas,subject to reasonable limitations of such parking as designated by Landlord.3. Tenant shall not permit or allow any vehicles that belong to or are controlled by Tenant or Tenant’s employees, suppliers,shippers, customers, or invitees to be loaded, unloaded, or parked in areas other than those designated by Landlord for such activities.4. Unless otherwise instructed, every person using the parking area is required to park and lock his own vehicle. Landlord isnot responsible for any damage to vehicles, injury to persons or loss of property, all of which risks are assumed by the party using theparking facilities. The release provision contained in Paragraph 14(f) of this Lease is expressly made applicable to Tenant’s use of theparking facilities and any occurrences therein and in the driveway access and entrances thereto.5. The maintenance, washing, waxing or cleaning of vehicles in the parking areas or anywhere on the property is prohibited.6. Tenant shall be responsible for ensuring that all of its employees, agents and invitees comply with the applicable parkingrules, regulations, laws and agreements.7. Parking herein provided is intended as a license only and no bailment is intended or shall be created hereby.8. Users of the parking area will obey all posted signs and park only in the areas designated for vehicle parking.9. Landlord reserves the right to modify these rules and/or adopt such other reasonable and nondiscriminatory rules andregulations as it may deem necessary for the proper operation of the parking facilities.WAIVERLandlord may waive any one or more of these Rules and Regulations for the benefit of any particular tenant or tenants, but nosuch waiver by Landlord shall be construed as a waiver of such Rules and Regulations in favor of any other tenant or tenants, nor preventLandlord from thereafter enforcing any such Rules and Regulations against any or all of the tenants of the Building in a uniform and non-discriminatory manner.C-2 LIFE SAFETYTenant shall comply with all safety, fire protection and evacuation regulations established by Landlord or any applicablegovernmental agency.SUPPLEMENTAL TO LEASEThese Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, thecovenants of this Lease. C-3 EXHIBIT DWORK LETTERThis Work Letter sets forth the agreement of Landlord and Tenant with respect to the improvements to be constructed in thePremises. All defined terms used herein shall have the meaning set forth in the Lease, unless otherwise defined in this Work Letter.1. Landlord’s Work.(a) Landlord shall deliver the Premises to Tenant upon Substantial Completion of the Landlord’s Work (as definedbelow). The term “Substantially Completed” or “Substantial Completion” as used in the Lease or this Work Letter shall mean Landlordhas sufficiently completed all the work required to be performed by Landlord in accordance with this Work Letter (except standardpunchlist items, which Landlord shall thereafter promptly complete after receipt of written notice thereof from Tenant received withinthirty (30) days after the Commencement Date) such that Tenant can conduct normal business operations from the Premises. TheLandlord’s Work shall be comprised of (i) the improvements (the “Base Landlord Work”) identified in that certain space plan (the “BaseLandlord Work Space Plan”), a copy of which is attached as Exhibit D-1 (and which, for avoidance of doubt, include, without limitation,HVAC for the warehouse, five (5) private offices on the first floor of the Premises, and the epoxy finish on the warehouse floor), and (ii) theimprovements identified in that certain space plan (the “Full Scope Space Plan” and referred to collectively with the Base Landlord WorkSpace Plan as the “Space Plan”), a copy of which is attached as Exhibit D-2, which are in addition to the Base Landlord Work and whichTenant elects pursuant to Section 1(b) below to cause Landlord to complete (such additional improvements, the “Supplemental LandlordWork”). Except as otherwise noted in the Space Plan, Landlord shall utilize Building Standard materials for improvement to thePremises. Landlord shall perform and commence work on the Landlord’s Work through an architect and contractors acceptable toLandlord in its sole discretion. As used herein, the term “Building Standard” refers to the materials maintained in stock by Landlord foruse in the improvements of tenant space in the Building. The parties acknowledge and agree that the Landlord’s Work constitutes all ofthe work required to enable Tenant to occupy, and operate its business in, the Premises.