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Item 1A. Risk Factors

2021-10-04 compared with 2020-09-29 · 330 added, 309 removed, 469 unchanged (58% of the section changed)

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Additional risks and uncertainties not presently known to us, or risks that we currently consider immaterial, could also negatively affect us.

Risks Related to our Business

Despite our belief that Gilat Satellite Networks Ltd.

("Gilat") suffered a material adverse effect and that we are not obligated to close on our pending acquisition of Gilat, we may be required to complete such acquisition.

If such event occurs, the merger with Gilat may not be successful, as we may not realize the anticipated benefits from the merger, the merger may divert our resources and management attention causing our operating results to fall short of expectations and we would incur substantial indebtedness which we may not be able to service in the future.

On January 29, 2020, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Gilat Satellite Networks, Ltd.

Under the terms of the Merger Agreement, Comtech would acquire Gilat by way of a merger of Comtech's newly formed subsidiary with and into Gilat, with Gilat surviving the merger as a wholly-owned subsidiary of Comtech.

Gilat is a worldwide leader in satellite networking technology, solutions and services, with market leading positions in the satellite ground station and in-flight connectivity solutions markets and deep expertise in operating large network infrastructures.

Pursuant to the Merger Agreement, each Gilat ordinary share would be converted into the right to receive consideration of (i) $7.18 in cash, without interest, plus (ii) 0.08425 of a share of Comtech common stock (worth approximately $1.12 per Gilat ordinary share as of September 24, 2020), with cash payable in lieu of fractional shares.

Based on the terms agreed to on January 29, 2020 and the September 24, 2020 closing price of Comtech common stock of $13.32 per share, the total amount payable to Gilat shareholders would have been approximately $465.8 million (consisting of approximately $402.9 million in cash with the remainder in Comtech Common Stock) or $8.30 per Gilat ordinary share.

Our intention would be to fund the $402.9 million cash portion of the acquisition by redeploying a large portion of both our and Gilat's unrestricted cash and cash equivalents, with the remaining funds provided by a new secured credit facility (the "Gilat Acquisition Related Credit Facility") that would replace our existing Credit Facility, allow us to refinance our existing debt of approximately $149.5 million as of July 31, 2020, and allow us to fund a $5.0 million commitment related to a small pending acquisition of UHP Networks Inc.

and its sister company (together, “UHP”), a leading provider of innovative and disruptive satellite ground station technology solutions..

Our obligation to acquire Gilat remains subject to certain closing conditions, including (a) regulatory approval in Russia to purchase Gilat’s Russian subsidiary and (b) the absence of any Material Adverse Effect (as defined in the Merger Agreement) on Gilat.

After we announced this acquisition, the COVID-19 pandemic resulted in a sudden and steep decline in the travel and aviation markets in which many of Gilat’s customers operate and a significant slowdown of Gilat's business.

In July 2020, we commenced litigation in the Delaware Court of Chancery (the “Delaware Court”) seeking certain declaratory judgments including a declaratory judgment that Gilat has suffered a Material Adverse Effect and that, as a result, we are not obligated to complete the acquisition of Gilat.

The amended complaint also seeks a declaratory judgment that certain actions, if taken by Gilat, relating to Comtech’s application for Russian regulatory approval, would breach Gilat’s obligations under the Merger Agreement.

Gilat subsequently sued in the Delaware Court for declaratory judgments, including that it has not suffered a Material Adverse Effect and that Comtech has not used reasonable best efforts to obtain Russian regulatory approval for the transaction.

To-date, we incurred significant amounts of legal expenses and professional fees in connection with the litigation and a trial is scheduled for October 5, 2020.

The Delaware Court has indicated that it intends to render a judgment prior to October 29, 2020, the date that we or Gilat may terminate the Merger Agreement.

If we are required to close the Gilat acquisition, total net debt of the combined companies would be expected to approximate $525.0 million.

The acquisition of Gilat, the status of Russian regulatory approval and related litigation is discussed in detail in Part II - " Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Acquisition Plan Update " and "Notes to Consolidated Financial Statements - Note (13)(a) - Commitments and Contingencies - Legal Proceedings and Other Matters" included in "Part II - Item 8.- Financial Statements and Supplementary Data," included in this Annual Report on Form 10-K.

If our acquisition with Gilat is consummated, it will pose certain risks to our business.

In August 2020, Gilat publicly reported a net loss of $16.0 million and negative Adjusted EBITDA (as Gilat defines it) of $4.9 million for the six-month period ended June 30, 2020.

