COMTECH TELECOMMUNICATIONS CORP /DE/ - Quarter Report: 2023 April (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM			10-Q

(Mark One)


☒			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended April 30, 2023


☐			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-7928

Comtech_logo_full_color_light_bkgrnd no tag horizontal (1) (002)_SIDE BY SIDE.jpg

(Exact name of registrant as specified in its charter)


Delaware						11-2139466
(State or other jurisdiction of incorporation /organization)						(I.R.S. Employer Identification Number)
68 South Service Road, Suite 230, Melville, NY						11747
(Address of principal executive offices)						(Zip Code)


(631)			962-7000
(Registrant's telephone number, including area code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.10 per share

CMTL

Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated filer

☒

Emerging growth company

☐

Non-accelerated filer

☐

Smaller reporting company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐ Yes ☒ No

As of June 2, 2023, the number of outstanding shares of Common Stock, par value $0.10 per share, of the registrant was 27,884,090 shares.

Index


COMTECH TELECOMMUNICATIONS CORP. INDEX
			Page
PART I. FINANCIAL INFORMATION

	Item 1.	Condensed Consolidated Financial Statements	2

		Condensed Consolidated Balance Sheets - April 30 , 2023 and July 31, 2022 (Unaudited)	2

		Condensed Consolidated Statements of Operations - Three and Nine Months Ended April 30, 2023 and 2022 (Unaudited)	3

		Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity - Three and Nine Months Ended April 30, 2023 and 2022 (Unaudited)	4

		Condensed Consolidated Statements of Cash Flows - Nine Months Ended April 30, 2023 and 2022 (Unaudited)	6

		Notes to Condensed Consolidated Financial Statements (Unaudited)	8

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	33

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54

	Item 4.	Controls and Procedures	54

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	55

	Item 1A.	Risk Factors	55

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55

	Item 4.	Mine Safety Disclosures	55

	Item 6.	Exhibits	56

		Signature Page	57

Index

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


Assets	April 30, 2023		July 31, 2022
Current assets:
Cash and cash equivalents	$	21,404,000	21,654,000
Accounts receivable, net	144,195,000		123,711,000
Inventories, net	107,311,000		96,317,000
Prepaid expenses and other current assets	17,924,000		21,649,000
Total current assets	290,834,000		263,331,000
Property, plant and equipment, net	53,806,000		50,363,000
Operating lease right-of-use assets, net	45,654,000		49,767,000

Goodwill	347,692,000		347,692,000
Intangibles with finite lives, net	231,256,000		247,303,000
Deferred financing costs, net	2,819,000		1,014,000
Other assets, net	17,798,000		14,827,000
Total assets	$	989,859,000	974,297,000
Liabilities, Convertible Preferred Stock and Stockholders’ Equity
Current liabilities:
Accounts payable	$	62,776,000	44,591,000
Accrued expenses and other current liabilities	64,944,000		72,662,000
Current portion of long-term debt	3,750,000		—
Operating lease liabilities, current	8,359,000		8,685,000
Dividends payable	—		2,746,000
Contract liabilities	67,725,000		64,601,000
Interest payable	1,208,000		172,000
Total current liabilities	208,762,000		193,457,000
Non-current portion of long-term debt	155,254,000		130,000,000
Operating lease liabilities, non-current	43,070,000		44,423,000
Income taxes payable	2,069,000		3,007,000
Deferred tax liability, net	10,627,000		15,355,000
Long-term contract liabilities	15,472,000		9,975,000
Other liabilities	3,334,000		6,291,000
Total liabilities	438,588,000		402,508,000
Commitments and contingencies (See Note 18)
Convertible preferred stock, par value $0.10 per share; authorized 125,000 shares; issued 100,000 at April 30, 2023 and July 31, 2022 (includes accrued dividends of $595,000 and $566,000, respectively)	110,417,000		105,204,000
Stockholders’ equity:
Preferred stock, par value $0.10 per share; authorized and unissued 1,875,000 shares	—		—
Common stock, par value $0.10 per share; authorized 100,000,000 shares; issued 42,922,265 and 42,672,827 shares at April 30, 2023 and July 31, 2022, respectively	4,292,000		4,267,000
Additional paid-in capital	634,191,000		625,484,000
Retained earnings	244,220,000		278,683,000
	882,703,000		908,434,000
Less:
Treasury stock, at cost (15,033,317 shares at April 30, 2023 and July 31, 2022)	(441,849,000)		(441,849,000)
Total stockholders’ equity	440,854,000		466,585,000
Total liabilities, convertible preferred stock and stockholders’ equity	$	989,859,000	974,297,000

See accompanying notes to condensed consolidated financial statements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three months ended April 30,			Nine months ended April 30,
	2023		2022	2023		2022
Net sales	$	136,316,000	122,116,000	$	401,180,000	359,256,000
Cost of sales	93,170,000		75,452,000	265,307,000		224,999,000
Gross profit	43,146,000		46,664,000	135,873,000		134,257,000

Expenses:
Selling, general and administrative	31,397,000		27,626,000	89,649,000		85,695,000
Research and development	11,676,000		14,255,000	36,868,000		39,384,000
Amortization of intangibles	5,349,000		5,349,000	16,047,000		16,047,000
CEO transition costs	—		—	9,090,000		13,554,000
Proxy solicitation costs	—		—	—		11,248,000

	48,422,000		47,230,000	151,654,000		165,928,000

Operating loss	(5,276,000)		(566,000)	(15,781,000)		(31,671,000)

Other expenses (income):
Interest expense	4,386,000		981,000	10,412,000		3,576,000
Interest (income) and other	728,000		(449,000)	928,000		(260,000)
Change in fair value of convertible preferred stock purchase option liability	—		(302,000)	—		(1,004,000)

Loss before benefit from income taxes	(10,390,000)		(796,000)	(27,121,000)		(33,983,000)
Benefit from income taxes	(2,932,000)		(771,000)	(3,762,000)		(6,100,000)


Net loss	$	(7,458,000)	(25,000)	$	(23,359,000)	(27,883,000)

Adjustments to reflect redemption value of convertible preferred stock:
Dividend on convertible preferred stock	(1,766,000)		(1,655,000)	(5,213,000)		(3,522,000)
Convertible preferred stock issuance costs	—		—	—		(4,007,000)
Establishment of initial convertible preferred stock purchase option liability	—		—	—		(1,005,000)
Net loss attributable to common stockholders	$	(9,224,000)	(1,680,000)	$	(28,572,000)	(36,417,000)

Net loss per common share (See Note 5):
Basic	$	(0.33)	(0.06)	$	(1.02)	(1.37)
Diluted	$	(0.33)	(0.06)	$	(1.02)	(1.37)

Weighted average number of common shares outstanding – basic	28,071,000		26,528,000	27,950,000		26,582,000

Weighted average number of common and common equivalent shares outstanding – diluted	28,071,000		26,528,000	27,950,000		26,582,000

See accompanying notes to condensed consolidated financial statements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

(Unaudited)


	Three months ended April 30, 2023 and 2022
	Series A Convertible Preferred Stock			Common Stock			Additional Paid-in Capital		Retained Earnings		Treasury Stock			Stockholders' Equity
	Shares	Amount		Shares	Amount						Shares	Amount
Balance as of January 31, 2022	100,000	$	101,867,000	41,553,244	$	4,155,000	$	612,780,000	$	292,778,000	15,033,317	$	(441,849,000)	$	467,864,000
Equity-classified stock award compensation	—	—		—	—		1,071,000		—		—	—		1,071,000

Issuance of employee stock purchase plan shares	—	—		12,131	2,000		160,000		—		—	—		162,000

Net settlement of stock-based awards	—	—		(5,014)	(1,000)		(113,000)		—		—	—		(114,000)
Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends)		1,655,000		—	—		—		(1,655,000)		—	—		(1,655,000)
Cash dividends declared, net ($0.10 per share)	—	—		—	—		—		(2,646,000)		—	—		(2,646,000)
Accrual of dividend equivalents, net of reversal ($0.10 per share)	—	—		—	—		—		(97,000)		—	—		(97,000)
Net loss	—	—		—	—		—		(25,000)		—	—		(25,000)
Balance as of April 30, 2022	100,000	$	103,522,000	41,560,361	$	4,156,000	$	613,898,000	$	288,355,000	15,033,317	$	(441,849,000)	$	464,560,000

Balance as of January 31, 2023	100,000	$	108,651,000	42,900,871	$	4,290,000	$	630,233,000	$	253,422,000	15,033,317	$	(441,849,000)	$	446,096,000
Equity-classified stock award compensation	—	—		—	—		4,126,000		—		—	—		4,126,000

Issuance of employee stock purchase plan shares	—	—		12,146	1,000		126,000		—		—	—		127,000

Net settlement of stock-based awards	—	—		9,248	1,000		(294,000)		—		—	—		(293,000)
Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends)	—	1,766,000		—	—		—		(1,766,000)		—	—		(1,766,000)

Reversal of dividend equivalents ($0.10 per share)	—	—		—	—		—		22,000		—	—		22,000
Net loss	—	—		—	—		—		(7,458,000)		—	—		(7,458,000)
Balance as of April 30, 2023	100,000	$	110,417,000	42,922,265	$	4,292,000	$	634,191,000	$	244,220,000	15,033,317	$	(441,849,000)	$	440,854,000

See accompanying notes to condensed consolidated financial statements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

(Unaudited)


	Nine months ended April 30, 2023 and 2022
	Series A Convertible Preferred Stock			Common Stock			Additional Paid-in Capital		Retained Earnings		Treasury Stock			Stockholders' Equity
	Shares	Amount		Shares	Amount						Shares	Amount
Balance as of July 31, 2021	—	$	—	41,281,812	$	4,128,000	$	605,439,000	$	333,001,000	15,033,317	$	(441,849,000)	$	500,719,000
Equity-classified stock award compensation	—	—		—	—		3,975,000		—		—	—		3,975,000

CEO transition costs related to equity-classified stock-based awards (See Note 1)	—	—		—	—		7,388,000		—		—	—		7,388,000
Issuance of employee stock purchase plan shares	—	—		33,807	4,000		612,000		—		—	—		616,000
Issuance of restricted stock, net of forfeiture	—	—		132,854	13,000		(13,000)		—		—	—		—
Net settlement of stock-based awards	—	—		111,888	11,000		(3,503,000)		—		—	—		(3,492,000)
Issuance of convertible preferred stock	100,000	100,000,000		—	—		—		—		—	—		—
Convertible preferred stock issuance costs	—	(4,007,000)		—	—		—		—		—	—		—
Establishment of initial convertible preferred stock purchase option liability	—	(1,005,000)		—	—		—		—		—	—		—
Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends)	—	8,534,000		—	—		—		(8,534,000)		—	—		(8,534,000)
Cash dividends declared, net ($0.30 per share)	—	—		—	—		—		(7,915,000)		—	—		(7,915,000)
Accrual of dividend equivalents, net of reversal ($0.30 per share)	—	—		—	—		—		(314,000)		—	—		(314,000)
Net loss	—	—		—	—		—		(27,883,000)		—	—		(27,883,000)
Balance as of April 30, 2022	100,000	$	103,522,000	41,560,361	$	4,156,000	$	613,898,000	$	288,355,000	15,033,317	$	(441,849,000)	$	464,560,000

Balance as of July 31, 2022	100,000	$	105,204,000	42,672,827	$	4,267,000	$	625,484,000	$	278,683,000	15,033,317	$	(441,849,000)	$	466,585,000
Equity-classified stock award compensation	—	—		—	—		6,298,000		—		—	—		6,298,000
CEO transition costs related to equity-classified stock-based awards (See Note 1)	—	—		—	—		3,764,000		—		—	—		3,764,000
Issuance of employee stock purchase plan shares	—	—		41,606	4,000		330,000		—		—	—		334,000
Issuance of restricted stock, net of forfeiture	—	—		93,091	9,000		(9,000)		—		—	—		—
Net settlement of stock-based awards	—	—		114,741	12,000		(1,676,000)		—		—	—		(1,664,000)




Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends)	—	5,213,000		—	—		—		(5,213,000)		—	—		(5,213,000)

Cash dividends declared, net ($0.20 per share)	—	—		—	—		—		(5,549,000)		—	—		(5,549,000)
Accrual of dividend equivalents, net of reversal ($0.20 per share)	—	—		—	—		—		(342,000)		—	—		(342,000)
Net loss	—	—		—	—		—		(23,359,000)		—	—		(23,359,000)
Balance as of April 30, 2023	100,000	$	110,417,000	42,922,265	$	4,292,000	$	634,191,000	$	244,220,000	15,033,317	$	(441,849,000)	$	440,854,000

See accompanying notes to condensed consolidated financial statements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine months ended April 30,

	2023		2022
Cash flows from operating activities:
Net loss	$	(23,359,000)	(27,883,000)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization of property, plant and equipment	8,746,000		7,057,000
Amortization of intangible assets with finite lives	16,047,000		16,047,000
Amortization of stock-based compensation	6,298,000		3,975,000
Amortization of cost to fulfill assets	720,000		233,000
CEO transition costs related to equity-classified stock-based awards	3,764,000		7,388,000
Amortization of deferred financing costs	1,257,000		608,000
Change in fair value of convertible preferred stock purchase option liability	—		(1,004,000)

Changes in other liabilities	(3,100,000)		(3,099,000)
Loss (gain) on disposal of property, plant and equipment	48,000		(120,000)
Provision for allowance for doubtful accounts	586,000		316,000
Provision for excess and obsolete inventory	2,753,000		3,299,000
Deferred income tax benefit	(4,926,000)		(5,253,000)

Changes in assets and liabilities, net of effects of business acquisitions:
Accounts receivable	(21,070,000)		33,709,000
Inventories	(14,383,000)		(18,184,000)
Prepaid expenses and other current assets	1,826,000		(3,447,000)
Other assets	(3,547,000)		(964,000)
Accounts payable	18,199,000		(5,802,000)
Accrued expenses and other current liabilities	(797,000)		(3,702,000)
Contract liabilities	8,621,000		11,487,000
Other liabilities, non-current	142,000		(3,698,000)
Interest payable	1,037,000		(73,000)
Income taxes payable	961,000		(2,469,000)
Net cash (used in) provided by operating activities	(177,000)		8,421,000
Cash flows from investing activities:



Purchases of property, plant and equipment	(14,873,000)		(14,420,000)
Net cash used in investing activities	(14,873,000)		(14,420,000)
Cash flows from financing activities:
Net borrowings (payments) of long-term debt under Revolving Loan Facility	31,000,000		(74,000,000)

Repayment of debt under Term Loan	(1,250,000)		—
Cash dividends paid on common stock	(8,658,000)		(8,398,000)
Payment of deferred financing costs	(3,791,000)		(140,000)
Remittance of employees' statutory tax withholding for stock awards	(2,766,000)		(6,088,000)
Proceeds from issuance of employee stock purchase plan shares	370,000		616,000
Payment of shelf registration costs	(101,000)		—
Repayment of principal amounts under finance lease liabilities	(4,000)		(14,000)
Proceeds from issuance of convertible preferred stock	—		100,000,000
Payment of convertible preferred stock issuance costs	—		(4,007,000)

Net cash provided by financing activities	14,800,000		7,969,000
Net (decrease) increase in cash and cash equivalents	(250,000)		1,970,000
Cash and cash equivalents at beginning of period	21,654,000		30,861,000
Cash and cash equivalents at end of period	$	21,404,000	32,831,000

See accompanying notes to condensed consolidated financial statements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)


	Nine months ended April 30,

	2023		2022
Supplemental cash flow disclosures:
Cash paid (received) during the period for:
Interest	$	8,070,000	2,906,000
Income taxes, net	$	123,000	1,631,000

Non-cash investing and financing activities:
Accrued additions to property, plant and equipment	$	1,421,000	2,379,000

Cash dividends declared on common stock but unpaid (including accrual of dividend equivalents)	$	342,000	2,960,000

Adjustment to reflect redemption value of convertible preferred stock	$	5,213,000	8,534,000

Accrued deferred financing costs	$	17,000	—

Reclassification of finance lease right-of-use assets to property, plant and equipment	$	274,000	—

Issuance of restricted stock	$	9,000	13,000



Establishment of initial convertible preferred stock purchase option liability	$	—	1,005,000

See accompanying notes to condensed consolidated financial statements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) General

The accompanying condensed consolidated financial statements of Comtech Telecommunications Corp. and its subsidiaries ("Comtech," "we," "us," or "our") as of and for the three and nine months ended April 30, 2023 and 2022 are unaudited. In the opinion of management, the information furnished reflects all material adjustments (which include normal recurring adjustments) necessary for a fair presentation of the results for the unaudited interim periods. Our results of operations for such periods are not necessarily indicative of the results of operations to be expected for the full fiscal year.

The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the condensed consolidated financial statements, and the reported amounts of net sales and expenses during the reported period. Actual results may differ from those estimates.

Our condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements, filed with the Securities and Exchange Commission ("SEC"), for the fiscal year ended July 31, 2022 and the notes thereto contained in our Annual Report on Form 10-K, and all of our other filings with the SEC.

Reclassifications

Certain reclassifications have been made to previously reported condensed consolidated financial statements to conform to the fiscal 2023 presentation. See Note (13) - "Segment Information" for additional information.

CEO Transition Costs & Related

On August 9, 2022, our Board of Directors appointed our Chairman of the Board, Ken Peterman, as President and Chief Executive Officer ("CEO"). Transition costs related to our former President and CEO, Michael D. Porcelain, pursuant to his separation agreement with the Company, were $7,424,000, of which $3,764,000 related to the acceleration of unamortized stock based compensation, with the remaining $3,660,000 related to his severance payments and benefits upon termination of employment. The cash portion of the transition costs of $3,660,000 was paid to Mr. Porcelain in October 2022. Also, in connection with Mr. Peterman entering into an employment agreement with the Company, effective as of August 9, 2022, we incurred a $1,000,000 expense related to a cash sign-on bonus, which was paid to Mr. Peterman in January 2023. CEO transition costs related to Mr. Porcelain and Mr. Peterman were expensed in our Unallocated segment during the first quarter of fiscal 2023. During fiscal 2022, we expensed $13,554,000 of transition costs related to another former CEO, Fred Kornberg.

Since being appointed President and CEO, Mr. Peterman, along with his senior leadership team, has been driving transformational changes at Comtech to, among other things, integrate our individual businesses into two segments and improve operational performance. This transformation, which we refer to as “One Comtech,” has provided insight into opportunities to manage costs, streamline operations, improve efficiency, and accelerate decision making by eliminating management layers and other redundancies – resulting in a reduction in our workforce and the implementation of other lean initiatives during the third and fourth quarters of fiscal 2023. Severance costs relating to these actions are not anticipated to be material to our results of operations.

(2) Adoption of Accounting Standards and Updates

We are required to prepare our condensed consolidated financial statements in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") which is the source for all authoritative U.S. generally accepted accounting principles, which are commonly referred to as "GAAP." The FASB ASC is subject to updates by the FASB, which are known as Accounting Standards Updates ("ASUs"). ASUs issued, but not effective until after April 30, 2023, are not expected to have a material impact on our condensed consolidated financial statements or disclosures.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(3) Revenue Recognition

In accordance with FASB ASC 606 - Revenue from Contracts with Customers ("ASC 606"), we record revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to customers. Under ASC 606, we follow a five-step model to: (1) identify the contract with our customer; (2) identify our performance obligations in our contract; (3) determine the transaction price for our contract; (4) allocate the transaction price to our performance obligations; and (5) recognize revenue using one of the following two methods:

•Over time - We recognize revenue using the over time method when there is a continuous transfer of control to the customer over the contractual period of performance. This generally occurs when we enter into a long-term contract relating to the design, development or manufacture of complex equipment or technology platforms to a buyer’s specification (or to provide services related to the performance of such contracts). Continuous transfer of control is typically supported by contract clauses which allow our customers to unilaterally terminate a contract for convenience, pay for costs incurred plus a reasonable profit and take control of work-in-process. Revenue recognized over time is generally based on the extent of progress toward completion of the related performance obligations. The selection of the method to measure progress requires judgment and is based on the nature of the products or services provided. In certain instances, typically for firm fixed-price contracts, we use the cost-to-cost measure because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion, including warranty costs. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Costs to fulfill generally include direct labor, materials, subcontractor costs, other direct costs and an allocation of indirect costs. When these contracts are modified, the additional goods or services are generally not distinct from those already provided. As a result, these modifications form part of an existing contract and we must update the transaction price and our measure of progress for the single performance obligation and recognize a cumulative catch-up to revenue and gross profits.