(b) Landlord will perform, at its sole cost and expense, the Base Landlord Work. Within five (5) business days of theEffective Date of the Lease, Tenant shall provide written notice to Landlord of the Supplemental Landlord Work which Tenant elects forLandlord to construct; provided that Tenant may modify its election of Supplemental Landlord Work to be performed by adding ordeleting therefrom until Construction Drawings have been approved pursuant to Section 2 below, and any modifications thereafter to theSupplemental Landlord Work shall constitute a Tenant Delay pursuant to Section 4 below. As part of the Landlord’s Work, Landlord willalso perform, at its sole cost and expense, the Supplemental Landlord Work, provided however, that all costs attributable to suchSupplemental Landlord Work shall be reimbursed by Tenant within thirty (30) days of receipt from Landlord of invoice therefore (andreasonable evidence of such costs), except that Tenant shall not be responsible to reimburse Landlord for the cost of architectural plans,engineering plans and permits attributable to the Supplemental Landlord Work, and Tenant may, by delivery of written notice to Landlord,elect to apply all or a portion of the TI Reimbursement (as set forth under Section 13(e) of the Lease) towards Tenant’s reimbursementobligations for the Supplemental Landlord Work.2. Plans.(a) Landlord shall deliver to Tenant construction drawings which incorporate and are consistent with the SpacePlan, and which show in detail the intended design, construction and finishing of all portions of the Landlord’s Work (collectively, the“Construction Drawings”). Within five (5) business days after Tenant’s receipt of the Construction Drawings, Tenant shall either approveor disapprove the Construction Drawings, which approval shall not be unreasonably withheld. Tenant’s failure to approve or disapprovethe Construction Drawings within such 5 business-day period shall be deemed to constitute Tenant’s approval of the ConstructionDrawings. If Tenant disapproves the Construction Drawings, then Tenant shall state in reasonable detail the changes which Tenantrequires to be made thereto. Landlord shall submit to Tenant revised Construction Drawings within five (5) business days after Landlord’sreceipt of Tenant’s disapproval notice. Tenant shall give Landlord written notice of its approval or disapproval of the revisedConstruction Drawings within two business (2)D-1 days after the date of Tenant’s receipt thereof. Tenant’s failure to approve or disapprove the revised Construction Drawings within such 2business-day period shall be deemed to constitute Tenant’s approval of the revised Construction Drawings. If Tenant disapproves therevised Construction Drawings, then Landlord and Tenant shall continue to follow the procedures set forth in this Paragraph 2(a) untilLandlord and Tenant reasonably approve such Construction Drawings in accordance with this Paragraph 4(a); provided, however, thatnotwithstanding anything to the contrary set forth above in this Paragraph 2(a), if Landlord and Tenant have not mutually approved theConstruction Drawings within two business (2) days after Landlord’s delivery of the third (3rd) iteration of the same to Tenant, or withinthirty (30) calendar days after Landlord delivers the initial set of Construction Drawings to Tenant (whichever is sooner), then Landlordmay, in its sole discretion, elect to terminate this Lease by giving written notice of such election to Tenant at any time thereafter.(b) After Landlord and Tenant have mutually approved the Construction Drawings pursuant to Paragraph 2(a)above, Landlord shall apply, or cause its architect to apply, for applicable permits. Notwithstanding anything to the contrary set forthabove in this Paragraph 2(b), if Architect is unable to obtain the Permits within sixty (60) days after Landlord and Tenant have mutuallyapproved the Construction Drawings despite Architect’s good faith and diligent efforts, then Landlord may elect to terminate this Lease bygiving written notice of such election to Tenant at any time thereafter.3. Early Access. Provided that Tenant, its employees, contractors and agents do not interfere with, or delay, the Landlord’sconstruction of the Landlord’s Work, Landlord shall allow Tenant access to the Premises commencing as of the execution and delivery ofthis Lease by both parties for the purpose of Tenant performing any building design, permitting and preparation prior to occupancy. Priorto Tenant’s entry into the Premises as permitted by the terms of this paragraph, Tenant shall submit a schedule to Landlord for its approval,which schedule shall detail the timing and purpose of Tenant’s entry, and shall deliver evidence of insurance coverage as required ofTenant under this Lease. Tenant’s early access onto the Premises under this Paragraph 3 shall be subject to all terms and conditions of thisLease (including without limitation all insurance and indemnity obligations), except for the payment of Rent.4. Tenant Delay. In the event of any Tenant Delays (as that term is hereinafter defined), the Commencement Date of theLease shall be determined based on the date Landlord in good faith determines