COMTECH TELECOMMUNICATIONS CORP /DE/ 10-Q

Item 1. Financial Statements COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) Assets October 31, 2020 July 31, 2020 Current assets: Cash and cash equivalents $ 32,468,000 47,878,000 Accounts receivable, net 132,070,000 126,816,000 Inventories, net 81,400,000 82,302,000 Prepaid expenses and other current assets 28,609,000 20,101,000 Total current assets 274,547,000 277,097,000 Property, plant and equipment, net 26,043,000 27,037,000 Operating lease right-of-use assets, net 28,340,000 30,033,000 Goodwill 331,487,000 330,519,000 Intangibles with finite lives, net 252,453,000 258,019,000 Deferred financing costs, net 2,207,000 2,391,000 Other assets, net 3,434,000 4,551,000 Total assets $ 918,511,000 929,647,000 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 25,887,000 23,423,000 Accrued expenses and other current liabilities 89,911,000 85,161,000 Operating lease liabilities, current 8,055,000 8,247,000 Dividends payable — 2,468,000 Contract liabilities 44,229,000 40,250,000 Interest payable 1,470,000 163,000 Total current liabilities 169,552,000 159,712,000 Non-current portion of long-term debt, net 217,000,000 149,500,000 Operating lease liabilities, non-current 22,561,000 24,109,000 Income taxes payable 2,147,000 1,963,000 Deferred tax liability, net 18,143,000 17,637,000 Long-term contract liabilities 9,891,000 9,596,000 Other liabilities 19,065,000 17,831,000 Total liabilities 458,359,000 380,348,000 Commitments and contingencies (See Note 18) Stockholders’ equity: Preferred stock, par value $ 0.10 per share; shares authorized and unissued 2,000,000 — — Common stock, par value $ 0.10 per share; authorized 100,000,000 shares; issued 40,043,753 shares and 39,924,439 shares at October 31, 2020 and July 31, 2020, respectively 4,004,000 3,992,000 Additional paid-in capital 569,422,000 569,891,000 Retained earnings 328,575,000 417,265,000 902,001,000 991,148,000 Less: Treasury stock, at cost ( 15,033,317 shares at October 31, 2020 and July 31, 2020) ( 441,849,000 ) ( 441,849,000 ) Total stockholders’ equity 460,152,000 549,299,000 Total liabilities and stockholders’ equity $ 918,511,000 929,647,000 See accompanying notes to condensed consolidated financial statements. 2 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three months ended October 31, 2020 2019 Net sales $ 135,218,000 170,267,000 Cost of sales 85,010,000 106,700,000 Gross profit 50,208,000 63,567,000 Expenses: Selling, general and administrative 27,540,000 31,851,000 Research and development 11,635,000 14,861,000 Amortization of intangibles 5,566,000 5,206,000 Acquisition plan expenses 91,183,000 2,389,000 135,924,000 54,307,000 Operating (loss) income ( 85,716,000 ) 9,260,000 Other expenses (income): Interest expense 2,297,000 1,804,000 Interest (income) and other 66,000 ( 77,000 ) (Loss) income before (benefit from) provision for income taxes ( 88,079,000 ) 7,533,000 (Benefit from) provision for income taxes ( 2,239,000 ) 1,145,000 Net (loss) income $ ( 85,840,000 ) 6,388,000 Net (loss) income per share: Basic $ ( 3.39 ) 0.26 Diluted $ ( 3.39 ) 0.26 Weighted average number of common shares outstanding – basic 25,305,000 24,555,000 Weighted average number of common and common equivalent shares outstanding – diluted 25,305,000 24,737,000 See accompanying notes to condensed consolidated financial statements. 3 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY THREE MONTHS ENDED OCTOBER 31, 2020 AND 2019 (Unaudited) Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Stockholders' Equity Shares Amount Shares Amount Balance as of July 31, 2019 39,276,161 $ 3,928,000 $ 552,670,000 $ 420,333,000 15,033,317 $ ( 441,849,000 ) $ 535,082,000 Equity-classified stock award compensation — — 879,000 — — — 879,000 Proceeds from exercises of stock options 10,600 1,000 305,000 — — — 306,000 Proceeds from issuance of employee stock purchase plan shares 10,135 1,000 245,000 — — — 246,000 Issuance of restricted stock 21,510 2,000 ( 2,000 ) — — — — Net settlement of stock-based awards 83,820 8,000 ( 2,781,000 ) — — — ( 2,773,000 ) Cash dividends declared, net ($ 0.10 per share) — — — ( 2,428,000 ) — — ( 2,428,000 ) Accrual of dividend equivalents, net of reversal ($ 0.10 per share) — — — ( 56,000 ) — — ( 56,000 ) Net income — — — 6,388,000 — — 6,388,000 Balance as of October 31, 2019 39,402,226 $ 3,940,000 $ 551,316,000 $ 424,237,000 15,033,317 $ ( 441,849,000 ) $ 537,644,000 Balance as of July 31, 2020 39,924,439 3,992,000 569,891,000 417,265,000 15,033,317 ( 441,849,000 ) 549,299,000 Equity-classified stock award compensation — — 699,000 — — — 699,000 Proceeds from issuance of employee stock purchase plan shares 15,265 1,000 181,000 — — — 182,000 Issuance of restricted stock 35,975 4,000 ( 4,000 ) — — — — Net settlement of stock-based awards 68,074 7,000 ( 1,345,000 ) — — — ( 1,338,000 ) Cash dividends declared, net ($ 0.10 per share) — — — ( 2,493,000 ) — — ( 2,493,000 ) Accrual of dividend equivalents, net of reversal ($ 0.10 per share) — — — ( 142,000 ) — — ( 142,000 ) Adoption of current expected credit loss standard (see Note (3)) — — — ( 215,000 ) — — ( 215,000 ) Net loss — — — ( 85,840,000 ) — — ( 85,840,000 ) Balance as of October 31, 2020 40,043,753 $ 4,004,000 $ 569,422,000 $ 328,575,000 15,033,317 $ ( 441,849,000 ) $ 460,152,000 See accompanying notes to condensed consolidated financial statements. 4 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three months ended October 31, 2020 2019 Cash flows from operating activities: Net (loss) income $ ( 85,840,000 ) 6,388,000 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization of property, plant and equipment 2,552,000 2,651,000 Amortization of intangible assets with finite lives 5,566,000 5,206,000 Amortization of stock-based compensation 699,000 879,000 Amortization of deferred financing costs 184,000 185,000 Estimated contract settlement costs — 230,000 Changes in other liabilities ( 1,033,000 ) ( 1,033,000 ) Provision for (benefit from) allowance for doubtful accounts 110,000 ( 343,000 ) Provision for excess and obsolete inventory 1,003,000 373,000 Deferred income tax expense 816,000 2,286,000 Other ( 225,000 ) ( 3,000 ) Changes in assets and liabilities, net of effects of business acquisitions: Accounts receivable ( 5,784,000 ) ( 15,947,000 ) Inventories ( 101,000 ) 2,656,000 Prepaid expenses and other current assets ( 5,247,000 ) 930,000 Other assets 45,000 ( 44,000 ) Accounts payable 1,133,000 4,299,000 Accrued expenses and other current liabilities 7,031,000 ( 1,095,000 ) Contract liabilities 4,274,000 ( 822,000 ) Other liabilities, non-current 2,358,000 3,000 Interest payable 1,307,000 ( 133,000 ) Income taxes payable ( 3,077,000 ) ( 1,221,000 ) Net cash (used in) provided by operating activities (See Note (2)) ( 74,229,000 ) 5,445,000 Cash flows from investing activities: Purchases of property, plant and equipment ( 890,000 ) ( 1,250,000 ) Net cash used in investing activities ( 890,000 ) ( 1,250,000 ) Cash flows from financing activities: Net borrowings of long-term debt under Credit Facility 67,500,000 4,000,000 Remittance of employees' statutory tax withholding for stock awards ( 2,737,000 ) ( 4,560,000 ) Cash dividends paid ( 5,236,000 ) ( 2,692,000 ) Repayment of principal amounts under finance lease liabilities — ( 198,000 ) Proceeds from issuance of employee stock purchase plan shares 182,000 246,000 Proceeds from exercises of stock options — 306,000 Net cash provided by (used in) financing activities 59,709,000 ( 2,898,000 ) Net (decrease) increase in cash and cash equivalents ( 15,410,000 ) 1,297,000 Cash and cash equivalents at beginning of period 47,878,000 45,576,000 Cash and cash equivalents at end of period $ 32,468,000 46,873,000 See accompanying notes to condensed consolidated financial statements (Continued) 5 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) Three months ended October 31, 2020 2019 Supplemental cash flow disclosures: Cash paid during the period for: Interest $ 786,000 1,701,000 Income taxes, net $ 22,000 79,000 Non-cash investing and financing activities: Reclass of finance lease right-of-use assets to property, plant and equipment $ — 295,000 Cash dividends declared but unpaid (including accrual of dividend equivalents) $ 142,000 2,484,000 Accrued additions to property, plant and equipment $ 1,489,000 692,000 See accompanying notes to condensed consolidated financial statements. 