For over time contracts using a cost-to-cost measure of progress, we have an estimate at completion ("EAC") process in which management reviews the progress and execution of our performance obligations. This EAC process requires management judgment relative to assessing risks, estimating contract revenue and costs, and making assumptions for schedule and technical issues. Since certain contracts extend over a long period of time, the impact of revisions in revenue and or cost estimates during the progress of work may impact current period earnings through a cumulative adjustment. Additionally, if the EAC process indicates a loss, a provision is made for the total anticipated loss in the period that it becomes evident. Contract revenue and cost estimates for significant contracts are generally reviewed and reassessed at least quarterly.

The cost-to-cost method is principally used to account for contracts in our Satellite and Space Communications segment and, to a lesser extent, certain location-based and messaging infrastructure contracts in our public safety and location technologies product line within our Terrestrial and Wireless Networks segment. For service-based contracts in our Terrestrial and Wireless Networks segment, we also recognize revenue over time. These services are typically recognized as a series of services performed over the contract term using the straight-line method, or based on our customers’ actual usage of the networks and platforms which we provide.

•Point in time - When a performance obligation is not satisfied over time, we must record revenue using the point in time accounting method which generally results in revenue being recognized upon shipment or delivery of a promised good or service to a customer. This generally occurs when we enter into short-term contracts or purchase orders where items are provided to customers with relatively quick turn-around times. Modifications to such contracts and or purchase orders, which typically provide for additional quantities or services, are accounted for as a new contract because the pricing for these additional quantities or services are based on standalone selling prices.

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COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Point in time accounting is principally applied to contracts in our satellite ground station technologies product line (which includes satellite modems, solid-state and traveling wave tube amplifiers) and certain contracts for our solid-state, high-power RF amplifiers. The contracts related to these product lines do not meet the requirements for over time revenue recognition because our customers cannot utilize the equipment for its intended purpose during any phase of our manufacturing process; customers do not simultaneously receive and or consume the benefits provided by our performance; customers do not control the asset (i.e., prior to delivery, customers cannot direct the use of the asset, sell or exchange the equipment, etc.); and, although many of our contracts have termination for convenience clauses and or an enforceable right to payment for performance completed to date, our performance creates an asset with an alternative use through the point of delivery.

In determining that our equipment has alternative use, we considered the underlying manufacturing process for our products. In the early phases of manufacturing, raw materials and work in process (including subassemblies) consist of common parts that are highly fungible among many different types of products and customer applications. Finished products are either configured to our standard configuration or based on our customers’ specifications. Finished products, whether built to our standard specification or to a customers’ specification, can be sold to a variety of customers and across many different end use applications with minimal rework, if needed, and without incurring a significant economic loss.

When identifying a contract with our customer, we consider when it has approval and commitment from both parties, if the rights of the parties are identified, if the payment terms are identified, if it has commercial substance and if collectability is probable.

When identifying performance obligations, we consider whether there are multiple promises and how to account for them. In our contracts, multiple promises are separated if they are distinct, both individually and in the context of the contract. If multiple promises in a contract are highly interrelated or comprise a series of distinct services performed over time, they are combined into a single performance obligation. In some cases, we may also provide the customer with an additional service-type warranty, which we recognize as a separate performance obligation. Service-type warranties do not represent a significant portion of our consolidated net sales. When service-type warranties represent a separate performance obligation, the revenue is deferred and recognized ratably over the extended warranty period. Our contracts, from time-to-time, may also include options for additional goods and services. To date, these options have not represented material rights to the customer as the pricing for them reflects standalone selling prices. As a result, we do not consider options we offer to be performance obligations for which we must allocate a portion of the transaction price. In many cases, we provide assurance-type warranty coverage for some of our products for a period of at least one year from the date of delivery.

When identifying the transaction price, we typically utilize the contract's stated price as a starting point. The transaction price in certain arrangements may include estimated amounts of variable consideration, including award fees, incentive fees or other provisions that can either increase or decrease the transaction price. We estimate variable consideration as the amount to which we expect to be entitled, and we include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the estimation uncertainty is resolved. The estimation of this variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (e.g., historical, current and forecasted) that is reasonably available to us.

When allocating the contract’s transaction price, we consider each distinct performance obligation. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. We determine standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions, including geographic or regional specific factors, competitive positioning, internal costs, profit objectives and internally approved pricing guidelines related to the performance obligations.

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COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Most of our contracts with customers are denominated in U.S. dollars and typically are either firm fixed-price or cost reimbursable type contracts (including fixed-fee, incentive-fee and time-and-material type contracts). In almost all of our contracts with customers, we are the principal in the arrangement and report revenue on a gross basis. Transaction prices for contracts with U.S. domestic and international customers are usually based on specific negotiations with each customer and in the case of the U.S. government, sometimes based on estimated or actual costs of providing the goods or services in accordance with applicable regulations. Sales by geography and customer type, as a percentage of consolidated net sales, are as follows:


	Three months ended April 30,				Nine months ended April 30,
	2023		2022		2023		2022
United States
U.S. government	29.1	%	23.3	%	30.3	%	26.8	%
Domestic	43.8	%	48.6	%	45.7	%	48.2	%
Total United States	72.9	%	71.9	%	76.0	%	75.0	%




International	27.1	%	28.1	%	24.0	%	25.0	%
Total	100.0	%	100.0	%	100.0	%	100.0	%

Sales to U.S. government customers include sales to the U.S. Department of Defense ("DoD"), intelligence and civilian agencies, as well as sales directly to or through prime contractors. Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. Except for the U.S. government, there were no customers that represented more than 10.0% of consolidated net sales for the three months ended April 30, 2023. Included in domestic sales are sales to Verizon Communications Inc. ("Verizon"), which accounted for 11.2% of consolidated net sales for the nine months ended April 30, 2023 and 10.6% and 11.1% of consolidated net sales for the three and nine months ended April 30, 2022, respectively. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented more than 10.0% of consolidated net sales for the three and nine months ended April 30, 2023 and 2022.

The following tables summarize our disaggregation of revenue consistent with information reviewed by our Chief Operating Decision Maker ("CODM") for the three and nine months ended April 30, 2023 and 2022. We believe these categories best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors which impact our business:


	Three months ended April 30, 2023					Nine months ended April 30, 2023
	Satellite and Space Communications		Terrestrial and Wireless Networks	Total		Satellite and Space Communications		Terrestrial and Wireless Networks	Total
Geographical region and customer type
U.S. government	$	38,779,000	855,000	$	39,634,000	$	118,739,000	2,841,000	$	121,580,000
Domestic	12,146,000		47,555,000	59,701,000		41,819,000		141,542,000	183,361,000
Total United States	50,925,000		48,410,000	99,335,000		160,558,000		144,383,000	304,941,000

International	31,324,000		5,657,000	36,981,000		82,971,000		13,268,000	96,239,000
Total	$	82,249,000	54,067,000	$	136,316,000	$	243,529,000	157,651,000	$	401,180,000
Contract type
Firm fixed-price	$	68,010,000	54,067,000	$	122,077,000	$	210,343,000	157,651,000	$	367,994,000
Cost reimbursable	14,239,000		—	14,239,000		33,186,000		—	33,186,000
Total	$	82,249,000	54,067,000	$	136,316,000	$	243,529,000	157,651,000	$	401,180,000
Transfer of control
Point in time	$	30,870,000	268,000	$	31,138,000	$	152,157,000	1,994,000	$	154,151,000
Over time	51,379,000		53,799,000	105,178,000		91,372,000		155,657,000	247,029,000
Total	$	82,249,000	54,067,000	$	136,316,000	$	243,529,000	157,651,000	$	401,180,000

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Three months ended April 30, 2022					Nine months ended April 30, 2022
	Satellite and Space Communications		Terrestrial and Wireless Networks	Total		Satellite and Space Communications		Terrestrial and Wireless Networks	Total
Geographical region and customer type
U.S. government	$	27,492,000	943,000	$	28,435,000	$	92,544,000	3,611,000	$	96,155,000
Domestic	12,189,000		47,143,000	59,332,000		35,239,000		137,968,000	173,207,000
Total United States	39,681,000		48,086,000	87,767,000		127,783,000		141,579,000	269,362,000

International	29,469,000		4,880,000	34,349,000		75,107,000		14,787,000	89,894,000
Total	$	69,150,000	52,966,000	$	122,116,000	$	202,890,000	156,366,000	$	359,256,000
Contract type
Firm fixed-price	$	61,051,000	52,966,000	$	114,017,000	$	180,120,000	156,366,000	$	336,486,000
Cost reimbursable	8,099,000		—	8,099,000		22,770,000		—	22,770,000
Total	$	69,150,000	52,966,000	$	122,116,000	$	202,890,000	156,366,000	$	359,256,000
Transfer of control
Point in time	$	46,880,000	465,000	$	47,345,000	$	134,018,000	1,889,000	$	135,907,000
Over time	22,270,000		52,501,000	74,771,000		68,872,000		154,477,000	223,349,000
Total	$	69,150,000	52,966,000	$	122,116,000	$	202,890,000	156,366,000	$	359,256,000

The timing of revenue recognition, billings and collections results in receivables, unbilled receivables and contract liabilities on our Condensed Consolidated Balance Sheet. Under typical payment terms for our contracts accounted for over time, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., monthly) or upon achievement of contractual milestones. For certain contracts with provisions that are intended to protect customers in the event we do not satisfy our performance obligations, billings occur subsequent to revenue recognition, resulting in unbilled receivables. Under ASC 606, unbilled receivables constitute contract assets. There were no material impairment losses recognized on contract assets during the three and nine months ended April 30, 2023 and 2022, respectively. On large long-term contracts, and for contracts with international customers that do not do business with us regularly, payment terms typically require advanced payments and deposits. Under ASC 606, payments received from customers in excess of revenue recognized to-date results in a contract liability. These contract liabilities are not considered to represent a significant financing component of the contract because we believe these cash advances and deposits are generally used to meet working capital demands which can be higher in the earlier stages of a contract. Also, advanced payments and deposits provide us with some measure of assurance that the customer will perform on its obligations under the contract. Under the typical payment terms for our contracts accounted for at a point in time, costs are accumulated in inventory until the time of billing, which generally coincides with revenue recognition. Of the current contract liability balance of $64,601,000 at July 31, 2022 and $66,130,000 at July 31, 2021, $43,125,000 and $46,031,000 was recognized as revenue during the nine months ended April 30, 2023 and 2022, respectively.

We recognize the incremental costs to obtain or fulfill a contract as an expense when incurred if the amortization period of the asset is one year or less; otherwise, such costs are capitalized and amortized over the estimated life of the contract. During the nine months ended April 30, 2023 and 2022, incremental costs to obtain or fulfill contracts with an amortization period greater than one year were not material.

As commissions payable to our internal sales and marketing employees or contractors are contingent upon multiple factors, such commissions are not considered direct costs to obtain or fulfill a contract with a customer and are expensed as incurred in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations. As for commissions payable to our third-party sales representatives related to long-term contracts, we do consider these types of commissions both direct and incremental costs to obtain and fulfill such contracts. Therefore, such types of commissions are included in total estimated costs at completion for such contracts and expensed over time through cost of sales on our Condensed Consolidated Statements of Operations.

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COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Remaining performance obligations represent the transaction price of firm orders for which work has not been performed as of the end of a fiscal period. Remaining performance obligations, which we refer to as backlog, exclude unexercised contract options and potential orders under indefinite delivery / indefinite quantity ("IDIQ") contracts. As of April 30, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was $668,405,000 (which represents the amount of our consolidated funded backlog). We estimate that a substantial portion of our remaining performance obligations at April 30, 2023 will be completed and recognized as revenue during the next twenty-four month period, with the rest thereafter. During the nine months ended April 30, 2023, revenue recognized from performance obligations satisfied, or partially satisfied, in previous periods (for example due to changes in the transaction price) was not material.

(4) Fair Value Measurements and Financial Instruments

Using the fair value hierarchy described in FASB ASC 820 "Fair Value Measurements and Disclosures," we valued our cash and cash equivalents using Level 1 inputs that were based on quoted market prices. We believe that the carrying amounts of our other current financial assets (such as accounts receivable) and other current liabilities (including accounts payable and accrued expenses) approximate their fair values due to their short-term maturities.

The fair value of the non-current portion of our credit facility approximates its carrying amount due to its variable interest rate and pricing grid that is dependent upon our leverage ratio as of the end of each fiscal quarter. See Note (9) - "Credit Facility" for more information.

As of April 30, 2023 and July 31, 2022, other than the cash and cash equivalents discussed above, we had no other significant assets or liabilities included in our Condensed Consolidated Balance Sheets recorded at fair value, as such term is defined by FASB ASC 820.

(5) Earnings Per Share

Our basic earnings per share ("EPS") is computed based on the weighted average number of common shares (including vested but unissued stock units, share units, performance shares and restricted stock units ("RSUs")) outstanding during each respective period. Our diluted EPS reflects the dilution from potential common stock issuable pursuant to the exercise of equity-classified stock-based awards, settlement of escrow arrangements related to our acquisition of UHP Networks Inc. ("UHP") and the assumed conversion of Convertible Preferred Stock, if dilutive, outstanding during each respective period. Pursuant to FASB ASC 260 "Earnings Per Share," shares whose issuance is contingent upon the satisfaction of certain conditions are included in diluted EPS based on the number of shares, if any, that would be issuable if the end of the reporting period were the end of the contingency period. When calculating our diluted earnings per share, we consider the amount an employee must pay upon assumed exercise of stock-based awards and the amount of stock-based compensation cost attributed to future services and not yet recognized.

There were no repurchases of our common stock during the three or nine months ended April 30, 2023 or 2022. See Note (17) - "Stockholders’ Equity" for more information.

Weighted average stock options, RSUs and restricted stock outstanding of 956,000 and 1,369,000 for the three months ended April 30, 2023 and 2022, respectively, and 1,001,000 and 1,463,000 shares for the nine months ended April 30, 2023 and 2022, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive. Our EPS calculations exclude 429,000 and 339,000 weighted average performance shares outstanding for the three months ended April 30, 2023 and 2022, respectively, and 384,000 and 287,000 for the nine months ended April 30, 2023 and 2022, respectively, as the performance conditions have not yet been satisfied. However, the numerator for EPS calculations for each respective period is reduced by the compensation expense related to these awards.

Weighted average common shares of 228,000 and 553,000 for the three months ended April 30, 2023 and 2022, respectively, and 293,000 and 455,000 for the nine months ended April 30, 2023 and 2022, respectively, related to our acquisition of UHP in March 2021 were not included in our diluted EPS calculation because their effect would have been anti-dilutive.

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COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Weighted average common shares underlying the assumed conversion of Convertible Preferred Stock, on an if-converted basis, of 4,606,000 and 4,225,000 for the three months ended April 30, 2023 and 2022, respectively, and 4,533,000 and 2,969,000 for the nine months ended April 30, 2023 and 2022, respectively, were not included in our diluted EPS calculation for the respective periods because their effect would have been anti-dilutive. As a result, the numerator for our basic and diluted EPS calculation for the three and nine months ended April 30, 2023 and 2022 is the respective net loss attributable to common stockholders.

The following table reconciles the numerators and denominators used in the basic and diluted EPS calculations:


	Three months ended April 30,			Nine months ended April 30,
	2023		2022	2023		2022
Numerator:
Net loss	$	(7,458,000)	(25,000)	$	(23,359,000)	(27,883,000)
Dividend on convertible preferred stock	(1,766,000)		(1,655,000)	(5,213,000)		(3,522,000)
Convertible preferred stock issuance costs	—		—	—		(4,007,000)
Establishment of initial convertible preferred stock purchase option liability	—		—	—		(1,005,000)
Net loss attributable to common stockholders	$	(9,224,000)	(1,680,000)	$	(28,572,000)	(36,417,000)

Denominator:



Denominator for basic and diluted calculation	28,071,000		26,528,000	27,950,000		26,582,000

As discussed further in Note (16) - "Convertible Preferred Stock," the Convertible Preferred Stock issued in October 2021 represents a "participating security" as defined in ASC 260. As a result, our EPS calculations for the three and nine months ended April 30, 2023 and 2022 were based on the two-class method. Given the net loss attributable to common stockholders for the three and nine months ended April 30, 2023 and 2022, there was no impact of applying the two-class method to our reported basic or diluted earnings per common share.

(6) Accounts Receivable

Accounts receivable consist of the following at:


	April 30, 2023		July 31, 2022
Receivables from commercial and international customers	$	63,924,000	59,922,000
Unbilled receivables from commercial and international customers	49,935,000		39,826,000
Receivables from the U.S. government and its agencies	20,703,000		24,776,000
Unbilled receivables from the U.S. government and its agencies	12,381,000		1,524,000
Total accounts receivable	146,943,000		126,048,000
Less allowance for doubtful accounts	2,748,000		2,337,000
Accounts receivable, net	$	144,195,000	123,711,000

Unbilled receivables as of April 30, 2023 relate to contracts-in-progress for which revenue has been recognized, but for which we have not yet earned the right to bill the customer for work performed to-date. Under ASC 606, unbilled receivables constitute contract assets. Management estimates that a substantial portion of the amounts not yet billed at April 30, 2023 will be billed and collected within one year. Accounts receivable in the table above excludes $2,873,000 of long-term unbilled receivables presented within "Other assets, net" in the condensed consolidated balance sheet as of April 30, 2023.

As of April 30, 2023, except for the U.S. government (and its agencies) and AT&T, which represented 22.5% and 13.9%, of total accounts receivable, respectively, there were no other customers which accounted for greater than 10% of total accounts receivable.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As of July 31, 2022, except for the U.S. government (and its agencies) and Verizon, which represented 20.9% and 13.4% of total accounts receivable, respectively, there were no other customers which accounted for greater than 10% of total accounts receivable.

(7) Inventories

Inventories consist of the following at:


	April 30, 2023		July 31, 2022
Raw materials and components	$	89,400,000	78,478,000
Work-in-process and finished goods	42,165,000		40,960,000
Total inventories	131,565,000		119,438,000
Less reserve for excess and obsolete inventories	24,254,000		23,121,000
Inventories, net	$	107,311,000	96,317,000

As of April 30, 2023 and July 31, 2022, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $6,006,000 and $4,100,000, respectively, and the amount of inventory related to contracts from third-party commercial customers who outsource their manufacturing to us was $3,533,000 and $1,866,000, respectively.

(8) Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following at:


	April 30, 2023		July 31, 2022
Accrued wages and benefits	$	19,180,000	25,675,000
Accrued contract costs	14,255,000		15,921,000
Accrued warranty obligations	8,240,000		9,420,000

Accrued commissions and royalties	6,559,000		5,697,000
Accrued legal costs	1,107,000		2,514,000
Other	15,603,000		13,435,000
Accrued expenses and other current liabilities	$	64,944,000	72,662,000

Accrued contract costs represent direct and indirect costs on contracts as well as estimates of amounts owed for invoices not yet received from vendors or reflected in accounts payable.

Accrued warranty obligations as of April 30, 2023 relate to estimated liabilities for assurance type warranty coverage that we provide to our customers. We generally provide warranty coverage for some of our products for a period of at least one year from the date of delivery. We record a liability for estimated warranty expense based on historical claims, product failure rates, consideration of contractual obligations, future costs to resolve software issues and other factors. Some of our product warranties are provided under long-term contracts, the costs of which are incorporated into our estimates of total contract costs.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Changes in our accrued warranty obligations during the nine months ended April 30, 2023 and 2022 were as follows:


	Nine months ended April 30,
	2023		2022
Balance at beginning of period	$	9,420,000	17,600,000
Provision (benefit) for warranty obligations	1,756,000		(613,000)
Adjustments for changes in estimates	(1,500,000)		(2,500,000)
Charges incurred	(1,436,000)		(3,655,000)


Balance at end of period	$	8,240,000	10,832,000

During the nine months ended April 30, 2023 and 2022, we recorded benefits of $1,500,000 and $2,500,000, respectively, to cost of sales in our Terrestrial and Wireless Networks segment due to lower than expected warranty claims associated with previously acquired NG-911 technologies.