it would have substantially completed the Landlord’s Workwithout the delays attributable to Tenant Delays. As used herein, the term “Tenant Delays” shall mean any delay that Landlord mayencounter in the performance of Landlord’s obligations under this Work Letter or the Lease to construct the Landlord’s Work because ofany act or omission of any nature by Tenant or its employees, contractors or agents, including, without limitation, delays resulting fromchanges in or additions to the plans for the Landlord’s Work; delays resulting from Tenant’s election to include in the Landlord’s Work theconstruction of offices within the warehouse portion of the Premises; delays due to the failure to promptly give authorizations or approvalsof the Construction Drawings or any other matter required to enable Landlord to proceed with any work; delays resulting from interferenceby Tenant, its employees, contractors or agents with Landlord’s performance of the Landlord’s Work. D-2 EXHIBIT D-1BASE LANDLORD WORK SPACE PLAN D-1-1  D-1-2  D-1-3  D-1-4 EXHIBIT D-2FULL SCOPE SPACE PLAN D-2-1  D-2-2  D-2-3  D-2-4 EXHIBIT ECOMMENCEMENT LETTER________, 20_________________________________________________________________Re: Lease dated __________ ___, 201_ (“Lease”), by and between Princeton Avenue Holdings, a California limited liabilitycompany (“Landlord”), and Aerovironment, Inc., a Delaware corporation (“Tenant”), with respect to 14501 Princeton Avenue, Moorpark,California (“Premises”)Dear Tenant:In accordance with the terms and conditions of the above referenced Lease, Tenant hereby accepts possession of the Premises and agrees asfollows:Commencement Date of the Lease: _______, 20__;Expiration Date of the Lease: _______, 20__. Please acknowledge your acceptance of possession of the Premises and agreement to the terms set forth above by signing all three (3)copies of this Commencement Letter in the space provided and returning two (2) fully executed copies of the same to my attention.Sincerely,PRINCETON AVENUE HOLDINGS, LLC,a California limited liability companyBy:Nearon Enterprises, a California corporationIts:Designated ManagerBy: Anthony Perino, President AGREED AND ACCEPTED: AEROVIRONMENT, INC.,a Delaware corporation By: Name: Its: E-1 RIDER NO. 1 TO LEASE14501 PRINCETON AVENUE, MOORPARK, CA This Rider No. 1 to Lease is attached to and incorporated by reference into that certain Lease, dated March 28, 2018, entered into by andbetween Princeton Avenue Holdings, LLC, a California limited liability company, as Landlord, and Aerovironment, Inc., a Delawarecorporation, as Tenant (the “Lease”). Landlord and Tenant hereby amend and supplement the Lease as hereinafter set forth. In the event ofany conflict or inconsistency between the Lease and this Rider, the terms of this Rider shall control and prevail. Capitalized terms usedherein and not otherwise defined shall have the meaning given said terms in the Lease. 35. EARLY TERMINATION. Tenant shall have the option (“Termination Option”) to terminate this Lease effective upon the last day of the thirty ninth (39th) fullcalendar month of the Term only (the “Termination Date”). In order to exercise the Termination Option, Tenant must fully and completelysatisfy each and every one of the following conditions: (a) Tenant must give Landlord written notice (“Termination Notice”) at least six(6) months prior to the Termination Date, (b) at the time of the Termination Notice, no Event of Default shall exist under this Lease, norshall any circumstance exist that, with the giving of notice, the passage of time, or both, would constitute an Event of Default under thisLease, and (c) concurrently with Tenant’s delivery of the Termination Notice to Landlord, Tenant shall pay to Landlord a termination fee(“Termination Fee”) equal to Six Hundred Thousand and 00/100 Dollars ($600,000.00). Tenant’s failure to deliver the Termination Feeconcurrently with the Termination Notice shall render the Termination Notice and the Termination Option null and void and this Leaseshall continue in full force and effect. Tenant’s rights granted under this Paragraph 35 are personal to the original Tenant signatory to thisLease and any Permitted Transferee, and shall not be assigned to nor inure to the benefit of any other party. 