6 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 months ended October 31, 2020 and 2019 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, 2020 and the notes thereto contained in our Annual Report on Form 10-K, and all of our other filings with the SEC. As disclosed in more detail in Note (14) - " Segment Information ," we manage our business in two reportable segments: Commercial Solutions and Government Solutions. Certain reclassifications have been made to previously reported condensed consolidated financial statements to conform to the current fiscal period presentation. Impact of Coronavirus Disease 2019 Pandemic ("COVID-19") on Our Business Since March 2020, we have conducted most of our non-production related operations using remote working arrangements, curtailed most business travel, and have established social distancing safeguards. These precautions and business practices are expected to remain in effect so long as government advisories recommend. Additionally, we have experienced order delays, production delays, minor supply chain disruptions, lower levels of factory utilization and higher logistics and operational costs. Although the COVID-19 pandemic is by no means over and additional waves of COVID-19 could again alter the business landscape, we believe that the pandemic’s worst impact on our business is largely behind us. As the vaccine for COVID-19 becomes widely available, we believe that business conditions will improve. Our long-term fundamentals remain strong as we continue to believe we are well-positioned for growth as business conditions meaningfully improve. (2) Acquisitions CGC Technology Limited On January 27, 2020, we completed the acquisition of CGC Technology Limited ("CGC"), a privately held company located in the United Kingdom, pursuant to the Share Purchase Agreement, dated as of January 27, 2020. CGC is a leading global provider of high precision full motion fixed and mobile X/Y satellite tracking antennas, reflectors, radomes and other ground station equipment. The acquisition of CGC brought established relationships with several top-tier European aerospace companies and other government entities, and we expect CGC to participate in the anticipated growth in the number of low Earth orbit ("LEO") and medium Earth orbit ("MEO") satellite constellations. The acquisition has a preliminary purchase price for accounting purposes of $ 23,650,000 , of which $ 12,075,000 was payable in cash and $ 11,575,000 was payable by the issuance of 323,504 shares of Comtech’s common stock at a volume weighted average stock price of $ 35.78 . The fair value of consideration transferred in connection with this acquisition was $ 22,740,000 , which was net of $ 160,000 of cash acquired and $ 750,000 payable by us upon the first anniversary of the closing of the transaction, subject to certain conditions. 7 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) We are accounting for the acquisition of CGC under the acquisition method of accounting in accordance with FASB ASC 805. The purchase price was allocated to the assets acquired and liabilities assumed, based on their preliminary fair value as of January 27, 2020, pursuant to the business combination accounting rules. Acquisition plan expenses were not included as a component of consideration transferred and were expensed in the period incurred. Pro forma financial information is not disclosed, as the acquisition was not material. The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed in connection with the CGC acquisition: Purchase Price Allocation (1) Measurement Period Adjustments Purchase Price Allocation (as adjusted) Payable in cash $ 12,075,000 — $ 12,075,000 Payable in common stock 11,575,000 — 11,575,000 Preliminary purchase price at fair value $ 23,650,000 — $ 23,650,000 Preliminary allocation of aggregate purchase price: Cash and cash equivalents $ 160,000 — $ 160,000 Current assets 4,904,000 101,000 5,005,000 Property, plant and equipment 697,000 — 697,000 Operating lease assets 924,000 — 924,000 Deferred tax assets, non-current 470,000 — 470,000 Non-current assets 89,000 — 89,000 Contract liabilities ( 6,890,000 ) — ( 6,890,000 ) Accrued warranty obligations ( 1,000,000 ) — ( 1,000,000 ) Other current liabilities ( 3,104,000 ) — ( 3,104,000 ) Non-current liabilities ( 1,327,000 ) — ( 1,327,000 ) Net tangible liabilities at preliminary fair value $ ( 5,077,000 ) 101,000 $ ( 4,976,000 ) Identifiable intangibles, deferred taxes and goodwill: Estimated Useful Lives Technology $ 6,700,000 — $ 6,700,000 20 years Customer relationships 8,100,000 — 8,100,000 17 years Trade name 1,000,000 — 1,000,000 5 years Deferred tax liabilities ( 2,967,000 ) ( 17,000 ) ( 2,984,000 ) Goodwill 15,894,000 ( 84,000 ) 15,810,000 Indefinite Preliminary allocation of aggregate purchase price $ 23,650,000 — $ 23,650,000 (1) As reported in the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2020. The acquired identifiable intangible assets are being amortized on a straight-line basis, which we believe approximates the pattern in which the assets are utilized over their estimated useful lives. The preliminary fair value of customer relationships (which include acquired backlog) was primarily based on the value of the discounted cash flows that the related intangible asset could be expected to generate in the future. The preliminary fair value of technology and trade name was based on the discounted capitalization of royalty expense saved because we now own the assets. Among the factors contributing to the recognition of goodwill, as a component of the preliminary purchase price allocation, were synergies in products and technologies and the addition of a skilled, assembled workforce. This goodwill has been assigned to our Government Solutions segment based on specific identification and is generally not deductible for income tax purposes. 