(9) Credit Facility

On October 31, 2018, we entered into a First Amended and Restated Credit Agreement (the "Credit Facility") with a syndicate of lenders. As of July 31, 2022, the amount outstanding under our Credit Facility was $130,000,000, which is reflected in the non-current portion of long-term debt on our condensed consolidated balance sheet.

On November 30, 2022, we refinanced the amount outstanding under the Credit Facility by entering into a Second Amended and Restated Credit Agreement (also referred to herein as the “Credit Facility”) with the existing lenders. The Credit Facility provides a senior secured loan facility of up to $300,000,000 consisting of: (i) a revolving loan facility (“Revolving Loan Facility”) with a borrowing limit of $150,000,000, including a $20,000,000 letter of credit sublimit and a swingline loan credit sublimit of $15,000,000; (ii) a $50,000,000 term loan A (“Term Loan”); and (iii) an accordion feature allowing us to make a request to borrow up to an additional $100,000,000 subject to the satisfaction of specified conditions, including approval by our lenders. The Credit Facility has a maturity date of October 31, 2024 (“Maturity Date”). In connection with entering the Credit Facility, we capitalized $3,809,000 of financing costs, and accounted for the amendment to the Credit Facility as a debt modification.

As of April 30, 2023, the amount outstanding under our Credit Facility was as follows:


	April 30, 2023
Term Loan	$	48,750,000
Less unamortized deferred financing costs related to Term Loan	746,000
Term Loan, net	48,004,000
Revolving Loan Facility	111,000,000
Amount outstanding under Credit Facility, net	159,004,000
Less current portion of long-term debt	3,750,000
Non-current portion of long-term debt	$	155,254,000

At April 30, 2023, we had $1,049,000 of standby letters of credit outstanding under our Credit Facility related to guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit. During the nine months ended April 30, 2023, we had outstanding balances under the Credit Facility ranging from $130,000,000 to $182,375,000.

As of April 30, 2023, total net deferred financing costs related to the Credit Facility were $3,565,000 and are being amortized over the term of our Credit Facility through the Maturity Date.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Interest expense related to our Credit Facility, including amortization of deferred financing costs, recorded during the three months ended April 30, 2023 and 2022 was $4,400,000 and $1,004,000, respectively. Interest expense related to our Credit Facility, including amortization of deferred financing costs, recorded during the nine months ended April 30, 2023 and 2022 was $10,401,000 and $3,478,000, respectively. Our blended interest rate approximated 10.10% and 3.30%, respectively, for the three months ended April 30, 2023 and 2022 and approximated 8.34% and 3.20%, respectively, for the nine months ended April 30, 2023 and 2022.

Under the Credit Facility, borrowings under the Revolving Loan Facility and Term Loan are either: (i) Alternate Base Rate borrowings, which would bear interest from the applicable borrowing date at a rate per annum equal to (x) the highest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.50% and (c) the Adjusted Term SOFR for a one-month tenor in effect on such day (or, if such day is not a business day, the immediately preceding business day) plus 1.00%, plus (y) the Applicable Rate, or (ii) SOFR borrowings, which would bear interest from the applicable borrowing date at a rate per annum equal to (x) the Adjusted Term SOFR for such interest period plus (y) the Applicable Rate. Determination of the Applicable Rate is based on a pricing grid that is dependent upon our Leverage Ratio as of the end of each fiscal quarter for which consolidated financial statements have been most recently delivered.

The Credit Facility contains customary representations, warranties and affirmative covenants. The Credit Facility also contains customary negative covenants, subject to negotiated exceptions, including but not limited to: (i) liens, (ii) investments, (iii) indebtedness, (iv) significant corporate changes, including mergers and acquisitions, (v) dispositions, (vi) restricted payments, including stockholder dividends, and (vii) certain other restrictive agreements. The Credit Facility also contains certain financial covenants and customary events of default (subject to grace periods, as appropriate), such as payment defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency, the occurrence of a defined change in control and the failure to observe the negative covenants and other covenants related to the operation of our business. In addition, under certain circumstances, we may be required to enter into amendments to the Credit Facility in connection with any further syndication of the Credit Facility.

The Credit Facility provides for, among other things: (i) scheduled payments of principal under the Term Loan totaling $2,500,000 in the first year after closing (of which $1,250,000 was paid through April 30, 2023), and $5,000,000 in the second year after closing, with the remaining balance of the Term Loan due upon maturity; (ii) a maximum Leverage Ratio of 4.00x trailing twelve months ("TTM") Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") at the fiscal quarter ended April 30, 2023, stepping down to 3.75x at the fiscal quarter ending July 31, 2023, and 3.50x at the fiscal quarter ending January 31, 2024 and thereafter; (iii) a Minimum Interest Coverage Ratio of 3.25x TTM Adjusted EBITDA; and (iv) Minimum Liquidity of $25,000,000.

As of April 30, 2023, our Secured Leverage Ratio was 3.73x TTM Adjusted EBITDA compared to the maximum allowable Secured Leverage Ratio of 4.00x TTM Adjusted EBITDA. Our Interest Expense Coverage Ratio as of April 30, 2023 was 4.11x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25x TTM Adjusted EBITDA. Our Minimum Liquidity was $32,500,000 compared to the Minimum Liquidity requirement of $25,000,000.

The obligations under the Credit Facility are guaranteed by certain of our domestic and foreign subsidiaries (the “Guarantors”). As collateral security under the Credit Facility and the guarantees thereof, we and the Guarantors have granted to the administrative agent, for the benefit of the lenders, a lien on, and first priority security interest in, substantially all of our tangible and intangible assets.

Capitalized terms used but not defined herein have the meanings set forth for such terms in the Credit Facility, which has been documented and filed with the SEC.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(10) Leases

Our leases historically relate to the leasing of facilities and equipment. In accordance with FASB ASC 842 - "Leases" ("ASC 842"), we determine at inception whether an arrangement is, or contains, a lease and whether the lease should be classified as an operating or a financing lease. At lease commencement, we recognize a right-of-use ("ROU") asset and lease liability based on the present value of the future lease payments over the estimated lease term. We have elected to not recognize a ROU asset or lease liability for any leases with terms of twelve months or less. Instead, for such short-term leases, we recognize lease expense on a straight-line basis over the lease term. Certain of our leases include options to extend the term of the lease or to terminate the lease early. When it is reasonably certain that we will exercise a renewal option or will not exercise a termination option, we include the impact of exercising or not exercising such option, respectively, in the estimate of the lease term. As our lease agreements do not explicitly state the discount rate implicit in the lease, we use our incremental borrowing rate ("IBR") on the commencement date to calculate the present value of future lease payments. Such IBR represents our estimated rate of interest to borrow on a collateralized basis over a term commensurate with the expected lease term.

Some of our leases include payments that are based on the Consumer Price Index ("CPI") or other similar indices. These variable lease payments are included in the calculation of the ROU asset and lease liability using the index as of the lease commencement date. Other variable lease payments, such as common area maintenance, property taxes, and usage-based amounts, are required by ASC 842 to be excluded from the ROU asset and lease liability and expensed as incurred. In addition to the present value of the future lease payments, the calculation of the ROU asset would also consider, to the extent applicable, any deferred rent upon adoption, lease pre-payments or initial direct costs of obtaining the lease (e.g., such as commissions).

For all classes of leased assets, we elected the practical expedient to not separate lease components (i.e., the actual item being leased, such as the facility or piece of equipment) from non-lease components (i.e., the distinct elements of a contract not related to securing the use of the leased asset, such as common area maintenance and consumable supplies).

Certain of our facility lease agreements (which are classified as operating leases) contain rent holidays or rent escalation clauses. For rent holidays and rent escalation clauses during the lease term, we record rental expense on a straight-line basis over the term of the lease. As of April 30, 2023, none of our leases contained a residual value guarantee and covenants included in our lease agreements are customary for the types of facilities and equipment being leased.

The components of lease expense are as follows:


	Three months ended April 30,			Nine months ended April 30,
	2023		2022	2023		2022
Finance lease expense:
Amortization of ROU assets	$	1,000	3,000	$	5,000	10,000
Interest on lease liabilities	—		1,000	—		1,000
Operating lease expense	2,495,000		2,933,000	8,088,000		8,797,000
Short-term lease expense	108,000		92,000	326,000		303,000
Variable lease expense	783,000		1,128,000	2,881,000		3,446,000
Sublease income	(17,000)		(17,000)	(50,000)		(50,000)
Total lease expense	$	3,370,000	4,140,000	$	11,250,000	12,507,000

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Additional information related to leases is as follows:


	Nine months ended April 30,
	2023		2022

Cash paid for amounts included in the measurement of lease liabilities:
Operating leases - Operating cash outflows	$	8,183,000	$	8,910,000
Finance leases - Operating cash outflows	—		1,000
Finance leases - Financing cash outflows	4,000		14,000
ROU assets obtained in the exchange for lease liabilities (non-cash):
Operating leases	$	2,850,000	$	15,212,000

The following table is a reconciliation of future cash flows relating to operating lease liabilities presented on our Condensed Consolidated Balance Sheet as of April 30, 2023:



Remainder of fiscal 2023	$	2,291,000
Fiscal 2024	9,271,000
Fiscal 2025	8,655,000
Fiscal 2026	7,232,000
Fiscal 2027	5,184,000
Thereafter	26,009,000
Total future undiscounted cash flows	58,642,000
Less: Present value discount	7,213,000
Lease liabilities	$	51,429,000

Weighted-average remaining lease terms (in years)	8.51
Weighted-average discount rate	3.41%

We lease our Melville, New York production facility from a partnership controlled by our former CEO. Lease payments made during the nine months ended April 30, 2023 and 2022 were $516,000 and $504,000, respectively. The current lease provides for our use of the premises as they exist through December 2031. The annual rent of the facility for calendar year 2023 is $691,000 and is subject to customary adjustments. We have a right of first refusal in the event of a sale of the facility.

As of April 30, 2023, we do not have any material rental commitments that have not already commenced.

(11) Income Taxes

Our effective tax rate for the three months ended April 30, 2023 was 28.2%, which includes a net discrete tax benefit of $1,203,000 primarily related to the reversal of tax contingencies no longer required due to the expiration of applicable statute of limitations, offset in part by the finalization of certain tax accounts in connection with our fiscal 2022 federal income tax return. Our effective tax rate for the nine months ended April 30, 2023 was 13.9%, which includes a net discrete tax benefit of $1,193,000 primarily related to the reversal of tax contingencies no longer required due to the expiration of applicable statute of limitations and the deductible portion of CEO transition costs, offset in part by the settlement of stock-based awards and the finalization of certain tax accounts in connection with our fiscal 2022 federal income tax return.

Our effective tax rate for the three months ended April 30, 2022 was 96.8%, which includes a net discrete tax expense of $166,000 primarily related to the expiration of equity-based awards, offset in part by the finalization of certain tax accounts in connection with our fiscal 2021 federal income tax return. Our effective tax rate for the nine months ended April 30, 2022 was 18.0%, which includes a net discrete tax benefit of $3,506,000 primarily related to proxy solicitation costs, the deductible portion of CEO transition costs and the finalization of certain tax accounts in connection with our fiscal 2021 federal income tax return.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Excluding discrete items, our effective tax rate for the three and nine months ended April 30, 2023 and 2022 was 14.25% and 28.25%, respectively. For purposes of determining our estimated annual effective tax rate for fiscal 2023, CEO transition costs are considered significant, unusual or infrequently occurring discrete tax items and are excluded from the computation of our effective tax rate. The 14.25% reflects the recognition of a valuation allowance in a foreign jurisdiction, offset in part by the recognition of research and experimentation tax credits. The 28.25% reflects the recognition of research and experimentation tax credits, offset in part by nondeductible executive compensation.

At April 30, 2023 and July 31, 2022, total unrecognized tax benefits were $8,922,000 and $10,008,000, respectively, including interest of $179,000 and $330,000, respectively. Unrecognized tax benefits result from income tax positions taken or expected to be taken on our income tax returns for which a tax benefit has not been recorded in our consolidated financial statements. We believe it is reasonably possible that the gross unrecognized tax benefits could decrease by as much as $600,000 in the next twelve months due to the expiration of a statute of limitations related to federal, state and foreign tax positions.

Our U.S. federal income tax returns for fiscal 2020 through 2022 are subject to potential future Internal Revenue Service ("IRS") audit. None of our state income tax returns prior to fiscal 2018 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.

(12) Stock-Based Compensation

Overview

We issue stock-based awards to certain of our employees and our Board of Directors pursuant to our 2000 Stock Incentive Plan, as amended and/or restated from time to time (the "Plan") and our 2001 Employee Stock Purchase Plan, as amended and/or restated from time to time (the "ESPP"), and recognize related stock-based compensation in our condensed consolidated financial statements. The Plan provides for the granting to employees and consultants of Comtech (including prospective employees and consultants): (i) incentive and non-qualified stock options, (ii) restricted stock units ("RSUs"), (iii) RSUs with performance measures (which we refer to as "performance shares"), (iv) restricted stock, (v) stock units (reserved for issuance to non-employee directors) and share units (reserved for issuance to employees) (collectively, "share units") and (vi) stock appreciation rights ("SARs"), among other types of awards. Our non-employee directors are eligible to receive non-discretionary grants of stock-based awards, subject to certain limitations.

As of April 30, 2023, the aggregate number of shares of common stock which may be issued, pursuant to the Plan, may not exceed 11,962,500. Stock options granted may not have a term exceeding ten years or, in the case of an incentive stock award granted to a stockholder who owns stock representing more than 10.0% of the voting power, no more than five years. We expect to settle all outstanding awards under the Plan and employee purchases under the ESPP with the issuance of new shares of our common stock.

As of April 30, 2023, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of 10,107,719 shares (net of 5,704,778 expired and canceled awards), of which an aggregate of 8,172,915 have been exercised or settled.

As of April 30, 2023, the following stock-based awards, by award type, were outstanding:


			April 30, 2023
Stock options			290,320
Performance shares			677,476
RSUs, restricted stock and share units			967,008


Total			1,934,804

Our ESPP provides for the issuance of up to 1,300,000 shares of our common stock. Our ESPP is intended to provide our eligible employees the opportunity to acquire our common stock at 85% of fair market value on the first or last day of each calendar quarter, whichever is lower. Through April 30, 2023, we have cumulatively issued 985,515 shares of our common stock to participating employees in connection with our ESPP.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Stock-based compensation for awards issued is reflected in the following line items in our Condensed Consolidated Statements of Operations:


	Three months ended April 30,			Nine months ended April 30,
	2023		2022	2023		2022
Cost of sales	$	141,000	80,000	$	452,000	229,000
Selling, general and administrative expenses	3,896,000		886,000	5,559,000		3,494,000
Research and development expenses	89,000		105,000	287,000		252,000
Stock-based compensation expense before CEO transition costs	4,126,000		1,071,000	6,298,000		3,975,000
CEO transition costs related to equity-classified stock-based awards	—		—	3,764,000		7,388,000
Total stock-based compensation expense before income tax benefit	4,126,000		1,071,000	10,062,000		11,363,000
Estimated income tax benefit	(915,000)		(226,000)	(1,701,000)		(1,449,000)
Net stock-based compensation expense	$	3,211,000	845,000	$	8,361,000	9,914,000

Stock-based compensation for equity-classified awards is measured at the date of grant, based on an estimate of the fair value of the award and is generally expensed over the vesting period of the award. At April 30, 2023, unrecognized stock-based compensation of $9,640,000, net of estimated forfeitures of $681,000, is expected to be recognized over a weighted average period of 2.5 years. Total stock-based compensation capitalized and included in ending inventory at both April 30, 2023 and July 31, 2022 was $48,000. There are no liability-classified stock-based awards outstanding as of April 30, 2023 or July 31, 2022.

Stock-based compensation expense, by award type, is summarized as follows:


	Three months ended April 30,			Nine months ended April 30,
	2023		2022	2023		2022
Stock options	$	22,000	40,000	$	66,000	482,000
Performance shares	335,000		300,000	690,000		1,013,000
RSUs, restricted stock and share units	3,738,000		675,000	5,449,000		2,314,000
ESPP	31,000		56,000	93,000		166,000

Stock-based compensation expense before CEO transition costs	4,126,000		1,071,000	6,298,000		3,975,000
CEO transition costs related to equity-classified stock-based awards	—		—	3,764,000		7,388,000
Total stock-based compensation expense before income tax benefit	4,126,000		1,071,000	10,062,000		11,363,000
Estimated income tax benefit	(915,000)		(226,000)	(1,701,000)		(1,449,000)
Net stock-based compensation expense	$	3,211,000	845,000	$	8,361,000	9,914,000

ESPP stock-based compensation expense primarily relates to the 15% discount offered to participants in the ESPP.

Stock-based compensation expense in the three months and nine months ended April 30, 2023 reflects our assumption that fully vested, unrestricted share units will be granted to certain employees in lieu of fiscal 2023 non-equity incentive compensation. In fiscal 2022 and prior years, fully vested share units granted to certain employees in lieu of non-equity incentive compensation would not be settled until the one-year anniversary of the grant date.

The estimated income tax benefit as shown in the above table was computed using income tax rates expected to apply when the awards are settled. Such deferred tax asset was recorded net as part of our non-current deferred tax liability on our Condensed Consolidated Balance Sheet as of April 30, 2023 and July 31, 2022. The actual income tax benefit recognized for tax reporting is based on the fair market value of our common stock at the time of settlement and can significantly differ from the estimated income tax benefit recorded for financial reporting.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Stock Options

The following table summarizes the Plan’s activity:


	Awards (in Shares)	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at July 31, 2022	483,480	$	24.43

Expired/canceled	(9,460)	26.55

Outstanding at October 31, 2022	474,020	24.38

Expired/canceled	(182,400)	24.75

Outstanding at January 31, 2023	291,620	24.15

Expired/canceled	(1,300)	25.51

Outstanding at April 30, 2023	290,320	$	24.15	3.74	$	—

Exercisable at April 30, 2023	245,740	$	25.28	3.18	$	—

Vested and expected to vest at April 30, 2023	288,205	$	24.19	3.72	$	—

Stock options outstanding as of April 30, 2023 have exercise prices ranging from $17.88 - $33.94, representing the fair market value of our common stock on the date of grant, a contractual term of ten years and a vesting period of five years. The total intrinsic value relating to stock options exercised during the nine months ended April 30, 2022 was $7,000. There were no stock options exercised during the nine months ended April 30, 2023.

Performance Shares, RSUs, Restricted Stock and Share Unit Awards

The following table summarizes the Plan’s activity relating to performance shares, RSUs, restricted stock and share units:


	Awards (in Shares)	Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
Outstanding at July 31, 2022	1,110,750	$	19.05
Granted	785,092	11.13
Settled	(256,069)	24.55
Canceled/Forfeited	(37,805)	16.44
Outstanding at October 31, 2022	1,601,968	14.35
Granted	105,887	12.40
Settled	(16,374)	19.01
Canceled/Forfeited	(23,236)	17.98
Outstanding at January 31, 2023	1,668,245	14.13
Granted	56,402	11.38
Settled	(48,614)	14.45
Canceled/Forfeited	(31,549)	17.11
Outstanding at April 30, 2023	1,644,484	$	13.97	$	17,020,000

Vested at April 30, 2023	534,171	$	15.70	$	5,529,000

Vested and expected to vest at April 30, 2023	1,597,645	$	13.96	$	16,536,000

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The total intrinsic value relating to fully-vested awards settled during the three and nine months ended April 30, 2023 was $669,000 and $3,633,000, respectively. The total intrinsic value relating to fully-vested awards settled during the three and nine months ended April 30, 2022 was $262,000 and $9,726,000, respectively.

The performance shares granted to employees principally vest over a three-year performance period, if pre-established performance goals are attained, or as specified pursuant to the Plan and related agreements. As of April 30, 2023, the number of outstanding performance shares included in the above table, and the related compensation expense prior to consideration of estimated pre-vesting forfeitures, assume achievement of the pre-established goals at a target level.

RSUs and restricted stock granted to non-employee directors prior to August 2022 had a vesting period of five years and are convertible into shares of our common stock generally at the time of termination, on a one-for-one basis for no cash consideration, or earlier under certain circumstances. Commencing in August 2022, such awards have a vesting period of one year.

RSUs granted to employees prior to August 2022 have a vesting period of five years and are convertible into shares of our common stock generally at the time of vesting, on a one-for-one basis for no cash consideration. Commencing in August 2022, such RSUs have a vesting period of three years.