36. EXTENSION OPTION. Tenant shall have the right to extend the Term of this Lease (the “Extension Option”), for one (1) thirty six (36) month period (the“Extension Term”) if Tenant (i) gives Landlord written notice of such election (the “Option Notice”) not earlier than eighteen (18) months,and not later than twelve (12) months, before the expiration of the original or then current Term of this Lease; (ii) is not in default beyondany applicable cure periods under any provision of this Lease on the date of giving the Option Notice; and (iii) is not in default beyondany applicable cure periods of any provision of this Lease on the date of the expiration of the original or then current Term of thisLease. The foregoing conditions are for the sole benefit of Landlord, and Landlord, alone, shall have the right in its sole and absolutediscretion to insist on strict observance with the foregoing conditions or to waive any of the foregoing conditions. All of the terms andconditions of this Lease shall apply during the Extension Term (other than the further right to extend the Term, and any obligation toconstruct Landlord’s Work provided in this Lease, which shall be inapplicable). The Base Rent for the first year of the Extension Termshall equal one hundred two point five percent (102.5%) of the then current Base Rent being paid under this Lease, and shall increaseannually thereafter by two point five percent (2.5%). The foregoing Extension Option is personal to the named Tenant under this Lease,and shall not inure to the benefit of any assignee or subtenant other than a Permitted Transferee. The Extension Option shall be void andof no further effect if at any time the named Tenant under this Lease assigns this Lease or subleases any portion of the Premises to anyentity other than a Permitted Transferee.AEROVIRONMENT14501 PRINCETON AVENUEExhibit 10.40 AMENDMENT NO. 01 TOSTANDARD CONSULTING AGREEMENT AeroVironment, Inc., (“AV” or “Party”) and General Charles R. Holland, USAF, Retired(“Consultant" or "Party"), collectively referred to as the “Parties,” previously entered into a StandardConsulting Agreement with an Effective Date of January 01, 2016 ("Agreement"), which provides forthe Consultant to render certain specified Services to AV during the Term of the Agreement. The Partieshave agreed to amend the Agreement as follows:1.First paragraph of the Agreement is modified to update AV's corporate address and also updateConsultant's address. The amended first paragraph reads as follows: “THIS AGREEMENT isexecuted and made effective as of January 01, 2016 (the “Effective Date”) betweenAeroVironment, Inc., a Delaware corporation, and its subsidiaries, with offices at 800 RoyalOaks Drive, Suite 210, Monrovia, CA 91016-6347 (hereinafter referred to as "AV" or Party) andGeneral Charles R. Holland, USAF, Retired, with offices at , Phone: , E-mail:mailto:hollandcr1@gmail.com (hereinafter referred to as “consultant" or “Party"). AVand the Consultant will be collectively referred to as “the Parties.”2.Section 2, “Term,” of the Agreement is modified to extend the Term of the Agreement to June30, 2017. The amended Section 2 reads as follows: "Services will be performed between theEffective Date and June 30, 2017 ("Expiration Date''). This Agreement may be extended foradditional periods by mutual written agreement between the Parties prior to the Expiration Dateof the initial term or any extension thereof. If the Parties do not execute such a writtenagreement, this Agreement will expire and automatically terminate as of the Expiration Date.”3.Section 19, "Notice,'' of the Agreement is modified to update AV’s corporate address and alsoupdate Consultant’s address. The amended Section 19 reads as follows: “Any notice betweenthe parties hereto required or permitted to be given under this Agreement shall be sufficient if inwriting and sent by registered or certified mail, postage prepaid, or other express deliveryservice, to the respective addresses set forth below or at such other address as either of theparties may from time to time designate in accordance with the provisions of this Section 19.Senior Counsel800 Royal Oaks Drive, Suite 210Monrovia, CA 91016-6347 Telephone: +626-357-9983 ext 4588Facsimile: +626-359-1894E-Mail: burkholder@avinc.com General Charles R. Holland, USAF RetiredAeroVironment:John BurkholderSenior Counsel800 Royal Oaks Drive, Suite 210Monrovia, CA 91016-6347 Telephone: +626-357-9983 ext 4588Facsimile: +626-359-1894E-Mail: burkholder@avinc.com Consultant: General Charles R. Holland, USAF Retired AEROVIRONMENT PROPRIETARY INFORMATIONPage 1 All other terms of the Agreement and any other terms of previous Amendments to the Agreementremain in full force and effect. If there is a conflict between the terms of this Amendment and those ofthe Agreement or any previous Amendment, the terms of this current Amendment shall control. IN WITNESS WHEREOF, the Parties have executed this Amendment effective as of January 01, 2017AEROVIRONMENT, INC.Signature: /s/ Wahid NawabiPrinted Name: Wahid NawabiTitle: President and CEODate: 11/23/2016 CONSULTANT:General Charles R. Holland, USAF, RetiredSignature: /s/ Charles R. HollandPrinted Name: Charles R. HollandTitle: ConsultantDate: 11/24/16AEROVIRONMENT PROPRIETARY INFORMATIONPage 2 STANDARD CONSULTING AGREEMENTEffective Date: January 01, 2016Consultant: General Charles R. Holland, USAF, RetiredTASK ORDER # FY17-001Project No. 9000.6435.0100.000A. Effort and/or Services to be provided by