8 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The allocation of the preliminary purchase price shown in the above table was based upon a preliminary valuation and estimates and assumptions that are subject to change within the purchase price allocation period, generally one year from the acquisition date. As such, the preliminary purchase price for accounting purposes is subject to finalization. The primary areas of the purchase price allocation not yet finalized include the purchase price (due to potential indemnification obligations of the seller under the Share Purchase Agreement), a final assessment of assets acquired and liabilities assumed (including inventory, contract liabilities and warranty obligations), income taxes and residual goodwill. UHP Networks Inc. In November 2019, we entered into an agreement to acquire UHP Networks, Inc. and its sister company (together, "UHP"), a leading provider of innovative and disruptive satellite ground station technology solutions. UHP is based in Canada and has developed revolutionary technology that is transforming the Very Small Aperture Terminal ("VSAT") market. With end-markets for high-speed satellite-based networks significantly growing, our acquisition of UHP, if consummated, will allow us to enhance our solution offerings with low cost time division multiple access ("TDMA") satellite modems, which we do not currently offer. In June 2020, we agreed with UHP to amend the terms of our purchase agreement, which resulted in the total aggregate purchase price being reduced by approximately 24 % from $ 50,000,000 to $ 38,000,000 (of which $ 5,000,000 will be paid in cash, with the remainder in shares of our common stock, cash, or a combination of both, as we may elect at the time of closing). The transaction is subject to customary closing conditions, including regulatory approval to allow us to purchase UHP's sister company which is headquartered in Moscow. In August 2020, at the request of the Federal Antimonopoly Service ("FAS") of the Russian Federation we submitted an application for regulatory approval to the FAS and the Commission for Supervising Foreign Investments in the Russian Federation (the "Russian Commission") pursuant to Russia’s Foreign Investment Law ("FIL"). In order to purchase UHP’s sister company, which is based in Moscow, approval by the Russian Commission and the FAS is required. If we do not receive approval by December 31, 2020, either we or UHP may terminate the purchase agreement. Acquisition Plan Expenses During the three months ended October 31, 2020 and 2019, we incurred $ 91,183,000 and $ 2,389,000 , respectively, of acquisition plan expenses. For the more recent fiscal quarter, $ 88,343,000 related to the previously announced litigation and merger termination with Gilat Satellite Networks, LTD. ("Gilat"), including $ 70,000,000 paid in cash to Gilat. The remaining costs primarily related to the pending acquisition of UHP and GD NG-911 acquisition-related litigation. Additionally, we recorded $ 1,178,000 of incremental interest expense for ticking fees related to a now terminated financing commitment letter. Cash Flow Presentation of $ 70,000,000 Merger Termination Fee Because we did not complete the Gilat acquisition, we presented the $ 70,000,000 payment to Gilat made during the three months ended October 31, 2020 as a reduction to cash flows from operating activities for the current period rather than as a cash outflow stemming from investing activities. (3) 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"). During the three months ended October 31, 2020, we adopted: • FASB ASU No. 2016-13 , which requires companies to utilize an impairment model (current expected credit loss ("CECL”)) for most financial assets measured at amortized cost and certain other financial instruments, which include, but are not limited to trade receivables and contract assets. This accounting standard replaced the incurred loss model with a model that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate those losses. On August 1, 2020, we adopted this ASU on a modified-retrospective basis and recorded a $ 215,000 decrease to opening retained earnings. 9 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) • FASB ASU No. 2018-13, which modifies the disclosure requirements for fair value measurements in Topic 820. On August 1, 2020, we adopted this ASU. Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures. • FASB ASU No. 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. On August 1, 2020, we adopted this ASU. Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures. • FASB ASU No. 2018-17, which requires entities to consider indirect interests held through related parties under common control on a proportional basis, rather than as the equivalent of a direct interest in its entirety, when determining whether a decision-making fee is a variable interest. On August 1, 2020, we adopted this ASU. Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures. • FASB ASU No. 2018-18, which clarifies when certain transactions between collaborative arrangement participants should be accounted for under ASC 606 and incorporates unit-of-account guidance consistent with ASC 606 to aid in this determination. The ASU also precludes entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. On August 1, 2020, we adopted this ASU. Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures. • FASB ASU No. 2019-08, which requires that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. The amount recorded as a reduction of the transaction price is required to be measured based on the grant-date fair value of the share-based payment award. On August 1, 2020, we adopted this ASU. Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures. (4) 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. 10 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 mission-critical technologies and high-performance transmission technologies product lines and, to a lesser extent, certain location-based and messaging infrastructure contracts in our public safety and location technologies product line. For service-based contracts in our public safety and location technologies product line, we 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. 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 amplifiers in our high-performance transmission technologies product line. Point in time accounting is also applied to certain contracts in our mission-critical technologies product line. 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. 11 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. Almost all 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 October 31, 2020 2019 United States U.S. government 32.5 % 40.8 % Domestic 41.9 % 36.1 % Total United States 74.4 % 76.9 % International 25.6 % 23.1 % Total 100.0 % 100.0 % 12 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. Included in domestic sales are sales to Verizon Communications Inc. ("Verizon"), which accounted for 12.5 % of consolidated net sales for the three months ended October 31, 2020. Except for the U.S. government, there were no customers that represented more than 10.0% of consolidated net sales during the three months ended October 31, 2019. 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 months ended October 31, 2020 and 2019. The following tables summarize our disaggregation of revenue consistent with information reviewed by our chief operating decision-maker ("CODM") for the three months ended October 31, 2020 and 2019. 