Share units granted to certain employees in fiscal 2022 in lieu of non-equity incentive compensation are convertible into shares of our common stock on the one-year anniversary of the respective grant date.

The fair value of performance shares, RSUs, restricted stock and share units is determined using the closing market price of our common stock on the date of grant, less the present value of any estimated future dividend equivalents such awards are not entitled to receive and an applicable estimated discount for any post-vesting transfer restrictions. RSUs, performance shares and restricted stock are entitled to dividend equivalents, as applicable, unless forfeited before vesting occurs. Share units would be entitled to dividend equivalents while the underlying shares are unissued.

Dividend equivalents are subject to forfeiture, similar to the terms of the underlying stock-based awards, and are payable in cash generally at the time of settlement of the underlying award. During the three months ended April 30, 2023, we reversed $22,000 of previously accrued dividend equivalents due to forfeitures and paid out $13,000. During the nine months ended April 30, 2023, we accrued $342,000 of dividend equivalents (net of forfeitures) and paid out $363,000. Accrued dividend equivalents were recorded as a reduction to retained earnings. As of April 30, 2023 and July 31, 2022, accrued dividend equivalents were $721,000 and $742,000, respectively.

With respect to the actual settlement of stock-based awards for income tax reporting, during the three and nine months ended April 30, 2023, we recorded an income tax expense of $15,000 and $560,000, respectively, and during the three and nine months ended April 30, 2022, we recorded an income tax expense of $483,000 and $344,000, respectively.

(13) Segment Information

Reportable operating segments are determined based on Comtech’s management approach. The management approach, as defined by FASB ASC 280 "Segment Reporting" is based on the way that the CODM organizes the segments within an enterprise for making decisions about resources to be allocated and assessing their performance. Our CODM, for purposes of FASB ASC 280, is our Chief Executive Officer.

In the fourth quarter of fiscal 2022, we revised our business segments to better align them with end-markets for our products and services and our CODM began managing our business in two new reportable segments: “Satellite and Space Communications” and “Terrestrial and Wireless Networks.” As a result, the segment information for the prior fiscal year has been recast to conform to the current year presentation.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Satellite and Space Communications is organized into four technology areas: satellite modem technologies and amplifier technologies, troposcatter and SATCOM solutions, space components and antennas, and high-power amplifiers and switches technologies. This segment offers customers: satellite ground station technologies, services and system integration that facilitate the transmission of voice, video and data over GEO, MEO and LEO satellite constellations, including solid-state and traveling wave tube power amplifiers, modems, VSAT platforms and frequency converters; satellite communications and tracking antenna systems, including high precision full motion fixed and mobile X/Y tracking antennas, RF feeds, reflectors and radomes; over-the-horizon microwave equipment that can transmit digitized voice, video, and data over distances up to 200 miles using the troposphere and diffraction, including the Comtech COMET™ solid-state, RF microwave high-power amplifiers and control components designed for radar, electronic warfare, data link, medical and aviation applications; and procurement and supply chain management of high reliability Electrical, Electronic and Electromechanical ("EEE") parts for satellite, launch vehicle and manned space applications.

Terrestrial and Wireless Networks is organized into three service areas: next generation 911 and call delivery, Solacom call handling solutions, and trusted location and messaging solutions. This segment offers customers: SMS text to 911 services, providing alternate paths for individuals who need to request assistance (via text messaging) a method to reach Public Safety Answering Points ("PSAPs"); next generation 911 solutions, providing emergency call routing, location validation, policy-based routing rules, logging and security functionality; Emergency Services IP Network transport infrastructure for emergency services communications and support of next generation 911 services; call handling applications for PSAPs; wireless emergency alerts solutions for network operators; and software and equipment for location-based and text messaging services for various applications, including for public safety, commercial and government services.

Our CODM primarily uses a metric that we refer to as Adjusted EBITDA to measure an operating segment’s performance and to make decisions about resources to be allocated. Our Adjusted EBITDA metric for the Satellite and Space Communications and Terrestrial and Wireless Networks segments do not consider any allocation of indirect expense, or any of the following: income taxes, interest, change in fair value of the convertible preferred stock purchase option liability, write-off of deferred financing costs, amortization of stock-based compensation, amortization of intangibles, depreciation expense, amortization of cost to fulfill assets, acquisition plan expenses, restructuring costs, COVID-19 related costs, strategic emerging technology costs (for next-generation satellite technology), facility exit costs, CEO transition costs, proxy solicitation costs, strategic alternatives expenses and other. These items, while periodically affecting our results, may vary significantly from period to period and may have a disproportionate effect in a given period, thereby affecting the comparability of results. Any amounts shown in the Adjusted EBITDA calculation for our Satellite and Space Communications and Terrestrial and Wireless Networks segments are directly attributable to those segments. Our Adjusted EBITDA is also used by our management in assessing the Company's operating results. Although closely aligned, the Company's definition of Adjusted EBITDA is different than the Consolidated EBITDA (as such term is defined in our Credit Facility) utilized for financial covenant calculations and also may differ from the definition of EBITDA or Adjusted EBITDA used by other companies and, therefore, may not be comparable to similarly titled measures used by other companies.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Operating segment information, along with a reconciliation of segment net income (loss) and consolidated net income (loss) to Adjusted EBITDA is presented in the tables below:



	Three months ended April 30, 2023
	Satellite and Space Communications		Terrestrial and Wireless Networks	Unallocated	Total
Net sales	$	82,249,000	54,067,000	—	$	136,316,000
Operating income (loss)	$	37,000	3,160,000	(8,473,000)	$	(5,276,000)

Net income (loss)	$	650,000	2,902,000	(11,010,000)	$	(7,458,000)
(Benefit from) provision for income taxes	(1,188,000)		84,000	(1,828,000)	(2,932,000)
Interest expense	(25,000)		—	4,411,000	4,386,000
Interest (income) and other	600,000		174,000	(46,000)	728,000

Amortization of stock-based compensation	—		—	4,126,000	4,126,000
Amortization of intangibles	1,828,000		3,521,000	—	5,349,000
Depreciation	1,027,000		1,921,000	33,000	2,981,000
Amortization of cost to fulfill assets	240,000		—	—	240,000



Restructuring costs	2,191,000		548,000	1,357,000	4,096,000

Strategic emerging technology costs	1,029,000		—	—	1,029,000
Adjusted EBITDA	$	6,352,000	9,150,000	(2,957,000)	$	12,545,000

Purchases of property, plant and equipment	$	1,106,000	3,549,000	300,000	$	4,955,000

Total assets at April 30, 2023	$	488,814,000	475,380,000	25,665,000	$	989,859,000



	Three months ended April 30, 2022
	Satellite and Space Communications		Terrestrial and Wireless Networks	Unallocated	Total
Net sales	$	69,150,000	52,966,000	—	$	122,116,000
Operating (loss) income	$	(120,000)	4,616,000	(5,062,000)	$	(566,000)

Net income (loss)	$	297,000	4,502,000	(4,824,000)	$	(25,000)
Provision for (benefit from) income taxes	59,000		98,000	(928,000)	(771,000)
Interest expense	(22,000)		—	1,003,000	981,000
Interest (income) and other	(454,000)		16,000	(11,000)	(449,000)
Change in fair value of convertible preferred stock purchase option liability	—		—	(302,000)	(302,000)
Amortization of stock-based compensation	—		—	1,071,000	1,071,000
Amortization of intangibles	1,828,000		3,521,000	—	5,349,000
Depreciation	846,000		1,588,000	48,000	2,482,000
Amortization of cost to fulfill assets	233,000		—	—	233,000
Restructuring costs	1,600,000		—	—	1,600,000
COVID-19 related costs	115,000		—	—	115,000

Strategic emerging technology costs	912,000		—	—	912,000
Adjusted EBITDA	$	5,414,000	9,725,000	(3,943,000)	$	11,196,000

Purchases of property, plant and equipment	$	2,297,000	3,311,000	—	$	5,608,000

Total assets at April 30, 2022	$	485,620,000	469,075,000	28,942,000	$	983,637,000

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


	Nine months ended April 30, 2023
	Satellite and Space Communications		Terrestrial and Wireless Networks	Unallocated	Total
Net sales	$	243,529,000	157,651,000	—	$	401,180,000
Operating income (loss)	$	8,380,000	7,216,000	(31,377,000)	$	(15,781,000)

Net income (loss)	$	9,588,000	7,070,000	(40,017,000)	$	(23,359,000)
Benefit from income taxes	(1,832,000)		(197,000)	(1,733,000)	(3,762,000)
Interest expense	2,000		—	10,410,000	10,412,000
Interest (income) and other	622,000		343,000	(37,000)	928,000

Amortization of stock-based compensation	—		—	6,298,000	6,298,000
Amortization of intangibles	5,484,000		10,563,000	—	16,047,000
Depreciation	3,057,000		5,579,000	110,000	8,746,000
Amortization of cost to fulfill assets	720,000		—	—	720,000


Restructuring costs	4,336,000		548,000	2,080,000	6,964,000

Strategic emerging technology costs	2,513,000		—	—	2,513,000
CEO transition costs	—		—	9,090,000	9,090,000
Adjusted EBITDA	$	24,490,000	23,906,000	(13,799,000)	$	34,597,000

Purchases of property, plant and equipment	$	5,660,000	8,505,000	708,000	$	14,873,000

Total assets at April 30, 2023	$	488,814,000	475,380,000	25,665,000	$	989,859,000


	Nine months ended April 30, 2022
	Satellite and Space Communications		Terrestrial and Wireless Networks	Unallocated	Total
Net sales	$	202,890,000	156,366,000	—	$	359,256,000
Operating (loss) income	$	(7,933,000)	17,574,000	(41,312,000)	$	(31,671,000)

Net (loss) income	$	(7,285,000)	17,445,000	(38,043,000)	$	(27,883,000)
(Benefit from) provision for income taxes	(458,000)		30,000	(5,672,000)	(6,100,000)
Interest expense	98,000		—	3,478,000	3,576,000
Interest (income) and other	(287,000)		98,000	(71,000)	(260,000)

Change in fair value of convertible preferred stock purchase option liability	—		—	(1,004,000)	(1,004,000)
Amortization of stock-based compensation	—		—	3,975,000	3,975,000
Amortization of intangibles	5,484,000		10,563,000	—	16,047,000
Depreciation	2,444,000		4,462,000	151,000	7,057,000
Amortization of cost to fulfill assets	233,000		—	—	233,000
Restructuring costs	4,038,000		—	—	4,038,000
COVID-19 related costs	1,144,000		—	—	1,144,000
Strategic emerging technology costs	912,000		—	—	912,000
CEO transition costs	—		—	13,554,000	13,554,000
Proxy solicitation costs	—		—	11,248,000	11,248,000
Adjusted EBITDA	$	6,323,000	32,598,000	(12,384,000)	$	26,537,000

Purchases of property, plant and equipment	$	6,522,000	7,898,000	—	$	14,420,000

Total assets at April 30, 2022	$	485,620,000	469,075,000	28,942,000	$	983,637,000

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Unallocated expenses result from corporate expenses such as executive compensation, accounting, legal and other regulatory compliance related costs and also includes all of our amortization of stock-based compensation. See Note (1) - "General - CEO Transition Costs & Related" for information related to such costs. During the three and nine months ended April 30, 2023, our Unallocated segment incurred $1,357,000 and $2,080,000, respectively, of restructuring costs focused on streamlining our operations. There were no similar costs incurred in fiscal 2022. Also, during the nine months ended April 30, 2022, we incurred $11,248,000 of proxy solicitation costs (including legal and advisory fees and costs associated with a related lawsuit) as a result of a now-settled proxy contest. There were no similar costs incurred in fiscal 2023.

During the three and nine months ended April 30, 2023, our Satellite and Space Communications segment recorded $2,191,000 and $4,336,000, respectively, of restructuring costs primarily incurred to streamline our operations and improve efficiency, including costs related to the relocation of certain of our satellite ground station production facilities to our new 146,000 square foot facility in Chandler, Arizona. Similar restructuring costs of $1,600,000 and $4,038,000 were incurred during the three and nine months ended April 30, 2022, respectively. In addition, during the three and nine months ended April 30, 2023, we incurred $1,029,000 and $2,513,000 of strategic emerging technology costs for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations. Similar strategic emerging technology costs of $912,000 were incurred during both the three and nine months ended April 30, 2022. During the three and nine months ended April 30, 2022, our Satellite and Space Communications segment recorded $115,000 and $1,144,000, respectively, of incremental operating costs related to our antenna facility located in the United Kingdom due to the impact of the COVID-19 pandemic. There were no similar incremental operating costs during the corresponding periods in fiscal 2023.

During both the three and nine months ended April 30, 2023, our Terrestrial and Wireless Networks segment recorded $548,000 of restructuring costs primarily incurred to streamline our operations and improve efficiency. There were no similar costs incurred in fiscal 2022.

Interest expense in the tables above primarily relates to our Credit Facility, and includes the amortization of deferred financing costs. See Note (9) - "Credit Facility" for further discussion.

Intersegment sales for both the three and nine months ended April 30, 2023 and 2022 between the Satellite and Space Communications segment and the Terrestrial and Wireless Networks segment were nominal. All intersegment sales are eliminated in consolidation and are excluded from the tables above.

Unallocated assets at April 30, 2023 consist principally of cash and cash equivalents, income taxes receivable, corporate property, plant and equipment and deferred financing costs. The large majority of our long-lived assets are located in the U.S.

(14) Goodwill

The following table represents goodwill by reportable operating segment as of April 30, 2023 and July 31, 2022.


	Satellite and Space Communications		Terrestrial and Wireless Networks	Total


Goodwill	$	173,602,000	174,090,000	$	347,692,000

In accordance with FASB ASC 350, we perform a goodwill impairment analysis at least annually (in the first quarter of each fiscal year), unless indicators of impairment exist in interim periods. If we fail the quantitative assessment of goodwill impairment ("quantitative assessment"), we would be required to recognize an impairment loss equal to the amount that a reporting unit's carrying value exceeded its fair value; however, any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

As discussed in Note (13) - "Segment Information," as a result of our segment restructuring in the fourth quarter of fiscal 2022 from the Commercial Solutions and Government Solutions segments to the Satellite and Space Communications and Terrestrial and Wireless Networks segments, we performed an interim quantitative assessment as of July 29, 2022 and estimated the fair value of each of our reporting units, both before and after the change, using a combination of the income and market approaches.

We performed our quantitative assessment using market participant assumptions to determine if the fair value of each of our reporting units with goodwill exceeded its carrying value. In making this assessment, we considered, among other things, expectations of projected net sales and cash flows, assumptions impacting the weighted average cost of capital, trends in trading multiples of comparable companies, changes in our stock price and changes in the carrying values of our reporting units with goodwill. We also considered overall business conditions.

The income approach, also known as the discounted cash flow ("DCF") method, utilizes the present value of cash flows to estimate fair value. The future cash flows for our reporting units were projected based on our estimates, at that time, of future revenues, operating income and other factors (such as working capital and capital expenditures). For purposes of conducting our impairment analysis, we assumed revenue growth rates and cash flow projections that are below our actual long-term expectations. The discount rates used in our DCF method were based on a weighted-average cost of capital ("WACC") determined from relevant market comparisons, adjusted upward for specific reporting unit risks (primarily the uncertainty of achieving projected operating cash flows). A terminal value growth rate was applied to the final year of the projected period, which reflects our estimate of stable, perpetual growth. We then calculated a present value of the respective cash flows for each reporting unit to arrive at an estimate of fair value under the income approach. Under the market approach, we estimated a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization and factored in a control premium. Finally, we compared our estimates of fair values to our total public market capitalization and assessed implied control premiums based on our common stock price of $11.62 as of the date of testing.

Ultimately, based on our quantitative evaluations, we determined that our Satellite and Space Communications and Terrestrial and Wireless Networks reporting units had estimated fair values in excess of their carrying values of at least 18.4% and 11.6%, respectively, and concluded that our goodwill was not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment. Also, given its proximity to our next regularly scheduled annual goodwill impairment testing date, we utilized our July 29, 2022 interim quantitative assessment to conclude that our goodwill was not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment as of August 1, 2022. Additionally, the carrying value of goodwill was reallocated to our new reporting units based on their respective estimated relative fair value.

It is possible that, during the remainder of fiscal 2023 or beyond, business conditions (both in the U.S. and internationally) could deteriorate from the current state, our current or prospective customers could materially postpone, reduce or even forgo purchases of our products and services to a greater extent than we currently anticipate, or our common stock price could fluctuate.

A significant decline in our customers' spending that is greater than we anticipate or a shift in funding priorities may also have a negative effect on future orders, sales, income and cash flows and we might be required to perform a quantitative assessment during fiscal 2023 or beyond. If assumed net sales and cash flow projections are not achieved in future periods or our common stock price significantly declines from current levels, our Satellite and Space Communications and Terrestrial and Wireless Networks reporting units could be at risk of failing the quantitative assessment and goodwill assigned to the respective reporting units could be impaired.

In any event, we are required to perform our next annual goodwill impairment analysis on August 1, 2023 (the start of our fiscal 2024). If our assumptions and related estimates change in the future, or if we change our reporting unit structure or other events and circumstances change (e.g., a sustained decrease in the price of our common stock (considered on both absolute terms and relative to peers)), we may be required to record impairment charges when we perform these tests, or in other future periods. Any impairment charges that we may record in the future could be material to our results of operations and financial condition.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(15) Intangible Assets

Intangible assets with finite lives are as follows:


	April 30, 2023
	Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization	Net Carrying Amount
Customer relationships	20.2	$	302,058,000	118,215,000	$	183,843,000
Technologies	14.8	114,949,000		79,453,000	35,496,000
Trademarks and other	16.7	32,926,000		21,009,000	11,917,000
Total		$	449,933,000	218,677,000	$	231,256,000


	July 31, 2022
	Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization	Net Carrying Amount
Customer relationships	20.2	$	302,058,000	107,500,000	$	194,558,000
Technologies	14.8	114,949,000		75,798,000	39,151,000
Trademarks and other	16.7	32,926,000		19,332,000	13,594,000
Total		$	449,933,000	202,630,000	$	247,303,000

The weighted average amortization period in the above table excludes fully amortized intangible assets.

Amortization expense for both the three months ended April 30, 2023 and 2022 was $5,349,000 and for both the nine months ended April 30, 2023 and 2022 was $16,047,000.

The estimated amortization expense consists of the following for the fiscal years ending July 31:


2023	$	21,460,000
2024	21,154,000
2025	21,039,000
2026	19,888,000
2027	18,534,000

We review net intangible assets with finite lives for impairment when an event occurs indicating the potential for impairment. Based on our last assessment, we believe that the carrying values of our net intangible assets were recoverable as of April 30, 2023. However, if business conditions deteriorate, we may be required to record impairment losses, and or increase the amortization of intangibles in the future. Any impairment charges that we may record in the future could be material to our results of operations and financial condition.

(16) Convertible Preferred Stock

On October 18, 2021, we entered into a Subscription Agreement (the “Subscription Agreement”) with certain affiliates and related funds of White Hat Capital Partners LP and Magnetar Capital LLC (collectively, the “Investors”), relating to the issuance and sale of up to 125,000 shares of a new series of the Company's Series A Convertible Preferred Stock, par value $0.10 per share (the “Convertible Preferred Stock”), for an aggregate purchase price of up to $125,000,000, or $1,000 per share. On October 19, 2021 (the “Initial Closing Date”), pursuant to the terms of the Subscription Agreement, the Investors purchased an aggregate of 100,000 shares of Convertible Preferred Stock (the “Initial Issuance”) for an aggregate purchase price of $100,000,000. The Investors had a one-time option exercisable at any time on or prior to March 31, 2023 to purchase additional shares of Convertible Preferred Stock for an aggregate purchase price of $25,000,000. This purchase option, commonly referred to as a “Green Shoe” expired unexercised and together with the Initial Issuance, is collectively referred to as the “Issuance.”

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The adjusted conversion price for the shares issued in the Initial Issuance is $23.97, subject to certain adjustments set forth in the Certificate of Designations filed with the Secretary of State of the State of Delaware.