Consultant:Consultant will provide marketing support for unmanned air vehicle systems. This includes: 1. Scheduling meetings with key executives from the U.S. Department of Defense.2. On-going consulting services on AV capture activities.3. Facilitate and provide assistance scheduling meetings with key participants at variousindustry conferences.4. Provide industry advice on ad-hoc basis as requested by the AV Task Manager.In performance of the work under this Task Order and Consultant Agreement, the Consultant is notpermitted to disclose any export-controlled data or furnish any defense services to non-US persons,unless authorized in advance by the US Department of State or Department of Commerce. TheConsultant is not permitted to access any US or other government classified information in the course ofperformance of work under this Task Order and Consulting Agreement, unless the following actionshave occurred: (1) AV Security Officer has approved such access in advance; (2) the Parties haveexecuted the “Consultant Certificate Regarding Access to and Handling of Classified Information”(Attachment E to the Consulting Agreement); and (3) and the Consultant has completed all necessarytraining. B. Unless otherwise designated in writing by AV with notice to Consultant, the AV TaskManager is: Wahid Nawabi C. Target Performance Period: January 1, 2017 through June 30, 2017 D. Rates: Authorized Days: As required and authorized by AV Task ManagerRate: $4,000.00 per dayMonthly Retainer: $4,000.00Total Not To Exceed Cost: $24,000.00 (excluding expenses) E. Expenses: Maximum authorized expenses: AV will reimburse Consultant for any AV related businesstravel expenses (transportation, lodging, meals, etc.) during “Target Performance Period”defined under Section C above, provided all travel expenses are pre-approved in writing by theAV Task Manager. Travel and/or miscellaneous expenses shall be reimbursed in accordance with current AVstandard travel procedures; receipts shall accompany invoices of $25 or more. No labor orexpense costs above those amounts shown here are to be incurred without the prior writtenapproval of the AV Task Manager. AEROVIRONMENT PROPRIETARY INFORMATIONPage 1  F. SUBMITTING INVOICES: This practice will support efficient processing and payment. 1. INVOICES: Reference shall be made to the correct Task Order No. and Project No.and/or Charge No. and include the name of the AV Task Manager on all invoices.2. PROGRESS STATEMENT: To stay in compliance with the Federal AcquisitionRegulation (FAR), Part 31, each invoice should also be accompanied by a progress statement.3. INVOICES SHALL BE SENT TO: Accounts Payable Group, AeroVironment, Inc., viae-mail to acp@avinc.com, and also reference the correct Task Order Number and yourorganization’s name in the subject line of the email, with courtesy copy to AV Task Manager, orby mail to P.O. Box 5031, Monrovia, CA 91107. AeroVironment, Inc. /s/ Wahid NawabiSignature Wahid NawabiName (Print) President and CEOTitle 11/28/2016DateGeneral Charles R. Holland, USAF, Retired /s/ Charles R. HollandSignature Charles R. HollandName (Print) ConsultantTitle 11/28/2016Date AEROVIRONMENT PROPRIETARY INFORMATIONPage 2 AMENDMENT NO. 02 TOSTANDARD CONSULTING AGREEMENT AeroVironment, Inc. (“AV or Party”) and General Charles R. Holland, USAF, Retired (“Consultantor Party”), collectively the “Parties,” previously entered into a Standard Consulting Agreement withan Effective Date of January 1, 2016 (“Agreement”), which provides for the Consultant to rendercertain specified services to AV during the Term of the Agreement. The Parties have agreed to amendthe Agreement as follows: 1. Section 2, “Term,” of the Agreement is modified to extend the Term of the Agreement to April30, 2018. The amended Section 2 reads as follows: “Services will be performed betweenthe Effective Date and April 30, 2018 (“Expiration Date”). This Agreement may be extendedfor additional periods by mutual written agreement between the Parties prior to the ExpirationDate of the initial term or any extension thereof. If the Parties do not execute such a writtenagreement, this Agreement will expire and automatically terminate as of the Expiration Date.” All other terms of the Agreement and any other terms of previous Amendments to the Agreementremain in full force and effect. If there is a conflict between the terms of this Amendment and those ofthe Agreement or any previous Amendment, the terms of this current Amendment shall control. IN WITNESS WHEREOF, the Parties have executed this Amendment effective as of July 1,2017 AEROVIRONMENT, INC. Signature: /s/ Wahid Nawabi Printed Name: Wahid Nawabi Title: President and CEO Date: 6/7/2017 CONSULTANT GENERAL CHARLES R. HOLLAND, USAF,RETIRED Signature: /s/ Charles R. Holland Printed Name: Charles R. Holland Date: 6/7/2017 AEROVIRONMENT PROPRIETARY INFORMATIONPage 1 STANDARD CONSULTING