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 October 31, 2020 Commercial Solutions Government Solutions Total Geographical region and customer type U.S. government $ 9,458,000 34,432,000 $ 43,890,000 Domestic 49,300,000 7,414,000 56,714,000 Total United States 58,758,000 41,846,000 100,604,000 International 23,044,000 11,570,000 34,614,000 Total $ 81,802,000 53,416,000 $ 135,218,000 Contract type Firm fixed-price $ 80,988,000 32,656,000 $ 113,644,000 Cost reimbursable 814,000 20,760,000 21,574,000 Total $ 81,802,000 53,416,000 $ 135,218,000 Transfer of control Point in time $ 29,671,000 23,031,000 $ 52,702,000 Over time 52,131,000 30,385,000 82,516,000 Total $ 81,802,000 53,416,000 $ 135,218,000 Three months ended October 31, 2019 Commercial Solutions Government Solutions Total Geographical region and customer type U.S. government $ 16,748,000 52,773,000 $ 69,521,000 Domestic 53,354,000 8,041,000 61,395,000 Total United States 70,102,000 60,814,000 130,916,000 International 24,212,000 15,139,000 39,351,000 Total $ 94,314,000 75,953,000 $ 170,267,000 Contract type Firm fixed-price $ 92,548,000 50,724,000 $ 143,272,000 Cost reimbursable 1,766,000 25,229,000 26,995,000 Total $ 94,314,000 75,953,000 $ 170,267,000 Transfer of control Point in time $ 37,723,000 37,786,000 $ 75,509,000 Over time 56,591,000 38,167,000 94,758,000 Total $ 94,314,000 75,953,000 $ 170,267,000 13 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 months ended October 31, 2020 and 2019, 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 contract liability balance at July 31, 2020 and July 31, 2019, $ 16,370,000 and $ 18,609,000 was recognized as revenue during the three months ended October 31, 2020 and 2019, 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. 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 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. 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 October 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 605,464,000 (which represents the amount of our consolidated backlog). We estimate that a substantial portion of our remaining performance obligations at October 31, 2020 will be completed and recognized as revenue during the next twenty-four month period, with the rest thereafter. During the three months ended October 31, 2020, revenue recognized from performance obligations satisfied, or partially satisfied, in previous periods (for example due to changes in the transaction price) was not material. (5) 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 our Credit Facility that we entered into on October 31, 2018 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. As of October 31, 2020 and July 31, 2020, other than the financial instruments 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. 14 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (6) 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, if dilutive, outstanding during each respective period. Pursuant to FASB ASC 260 " Earnings Per Share, " equity-classified stock-based awards that are subject to performance conditions are not considered in our diluted EPS calculations until the respective performance conditions have been satisfied. 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 months ended October 31, 2020 and 2019. See Note (17) - " Stockholders’ Equity " for more information. Weighted average stock options, RSUs and restricted stock outstanding of 1,839,000 and 382,000 shares for the three months ended October 31, 2020 and 2019, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive. Our EPS calculations exclude 232,000 and 197,000 weighted average performance shares outstanding for the three months ended October 31, 2020 and 2019, respectively, as the performance conditions have not yet been satisfied. However, net (loss) income (the numerator) for EPS calculations for each respective period, is reduced by the compensation expense related to these awards. The following table reconciles the numerators and denominators used in the basic and diluted EPS calculations: Three months ended October 31, 2020 2019 Numerator: Net (loss) income for basic calculation $ ( 85,840,000 ) 6,388,000 Numerator for diluted calculation $ ( 85,840,000 ) 6,388,000 Denominator: Denominator for basic calculation 25,305,000 24,555,000 Effect of dilutive securities: Stock-based awards — 182,000 Denominator for diluted calculation 25,305,000 24,737,000 (7) Accounts Receivable Accounts receivable consist of the following at: October 31, 2020 July 31, 2020 Receivables from commercial and international customers $ 64,461,000 67,109,000 Unbilled receivables from commercial and international customers 28,806,000 21,588,000 Receivables from the U.S. government and its agencies 37,345,000 32,870,000 Unbilled receivables from the U.S. government and its agencies 3,446,000 7,018,000 Total accounts receivable 134,058,000 128,585,000 Less allowance for doubtful accounts 1,988,000 1,769,000 Accounts receivable, net $ 132,070,000 126,816,000 15 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Unbilled receivables as of October 31, 2020 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 substantially all amounts not yet billed at October 31, 2020 will be billed and collected within one year. Allowance for doubtful accounts as of October 31, 2020 includes $ 215,000 recorded at August 1, 2020 as a result of our adoption of FASB ASU No. 2016-13 , which is discussed in more detail in Note (3) - " Adoption of Accounting Standards and Updates ." As of October 31, 2020, the U.S. government (and its agencies) and Verizon represented 30.4 % and 10.1 %, respectively, of total accounts receivable. As of July 31, 2020, except for the U.S. government (and its agencies), which represented 31.0 % of total accounts receivable, there were no other customers which accounted for greater than 10.0% of total accounts receivable. (8) Inventories Inventories consist of the following at: October 31, 2020 July 31, 2020 Raw materials and components $ 60,718,000 59,175,000 Work-in-process and finished goods 39,851,000 42,203,000 Total inventories 100,569,000 101,378,000 Less reserve for excess and obsolete inventories 19,169,000 19,076,000 Inventories, net $ 81,400,000 82,302,000 As of October 31, 2020 and July 31, 2020, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $ 7,633,000 and $ 7,215,000 , respectively, and the amount of inventory related to contracts from third-party commercial customers who outsource their manufacturing to us was $ 1,383,000 and $ 1,387,000 , respectively. (9) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following at: October 31, 2020 July 31, 2020 Accrued wages and benefits $ 19,613,000 20,857,000 Accrued contract costs 12,707,000 15,306,000 Accrued warranty obligations 16,196,000 15,200,000 Accrued legal costs 2,593,000 2,539,000 Accrued commissions and royalties 4,576,000 4,621,000 Accrued acquisition plan expenses 22,794,000 7,014,000 Other 11,432,000 19,624,000 Accrued expenses and other current liabilities $ 89,911,000 85,161,000 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 October 31, 2020 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. 