The Convertible Preferred Stock ranks senior to the shares of our common stock, with respect to the payment of dividends and the distribution of assets upon a liquidation, dissolution or winding up of the Company. The Convertible Preferred Stock initially had a liquidation preference of $1,000 per share with each share entitled to a cumulative dividend (the “Dividend”) at the rate of 6.5% per annum, compounding quarterly, paid-in-kind or paid in cash, at our election. For any quarter in which we elect not to pay the Dividend in cash with respect to a share of Convertible Preferred Stock, such Dividend becomes part of the liquidation preference of such share. In addition, no dividend or other distribution on our common stock in excess of $0.10 per share per quarter will be declared or paid on the common stock unless, at the time of such declaration and payment, an equivalent dividend or distribution is declared and paid on the Convertible Preferred Stock (the “Participating Dividend”), provided that in the case of any such dividend in the form of cash, in lieu of a cash payment, such Participating Dividend will become part of the liquidation preference of the shares of the Convertible Preferred Stock. Such Participating Dividend results in the Convertible Preferred Stock meeting the definition of a "participating security" for purposes of our earnings per share calculations.

Effective September 29, 2022, the Convertible Preferred Stock is convertible into shares of common stock at the option of the holders. At any time after October 19, 2024, we have the right to mandate the conversion of the Convertible Preferred Stock, subject to certain restrictions, based on the price of the common stock in the preceding thirty trading days.

Holders of the Convertible Preferred Stock are entitled to vote with the holders of the common stock on an as-converted basis, as well as are entitled to a separate class vote with respect to, among other things, amendments to our organizational documents that have an adverse effect on the Convertible Preferred Stock, authorizations or issuances of securities of the Company, the payment of dividends other than dividends on common stock in the ordinary course consistent with past practice on a quarterly basis in an amount not to exceed our current dividend rate of $0.10 per share per quarter, related party transactions, repurchases or redemptions of securities of the Company (other than the repurchase of up to $25,000,000 of shares of common stock), dispositions of businesses or assets, the incurrence of certain indebtedness and certain amendments or extensions of our existing Credit Facility.

Holders will have the right to require the Company to repurchase such holder's Convertible Preferred Stock on a date occurring either (a) on or after October 19, 2026 (the “Optional Repurchase Trigger Date”) at a price equal to the liquidation preference or (b) in connection with a conversion of Convertible Preferred Stock, pursuant to which the number of shares of common stock issuable upon such conversion would exceed 19.99% of the issued and outstanding shares of common stock as of October 18, 2021 (such excess shares, "Excess Conversion Shares"), at any time after the date that is 91 days after the maturity date of the Company's existing Credit Facility, at a price per share equal to the number of Excess Conversion Shares multiplied by the Last Reported Sales Price (as defined) of common stock on the applicable conversion date. In addition, each holder will have the right to cause the Company to repurchase its shares of Convertible Preferred Stock in connection with a Change of Control, at a price equal to the liquidation preference.

We determined that our obligation to issue the Green Shoe at any time on or prior to March 31, 2023 met the definition of a freestanding financial instrument that should be accounted for as a liability. As such, we established an initial convertible preferred stock purchase option liability of $1,005,000 and reduced the proceeds from the Initial Issuance by such amount. The liability was remeasured to its estimated fair value each reporting period until such instrument expired. Changes in its estimated fair value were recognized as a non-cash charge or benefit and presented on the condensed consolidated statement of operations.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In accordance with ASC 480, "Distinguishing Liabilities from Equity," specifically ASC 480-10-S99-3A(2), SEC Staff Announcement: Classification and Measurement of Redeemable Securities, we have classified the Convertible Preferred Stock outside of permanent equity as temporary equity since the redemption of such shares is not solely within our control and we could be required by the holder to redeem the shares for cash or other assets, at their option. Upon the Initial Issuance, we recorded the Convertible Preferred Stock, net of issuance costs of $4,007,000 and net of the portion of such proceeds allocated to the convertible preferred stock purchase option liability described above, which resulted in an initial carrying value of the Convertible Preferred Stock less than its initial redemption value of $100,000,000. We have elected to adjust the carrying value of the Convertible Preferred Stock to its current redemption value of $110,417,000, which includes $9,822,000 of cumulative dividends paid in kind and $595,000 of accumulated and unpaid dividends. As such, a total adjustment of $5,213,000 to increase the carrying value of the Convertible Preferred Stock was recorded against retained earnings during the nine months ended April 30, 2023.

(17) Stockholders’ Equity

Shelf Registration

On July 13, 2022, we filed a $200,000,000 shelf registration statement with the SEC for the sale of various types of securities, including debt securities. This shelf registration statement was declared effective by the SEC as of July 25, 2022 and expires on July 25, 2025. To-date, we have not issued any securities pursuant to our $200,000,000 shelf registration statement.

Common Stock Repurchase Program

On September 29, 2020, our Board of Directors authorized a new $100,000,000 stock repurchase program, which replaced our prior program. The new $100,000,000 stock repurchase program has no time restrictions and repurchases may be made from time to time in open-market or privately negotiated transactions, or by other means in accordance with federal securities laws. There were no repurchases of our common stock during the nine months ended April 30, 2023 or 2022.

Common Stock Dividends

On September 29, 2022 and December 8, 2022, our Board of Directors declared a dividend of $0.10 per common share, which was paid on November 18, 2022 and February 17, 2023, respectively. In connection with our CEO transition and One Comtech transformation, discussed further in Note (1) – “General – CEO Transition Costs & Related,” the Board, together with management, adjusted the Company’s capital allocation plans during the third quarter of fiscal 2023 and determined to forgo a common stock dividend, thereby increasing our financial flexibility. Future common stock dividends, if any, remain subject to compliance with financial covenants under our Credit Facility, as well as Board approval and certain voting rights of holders of our Series A Convertible Preferred Stock.

(18) Legal Proceedings and Other Matters

Other Matters

In the ordinary course of business, we include indemnification provisions in certain of our customer contracts to indemnify, hold harmless and reimburse such customers for certain losses, including but not limited to losses related to third-party claims of intellectual property infringement arising from the customer’s use of our products or services. We may also, from time to time, receive indemnification requests from customers related to third-party claims that 911 calls were improperly routed during an emergency. We evaluate such claims as and when they arise. We do not always agree with customers that they are entitled to indemnification and in such cases reject their claims. Despite maintaining that we have properly carried out our duties, we may seek coverage under our various insurance policies; however, we cannot be sure that we will be able to maintain or obtain insurance coverage at acceptable costs or in sufficient amounts or that our insurer will not disclaim coverage as to such claims. Accordingly, pending or future claims asserted against us by a party that we are obligated to indemnify could result in legal costs and damages that could have a material adverse effect on our consolidated results of operations and financial condition.

There are certain other pending and threatened legal actions which arise in the normal course of business. Although the ultimate outcome of litigation is difficult to accurately predict, we believe that the outcome of these other pending and threatened actions will not have a material adverse effect on our consolidated financial condition or results of operations.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Employment Change of Control and Indemnification Agreements

On August 9, 2022, our Board of Directors appointed our Chairman of the Board, Ken Peterman, as President and CEO, and the Company entered an employment agreement with Mr. Peterman generally providing for an annual salary, bonus award, sign-on bonus, equity incentive awards and, under certain terminations of employment, severance payment.

We have also entered into legacy change of control agreements prior to 2022 with certain of our executive officers and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of the Company or termination of the employee.

Index

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain information in this Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements can be identified by words such as: "anticipate," "believe," "continue," "could," "estimate," "expect," "future," "goal," "intend," "likely," "may," "plan," "potential," "predict," "project," "seek," "should," "strategy," "target," "will," "would," and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding our future performance and financial condition, plans and objectives of our management and our assumptions regarding such future performance, financial condition, and plans and objectives that involve certain significant known and unknown risks and uncertainties and other factors not under our control which may cause our actual results, future performance and financial condition, and achievement of our plans and objectives of our management to be materially different from the results, performance or other expectations implied by these forward-looking statements. These factors include, among other things: the possibility that the expected synergies and benefits from acquisitions will not be fully realized, or will not be realized within the anticipated time periods; the risk that the acquired businesses will not be integrated successfully; the possibility of disruption from acquisitions, making it more difficult to maintain business and operational relationships or retain key personnel; the risk that we will be unsuccessful in implementing our "One Comtech" transformation and integration of individual businesses into two segments; the risk that we will be unsuccessful in implementing a tactical shift in our Satellite and Space Communications segment away from bidding on large commodity service contracts and toward pursuing contracts for our niche products and solutions with higher margins; the nature and timing of our receipt of, and our performance on, new or existing orders that can cause significant fluctuations in net sales and operating results; the timing and funding of government contracts; adjustments to gross profits on long-term contracts; risks associated with international sales; rapid technological change; evolving industry standards; new product announcements and enhancements; changing customer demands and or procurement strategies; changes in prevailing economic and political conditions, including as a result of Russia's military incursion into Ukraine; changes in the price of oil in global markets; changes in prevailing interest rates and foreign currency exchange rates; risks associated with our legal proceedings, customer claims for indemnification, and other similar matters; risks associated with our obligations under our credit facility; risks associated with our large contracts; risks associated with the COVID-19 pandemic and related supply chain disruptions; and other factors described in this and our other filings with the Securities and Exchange Commission ("SEC").

OVERVIEW

We are a leading global provider of next-generation 911 emergency systems ("NG-911") and secure wireless and satellite communications technologies. This includes the critical communications infrastructure that people, businesses, and governments rely on when durable, trusted connectivity is required, no matter where they are – on land, at sea, or in the air – and no matter what the circumstances – from armed conflict to a natural disaster. Our solutions fulfill our customers’ needs for secure wireless communications in the most demanding environments, including those where traditional communications are unavailable or cost-prohibitive, and in mission-critical and other scenarios where performance is crucial. We anticipate future growth in our business due to increasing demand for global voice, video and data usage in recent years. We provide our solutions to both commercial and governmental customers.

In the fourth quarter of fiscal 2022, we revised our business segments to better align them with end-markets for our products and services. Our businesses have been re-organized into two new reportable segments: “Satellite and Space Communications” and “Terrestrial and Wireless Networks.” All current and prior periods reflected in this Form 10-Q have been presented according to these two segments, unless otherwise noted. For more information and for financial information about our business segments, including net sales, operating income, Adjusted EBITDA (a non-GAAP financial measure), total assets, and our operations outside the United States, refer to "Notes to Consolidated Financial Statements - Note (13) Segment Information" included in "Part I - Item 1 - Notes to Condensed Consolidated Financial Statements (Unaudited)."

Index

We manage our business through two reportable operating segments:

•Satellite and Space Communications - is organized into four technology areas: satellite modem technologies and amplifier technologies, troposcatter and SATCOM solutions, space components and antennas, and high-power amplifiers and switches technologies. This segment offers customers: satellite ground station technologies, services and system integration that facilitate the transmission of voice, video and data over GEO, MEO and LEO satellite constellations, including solid-state and traveling wave tube power amplifiers, modems, VSAT platforms and frequency converters; satellite communications and tracking antenna systems, including high precision full motion fixed and mobile X/Y tracking antennas, RF feeds, reflectors and radomes; over-the-horizon microwave equipment that can transmit digitized voice, video, and data over distances up to 200 miles using the troposphere and diffraction, including the Comtech COMET™ solid-state, RF microwave high-power amplifiers and control components designed for radar, electronic warfare, data link, medical and aviation applications; and procurement and supply chain management of high reliability Electrical, Electronic and Electromechanical ("EEE") parts for satellite, launch vehicle and manned space applications.

•Terrestrial and Wireless Networks - is organized into three service areas: next generation 911 and call delivery, Solacom call handling solutions, and trusted location and messaging solutions. This segment offers customers SMS text to 911 services, providing alternate paths for individuals who need to request assistance (via text messaging) a method to reach Public Safety Answering Points ("PSAPs"); next generation 911 solutions, providing emergency call routing, location validation, policy-based routing rules, logging and security functionality; Emergency Services IP Network transport infrastructure for emergency services communications and support of next generation 911 services; call handling applications for PSAPs; wireless emergency alerts solutions for network operators; and software and equipment for location-based and text messaging services for various applications, including for public safety, commercial and government services.

Our Quarterly Financial Information

Quarterly and period-to-period sales and operating results may be significantly affected by either short-term or long-term contracts with our customers. In addition, our gross profit is affected by a variety of factors, including the mix of products, systems and services sold, production efficiencies, estimates of warranty expense, price competition and general economic conditions. Our gross profit may also be affected by the impact of any cumulative adjustments to contracts that are accounted for over time.

In particular, our contracts with the U.S. government can be terminated for convenience by it at any time and orders are subject to unpredictable funding, deployment and technology decisions by the U.S. government. Some of these contracts are indefinite delivery/indefinite quantity ("IDIQ") contracts and, as such, the U.S. government is not obligated to purchase any equipment or services under these contracts. We have, in the past, experienced and we continue to expect significant fluctuations in sales and operating results from quarter-to-quarter and period-to-period due to these factors. As such, comparisons between periods and our current results may not be indicative of a trend or future performance.

CRITICAL ACCOUNTING POLICIES

We consider certain accounting policies to be critical due to the estimation process involved in each.

Revenue Recognition. In accordance with FASB ASC 606 - Revenue from Contracts with Customers ("ASC 606"), we record revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to customers. See "Notes to Condensed Consolidated Financial Statements - Note (3) - Revenue Recognition" for further information.

Impairment of Goodwill and Other Intangible Assets. As of April 30, 2023, total goodwill recorded on our Condensed Consolidated Balance Sheet aggregated $347.7 million (of which $173.6 million relates to our Satellite and Space Communications segment and $174.1 million relates to our Terrestrial and Wireless Networks segment). Additionally, as of April 30, 2023, net intangibles recorded on our Condensed Consolidated Balance Sheet aggregated $231.3 million (of which $66.9 million relates to our Satellite and Space Communications segment and $164.4 million relates to our Terrestrial and Wireless Networks segment). For purposes of reviewing impairment and the recoverability of goodwill and other intangible assets, our Satellite and Space Communications and Terrestrial and Wireless Networks segments each constitute a reporting unit and we must make various assumptions in determining their estimated fair values. See "Notes to Condensed Consolidated Financial Statements - Note (14) - Goodwill and Note (15) - Intangible Assets" for further information.

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Provision for Warranty Obligations. We provide warranty coverage for most of our products, including products under long-term contracts, for a period of at least one year from the date of shipment. We record a liability for estimated warranty expense based on historical claims, product failure rates and other factors. Costs associated with some of our warranties that are provided under long-term contracts are incorporated into our estimates of total contract costs. There exist inherent risks and uncertainties in estimating warranty expenses, particularly on larger or longer-term contracts. If we do not accurately estimate our warranty costs, any changes to our original estimates could be material to our results of operations and financial condition.

Accounting for Income Taxes. Our deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities and applying enacted tax rates expected to be in effect for the year in which we expect the differences to reverse. Our provision for income taxes is based on domestic (including federal and state) and international statutory income tax rates in the tax jurisdictions where we operate, permanent differences between financial reporting and tax reporting and available credits and incentives. We recognize potential interest and penalties related to uncertain tax positions in income tax expense. The U.S. federal government is our most significant income tax jurisdiction.

Significant judgment is required in determining income tax provisions and tax positions. We may be challenged upon review by the applicable taxing authority and positions taken by us may not be sustained. We recognize all or a portion of the benefit of income tax positions only when we have made a determination that it is more likely than not that the tax position will be sustained upon examination, based upon the technical merits of the position and other factors. For tax positions that are determined as "more likely than not" to be sustained upon examination, the tax benefit recognized is the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.

The development of valuation allowances for deferred tax assets and reserves for income tax positions requires consideration of timing and judgments about future taxable income, tax issues and potential outcomes, and are subjective critical estimates. Valuation allowances are established, when necessary, to reduce net deferred tax assets to the amount "more likely than not" expected to be realized. A portion of our deferred tax assets consist of federal research and experimentation tax credit carryforwards, some of which was acquired in connection with prior acquisitions. No valuation allowance has been established on these deferred tax assets based on our evaluation that our ability to realize such assets has met the criteria of "more likely than not." We continuously evaluate additional facts representing positive and negative evidence in determining our ability to realize these deferred tax assets. In certain circumstances, the ultimate outcome of exposures and risks involves significant uncertainties. If actual outcomes differ materially from these estimates, they could have a material impact on our results of operations and financial condition.

Research and Development Costs. We generally expense all research and development costs. Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other personnel-related expenses associated with product development. Research and development expenses also include third-party development and programming costs. Costs incurred internally in researching and developing software to be sold are charged to expense until technological feasibility has been established for the software. Judgment is required in determining when technological feasibility of a product is established. Technological feasibility for our advanced communication software solutions is generally reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to customers and when we are able to validate the marketability of such product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. To date, capitalized internally developed software costs were not material.

Provisions for Excess and Obsolete Inventory. We record a provision for excess and obsolete inventory based on historical and projected usage trends. Other factors may also influence our provision, including decisions to exit a product line, technological change and new product development. These factors could result in a change in the amount of excess and obsolete inventory on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory was overvalued, we would be required to recognize such costs in our financial statements at the time of such determination. Any such charge could be material to our results of operations and financial condition.

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Allowance for Doubtful Accounts. We perform credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness, as determined by our review of our customers’ current credit information. Generally, we will require cash in advance or payment secured by irrevocable letters of credit before an order is accepted from an international customer that we do not do business with regularly. In addition, we seek to obtain insurance for certain domestic and international customers.

We monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. In light of ongoing tight credit market conditions, we continue to see requests from our customers for higher credit limits and longer payment terms. Because of our cash position and the nominal amount of interest we are earning on our cash and cash equivalents, we have, on a limited basis, approved certain customer requests. We continue to monitor our accounts receivable credit portfolio. To-date, there has been no material changes in our credit portfolio as a result of the COVID-19 pandemic on worldwide business activities.

Although our overall credit losses have historically been within the allowances we established, we cannot accurately predict our future credit loss experience, given the current poor business environment. Measurement of credit losses requires consideration of historical loss experience, including the need to adjust for changing business conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and the financial health of specific customers. Future changes to the estimated allowance for doubtful accounts could be material to our results of operations and financial condition.

Fiscal 2023: Third Quarter Highlights and Business Outlook

Financial highlights for the third quarter of fiscal 2023 include:

•Consolidated net sales were $136.3 million, up 1.9% sequentially from the second quarter of fiscal 2023 and up 11.6% from the third quarter of fiscal 2022;

•Gross margin was 31.7%, compared to 34.3% in our second quarter of fiscal 2023 and 38.2% in our third quarter of fiscal 2022;

•GAAP net loss attributable to common stockholders was $9.2 million, and included $4.1 million of restructuring costs and $1.0 million of strategic emerging technology costs for next-generation satellite technology;

•GAAP EPS loss of $0.33 and Non-GAAP EPS income of $0.11;

•Adjusted EBITDA (a Non-GAAP financial measure discussed below) of $12.5 million, or 9.2% of consolidated net sales, a sequential increase from the $11.3 million, or 8.5% of consolidated net sales for the second quarter of fiscal 2023;

•New bookings (also referred to as orders) of $102.8 million, representing a quarterly book-to-bill ratio of 0.75x (a measure defined as bookings divided by net sales);

•Backlog of $668.4 million as of April 30, 2023, compared to $702.0 million as of January 31, 2023 and $602.3 million as of April 30, 2022;

•Revenue visibility of approximately $1.1 billion. We measure this revenue visibility as the sum of our $668.4 million of funded backlog, plus the total unfunded value of certain multi-year contracts that we have received and from which we expect future orders; and

•Cash flows provided by operating activities of $16.6 million.

Non-GAAP financial measures discussed above are reconciled to the most directly comparable GAAP financial measures in the table included in the below section "Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of the Results of Operations for the Three Months Ended April 30, 2023 and 2022" and "Comparison of the Results of Operations for the Nine Months Ended April 30, 2023 and 2022."

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In August 2022, we announced that Ken Peterman was appointed President and CEO. Mr. Peterman’s significant experience in satellite technology and decades of experience with U.S. government contracting is expected to enhance our efforts to continually improve commercial success and shareholder value. To advance our CEO’s initiatives to further strengthen and grow our business, we continue to move forward on the operational and cultural transformation that we call "One Comtech."