AGREEMENTEffective Date: January 01, 2016Consultant: General Charles R. Holland, USAF, RetiredTASK ORDER # FY18-001Project No. 0100.CORA. Effort and/or Services to be provided by Consultant:Consultant will provide marketing support for unmanned air vehicle systems. This includes: 1. Scheduling meetings with key executives from the U.S. Department of Defense.2. On-going consulting services on AV capture activities.3. Facilitate and provide assistance scheduling meetings with key participants at variousindustry conferences.4. Provide industry advice on ad-hoc basis as requested by the AV Task Manager.In performance of the work under this Task Order and Consultant Agreement, the Consultant is notpermitted to disclose any export-controlled data or furnish any defense services to non-US persons,unless authorized in advance by the US Department of State or Department of Commerce. TheConsultant is not permitted to access any US or other government classified information in the course ofperformance of work under this Task Order and Consulting Agreement, unless the following actionshave occurred: (1) AV Security Officer has approved such access in advance; (2) the Parties haveexecuted the “Consultant Certificate Regarding Access to and Handling of Classified Information”(Attachment E to the Consulting Agreement); and (3) and the Consultant has completed all necessarytraining. B. Unless otherwise designated in writing by AV with notice to Consultant, the AV TaskManager is: Wahid Nawabi C. Target Performance Period: July 1, 2017 through April 30, 2018 D. Rates: Authorized Days: As required and authorized by AV Task ManagerRate: $4,000.00 per dayMonthly Retainer: $4,000.00Total Not To Exceed Cost: $24,000.00 (excluding expenses) E. Expenses: Maximum authorized expenses: AV will reimburse Consultant for any AV related businesstravel expenses (transportation, lodging, meals, etc.) during “Target Performance Period”defined under Section C above, provided all travel expenses are pre-approved in writing by theAV Task Manager. Travel and/or miscellaneous expenses shall be reimbursed in accordance with current AVstandard travel procedures; receipts shall accompany invoices of $25 or more. No labor orexpense costs above those amounts shown here are to be incurred without the prior writtenapproval of the AV Task Manager. AEROVIRONMENT PROPRIETARY INFORMATIONPage 1  F. SUBMITTING INVOICES: This practice will support efficient processing and payment. 1. INVOICES: Reference shall be made to the correct Task Order No. and Project No.and/or Charge No. and include the name of the AV Task Manager on all invoices.2. PROGRESS STATEMENT: To stay in compliance with the Federal AcquisitionRegulation (FAR), Part 31, each invoice should also be accompanied by a progress statement.3. INVOICES SHALL BE SENT TO: Accounts Payable Group, AeroVironment, Inc., viae-mail to acp@avinc.com, and also reference the correct Task Order Number and yourorganization’s name in the subject line of the email, with courtesy copy to AV Task Manager, orby mail to P.O. Box 5031, Monrovia, CA 91107. AeroVironment, Inc. /s/ Wahid NawabiSignature President and CEOTitle 6/6/2017DateGeneral Charles R. Holland, USAF, Retired /s/ Charles R. HollandSignature 6/5/2017Date AEROVIRONMENT PROPRIETARY INFORMATIONPage 2 AMENDMENT NO. 03 TOSTANDARD CONSULTING AGREEMENT Aerovironment, Inc. (“AV or Party”) and General Charles R. Holland, USAF, Retired (“Consultantor Party”), collectively the “Parties,” previously entered into a Standard Consulting Agreement withan Effective Date of January 1, 2016 (“Agreement”), which provides for the Consultant to rendercertain specified services to AV during the Term of the Agreement. The Parties have agreed toamend the Agreement as follows: 1. Section 2, “Term,” of the Agreement is modified to extend the Term of the Agreement to April30, 2019. The amended Section 2 reads as follows: “Services will be performed between theEffective Date and April 30, 2019 (“Expiration Date”). This Agreement may be extended foradditional periods by mutual written agreement between the Parties prior to the Expiration Dateof the initial term or any extension thereof. If the Parties do not execute such a writtenagreement, this Agreement will expire and automatically terminate as of the Expiration Date.” All other terms of the Agreement and any other terms of previous Amendments to the Agreementremain in full force and effect. If there is a conflict between the terms of this Amendment and thoseof the Agreement or any previous Amendment, the terms of this current Amendment shall control. IN WITNESS WHEREOF, the Parties have executed this Amendment effective as of May 1,2018. AEROVIRONMENT, INC. Signature:/s/ Wahid Nawabi Printed Name:Wahid Nawabi Title:President and CEO Date:4/23/2018 CONSULTANT: GENERAL CHARLES R. HOLLAND, USAF,RETIRED Signature:/s/ Charles R. Holland Printed Name:Charles R. Holland Date:4/23/2018 AEROVIRONMENT PROPRIETARY INFORMATIONPage 1 STANDARD CONSULTING AGREEMENTEffective Date: January 1, 2016 Consultant: Charles R. Holland TASK ORDER # FY19-001Project and/or Charge No.0100 COR A. Effort and/or Services to be provided by Consultant: Consultant will assist with the following services: Consultant will provide marketing support for unmanned air vehicle systems. This includes: 1. Scheduling meetings with key executives from the U.S. Department of Defense. 