16 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Accrued acquisition plan expenses as of October 31, 2020 and July 31, 2020 primarily relate to legal and professional fees for litigation settlement and merger termination with Gilat as well as legal expenses associated with a previously completed acquisition. See Note (2) - " Acquisitions " and Note (18) - " Legal Proceedings and Other Matters " for further discussion. Changes in our accrued warranty obligations during the three months ended October 31, 2020 and 2019 were as follows: Three months ended October 31, 2020 2019 Balance at beginning of period $ 15,200,000 15,968,000 Provision for warranty obligations 1,845,000 989,000 Charges incurred ( 849,000 ) ( 1,191,000 ) Reclassification from non-current liabilities — 302,000 Balance at end of period $ 16,196,000 16,068,000 Our current accrued warranty obligations at October 31, 2020 and July 31, 2020 include $ 1,856,000 and $ 2,158,000 , respectively, of warranty obligations for a small product line that we refer to as the TCS 911 call handling software solution. This solution was licensed to customers prior to our acquisition of TeleCommunication Systems, Inc. ("TCS"). (10) Credit Facility On October 31, 2018, we entered into a First Amended and Restated Credit Agreement (the "Credit Facility") with a syndicate of lenders. The Credit Facility provides a senior secured loan facility of up to $ 550,000,000 consisting of: (i) a revolving loan facility ("Revolving Loan Facility") with a borrowing limit of $ 300,000,000 ; (ii) an accordion feature allowing us to borrow up to an additional $ 250,000,000 ; (iii) a $ 35,000,000 letter of credit sublimit; and (iv) a swingline loan credit sublimit of $ 25,000,000 . The Credit Facility matures on October 31, 2023 (the "Revolving Maturity Date"). If we issue new unsecured debt in excess of $ 5,000,000 with a maturity date that is less than 91 days from October 31, 2023, the Revolving Maturity Date would automatically accelerate so that it would be 91 days earlier than the maturity date of the new unsecured debt. As of October 31, 2020, the amount outstanding under our Credit Facility was $ 217,000,000 which is reflected in the non-current portion of long-term debt on our Condensed Consolidated Balance Sheet. At October 31, 2020, we had $ 3,046,000 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 three months ended October 31, 2020, we had outstanding balances under the Credit Facility ranging from $ 125,000,000 to $ 217,000,000 . As of October 31, 2020, total net deferred financing costs related to the Credit Facility were $ 2,207,000 and are being amortized over the term of our Credit Facility through October 31, 2023. Interest expense related to our Credit Facility, including amortization of deferred financing costs, recorded during the three months ended October 31, 2020 and 2019 was $ 1,111,000 and $ 1,753,000 , respectively. Our blended interest rate approximated 2.70 % and 4.70 %, respectively, for the three months ended October 31, 2020 and 2019. 17 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Borrowings under the Credit Facility shall be either: (i) Alternate Base Rate borrowings, which bear interest from the applicable borrowing date at a rate per annum equal to (x) the greatest of (a) the Prime Rate (as defined) in effect on such day, (b) the Federal Funds Effective Rate (as defined) in effect on such day plus 1/2 of 1.00% per annum and (c) the Adjusted LIBO Rate (as defined) on such day (or, if such day is not a business day, the immediately preceding business day) plus 1.00 % per annum, plus (y) the Applicable Rate (as defined), or (ii) Eurodollar borrowings, which bear interest from the applicable borrowing date at a rate per annum equal to (x) the Adjusted LIBO Rate 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 Secured Leverage Ratio (as defined) 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) no scheduled payments of principal until maturity; (ii) a maximum Secured Leverage Ratio of 3.75 x trailing twelve months ("TTM") Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") and a Maximum Total Leverage Ratio of 4.50 x TTM Adjusted EBITDA, each with no step downs; and (iii) a Minimum Interest Expense Coverage Ratio of 3.25 x TTM Adjusted EBITDA. As of October 31, 2020, our Secured Leverage Ratio was 3.31 x TTM Adjusted EBITDA compared to the maximum allowable Secured Leverage Ratio of 3.75 x TTM Adjusted EBITDA. Our Interest Expense Coverage Ratio as of October 31, 2020 was 11.42 x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25 x TTM Adjusted EBITDA. Given our expected future business performance, we anticipate maintaining compliance with the terms and financial covenants in our Credit Facility for the foreseeable future. The obligations under the Credit Facility are guaranteed by certain of our domestic 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. On December 6, 2018, we entered into the first amendment to the Credit Facility. The purpose of the amendment was to provide for a mechanism to replace the LIBO Rate for Eurodollar borrowings with an alternative benchmark interest rate, should the LIBO Rate generally become unavailable in the future on an other-than-temporary basis. Capitalized terms used but not defined herein have the meanings set forth for such terms in the Credit Facility and the Prior Credit Facility, which have been documented and filed with the SEC. 18 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (11) 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 October 31, 2020, 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. 19 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The components of lease expense are as follows: Three months ended October 31, 2020 2019 Finance lease expense: Amortization of ROU assets $ 12,000 108,000 Interest on lease liabilities 1,000 2,000 Operating lease expense 2,488,000 2,637,000 Short-term lease expense 247,000 863,000 Variable lease expense 964,000 993,000 Sublease income ( 17,000 ) — Total lease expense $ 3,695,000 4,603,000 Additional information related to leases is as follows: Three months ended October 31, 2020 2019 Cash paid for amounts included in the measurement of lease liabilities: Operating leases - Operating cash outflows $ 2,543,000 2,843,000 Finance leases - Operating cash outflows 1,000 2,000 Finance leases - Financing cash outflows 12,000 198,000 ROU assets obtained in the exchange for lease liabilities (non-cash): Operating leases $ 478,000 598,000 The following table is a reconciliation of future cash flows relating to operating and financing lease liabilities presented on our Condensed Consolidated Balance Sheet as of October 31, 2020: Operating Finance Total Remainder of fiscal 2021 $ 6,915,000 23,000 $ 6,938,000 Fiscal 2022 8,056,000 16,000 8,072,000 Fiscal 2023 6,327,000 5,000 6,332,000 Fiscal 2024 4,982,000 — 4,982,000 Fiscal 2025 4,319,000 — 4,319,000 Thereafter 2,807,000 — 2,807,000 Total future undiscounted cash flows 33,406,000 44,000 33,450,000 Less: Present value discount 2,790,000 2,000 2,792,000 Lease liabilities $ 30,616,000 42,000 $ 30,658,000 Weighted-average remaining lease terms (in years) 4.39 2.00 Weighted-average discount rate 4.04 % 6.34 % We lease our Melville, New York production facility from a partnership controlled by our CEO and Chairman. Lease payments made during the three months ended October 31, 2020 and 2019 were $ 163,000 and $ 160,000 , respectively. The current lease provides for our use of the premises as they exist through December 2021 with an option for an additional ten years . The annual rent of the facility for calendar year 2021 is $ 665,000 and is subject to customary adjustments. We have a right of first refusal in the event of a sale of the facility. 