In our third quarter of fiscal 2023, as part of our comprehensive and company-wide "people strategy," we continued to enhance our leadership team with key appointments designed to maximize our ability to compete and deliver across our global market segments. In April 2023, Donald Walther was appointed as Comtech’s new Chief Legal Officer and Nicole Robinson was appointed as Chief Strategy Officer. Mr. Walther has significant technology and aerospace industry experience in both public and private companies in the commercial and defense sectors with his previous experience at ITT Inc. and the Boeing Company. He will focus on ensuring Comtech's competitive differentiation through contracts is preserved and protected. Prior to joining Comtech, Ms. Robinson served as President of Ursa Space Systems, a leading satellite intelligence and data analytics provider. Ms. Robinson also served as Senior Vice President of Global Government for SES, one of the largest commercial satellite operators in the world. Ms. Robinson will focus on creating and implementing priority space business pursuits; oversee the development and implementation of new technologies; orchestrate global growth initiatives and lead other priorities related to geospatial imagery and data, as well as space communications in both U.S. and international markets.

Notably, our people strategy extends beyond the organic development of our talent pipeline and the addition of proven leaders to our team. Our strategy also includes regular assessments of the capabilities, experiences and skill sets of our Board members to ensure continued alignment with our short and long-term goals and objectives. To that end, we are very excited to have both Lieutenant General (Retired) Bruce T. Crawford and the Honorable Ellen M. Lord join our Board of Directors, effective June 15, 2023.

As planned, during the three months ended April 30, 2023, we completed our migration to our new 146,000 square-foot facility in Chandler, Arizona. We also continued to integrate our individual businesses into two segments and improve operational performance. This transformation has provided insight into opportunities to manage costs, streamline operations, improve efficiency, and accelerate decision making by eliminating management layers and other redundancies – resulting in a reduction in our workforce and the implementation of other lean initiatives during our third and fourth quarters of fiscal 2023. Severance costs relating to these actions are not anticipated to be material to our results of operations. We believe that these actions will further streamline and optimize our organization and cost structure as we approach the start of our fiscal 2024.

Over the past several months, we established EVOKE as Comtech’s innovation foundry, which is dedicated to creating and accelerating transformational changes in global technologies. We believe that EVOKE will enhance our existing technologies and service offerings (e.g., cloud-native satellite ecosystems, 5G advanced services and “as-a-service” business models) as well as allow us to pioneer entirely new ideas and opportunities with the benefit of multiple perspectives, industry backgrounds and areas of expertise. During our third quarter of fiscal 2023, we were pleased to announce that we added several new partners to EVOKE’s growing roster, including Aarna Networks, Descartes Labs, Inc. and WishKnish Corp. By combining Aarna Networks’ technologies with Comtech’s Dynamic Cloud Platform, the companies anticipate enabling customers to easily add and manage a variety of open architecture cloud-based applications across private, hybrid and public networks, in both terrestrial and non-terrestrial environments. Descartes Labs will work with Comtech to infuse the power of artificial intelligence, machine learning, predictive intelligence and insight monitoring across Comtech’s product offerings. We plan to collaborate with WishKnish on integrating highly secure, flexible distributed ledger (blockchain) technologies across diverse commercial and government applications.

As we enter the fourth quarter of fiscal 2023, business conditions continue to be challenging, and the operating environment is largely unpredictable, including factors such as inflation, rising interest rates, the repercussions of the military conflict between Russia and Ukraine and a potential global recession. Order and production delays, disruptions in component availability, increased pricing both for labor and parts, lower levels of factory utilization and higher logistics and operational costs are also continuing to impact our business.

Nevertheless, despite these business conditions and resulting challenges and although we anticipate some variability from time to time as we move through our One Comtech transformational change, for our fourth quarter of fiscal 2023, we are targeting consolidated net sales to sequentially increase approximately 2.0% to 4.0% and for our consolidated Adjusted EBITDA margin to range between 9.5% and 10.5%.

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We do not provide forward-looking guidance on a GAAP basis because we are unable to predict certain items contained in the GAAP measure without unreasonable efforts. Because our consolidated Adjusted EBITDA, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each segment as well as unallocated spending, it is inherently difficult to forecast. Please refer to the discussion below under "Adjusted EBITDA" for more information.

Additional information related to our Business Outlook for fiscal 2023 and a definition and explanation of Adjusted EBITDA is included in the below section "Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of the Results of Operations for the Three Months Ended April 30, 2023 and 2022" and "Comparison of the Results of Operations for the Nine Months Ended April 30, 2023 and 2022."

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2023 AND 2022

Net Sales. Consolidated net sales were $136.3 million and $122.1 million for the three months ended April 30, 2023 and 2022, respectively, representing an increase of $14.2 million, or 11.6%. The period-over-period increase in net sales primarily reflects significantly higher net sales in our Satellite and Space Communications segment, as further discussed below.

Satellite and Space Communications

Net sales in our Satellite and Space Communications segment were $82.2 million for the three months ended April 30, 2023 as compared to $69.2 million for the three months ended April 30, 2022, an increase of $13.0 million or 18.9%. Net sales for the three months ended April 30, 2023 primarily reflect significantly higher net sales of our troposcatter and SATCOM solutions to U.S. government customers (including VSAT equipment for the U.S. Army, progress toward delivering next-generation troposcatter terminals to the U.S. Marine Corps and delivery of our COMETTM troposcatter terminals to an international customer), offset in part by lower sales of our satellite ground station technologies, solid-state, RF microwave high-power amplifiers and control components and high reliability EEE satellite-based space components. Our Satellite and Space Communications segment represented 60.3% of consolidated net sales for the three months ended April 30, 2023 as compared to 56.6% for the three months ended April 30, 2022. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the three months ended April 30, 2023 was 0.94x.

Bookings, sales and profitability in our Satellite and Space Communications segment can fluctuate substantially from period-to-period due to many factors, including unpredictable funding, deployment and technology decisions by our U.S. and international government customers. Period-to-period fluctuations in bookings are normal for this segment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance.

Terrestrial and Wireless Networks

Net sales in our Terrestrial and Wireless Networks segment were $54.1 million for the three months ended April 30, 2023, as compared to $53.0 million for the three months ended April 30, 2022, an increase of $1.1 million, or 2.1%. Net sales in the three months ended April 30, 2023 reflect higher sales of our NG-911 solutions and services, offset in part by lower sales of our trusted location and messaging solutions. Our Terrestrial and Wireless Networks segment represented 39.7% of consolidated net sales for the three months ended April 30, 2023 as compared to 43.4% for the three months ended April 30, 2022. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the three months ended April 30, 2023 was 0.47x.

Bookings, sales and profitability in our Terrestrial and Wireless Networks segment can fluctuate from period-to-period due to many factors, including changes in the general business environment. Period-to-period fluctuations in bookings are normal for this segment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance.

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Geography and Customer Type

Sales by geography and customer type, as a percentage of related sales, for the three months ended April 30, 2023 and 2022 are as follows:


	Three months ended April 30,
	2023		2022		2023		2022		2023		2022
	Satellite and Space Communications				Terrestrial and Wireless Networks				Consolidated
U.S. government	47.1	%	39.8	%	1.6	%	1.8	%	29.1	%	23.3	%
Domestic	14.8	%	17.6	%	87.9	%	89.0	%	43.8	%	48.6	%
Total U.S.	61.9	%	57.4	%	89.5	%	90.8	%	72.9	%	71.9	%

International	38.1	%	42.6	%	10.5	%	9.2	%	27.1	%	28.1	%
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Sales to U.S. government customers include sales to the U.S. Department of Defense ("DoD"), intelligence and civilian agencies, as well as sales directly to or through prime contractors.

Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. No commercial customer accounted for greater than 10% of consolidated net sales for the three months ended April 30, 2023. Included in domestic sales are sales to Verizon, which accounted for 10.6% of consolidated net sales for the three months ended April 30, 2022.

International sales for the three months ended April 30, 2023 and 2022 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $37.0 million and $34.3 million, respectively. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented more than 10% of consolidated net sales for the three months ended April 30, 2023 and 2022.

Gross Profit. Gross profit was $43.1 million and $46.7 million for the three months ended April 30, 2023 and 2022, respectively. Gross profit, as a percentage of consolidated net sales, for the three months ended April 30, 2023 was 31.7% as compared to 38.2% for the three months ended April 30, 2022. Our gross profit (both in dollars and as a percentage of consolidated net sales) reflects an increase in net sales and overall product mix changes, including significantly higher net sales of our troposcatter and SATCOM solutions to U.S. government customers, as discussed above. Our gross profit in both periods reflects start-up costs associated with the opening of our new high-volume technology manufacturing centers, as well as increased costs resulting from the ongoing impacts of the COVID-19 pandemic and inflationary pressures. In addition, gross profit during the three months ended April 30, 2022 reflects a lower provision for warranty obligations in light of the reduced level of sales activity during that period. Gross profit, as a percentage of related segment net sales, is further discussed below.

Our Satellite and Space Communications segment's gross profit, as a percentage of related segment net sales, for the three months ended April 30, 2023 decreased in comparison to the three months ended April 30, 2022 and reflects changes in product and services mix, as discussed above. Also, during the three months ended April 30, 2022, we incurred $0.1 million of incremental operating costs related to our antenna facility located in the United Kingdom due to the impact of the COVID-19 pandemic. Similar operating costs were not incurred in the three months ended April 30, 2023.

Our Terrestrial and Wireless Networks segment's gross profit, as a percentage of related segment net sales, for the three months ended April 30, 2023 decreased in comparison to the three months ended April 30, 2022. The gross profit percentage in the most recent quarter primarily reflects changes in products and services mix, as discussed above.

Included in consolidated cost of sales for the three months ended April 30, 2023 and 2022 are provisions for excess and obsolete inventory of $1.5 million and $1.1 million, respectively. As discussed in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Provisions for Excess and Obsolete Inventory," we regularly review our inventory and record a provision for excess and obsolete inventory based on historical and projected usage trends.

Our consolidated gross profit, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each segment, and therefore is inherently difficult to forecast.

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Selling, General and Administrative Expenses. Selling, general and administrative expenses were $31.4 million and $27.6 million for the three months ended April 30, 2023 and 2022, respectively. As a percentage of consolidated net sales, selling, general and administrative expenses were 23.0% and 22.6% for the three months ended April 30, 2023 and 2022, respectively.

During the three months ended April 30, 2023 and 2022, we incurred $4.1 million and $1.6 million, respectively, of restructuring costs primarily to streamline our operations and improve efficiency, including severance and costs related to the relocation of certain of our satellite ground station production facilities to our new 146,000 square foot facility in Chandler, Arizona. Excluding restructuring costs, selling, general and administrative expenses for the three months ended April 30, 2023 and 2022 would have been $27.3 million, or 20.0%, and $26.0 million, or 21.3%, respectively, of consolidated net sales. The decrease in our selling, general and administrative expenses, as a percentage of consolidated net sales, is primarily due to higher consolidated net sales, as discussed above. Our selling, general and administrative expenses in the most recent period also reflect higher labor costs associated with a tight global labor market, increased investments in marketing, including new social media activities, and other investments we are making to achieve our long-term business goals. Such spending is expected to continue throughout the remainder of fiscal 2023.

Amortization of stock-based compensation expense recorded as selling, general and administrative expenses was $3.9 million in the three months ended April 30, 2023 as compared to $0.9 million in the three months ended April 30, 2022. Such increase reflects our assumption that fully vested, unrestricted share units will be granted to certain employees in lieu of fiscal 2023 non-equity incentive compensation. In fiscal 2022 and prior years, fully vested share units granted to certain employees in lieu of non-equity incentive compensation would not be settled until the one-year anniversary of the grant date. Amortization of stock-based compensation is not allocated to our two reportable operating segments.

Research and Development Expenses. Research and development expenses were $11.7 million and $14.3 million for the three months ended April 30, 2023 and 2022, respectively. As a percentage of consolidated net sales, research and development expenses were 8.6% and 11.7% for the three months ended April 30, 2023 and 2022, respectively.

For the three months ended April 30, 2023 and 2022, research and development expenses of $5.3 million and $7.4 million, respectively, related to our Satellite and Space Communications segment, and $6.3 million and $6.8 million, respectively, related to our Terrestrial and Wireless Networks segment. The remaining research and development expenses of $0.1 million in both the three months ended April 30, 2023 and 2022 related to the amortization of stock-based compensation expense.

During the three months ended April 30, 2023 and 2022, we incurred $1.0 million and $0.9 million, respectively, of strategic emerging technology costs in our Satellite and Space Communications segment for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations. We are evaluating this new market in relation to our long-term business strategies, and we may incur additional costs in the future.

Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the three months ended April 30, 2023 and 2022, customers reimbursed us $4.5 million and $2.7 million, respectively, which is not reflected in the reported research and development expenses but is included in net sales with the related costs included in cost of sales.

Amortization of Intangibles. Amortization relating to intangible assets with finite lives for both the three months ended April 30, 2023 and 2022 was $5.3 million (of which $1.8 million was for the Satellite and Space Communications segment and $3.5 million was for the Terrestrial and Wireless Networks segment).

Operating Income (Loss). Operating loss for the three months ended April 30, 2023 and 2022 was $5.3 and $0.6 million, respectively. Operating income (loss) by reportable segment is shown in the table below:


	Three months ended April 30,
	2023			2022	2023		2022		2023	2022	2023		2022
($ in millions)	Satellite and Space Communications				Terrestrial and Wireless Networks				Unallocated		Consolidated
Operating income (loss)	$	0.1		(0.1)	3.1		4.6		(8.5)	(5.1)	$	(5.3)	(0.6)
Percentage of related net sales	0.1		%	NA	5.8	%	8.7	%	NA	NA	NA		NA

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Our GAAP operating loss of $5.3 million for the three months ended April 30, 2023 reflects: (i) $5.3 million of amortization of intangibles; (ii) $4.1 million of restructuring costs (of which $2.2 million, $0.5 million and $1.4 million related to our Satellite and Space Communications, Terrestrial and Wireless Networks and Unallocated segments, respectively); (iii) $4.1 million of amortization of stock-based compensation; (iv) $1.0 million of strategic emerging technology costs; and (v) $0.2 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating income for the three months ended April 30, 2023 would have been $9.6 million. Our GAAP operating loss of $0.6 million for the three months ended April 30, 2022 reflects: (i) $5.3 million of amortization of intangibles; (ii) $1.6 million of restructuring costs (all of which related to our Satellite and Space Communications segment); (iii) $1.1 million of amortization of stock-based compensation; (iv) $0.9 million of strategic emerging technology costs; (v) $0.2 million of amortization of cost to fulfill assets; and (vi) $0.1 million of incremental operating costs due to the impact of COVID-19, as discussed above. Excluding such items, our consolidated operating income for the three months ended April 30, 2022 would have been $8.7 million. The increase in operating income, excluding the above items, from $8.7 million to $9.6 million for the most recent period reflects the benefit of our One Comtech lean initiatives implemented through April 30, 2023, offset in part by a lower gross profit percentage on higher net sales, as discussed above. Operating income (loss) by reportable segment is further discussed below.

The slight increase in our Satellite and Space Communications segment operating income, both in dollars and as a percentage of related segment net sales, for the three months ended April 30, 2023 was driven primarily by lower research and development expenses, offset in part by a lower gross profit percentage on significantly higher related segment net sales and higher restructuring costs, as discussed above.

The decrease in our Terrestrial and Wireless Networks segment operating income, both in dollars and as a percentage of related segment net sales, for the three months ended April 30, 2023 was driven primarily by a lower gross profit percentage on higher related segment net sales, offset in part by lower research and development expenses, as discussed above.

Excluding the impact of its respective portion of restructuring charges, Unallocated expenses for the three months ended April 30, 2023 would have been $7.1 million, as compared to $5.1 million for the three months ended April 30, 2022. The increase in Unallocated expenses, excluding such items, was primarily due to our increased investments in marketing, including new social media activities, and other investments we are making to achieve our long-term business goals.

Interest Expense and Other. Interest expense was $4.4 million and $1.0 million for the three months ended April 30, 2023 and 2022, respectively. The increase is due to a higher average debt balance outstanding during the most recent quarter, as well as higher interest rates under our Credit Facility that we entered into in November 2022. Our effective interest rate (including amortization of deferred financing costs) in the three months ended April 30, 2023 was approximately 10.1%, as compared to 3.3% in the prior year period. Our current cash borrowing rate (which excludes the amortization of deferred financing costs) under our Credit Facility approximates 8.9%, as compared to 2.5% in the prior year period.

Interest (Income) and Other. Interest (income) and other for both the three months ended April 30, 2023 and 2022 was nominal. All of our available cash and cash equivalents are currently invested in bank deposits and money market deposit accounts which, at this time, are currently yielding an immaterial interest rate.

Change in Fair Value of Convertible Preferred Stock Purchase Option Liability. During the three months ended April 30, 2022, we recorded a $0.3 million non-cash benefit from the remeasurement of the convertible preferred stock purchase option liability. There was no similar adjustment during the three months ended April 30, 2023. See "Notes to Condensed Consolidated Financial Statements - Note (16) - Convertible Preferred Stock" for more information.

Benefit from Income Taxes. For the three months ended April 30, 2023 and 2022, we recorded a tax benefit of $2.9 million and $0.8 million, respectively. Our effective tax rate (excluding discrete tax items) for the three months ended April 30, 2023 and 2022 was 14.25% and 28.25%, respectively. The decrease in the rate is primarily due to the recognition of a valuation allowance in a foreign jurisdiction.

For purposes of determining our 14.25% estimated annual effective tax rate for fiscal 2023, CEO transition costs are considered significant, unusual or infrequently occurring discrete tax items and are excluded from the computation of our effective tax rate.

During the three months ended April 30, 2023, we recorded a net discrete tax benefit of $1.2 million primarily related to the reversal of tax contingencies no longer required due to the expiration of applicable statute of limitations, offset in part by the finalization of certain tax accounts in connection with our fiscal 2022 federal income tax return. During the three months ended April 30, 2022, we recorded a net discrete tax expense of $0.2 million, primarily related to the expiration of equity based awards, offset in part by the finalization of certain tax accounts in connection with our fiscal 2021 federal income tax return.

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Our U.S. federal income tax returns for fiscal 2020 through 2022 are subject to potential future IRS audit. None of our state income tax returns prior to fiscal 2018 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.

Net Loss Attributable to Common Stockholders. During the three months ended April 30, 2023 and 2022, consolidated net loss attributable to common stockholders was $9.2 million and $1.7 million, respectively.

Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both the three months ended April 30, 2023 and 2022 are shown in the table below with a reconciliation to net income (numbers in the table may not foot due to rounding):


	Three months ended April 30,
	2023			2022		2023		2022		2023	2022	2023			2022
($ in millions)	Satellite and Space Communications					Terrestrial and Wireless Networks				Unallocated		Consolidated
Net income (loss)	$	0.7		0.3		2.9		4.5		(11.0)	(4.8)	$	(7.5)		—
(Benefit from) provision for income taxes	(1.2)			0.1		0.1		0.1		(1.8)	(0.9)	(2.9)			(0.8)
Interest expense	—			—		—		—		4.4	1.0	4.4			1.0
Interest (income) and other	0.6			(0.5)		0.2		—		—	—	0.7			(0.4)
Change in fair value of convertible preferred stock purchase option liability	—			—		—		—		—	(0.3)	—			(0.3)
Amortization of stock-based compensation	—			—		—		—		4.1	1.1	4.1			1.1
Amortization of intangibles	1.8			1.8		3.5		3.5		—	—	5.3			5.3
Depreciation	1.0			0.8		1.9		1.6		—	—	3.0			2.5


Amortization of cost to fulfill assets	0.2			0.2		—		—		—	—	0.2			0.2
Restructuring costs	2.2			1.6		0.5		—		1.4	—	4.1			1.6
COVID-19 related costs	—			0.1		—		—		—	—	—			0.1
Strategic emerging technology costs	1.0			0.9		—		—		—	—	1.0			0.9
Adjusted EBITDA	$	6.4		5.4		9.2		9.7		(3.0)	(3.9)	$	12.5		11.2
Percentage of related net sales	7.7		%	7.8	%	16.9	%	18.4	%	NA	NA	9.2		%	9.2	%

The increase in consolidated Adjusted EBITDA, in dollars, for the three months ended April 30, 2023 as compared to the three months ended April 30, 2022 reflects the benefit of our One Comtech lean initiatives implemented through April 30, 2023, offset in part by a lower gross profit percentage, as discussed above.

The increase in our Satellite and Space Communications segment's Adjusted EBITDA, in dollars, is primarily due to lower research and development expenses, offset in part by a lower gross profit percentage on significantly higher related segment net sales, as discussed above.