2. On-going consulting services on AV capture activities. 3. Facilitate and provide assistance scheduling meetings with key participants at variousindustry conferences. 4. Provide industry advice on ad-hoc basis as requested by the AV Task Manager. In performance of the work under this Task Order and Consultant Agreement, the Consultant isnot permitted to disclose any export-controlled data or furnish any defense services to non-USpersons, unless authorized in advance by the US Department of State or Department ofCommerce. The Consultant is not permitted to access any US or other government classifiedinformation in the course of performance of work under this Task Order and ConsultingAgreement, unless the following actions have occurred: (1) AV Security Officer has approvedsuch access in advance; (2) the Parties have executed the “Consultant Certificate RegardingAccess to and Handling of Classified Information” (Attachment E to the Consulting Agreement);and (3) and the Consultant has completed all necessary training. B. Unless otherwise designated in writing by AV with notice to Consultant, the AV TaskManager is: Wahid Nawabi C. Target Performance Period: May 1, 2018 through April 30, 2019 AEROVIRONMENT PROPRIETARY INFORMATIONPage 1 Consultant Initial Date AV Initial Date D. Rates: Authorized Days: As required and authorized by AV Task Manager Monthly Retainer: $4,000.00 Total Not To Exceed Cost: $48,000.00 (plus any expenses incurred as approved by TaskManager) E. Expenses: Maximum authorized expenses: NoneAV will reimburse Consultant for any AV related business travel expenses (transportation,lodging, meals, etc.) during “Target Performance Period” defined under Section C above,provided all travel expenses are pre-approved in writing by the AV Task Manager. Travel and/or miscellaneous expenses shall be reimbursed in accordance with current AVstandard travel procedures; receipts shall accompany invoices of $25 or more. No labor or expense costs above those amounts shown here are to be incurred without the priorwritten approval of the AV Task Manager. F. SUBMITTING INVOICES: This practice will support efficient processing and payment. 1. INVOICES: Reference shall be made to the correct Task Order No. and Project No. and/orCharge No. and include the name of the AV Task Manager on all invoices. 2. PROGRESS STATEMENT: To stay in compliance with the Federal Acquisition Regulation(FAR), Part 31, each invoice should also be accompanied by a progress statement. 3. INVOICES SHALL BE SENT TO: Accounts Payable Group, AeroVironment, Inc., via e-mailto acp@avinc.com, and also reference the correct Task Order Number and yourorganization’s name in the subject line of the email, with courtesy copy to AV Task Manager,or by mail to P.O. Box 5031, Monrovia, CA 91107. AeroVironment, Inc. Charles R. Holland, USAF Retired /s/ Wahid Nawabi /s/ Charles R. HollandSignature Signature Wahid Nawabi Charles R. HollandName (Print) Name (Print) CEO & President Title 4/23/2018 4/23/2018Date DateAEROVIRONMENT PROPRIETARY INFORMATIONPage 2 Consultant Initial Date AV Initial Date Exhibit 21.1Subsidiaries of AeroVironment, Inc.Name Jurisdiction of OrganizationAeroVironment International PTE. LTD. SingaporeAV Rhode Island, LLC Rhode IslandSkyTower, Inc. DelawareAltoy Savunma Sanayi ve Havacilik Anonim Sirketi* TurkeyAeroVironment, Inc. AfghanastanHAPSMobile, Inc.** Japan* AeroVironment, Inc. has an 85% ownership interest** AeroVironment, Inc. has a 5% ownership interest Exhibit 23.1CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMWe consent to the incorporation by reference in the Registration Statement (Form S-8 No. 333-140237) pertainingto the AeroVironment, Inc. Nonqualified Stock Option Plan, the AeroVironment, Inc. 2002 Equity Incentive Plan, and theAeroVironment, Inc. 2006 Equity Incentive Plan, as amended and restated, and Registration Statement (Form S-8 No. 333-178349) pertaining to the AeroVironment, Inc. 2006 Equity Incentive Plan, as amended and restated, of our reports datedJune 26, 2018, with respect to the consolidated financial statements and schedule of AeroVironment, Inc. and subsidiariesand the effectiveness of internal control over financial reporting of AeroVironment, Inc. and subsidiaries included in thisAnnual Report (Form 10-K) for the year ended April 30, 2018. /s/ Ernst & Young LLP Los Angeles, CaliforniaJune 26, 2018 Exhibit 31.1Certification