20 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) In September 2020, we signed a 15-year lease commencing in December 2020 for a facility in Chandler, Arizona to support our anticipated growth and long-term business goals for our satellite earth station product line. We anticipate that all existing Tempe, Arizona locations will be fully relocated to this new facility in the second half of our fiscal 2021. In November 2020, we also signed a 10-year facility lease in the United Kingdom to expand our Government Solution segment's manufacturing capabilities for high precision full motion fixed and mobile X/Y satellite tracking antennas, RF feeds, reflectors and radomes. Amounts related to both leases are not reflected as either an operating lease right-of-use asset or the related operating lease liability in our Condensed Consolidated Balance Sheet as of October 31, 2020, as the related commitment has not commenced. There are no other rental commitments that have not commenced as of October 31, 2020. (12) Income Taxes At October 31, 2020 and July 31, 2020, total unrecognized tax benefits were $ 8,531,000 and $ 8,345,000 , respectively, including interest of $ 101,000 and $ 75,000 , respectively. At October 31, 2020 and July 31, 2020, $ 2,147,000 and 1,963,000 , respectively, of our unrecognized tax benefits were recorded as non-current income taxes payable on our Condensed Consolidated Balance Sheets. The remaining unrecognized tax benefits of $ 6,384,000 and $ 6,382,000 at October 31, 2020 and July 31, 2020, respectively, were presented as an offset to the associated non-current deferred tax assets on our Condensed Consolidated Balance Sheets. Of the total unrecognized tax benefits, $ 7,849,000 and $ 7,700,000 at October 31, 2020 and July 31, 2020, respectively, net of the reversal of the federal benefit recognized as a deferred tax asset relating to state reserves, would favorably impact our effective tax rate, if recognized. 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 condensed consolidated financial statements. We do not expect that there will be any significant changes to our total unrecognized tax benefits within the next twelve months. Our federal income tax returns for fiscal 2017 through 2019 are subject to potential future Internal Revenue Service ("IRS") audit. None of our state income tax returns prior to fiscal 2016 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition. (13) 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, (the "Plan") and our 2001 Employee Stock Purchase Plan (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 October 31, 2020, the aggregate number of shares of common stock which may be issued, pursuant to the Plan, may not excee d 10,962,500 . 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 October 31, 2020, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of 9,415,658 shares (net of 4,390,752 expired and canceled awards), of which an aggregate of 6,929,378 have been exercised or settled. 21 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) As of October 31, 2020, the following stock-based awards, by award type, were outstanding: October 31, 2020 Stock options 1,344,635 Performance shares 254,148 RSUs and restricted stock 599,975 Share units 287,522 Total 2,486,280 Our ESPP provides for the issuance of up to 1,050,000 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 at the date of issuance. Through October 31, 2020, we have cumulatively issued 855,274 shares of our common stock to participating employees in connection with our ESPP. Stock-based compensation for awards issued is reflected in the following line items in our Condensed Consolidated Statements of Operations: Three months ended October 31, 2020 2019 Cost of sales $ 73,000 59,000 Selling, general and administrative expenses 542,000 743,000 Research and development expenses 84,000 77,000 Stock-based compensation expense before income tax benefit 699,000 879,000 Estimated income tax benefit ( 144,000 ) ( 189,000 ) Net stock-based compensation expense $ 555,000 690,000 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 October 31, 2020, unrecognized stock-based compensation of $ 14,244,000 , net of estimated forfeitures of $ 989,000 , is expected to be recognized over a weighted average period of 3.5 years. Total stock-based compensation capitalized and included in ending inventory at both October 31, 2020 and July 31, 2020 was $ 48,000 . There are no liability-classified stock-based awards outstanding as of October 31, 2020 or July 31, 2020. Stock-based compensation expense (benefit), by award type, is summarized as follows: Three months ended October 31, 2020 2019 Stock options $ 120,000 82,000 Performance shares 222,000 352,000 RSUs and restricted stock 922,000 698,000 ESPP 51,000 57,000 Share units ( 616,000 ) ( 310,000 ) Stock-based compensation expense before income tax benefit 699,000 879,000 Estimated income tax benefit ( 144,000 ) ( 189,000 ) Net stock-based compensation expense $ 555,000 690,000 ESPP stock-based compensation expense primarily relates to the 15 % discount offered to participants in the ESPP. 22 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 October 31, 2020 and July 31, 2020. 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. 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, 2020 1,422,025 $ 26.17 Expired/canceled ( 77,390 ) 29.90 Outstanding at October 31, 2020 1,344,635 $ 25.95 4.44 $ — Exercisable at October 31, 2020 1,011,335 $ 28.59 2.77 $ — Vested and expected to vest at October 31, 2020 1,330,173 $ 26.04 4.39 $ — Stock options outstanding as of October 31, 2020 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 five or ten years and a vesting period of three or five years . 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, 2020 999,574 $ 21.15 Granted 383,337 16.67 Settled ( 176,051 ) 20.47 Canceled/Forfeited ( 65,215 ) 16.16 Outstanding at October 31, 2020 1,141,645 $ 20.03 $ 16,439,684 Vested at October 31, 2020 396,254 $ 16.61 $ 5,706,054 Vested and expected to vest at October 31, 2020 1,098,098 $ 20.00 $ 15,812,607 The total intrinsic value relating to fully-vested awards settled during the three months ended October 31, 2020 and 2019 was $ 2,896,000 and $ 5,806,000 , respectively. The performance shares granted to employees since fiscal 2014 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 October 31, 2020, 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. 23 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) RSUs and restricted stock granted to non-employee directors prior to July 31, 2019 have a vesting period of three 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. RSUs and restricted stock granted to non-employee directors after July 31, 2019 have a vesting period of five years . RSUs granted to employees 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. Share units granted prior to July 31, 2017 were vested when issued 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. Share units granted on or after July 31, 2017 were granted to certain employees in lieu of non-equity incentive compensation and are convertible into shares of our common stock on the one-year anniversary of the respective grant date. Cumulatively, through October 31, 2020, 672,085 share units granted have been settled. 