The decrease in our Terrestrial and Wireless Networks segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is primarily due to a lower gross profit percentage on higher related segment net sales, offset in part by lower selling, general and administrative and research and development expenses, as discussed above.

Because our consolidated Adjusted EBITDA, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each segment as well as unallocated spending, it is inherently difficult to forecast.

Index

A reconciliation of our fiscal 2022 GAAP Net Loss to Adjusted EBITDA is shown in the table below (numbers in the table may not foot due to rounding):


($ in millions)	Fiscal Year 2022
Reconciliation of GAAP Net Loss to Adjusted EBITDA:
Net loss	$	(33.1)
Benefit from income taxes	(4.0)
Interest (income) and other	(0.7)
Change in fair value of convertible preferred stock purchase option liability	(1.0)
Interest expense	5.0
Amortization of stock-based compensation	7.8
Amortization of intangibles	21.4
Depreciation	10.3
Amortization of cost to fulfill assets	0.5
CEO transition costs	13.6
Proxy solicitation costs	11.2
Restructuring costs	6.0
COVID-19 related costs	1.1
Strategic emerging technology costs	1.2
Adjusted EBITDA	$	39.3

Our Adjusted EBITDA is a Non-GAAP measure that represents earnings (loss) before income taxes, interest, change in fair value of the convertible preferred stock purchase option liability, write-off of deferred financing costs, amortization of stock-based compensation, amortization of intangibles, depreciation expense, amortization of cost to fulfill assets, acquisition plan expenses, restructuring costs, COVID-19 related costs, strategic emerging technology costs (for next-generation satellite technology), facility exit costs, CEO transition costs, proxy solicitation costs, strategic alternatives analysis expenses and other. Our definition of Adjusted EBITDA may differ from the definition of EBITDA or Adjusted EBITDA used by other companies and therefore may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA is also a measure frequently requested by our investors and analysts. We believe that investors and analysts may use Adjusted EBITDA, along with other information contained in our SEC filings, including GAAP measures, in assessing our performance and comparability of our results with other companies. Our Non-GAAP measures reflect the GAAP measures as reported, adjusted for certain items as described herein and also excludes the effects of our outstanding convertible preferred stock. During the first quarter of fiscal 2023, we changed the computation of our Non-GAAP measures of operating (loss) income, net (loss) income attributable to common stockholders and net (loss) income per diluted common share to adjust for amortization of intangibles (including cost to fulfill assets) and stock-based compensation. This change was made to improve the comparability of our results with our peers. Prior period Non-GAAP results have been restated in the tables below to reflect this change.

These Non-GAAP financial measures have limitations as an analytical tool as they exclude the financial impact of transactions necessary to conduct our business, such as the granting of equity compensation awards, and are not intended to be an alternative to financial measures prepared in accordance with GAAP. These measures are adjusted as described in the reconciliation of GAAP to Non-GAAP measures in the tables presented herein, but these adjustments should not be construed as an inference that all of these adjustments or costs are unusual, infrequent or non-recurring. Non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, financial measures determined in accordance with GAAP. Investors are advised to carefully review the GAAP financial results that are disclosed in our SEC filings. We have not quantitatively reconciled our fourth quarter fiscal 2023 Adjusted EBITDA target to the most directly comparable GAAP measure because items such as stock-based compensation, adjustments to the provision for income taxes, amortization of intangibles and interest expense, which are specific items that impact these measures, have not yet occurred, are out of our control, or cannot be predicted. For example, quantification of stock-based compensation expense requires inputs such as the number of shares granted and market price that are not currently ascertainable. Accordingly, reconciliations to the Non-GAAP forward looking metrics are not available without unreasonable effort and such unavailable reconciling items could significantly impact our financial results.

Index

Reconciliations of our GAAP consolidated operating (loss) income, net (loss) income attributable to common stockholders and net (loss) income per diluted common share for the three months ended April 30, 2023 and 2022 to the corresponding Non-GAAP measures are shown in the tables below (numbers and per share amounts in the tables may not foot due to rounding). Non-GAAP net (loss) income attributable to common stockholders and non-GAAP net (loss) income per diluted common share reflect Non-GAAP provisions for income taxes based on year-to-date results, as adjusted for the Non-GAAP reconciling items included in the tables below. We evaluate our Non-GAAP effective income tax rate on an ongoing basis, and it can change from time to time. Our Non-GAAP effective income tax rate can differ materially from our GAAP effective income tax rate. In addition, due to the GAAP net loss for the period, Non-GAAP net (loss) income per diluted common share for the three months ended April 30, 2023 and 2022 was computed using weighted average diluted shares outstanding of 28,498,000 and 27,225,000, respectively, during the period.


	Three months ended April 30, 2023
($ in millions, except for per share amount)	Operating (Loss) Income		Net (Loss) Income Attributable to Common Stockholders		Net (Loss) Income per Diluted Common Share
Reconciliation of GAAP to Non-GAAP Earnings:
GAAP measures, as reported	$	(5.3)	$	(9.2)	$	(0.33)
Adjustments to reflect redemption value of convertible preferred stock		—		1.8		0.06
Amortization of intangibles		5.3		4.1		0.15
Amortization of stock-based compensation		4.1		3.2		0.11
Restructuring costs		4.1		3.2		0.11
Strategic emerging technology costs		1.0		0.9		0.03
Amortization of costs to fulfill assets		0.2		0.2		0.01
Net discrete tax benefit		—		(1.2)		(0.04)
Non-GAAP measures	$	9.6	$	3.0	$	0.11

	Three months ended April 30, 2022
($ in millions, except for per share amount)	Operating (Loss) Income		Net (Loss) Income Attributable to Common Stockholders		Net (Loss) Income per Diluted Common Share
Reconciliation of GAAP to Non-GAAP Earnings:
GAAP measures, as reported	$	(0.6)	$	(1.7)	$	(0.06)
Adjustments to reflect redemption value of convertible preferred stock		—		1.7		0.06


Amortization of intangibles		5.3		4.1		0.15
Amortization of stock-based compensation		1.1		0.8		0.03
Restructuring costs		1.6		1.1		0.04
Strategic emerging technology costs		0.9		0.7		0.03
Amortization of costs to fulfill assets		0.2		0.2		0.01
COVID-19 related costs		0.1		0.1		—
Change in fair value of convertible preferred stock purchase option liability		—		(0.3)		(0.01)
Net discrete tax expense		—		0.2		0.01
Non-GAAP measures	$	8.7	$	6.9	$	0.25

Index

COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 2023 AND 2022

Net Sales. Consolidated net sales were $401.2 million and $359.3 million for the nine months ended April 30, 2023 and 2022, respectively, representing an increase of $41.9 million, or 11.7%. The period-over-period increase in consolidated net sales primarily reflects significantly higher net sales in our Satellite and Space Communications segment, as further discussed below.

Satellite and Space Communications

Net sales in our Satellite and Space Communications segment were $243.5 million for the nine months ended April 30, 2023 as compared to $202.9 million for the nine months ended April 30, 2022, an increase of $40.6 million or 20.0%. Related segment net sales for the nine months ended April 30, 2023 primarily reflect significantly higher net sales of our troposcatter and SATCOM solutions to U.S. government customers (including delivery of our COMETTM troposcatter terminals to international customers, VSAT equipment for the U.S. Army and progress toward delivering next-generation troposcatter terminals to the U.S. Marine Corps) and satellite ground station technologies, offset in part by lower sales of our solid-state, RF microwave high-power amplifiers and control components and high reliability EEE satellite-based space components. Our Satellite and Space Communications segment represented 60.7% of consolidated net sales for the nine months ended April 30, 2023 as compared to 56.5% for the nine months ended April 30, 2022. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the nine months ended April 30, 2023 was 1.44x.

Terrestrial and Wireless Networks

Net sales in our Terrestrial and Wireless Networks segment were $157.7 million for the nine months ended April 30, 2023, as compared to $156.4 million for the nine months ended April 30, 2022, an increase of $1.3 million, or 0.8%. Related segment net sales for the nine months ended April 30, 2023 primarily reflect higher sales of our NG-911 solutions and services, offset in part by lower sales of our trusted location and messaging solutions and cyber security training services. Our Terrestrial and Wireless Networks segment represented 39.3% of consolidated net sales for the nine months ended April 30, 2023 as compared to 43.5% for the nine months ended April 30, 2022. Our book-to-bill ratio in this segment for the nine months ended April 30, 2023 was 0.64x.

Geography and Customer Type

Sales by geography and customer type, as a percentage of related sales, for the nine months ended April 30, 2023 and 2022 are as follows:


	Nine months ended April 30,
	2023		2022		2023		2022		2023		2022
	Satellite and Space Communications				Terrestrial and Wireless Networks				Consolidated
U.S. government	48.7	%	45.6	%	1.8	%	2.3	%	30.3	%	26.8	%
Domestic	17.2	%	17.4	%	89.8	%	88.2	%	45.7	%	48.2	%
Total U.S.	65.9	%	63.0	%	91.6	%	90.5	%	76.0	%	75.0	%

International	34.1	%	37.0	%	8.4	%	9.5	%	24.0	%	25.0	%
Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%

Sales to U.S. government customers include sales to the DoD, intelligence and civilian agencies, as well as sales directly to or through prime contractors.

Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. Included in domestic sales are sales to Verizon, which accounted for 11.2% and 11.1% of consolidated net sales for the nine months ended April 30, 2023 and 2022, respectively.

Index

International sales for the nine months ended April 30, 2023 and 2022 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $96.2 million and $89.9 million, respectively. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented more than 10% of consolidated net sales for the nine months ended April 30, 2023 and 2022.

Gross Profit. Gross profit was $135.9 million and $134.3 million for the nine months ended April 30, 2023 and 2022, respectively, an increase of $1.6 million. Gross profit, as a percentage of consolidated net sales, for the nine months ended April 30, 2023 was 33.9% as compared to 37.4% for the nine months ended April 30, 2022. Our gross profit (both in dollars and as a percentage of consolidated net sales) reflects an increase in net sales and overall product mix changes, including significantly higher net sales of our troposcatter and SATCOM solutions to U.S. government customers, as discussed above. In addition, during the nine months ended April 30, 2023 and 2022, respectively, we recorded a $1.5 million and $2.5 million benefit to cost of sales as we reduced a warranty accrual due to lower than expected warranty claims in our NG-911 product line. Our gross profit in both periods reflects start-up costs associated with the opening of our new high-volume technology manufacturing centers, as well as increased costs resulting from the ongoing impacts of the COVID-19 pandemic and inflationary pressures. Gross profit, as a percentage of related segment net sales, is further discussed below.

Our Satellite and Space Communications segment's gross profit, as a percentage of related segment net sales, for the nine months ended April 30, 2023 is comparable to the nine months ended April 30, 2022 and reflects changes in products and services mix, as discussed above. Also, during the nine months ended April 30, 2022, we incurred $1.1 million of incremental operating costs related to our antenna facility located in the United Kingdom due to the impact of the COVID-19 pandemic. Similar operating costs were not incurred in the nine months ended April 30, 2023.

Our Terrestrial and Wireless Networks segment's gross profit, as a percentage of related segment net sales, for the nine months ended April 30, 2023 decreased in comparison to the nine months ended April 30, 2022. The gross profit percentage in the most recent nine-month period primarily reflects changes in products and services mix, as discussed above.

Included in consolidated cost of sales for the nine months ended April 30, 2023 and 2022 are provisions for excess and obsolete inventory of $2.8 million and $3.3 million, respectively. As discussed in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Provisions for Excess and Obsolete Inventory," we regularly review our inventory and record a provision for excess and obsolete inventory based on historical and projected usage trends.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $89.6 million and $85.7 million for the nine months ended April 30, 2023 and 2022, respectively. As a percentage of consolidated net sales, selling, general and administrative expenses were 22.3% and 23.9% for the nine months ended April 30, 2023 and 2022, respectively.

During the nine months ended April 30, 2023 and 2022, we incurred $7.0 million and $4.0 million, respectively, of restructuring costs primarily to streamline our operations and improve efficiency, including severance and costs related to the relocation of certain of our satellite ground station production facilities to our new 146,000 square foot facility in Chandler, Arizona. Excluding restructuring costs, selling, general and administrative expenses for the nine months ended April 30, 2023 and 2022 would have been $82.6 million or 20.6% and $81.7 million or 22.7%, respectively, of consolidated net sales. The decrease in our selling, general and administrative expenses, as a percentage of consolidated net sales, is primarily due to higher consolidated net sales, as discussed above. Our selling, general and administrative expenses in the most recent period also reflect higher labor costs associated with a tight global labor market, increased investments in marketing, including new social media activities and other investments we are making to achieve our long-term business goals. Such spending is expected to continue throughout the remainder of fiscal 2023.

Amortization of stock-based compensation expense recorded as selling, general and administrative expenses was $5.6 million in the nine months ended April 30, 2023 as compared to $3.5 million in the nine months ended April 30, 2022. The most recent period reflects our assumption that fully vested, unrestricted share units will be granted to certain employees in lieu of fiscal 2023 non-equity incentive compensation. In fiscal 2022 and prior years, fully vested share units granted to certain employees in lieu of non-equity incentive compensation would not be settled until the one-year anniversary of the grant date. Amortization of stock-based compensation expense for the prior year period includes $0.8 million related to the retirement, in December 2021, of three long-standing members of the Board of Directors. Amortization of stock-based compensation is not allocated to our two reportable operating segments.

Index

Research and Development Expenses. Research and development expenses were $36.9 million and $39.4 million for the nine months ended April 30, 2023 and 2022, respectively, representing a decrease of $2.5 million or 6.4%. As a percentage of consolidated net sales, research and development expenses were 9.2% and 11.0% for the nine months ended April 30, 2023 and 2022, respectively.

For the nine months ended April 30, 2023 and 2022, research and development expenses of $17.3 million and $20.6 million, respectively, related to our Satellite and Space Communications segment and $19.3 million and $18.5 million, respectively, related to our Terrestrial and Wireless Networks segment. The remaining research and development expenses of $0.3 million in both the nine months ended April 30, 2023 and 2022, respectively, related to the amortization of stock-based compensation expense.

During the nine months ended April 30, 2023 and 2022, we incurred $2.5 million and $0.9 million, respectively, of strategic emerging technology costs in our Satellite and Space Communications segment for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations. We are evaluating this new market in relation to our long-term business strategies, and we may incur additional costs in the future.

Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the nine months ended April 30, 2023 and 2022, customers reimbursed us $10.1 million and $8.0 million, respectively, which is not reflected in the reported research and development expenses but is included in net sales with the related costs included in cost of sales.

Amortization of Intangibles. Amortization relating to intangible assets with finite lives for both the nine months ended April 30, 2023 and 2022 was $16.0 million (of which $5.5 million was for the Satellite and Space Communications segment and $10.5 million was for the Terrestrial and Wireless Networks segment).

Proxy Solicitation Costs. During the nine months ended April 30, 2022, we incurred $11.2 million of proxy solicitation costs (including legal and advisory fees and costs associated with a related lawsuit) in our Unallocated segment as a result of a now settled proxy contest initiated by a shareholder. During our first quarter of fiscal 2022, we also entered into a Cooperation Agreement with such shareholder. There were no similar costs during the nine months ended April 30, 2023.

CEO Transition Costs. CEO transition costs were $9.1 million for the nine months ended April 30, 2023. On August 9, 2022, our Board of Directors appointed our Chairman of the Board, Mr. Peterman, as President and CEO. Transition costs related to our former President and CEO, Mr. Porcelain, pursuant to his separation agreement with the Company, were $7.4 million, of which $3.8 million related to the acceleration of unamortized stock-based compensation, with the remaining $3.6 million related to his severance payments and benefits upon termination of employment. The cash portion of the transition costs of $3.6 million was paid to Mr. Porcelain in October 2022. Also, in connection with Mr. Peterman entering into an employment agreement with the Company, effective as of August 9, 2022, we incurred a $1.0 million expense related to a cash sign-on bonus, which was paid in January 2023. CEO transition costs related to Mr. Porcelain and Mr. Peterman were expensed in our Unallocated segment.

CEO transition costs were $13.6 million for the nine months ended April 30, 2022 and related to our former CEO, Fred Kornberg. Of such amount, $10.3 million related to Mr. Kornberg's severance payments and benefits upon termination of his employment; the remainder related to him agreeing to serve as a Senior Technology Advisor for a minimum of two years. CEO transition costs related to Mr. Kornberg were expensed in our Unallocated segment.

Operating Income (Loss). Operating loss for the nine months ended April 30, 2023 and 2022 was $15.8 million and $31.7 million, respectively. Operating income (loss) by reportable segment is shown in the table below:


	Nine months ended April 30,
	2023			2022	2023		2022		2023	2022	2023		2022
($ in millions)	Satellite and Space Communications				Terrestrial and Wireless Networks				Unallocated		Consolidated
Operating income (loss)	$	8.4		(7.9)	7.2		17.6		(31.4)	(41.4)	$	(15.8)	(31.7)
Percentage of related net sales	3.4		%	NA	4.6	%	11.2	%	NA	NA	NA		NA

Index

Our GAAP operating loss of $15.8 million for the nine months ended April 30, 2023 reflects: (i) $16.0 million of amortization of intangibles; (ii) $9.1 million of CEO transition costs; (iii) $7.0 million of restructuring costs (of which $4.4 million, $0.5 million and $2.1 million related to our Satellite and Space Communications, Terrestrial and Wireless Networks and Unallocated segments, respectively); (iv) $6.3 million of amortization of stock-based compensation; (v) $2.5 million of strategic emerging technology costs; and (vi) $0.7 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating income for the nine months ended April 30, 2023 would have been $25.9 million, or 6.4% of consolidated net sales.

Our GAAP operating loss of $31.7 million for the nine months ended April 30, 2022 reflects: (i) $16.0 million of amortization of intangibles; (ii) $13.6 million of CEO transition costs; (iii) $11.2 million of proxy solicitation costs; (iv) $4.0 million of restructuring costs (all of which related to our Satellite and Space Communications segment); (v) $4.0 million of amortization of stock-based compensation; (vi) $1.1 million of incremental operating costs due to the impact of COVID-19; (vii) $0.9 million of strategic emerging technology costs; and (viii) $0.2 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating income for the nine months ended April 30, 2022 would have been $19.5 million, or 5.4% of consolidated net sales. The increase in operating income, excluding the above items, from $19.5 million to $25.9 million for the most recent period reflects the benefit of our One Comtech lean initiatives implemented through April 30, 2023 and, to a lesser extent, higher consolidated net sales, as discussed above. Operating income (loss) by reportable segment is further discussed below.

The increase in our Satellite and Space Communications segment operating income, both in dollars and as a percentage of the related segment net sales, for the nine months ended April 30, 2023 was driven primarily by an increase in related segment net sales and lower research and development expenses, as discussed above.

The decrease in our Terrestrial and Wireless Networks segment operating income, both in dollars and as a percentage of the related segment net sales, for the nine months ended April 30, 2023 was driven primarily by changes in products and services mix and higher research and development expenses, as discussed above.

Excluding the impact of CEO transition costs, proxy solicitation costs and its respective portion of restructuring charges, Unallocated expenses for the nine months ended April 30, 2023 would have been $20.2 million, as compared to $16.5 million for the nine months ended April 30, 2022. The increase in Unallocated expenses excluding such items was primarily due to our increased investments in marketing, including new social media activities, and other investments we are making to achieve our long-term business goals.

Interest Expense and Other. Interest expense was $10.4 million and $3.6 million for the nine months ended April 30, 2023 and 2022, respectively. The increase is due to a higher average debt balance outstanding during the most recent period, as well as higher interest rates under our Credit Facility that we entered into in November 2022. Our effective interest rate (including amortization of deferred financing costs) in the nine months ended April 30, 2023 was approximately 8.3%, as compared to 3.2% in the prior year period. Our current cash borrowing rate (which excludes the amortization of deferred financing costs) under our existing Credit Facility approximates 8.9%, as compared to 2.5% in the prior year period.

Interest (Income) and Other. Interest (income) and other for both the nine months ended April 30, 2023 and 2022 was nominal. All of our available cash and cash equivalents are currently invested in bank deposits and money market deposit accounts which, at this time, are currently yielding an immaterial interest rate.