of CEO Pursuant toSecurities Exchange Act Rules 13a‑14 and 15d‑14as Adopted Pursuant toSection 302 of the Sarbanes‑Oxley Act of 2002I, Wahid Nawabi, certify that:1.I have reviewed this annual report on Form 10‑K of AeroVironment, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this annualreport, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of,and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financialreporting (as defined in Exchange Act Rules 13a‑15(f) and 15(d)‑15(f)) for the registrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls andprocedures to be designed under our supervision, to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control overfinancial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented inthis report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of theperiod covered by this report based on such evaluation; andd)Disclosed in this report any change in the registrant’s internal control over financial reporting thatoccurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of anannual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internalcontrol over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation ofinternal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board ofdirectors (or persons performing the equivalent function):a)All significant deficiencies and material weaknesses in the design or operation of internal controlover financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal control over financial reporting.6Date: June 26, 2018 /s/ Wahid Nawabi Wahid Nawabi Chief Executive Officer and President Exhibit 31.2Certification of CFO Pursuant toSecurities Exchange Act Rules 13a‑14 and 15d‑14as Adopted Pursuant toSection 302 of the Sarbanes‑Oxley Act of 2002I, Teresa P. Covington, certify that:1.I have reviewed this annual report on Form 10‑K of AeroVironment, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of the circumstances under which such statements weremade, not misleading with respect to the period covered by this report;3.Based on my knowledge, the financial statements, and other financial information included in this annualreport, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of,and for, the periods presented in this report;4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a‑15(e) and 15d‑15(e)) and internal control over financialreporting (as defined in Exchange Act Rules 13a‑15(f) and 15(d)‑15(f)) for the registrant and have:a)Designed such disclosure controls and procedures, or caused such disclosure controls andprocedures to be designed under our supervision, to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared;b)Designed such internal control over financial reporting, or caused such internal control overfinancial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles;c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented inthis report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of theperiod covered by this report based on such evaluation; andd)Disclosed in this report any change in the registrant’s internal control over financial reporting thatoccurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of anannual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internalcontrol over financial reporting; and5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation ofinternal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board ofdirectors (or persons performing the equivalent function):a)All significant deficiencies and material weaknesses in the design or operation of internal controlover financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process,summarize and report financial information; andb)Any fraud, whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal control over financial reporting.Date: June 26, 2018 /s/ Teresa P. Covington Teresa P. Covington Senior Vice President and Chief Financial Officer Exhibit 32.1CERTIFICATION PURSUANT TO18 U.S.C. SECTION 1350AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES‑OXLEY ACT OF 2002Pursuant to 18 U.S.C. Section 1350, as created by Section 906 of the Sarbanes‑Oxley Act of 2002, each of theundersigned officers of AeroVironment, Inc. (the “Company”) hereby certifies, to each such officer’s knowledge, that:(i)the accompanying Annual Report on Form 10‑K of the Company for the year ended April 30, 2018 (the“Report”) fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of theSecurities Exchange Act of 1934, as amended; and(ii)the information contained in the Report fairly presents, in all material respects, the financial condition andresults of operations of the Company.Date: June 26, 2018 /s/ WAHID NAWABI Wahid Nawabi Chief Executive Officer and President Date: June 26, 2018 /s/ TERESA P. COVINGTON Teresa P. Covington Senior Vice President and Chief Financial Officer 

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