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 granted since fiscal 2013 are entitled to dividend equivalents unless forfeited before vesting occurs. Share units granted since fiscal 2014 are 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 October 31, 2020 and 2019, we accrued $ 142,000 and $ 56,000 , respectively, of dividend equivalents (net of forfeitures) and paid out $ 275,000 and $ 285,000 , respectively. Accrued dividend equivalents were recorded as a reduction to retained earnings. As of October 31, 2020 and July 31, 2020, accrued dividend equivalents were $ 650,000 and $ 783,000 , respectively. With respect to the actual settlement of stock-based awards for income tax reporting, during the three months ended October 31, 2020 and 2019, we recorded an income tax expense of $ 199,000 and an income tax benefit of $ 612,000 , respectively. (14) 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. Our Commercial Solutions segment offers satellite ground station technologies (such as modems and amplifiers) and public safety and location technologies (such as 911 call routing and mapping solutions) to commercial customers and smaller government customers, such as state and local governments. This segment also serves certain large government customers (including the U.S. government) that have requirements for off-the-shelf commercial equipment. Our Government Solutions segment provides mission-critical technologies (such as tactical satellite-based networks and ongoing support for complicated communications networks) and high-performance transmission technologies (such as troposcatter systems and solid-state, high-power amplifiers) to large government end-users (including those of foreign countries), large international customers and domestic prime contractors. 24 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 Commercial Solutions and Government Solutions segments do not consider any allocation of indirect expense, or any of the following: income taxes, interest (income) and other, write-off of deferred financing costs, interest expense, amortization of stock-based compensation, amortization of intangible assets, depreciation expense, estimated contract settlement costs, settlement of intellectual property litigation, acquisition plan expenses, facility exit costs, strategic alternatives analysis expenses and other that relate to our Unallocated segment. 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 Commercial Solutions and Government Solutions 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. Operating segment information, along with a reconciliation of segment net income and consolidated net (loss) income to Adjusted EBITDA is presented in the tables below: Three months ended October 31, 2020 Commercial Solutions Government Solutions Unallocated Total Net sales $ 81,802,000 53,416,000 — $ 135,218,000 Operating income (loss) $ 8,750,000 2,585,000 ( 97,051,000 ) $ ( 85,716,000 ) Net income (loss) $ 8,315,000 2,691,000 ( 96,846,000 ) $ ( 85,840,000 ) Provision for (benefit from) income taxes 339,000 ( 126,000 ) ( 2,452,000 ) ( 2,239,000 ) Interest (income) and other 96,000 ( 40,000 ) 10,000 66,000 Interest expense — 60,000 2,237,000 2,297,000 Amortization of stock-based compensation — — 699,000 699,000 Amortization of intangibles 4,287,000 1,279,000 — 5,566,000 Depreciation 1,996,000 403,000 153,000 2,552,000 Acquisition plan expenses ( 1,052,000 ) — 92,235,000 91,183,000 Adjusted EBITDA $ 13,981,000 4,267,000 ( 3,964,000 ) $ 14,284,000 Purchases of property, plant and equipment $ 389,000 421,000 80,000 $ 890,000 Total assets at October 31, 2020 $ 646,264,000 238,172,000 34,075,000 $ 918,511,000 25 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Three months ended October 31, 2019 Commercial Solutions Government Solutions Unallocated Total Net sales $ 94,314,000 75,953,000 — $ 170,267,000 Operating income (loss) $ 9,841,000 7,083,000 ( 7,664,000 ) $ 9,260,000 Net income (loss) $ 9,867,000 7,095,000 ( 10,574,000 ) $ 6,388,000 Provision for income taxes 13,000 — 1,132,000 1,145,000 Interest (income) and other ( 47,000 ) ( 13,000 ) ( 17,000 ) ( 77,000 ) Interest expense 8,000 1,000 1,795,000 1,804,000 Amortization of stock-based compensation — — 879,000 879,000 Amortization of intangibles 4,362,000 844,000 — 5,206,000 Depreciation 2,196,000 313,000 142,000 2,651,000 Estimated contract settlement costs 230,000 — — 230,000 Acquisition plan expenses — — 2,389,000 2,389,000 Adjusted EBITDA $ 16,629,000 $ 8,240,000 $ ( 4,254,000 ) $ 20,615,000 Purchases of property, plant and equipment $ 1,000,000 224,000 26,000 $ 1,250,000 Total assets at October 31, 2019 $ 675,344,000 211,125,000 44,553,000 $ 931,022,000 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. During the three months ended October 31, 2020 and 2019, we recorded $ 91,183,000 and $ 2,389,000 of acquisition plan expenses, respectively, all of which were recorded in our unallocated expenses. See Note (2) - " Acquisitions " for further information. Interest expense in the tables above primarily relates to our Credit Facility, and includes the amortization of deferred financing costs. See Note (10) - " Credit Facility " for further discussion. In addition, interest expense for the three months ended October 31, 2020 includes $ 1,178,000 of incremental interest expense for ticking fees related to a now terminated financing commitment letter, as discussed in more detail in Note (2) - " Acquisitions ." There were no such charges recorded in the three months ended October 31, 2019. Intersegment sales for the three months ended October 31, 2020 and 2019 by the Commercial Solutions segment to the Government Solutions segment were $ 851,000 and $ 1,899,000 , respectively. There were nominal sales by the Government Solutions segment to the Commercial Solutions segment for these periods. All intersegment sales are eliminated in consolidation and are excluded from the tables above. Unallocated assets at October 31, 2020 consist principally of cash and cash equivalents, income taxes receivable, corporate property, plant and equipment and deferred financing costs. Substantially all of our long-lived assets are located in the U.S. 26 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (15) Goodwill The following table represents goodwill by reportable operating segment, including the changes in the net carrying value of goodwill during the three months ended October 31, 2020: Commercial Solutions Government Solutions Total Balance as of July 31, 2020 $ 255,432,000 75,087,000 $ 330,519,000 Change related to CGC acquisition — ( 84,000 ) ( 84,000 ) Change related to Solacom Technologies Inc. ("Solacom") 1,052,000 — 1,052,000 Balance as of October 31, 2020 $ 256,484,000 75,003,000 $ 331,487,000 As discussed further in Note (2) - " Acquisitions ," the goodwill resulting from the acquisition of CGC was based upon a preliminary valuation and estimates and assumptions that are subject to change within the purchase price allocation period (generally one year from the acquisition date). Also, during the three months ended October 31, 2020, we recorded an adjustment to Solacom's goodwill to correct an immaterial item. 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. On August 1, 2020 (the first day of our fiscal 2021), we performed our annual 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. In performing the quantitative assessment, we estimated the fair value of each of our reporting units using a combination of the income and market approaches. 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 August 1, 2020 total public market capitalization and assessed implied control premiums based on our common stock price of $ 16.42 as of August 1, 2020. Based on our quantitative evaluation, we determined that our Commercial Solutions and Government Solutions reporting units had estimated fair values in excess of their carrying values of at least 8.4 % and 78.0 %, 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. 