Change in Fair Value of Convertible Preferred Stock Purchase Option Liability. During the nine months ended April 30, 2022, we recorded a $1.0 million non-cash benefit from the remeasurement of the convertible preferred stock purchase option liability. There was no similar adjustment during the nine months ended April 30, 2023. See "Notes to Condensed Consolidated Financial Statements - Note (16) - Convertible Preferred Stock" for more information.

Benefit from Income Taxes. For the nine months ended April 30, 2023 and 2022, we recorded a tax benefit of $3.8 million and $6.1 million, respectively. Our effective tax rate (excluding discrete tax items) for the nine months ended April 30, 2023 and 2022 was 14.25% and 28.25%, respectively. The decrease in the rate is primarily due to the recognition of a valuation allowance in a foreign jurisdiction.

Index

During the nine months ended April 30, 2023, we recorded a net discrete tax benefit of $1.2 million primarily related to the reversal of tax contingencies no longer required due to the expiration of applicable statute of limitations and the deductible portion of CEO transition costs, offset in part by the settlement of stock-based awards and the finalization of certain tax accounts in connection with our fiscal 2022 federal income tax return. During the nine months ended April 30, 2022, we recorded a net discrete tax benefit of $3.5 million primarily related to proxy solicitation costs, the deductible portion of CEO transition costs and the finalization of certain tax accounts in connection with our fiscal 2021 federal income tax return.

Net Loss Attributable to Common Stockholders. During the nine months ended April 30, 2023 and 2022, consolidated net loss attributable to common stockholders was $28.6 million and $36.4 million, respectively.

Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both the nine months ended April 30, 2023 and 2022 are shown in the table below (numbers in the table may not foot due to rounding):


	Nine months ended April 30,
	2023			2022		2023		2022		2023	2022	2023			2022
($ in millions)	Satellite and Space Communications					Terrestrial and Wireless Networks				Unallocated		Consolidated
Net income (loss)	$	9.6		(7.3)		7.1		17.4		(40.0)	(38.0)	$	(23.4)		(27.9)
Benefit from income taxes	(1.8)			(0.5)		(0.2)		—		(1.7)	(5.7)	(3.8)			(6.1)
Interest expense	—			0.1		—		—		10.4	3.5	10.4			3.6
Interest (income) and other	0.6			(0.3)		0.3		0.1		—	(0.1)	0.9			(0.3)
Change in fair value of convertible preferred stock purchase option liability	—			—		—		—		—	(1.0)	—			(1.0)
Amortization of stock-based compensation	—			—		—		—		6.3	4.0	6.3			4.0
Amortization of intangibles	5.5			5.5		10.6		10.6		—	—	16.0			16.0
Depreciation	3.1			2.4		5.6		4.5		0.1	0.2	8.7			7.1
Amortization of cost to fulfill assets	0.7			0.2		—		—		—	—	0.7			0.2
Restructuring costs	4.4			4.0		0.5		—		2.1	—	7.0			4.0
COVID-19 related costs	—			1.1		—		—		—	—	—			1.1
Strategic emerging technology costs	2.5			0.9		—		—		—	—	2.5			0.9
CEO transition costs	—			—		—		—		9.1	13.6	9.1			13.6
Proxy solicitation costs	—			—		—		—		—	11.2	—			11.2

Adjusted EBITDA	$	24.5		6.3		23.9		32.6		(13.8)	(12.4)	$	34.6		26.5
Percentage of related net sales	10.1		%	3.1	%	15.2	%	20.8	%	NA	NA	8.6		%	7.4	%

The increase in consolidated Adjusted EBITDA, both in dollars and as a percentage of consolidated net sales, for the nine months ended April 30, 2023 as compared to the nine months ended April 30, 2022 reflects the benefit of our One Comtech lean initiatives implemented through April 30, 2023, as discussed above.

The increase in our Satellite and Space Communications segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is primarily due to an increase in related segment net sales and lower research and development expenses, as discussed above.

The decrease in our Terrestrial and Wireless Networks segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is primarily due to changes in products and services mix and higher research and development expenses, as discussed above.

A reconciliation of our fiscal 2022 GAAP net loss to Adjusted EBITDA, and our definition of Adjusted EBITDA, is presented above in "Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of the Results of Operations for the Three Months Ended April 30, 2023 and 2022."

Index

Reconciliations of our GAAP consolidated operating (loss) income, net (loss) income attributable to common stockholders and net (loss) income per diluted common share for the nine months ended April 30, 2023 and 2022 to the corresponding Non-GAAP measures are shown in the tables below (numbers and per share amounts in the tables may not foot due to rounding). Non-GAAP net (loss) income attributable to common stockholders and non-GAAP net (loss) income per diluted common share reflect Non-GAAP provisions for income taxes based on year-to-date results, as adjusted for the Non-GAAP reconciling items included in the tables below. We evaluate our Non-GAAP effective income tax rate on an ongoing basis, and it can change from time to time. Our Non-GAAP effective income tax rate can differ materially from our GAAP effective income tax rate. In addition, due to the GAAP net loss for the period, Non-GAAP net (loss) income per diluted common share for the nine months ended April 30, 2023 and 2022 was computed using weighted average diluted shares outstanding of 28,353,000 and 27,160,000 respectively, during the period.


	Nine months ended April 30, 2023
($ in millions, except for per share amount)	Operating (Loss) Income		Net (Loss) Income Attributable to Common Stockholders		Net (Loss) Income per Diluted Common Share
Reconciliation of GAAP to Non-GAAP Earnings:
GAAP measures, as reported	$	(15.8)	$	(28.6)	$	(1.02)
Adjustments to reflect redemption value of convertible preferred stock		—		5.2		0.19
CEO transition costs		9.1		8.6		0.31
Amortization of intangibles		16.0		12.4		0.44
Amortization of stock-based compensation		6.3		4.9		0.18
Restructuring costs		7.0		5.4		0.19

Strategic emerging technology costs		2.5		2.2		0.08
Amortization of cost to fulfill assets		0.7		0.7		0.03


Net discrete tax benefit		—		(0.7)		(0.03)
Non-GAAP measures	$	25.9	$	10.2	$	0.36

	Nine months ended April 30, 2022
($ in millions, except for per share amount)	Operating (Loss) Income		Net (Loss) Income Attributable to Common Stockholders		Net (Loss) Income per Diluted Common Share
Reconciliation of GAAP to Non-GAAP Earnings:
GAAP measures, as reported	$	(31.7)	$	(36.4)	$	(1.37)
Adjustment to reflect redemption value of convertible preferred stock		—		8.5		0.32
CEO transition costs		13.6		13.0		0.49
Proxy solicitation costs		11.2		8.7		0.33
Amortization of intangibles		16.0		12.3		0.45
Amortization of stock-based compensation		4.0		3.1		0.12
Restructuring costs		4.0		3.1		0.12
Strategic emerging technology costs		0.9		0.7		0.03
Amortization of cost to fulfill assets		0.2		0.2		0.01
COVID-19 related costs		1.1		0.9		0.03
Change in fair value of convertible preferred stock purchase option liability		—		(1.0)		(0.04)
Net discrete tax benefit		—		(0.3)		(0.01)
Non-GAAP measures	$	19.5	$	12.7	$	0.47

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LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents were $21.4 million and $21.7 million at April 30, 2023 and July 31, 2022, respectively. For the nine months ended April 30, 2023, our cash flows reflect the following:

•Net cash used in operating activities was $0.2 million for the nine months ended April 30, 2023 as compared to net cash provided by operating activities of $8.4 million for the nine months ended April 30, 2022. The period-over-period decrease in cash flow from operating activities reflects overall changes in net working capital requirements, principally the timing of shipments, billings and payments.

•Net cash used in investing activities for the nine months ended April 30, 2023 and 2022 was $14.9 million and $14.4 million, respectively. Net cash used in investing activities for the nine months ended April 30, 2023 primarily reflects capital expenditures to build-out cloud-based computer networks to support our previously announced NG-911 contract wins and capital investments and building improvements in connection with the opening of our new high-volume technology manufacturing centers. Net cash used in both periods also relates to expenditures for property, plant and equipment upgrades and enhancements.

•Net cash provided by financing activities was $14.8 million and $8.0 million for the nine months ended April 30, 2023 and 2022, respectively. During the nine months ended April 30, 2023, we had net borrowings under our Credit Facility of $29.8 million, as compared to net payments under our Credit Facility of $74.0 million during the nine months ended April 30, 2022. During the nine months ended April 30, 2022, we received an aggregate of $100.0 million in proceeds related to the issuance of a new series of Convertible Preferred Stock to certain investors. During the nine months ended April 30, 2023, we paid deferred financing costs of $3.8 million in connection with the amendment of our Credit Facility. During the nine months ended April 30, 2023 and 2022, we paid $8.7 million and $8.4 million, respectively, in cash dividends to our common stockholders. We also made $2.8 million and $6.1 million of payments to remit employees' statutory tax withholding requirements related to the net settlement of stock-based awards during the nine months ended April 30, 2023 and 2022, respectively.

The Credit Facility is discussed below and in "Notes to Condensed Consolidated Financial Statements – Note (9) – Credit Facility."

The Convertible Preferred Stock is discussed below and in "Notes to Condensed Consolidated Financial Statements – Note (16) – Convertible Preferred Stock."

Our investment policy relating to our cash and cash equivalents is intended to minimize principal loss while at the same time maximize the income we receive without significantly increasing risk. To minimize risk, we generally invest our cash and cash equivalents in money market mutual funds (both government and commercial), certificates of deposit, bank deposits and U.S. Treasury securities. Many of our money market mutual funds invest in direct obligations of the U.S. government, bank securities guaranteed by the Federal Deposit Insurance Corporation, certificates of deposit and commercial paper and other securities issued by other companies. While we cannot predict future market conditions or market liquidity, we believe our investment policies are appropriate in the current environment. Ultimately, the availability of our cash and cash equivalents is dependent on a well-functioning liquid market.

In addition to making capital investments for our new high-volume manufacturing centers, we have been making significant capital expenditures and building out cloud-based computer networks to support our previously announced NG-911 contract wins for the states of Pennsylvania, South Carolina and Arizona. We expect capital investments for these and other initiatives to continue for the remainder of fiscal 2023 as we look to complete such projects.

On July 13, 2022, we filed a $200.0 million shelf registration statement with the SEC for the sale of various types of securities, including debt securities. This new shelf registration statement was declared effective by the SEC as of July 25, 2022 and expires on July 25, 2025.

On September 29, 2020, our Board of Directors authorized a new $100.0 million stock repurchase program, which replaced our prior program. The new $100.0 million stock repurchase program has no time restrictions and repurchases may be made from time to time in open-market or privately negotiated transactions, or by other means in accordance with federal securities laws. There were no repurchases of our common stock during the nine months ended April 30, 2023 and 2022.

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On September 29, 2022 and December 8, 2022, our Board of Directors declared a dividend of $0.10 per common share, which was paid on November 18, 2022 and February 17, 2023, respectively. Encouraged by the progress that we have made related to our One Comtech transformation, our launch of EVOKE and our emerging growth opportunities, as previously disclosed, during the third quarter of fiscal 2023, the Board, together with management, adjusted the Company’s capital allocation plans and determined to forgo a common stock dividend, thereby increasing our financial flexibility. Future common stock dividends, if any, remain subject to compliance with financial covenants under our Credit Facility, as well as Board approval and certain voting rights of holders of our Series A Convertible Preferred Stock.

Our material cash requirements are for working capital, capital expenditures, income tax payments, debt service (including interest), facilities lease payments and dividends related to our Convertible Preferred Stock, which are payable in kind or in cash at our election.

We have historically met our cash requirements with funds provided by a combination of cash and cash equivalent balances, cash generated from operating activities and cash generated from equity and debt financing transactions. In our first quarter of fiscal 2022, we secured a $100.0 million strategic growth investment to enhance our financial flexibility and strengthen our ability to capitalize on recent large contract awards and growing customer demand by making crucial investments in our satellite and space communications and terrestrial and wireless networks solutions. Based on our current revenue visibility and anticipated benefits of our One Comtech profit improvement initiatives, we believe that our existing cash and cash equivalent balances, our cash generated from operating activities and amounts potentially available under our Credit Facility will be sufficient to meet our currently anticipated cash requirements in the next twelve months and beyond.

Our material cash requirements could increase beyond our current expectations due to factors such as general economic conditions, a change in government spending priorities, larger than usual customer orders or a future redemption by the holders of our Series A Convertible Preferred Stock. Also, in light of our CEO's initiatives to grow the Company, we continue to review and evaluate our capital allocation plans. Furthermore, we may choose to raise additional funds through equity and debt financing transactions to provide additional flexibility or to pursue acquisitions. Although it is difficult in the current economic and credit environment to predict the terms and conditions of financing that may be available in the future, we believe that we would have sufficient access to credit from financial institutions and/or financing from public and private debt and equity markets.

Credit Facility

On October 31, 2018, we entered into a First Amended and Restated Credit Agreement (the "Credit Facility") with a syndicate of lenders. On November 30, 2022, we refinanced the amount outstanding under the Credit Facility by entering into a Second Amended and Restated Credit Agreement (also referred to herein as the "Credit Facility") with the existing lenders. See "Notes to Condensed Consolidated Financial Statements – Note (9) – Credit Facility" for further information. Capitalized terms used but not defined herein have the meanings set forth for such terms in the Credit Facility, which have been documented and filed with the SEC.

As of April 30, 2023, the amount outstanding under our Credit Facility was $159.8 million, comprised of $111.0 million under the Revolving Loan Facility and $48.8 million under the Term Loan. At April 30, 2023, we had $1.0 million of standby letters of credit outstanding under our Credit Facility related to our guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit. During the nine months ended April 30, 2023, we had outstanding balances under the Credit Facility ranging from $130.0 million to $182.4 million.

As of April 30, 2023, our Secured Leverage Ratio was 3.73x trailing twelve months ("TTM") Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") compared to the maximum allowable Secured Leverage Ratio of 4.00x TTM Adjusted EBITDA. Our Interest Expense Coverage Ratio as of April 30, 2023 was 4.11x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25x TTM Adjusted EBITDA. Our Minimum Liquidity was $32.5 million compared to the Minimum Liquidity requirement of $25.0 million.

Given our expected future business performance, we anticipate maintaining compliance with the terms and financial covenants in our Credit Facility for the foreseeable future, however there can be no assurance that we will be able to satisfy these covenants.

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Convertible Preferred Stock

As discussed further in "Notes to Condensed Consolidated Financial Statements - Note (16) - Convertible Preferred Stock," on October 18, 2021, we entered into a Subscription Agreement (the “Subscription Agreement”) with certain affiliates and related funds of White Hat Capital Partners LP and Magnetar Capital LLC (collectively, the “Investors”), relating to the issuance and sale of up to 125,000 shares of a new series of the Company's Series A Convertible Preferred Stock, par value $0.10 per share (the "Convertible Preferred Stock"), for an aggregate purchase price of up to $125.0 million, or $1,000 per share. On October 19, 2021 (the “Initial Closing Date”), pursuant to the terms of the Subscription Agreement, the Investors purchased an aggregate of 100,000 shares of Convertible Preferred Stock (the “Initial Issuance”) for an aggregate purchase price of $100.0 million.

Commitments

In the normal course of business, other than as discussed below, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment. We do not expect that these commitments, as of April 30, 2023, will materially adversely affect our liquidity. At April 30, 2023, cash payments due under contractual obligations (including estimated interest expense on our Credit Facility), excluding purchase orders that we entered into in our normal course of business, are as follows:



	Total		Due Within 1 Year
Credit Facility - principal payments	$	159,750	3,750
Credit Facility - interest payments	21,331		14,323
Operating lease obligations	58,642		9,343
Contractual cash obligations	$	239,723	27,416

The commitments under our Credit Facility are described in detail above.

As discussed in "Notes to Condensed Consolidated Financial Statements - Note (16) - Convertible Preferred Stock," the holders of the Convertible Preferred Stock have the option to redeem such shares for cash commencing in October 2026. As the Convertible Preferred Stock are not mandatorily redeemable for cash, the redemption value of such shares are not presented in the table above.

In the ordinary course of business, we include indemnification provisions in certain of our customer contracts. Pursuant to these agreements, we have agreed to indemnify, hold harmless and reimburse the indemnified party for certain losses suffered or incurred by the indemnified party, including but not limited to losses related to third-party intellectual property claims. It is not possible to determine the maximum potential amount under these agreements due to a history of nominal claims and the unique facts and circumstances involved in each particular agreement.

As discussed further in "Notes to Condensed Consolidated Financial Statements - Note (18) - Legal Proceedings and Other Matters," we are subject to a number of indemnification demands and we are incurring ongoing legal expenses in connection with these matters. Our insurance policies may not cover the cost of defending indemnification claims or providing indemnification. As a result, pending or future claims asserted against us by a party that we may agree or have agreed to indemnify could result in legal costs and damages that could have a material adverse effect on our consolidated results of operations and financial condition.

We entered into legacy change of control agreements prior to 2022 with certain of our executive officers and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of the Company or termination of the employee.

Our Condensed Consolidated Balance Sheet at April 30, 2023 includes total liabilities of $8.9 million for uncertain tax positions, including interest, any or all of which may result in a cash payment. The future payments related to uncertain tax positions have not been presented in the table above due to the uncertainty of the amounts and timing of any potential cash settlement with the taxing authorities.

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RECENT ACCOUNTING PRONOUNCEMENTS

We are required to prepare our condensed consolidated financial statements in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") which is the source for all authoritative U.S. generally accepted accounting principles, which is commonly referred to as "GAAP." The FASB ASC is subject to updates by the FASB, which are known as Accounting Standards Updates ("ASUs").

As further discussed in "Notes to Condensed Consolidated Financial Statements – Note (2) - Adoption of Accounting Standards and Updates," ASUs issued, but not effective until after April 30, 2023, are not expected to have a material impact on our condensed consolidated financial statements or disclosures.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from borrowings under our Credit Facility. Based on the amount of outstanding debt under our Credit Facility, a hypothetical change in interest rates by 10% would change interest expense by approximately $1.4 million over a one-year period. Although we do not currently use interest rate derivative instruments to manage exposure to interest rate changes, we may choose to do so in the future in connection with our Credit Facility.

Our earnings and cash flows are also subject to fluctuations due to changes in interest rates on our investment of available cash balances. As of April 30, 2023, we had cash and cash equivalents of $21.4 million, which consisted of cash and highly-liquid money market deposit accounts. Many of these investments are subject to fluctuations in interest rates, which could impact our results. Based on our investment portfolio balance as of April 30, 2023, a hypothetical change in interest rates of 10% would have a nominal impact on interest income over a one-year period. Ultimately, the availability of our cash and cash equivalents is dependent on a well-functioning liquid market.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934), was carried out by us under the supervision and with the participation of our management, including our President and Chief Executive Officer and Chief Financial Officer. Based on that evaluation, our President and Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by the report to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure. A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

There have been no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The certifications of our President and Chief Executive Officer and Chief Financial Officer, that are Exhibits 31.1 and 31.2, respectively, should be read in conjunction with the foregoing information for a more complete understanding of the references in those Exhibits to disclosure controls and procedures and internal control over financial reporting.

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

See "Notes to Condensed Consolidated Financial Statements – Note (18) – Legal Proceedings and Other Matters" of this Form 10-Q for information regarding legal proceedings and other matters.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in our Form 10-K for the fiscal year ended July 31, 2022.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

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Item 6. Exhibits

Exhibit 31.1 - Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 - Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 101.INS - The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, 2023, formatted in inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity, (iv) Condensed Consolidated Statement of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements

Exhibit 101.SCH - Inline XBRL Taxonomy Extension Schema Document

Exhibit 101.CAL - Inline XBRL Taxonomy Extension Calculation Linkbase Document

Exhibit 101.LAB - Inline XBRL Taxonomy Extension Labels Linkbase Document

Exhibit 101.PRE - Inline XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 101.DEF - Inline XBRL Taxonomy Extension Definition Linkbase Document

Exhibit 104 - Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COMTECH TELECOMMUNICATIONS CORP.

(Registrant)



Date:	June 8, 2023	By: /s/ Ken Peterman
	(Date)	Ken Peterman
		Chairman of the Board
		President and Chief Executive Officer
		(Principal Executive Officer)

Date:	June 8, 2023	By: /s/ Michael A. Bondi
	(Date)	Michael A. Bondi
		Chief Financial Officer
		(Principal Financial and Accounting Officer)