27 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) It is possible that, during fiscal 2021 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 decline further. Such deterioration could be caused by uncertainty about the severity and length of the COVID-19 pandemic, and its impact on global business activity. 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 2021 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 Commercial Solutions and Government Solutions 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 the next annual goodwill impairment analysis on August 1, 2021 (the start of our fiscal 2022). 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. (16) Intangible Assets Intangible assets with finite lives are as follows: October 31, 2020 Weighted Average Amortization Period Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships 20.4 $ 286,058,000 82,845,000 $ 203,213,000 Technologies 14.0 99,349,000 66,908,000 32,441,000 Trademarks and other 16.6 32,826,000 16,027,000 16,799,000 Total $ 418,233,000 165,780,000 $ 252,453,000 July 31, 2020 Weighted Average Amortization Period Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships 20.4 $ 286,058,000 79,534,000 $ 206,524,000 Technologies 14.0 99,349,000 65,398,000 33,951,000 Trademarks and other 16.6 32,826,000 15,282,000 17,544,000 Total $ 418,233,000 160,214,000 $ 258,019,000 The weighted average amortization period in the above table excludes fully amortized intangible assets. Amortization expense for the three months ended October 31, 2020 and 2019 was $ 5,566,000 and $ 5,206,000 , respectively. The estimated amortization expense consists of the following for the fiscal years ending July 31: 2021 $ 21,116,000 2022 19,648,000 2023 19,648,000 2024 19,021,000 2025 18,918,000 28 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 October 31, 2020. However, if current poor business conditions further 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. (17) Stockholders’ Equity Sale of Common Stock In December 2018, we filed a $ 400,000,000 shelf registration statement with the SEC for the sale of various types of securities, including debt. The shelf registration was declared effective by the SEC as of December 14, 2018. To-date, we have not issued any securities pursuant to our $ 400,000,000 shelf registration statement. 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 made during the three months ended October 31, 2020 or 2019. Dividends Since September 2010, we have paid quarterly dividends pursuant to an annual targeted dividend amount that was established by our Board of Directors. On September 29, 2020, our Board of Directors declared a dividend of $ 0.10 per common share, which was paid on October 27, 2020. On December 9, 2020, our Board of Directors declared a dividend of $ 0.10 per common share, payable on February 19, 2021 to stockholders of record at the close of business on January 20, 2021. Future dividends remain subject to compliance with financial covenants under our Credit Facility, as well as Board approval. (18) Legal Proceedings and Other Matters GD NG-911 Acquisition-Related Litigation In April 2019, we completed the acquisition of a state and local government NG-911 business (the “GD NG-911 business”) from General Dynamics Information Technology, Inc. (“GDIT”). During negotiations preceding such acquisition, we learned that a TeleCommunication Systems Inc. employee, who we had terminated for cause in April 2018 was violating her one-year non-competition obligations. Amongst other things, this former employee began working for a competitor, Motorola Solutions, Inc. ("Motorola") and we believe she interfered with our negotiations with GDIT, as well as improperly soliciting our customers. Consequently, in March 2019, we filed a lawsuit against this former employee and her new employer. Only after we filed a lawsuit against the former employee and Motorola, did the former employee respond with her own lawsuit against us for alleged discrimination and alleged breach of her employment agreement as a result of a wrongful termination. During the first quarter of fiscal 2021, we devoted significant efforts to litigate both cases and spent several million dollars related to these matters. These cases have been consolidated for purposes of a trial which is now set to commence in February 2021. As such, we anticipate spending several million dollars of legal and professional fees in our second quarter of fiscal 2021. We believe we have meritorious claims against this former employee and her new employer. Additionally, as we believe the claims made against us are without merit, we intend to vigorously defend ourselves in these matters and pursue our own damages claims valued at several million dollars. The ultimate resolution of this litigation is not expected to have any material negative impact on our consolidated results of operations or financial position. 29 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Other Matters In May 2018, we were informed by the Office of Export Enforcement ("OEE") of the Department of Commerce ("DoC") that it was forwarding to the OEE's Office of Chief Counsel, the results of its audit of international shipments by Comtech Xicom Technology, Inc. ("Xicom") for further review and possible determination of an administrative penalty. We fully cooperated with the OEE in their audit and, based on our self-assessment of approximately 7,800 individual transactions audited, have determined that six ( 6 ) transactions may not have been fully in compliance with the Export Administration Regulations ("EAR"). These six ( 6 ) transactions, for which export licenses were not obtained, were either spares or repaired power amplifier subassembly components valued at approximately $ 230,000 (in aggregate) and were shipped to Brazil, Italy, Russia, Thailand and the United Arab Emirates. Since discovering this issue, we have implemented additional controls and procedures and have increased awareness of these specific export requirements throughout the Company to help avoid similar occurrences in the future. Administrative penalties under the EAR can range from a warning letter to a denial of export privileges. A civil monetary penalty not to exceed the amount set forth in the Export Administration Act ("EAA") may be imposed for each violation, and in the event that any provision of the EAR is continued by any other authority, the maximum monetary civil penalty for each violation shall be that provided by such other authority. Administrative penalties under the EAR are currently determined pursuant to the International Emergency Economic Powers Act ("IEEPA"), which can reach the greater of twice the amount of the transaction that is the basis of the violation or approximately $300,000 per violation. We continue to work cooperatively with the OEE and Xicom entered a Tolling Agreement with DoC, which extended the statute of limitations in this matter through February 1, 2021. On September 17, 2020, we reached an agreement with OFAC resolving a previously disclosed investigation pending since 2014. Pursuant to the agreement, we made a payment to OFAC of $ 894,000 and agreed to implement enhancements to our trade compliance controls and hire a Chief Trade Compliance Officer which occurred in September 2020. 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 agree 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. 30 Index