The acquisition of Gilat would significantly increase our exposure to the global in-flight connectivity solutions market, which has suffered and is expected to continue to suffer, from a material and prolonged downturn as a result of the COVID-19 pandemic.

If Gilat continues to experience net losses and negative Adjusted EBITDA (as it defines it), future cash flows of the combined entities will be less than currently expected and we may be unable to meet future debt service obligations, resulting in potentially material adverse consequences.

Contemporaneously with entering into the agreement to acquire Gilat, we and our banking partners entered into a commitment letter with respect to the Gilat Acquisition Related Credit Facility.

Under the terms of the commitment letter, the lender's commitment to fund the facility is subject to the condition that no Material Adverse Effect has occurred with respect to Gilat or Comtech.

We face the risk that our banking partners would independently determine that a Material Adverse Effect has occurred with respect to Gilat and terminate their commitments.

As a result, if we are compelled to complete the acquisition of Gilat, we may have to seek alternative financing, which may not be available on favorable terms, or at all.

If our banking partners do not terminate their commitment, under the terms of the Gilat Acquisition Related Credit Facility we would be required to grant the lenders a security interest in substantially all our assets as collateral security for our payment obligations.

Accordingly, if we are unable to meet our debt service obligations, we could be forced to dispose of some or all of our assets on disadvantageous terms.

We may not be able to refinance our indebtedness under the Gilat Acquisition Related Credit Facility on favorable terms, or at all.

Moreover, borrowings under the Gilat Acquisition Related Credit Facility following completion of the Gilat acquisition would be significantly greater than our outstanding indebtedness under our existing Credit Facility.

The prospective merger with Gilat would significantly expand the types of products that we sell, expand the businesses in which we are engaged and expand our global footprint including increasing the number of facilities we operate, thereby presenting us with significant challenges as we will need to manage the substantial increase in scale resulting from the acquisition.

The success of the acquisition, if completed, will depend, in part, on our ability to integrate Gilat’s workforce and complex operations (concentrated in large part in Israel and Peru), with Comtech’s business.

That integration will be more difficult given the international travel restrictions still in place in many parts of the world as a result of the global COVID-19 pandemic.

The operational and administrative challenges we will face as we integrate Gilat’s operations into our business include maintaining our focus on meeting all customer commitments and expectations, including supporting all existing products, services and agreements.

Delays in the integration process could have a material adverse impact on our business, results of operation and financial condition.

Also, the diversion of our management’s attention to these matters and away from other business concerns could have an adverse effect on our business and operating results may fall short of expectations.

Ultimately, we may not be successful.

The ongoing COVID-19 pandemic has impacted our business, operating results and financial condition, as well as the operations and financial performance of many of the customers and suppliers in industries that we serve.

We are unable to predict the extent to which the pandemic and related effects will adversely impact our business operations, financial performance, results of operations, financial position and the achievement of our strategic objectives.

Comtech’s second half of fiscal 2020, running from February 1 through July 31, 2020, corresponded almost precisely with the period in which significant worldwide restrictions on business activities were in force due to the COVID-19 pandemic.

Most if not all of our sales and marketing personnel were unable to travel and/or meet with customers.

As a result, Comtech experienced significant order delays and lower net sales during such period.

These poor business conditions have resulted in the immediate suppression of end-market demand for many of our products such as satellite ground station technologies and other short-lead time products.

Summary of Risk Factors

The following is a summary of the principal risks that could significantly and negatively affect our business, prospects, financial conditions, or operating results.

For a more complete discussion of the material risks facing our business, please see below:

• We are unable to predict the extent to which the ongoing COVID-19 pandemic and supply chain constraints will continue to adversely impact our business operations, financial performance, results of operations, financial position and the achievement of our strategic objectives.

• Our fiscal 2022 business outlook is difficult to forecast and operating results are subject to significant fluctuations and are likely to be volatile.

• If global economic business and political conditions deteriorate as compared to the current environment it could have a material adverse impact on our business outlook and our business, operating results and financial condition.

• We have significant operations in locations which could be materially and adversely impacted in the event of a terrorist attack or other significant disruptions (including natural disasters).

Business Risks

• Our backlog is subject to customer cancellation or modification.

• Contract cost growth on our firm fixed-price contracts exposes us to reduced profitability and the potential loss of future business and other risks.

• Our business is highly dependent on the budgetary decisions of our government customers.

• Our contracts with the U.S.

government are subject to unique business, commercial and government audit risks.

• Our dependence on sales to international customers exposes us to unique business, commercial and export compliance audit risks.

• A change in our relationship with our large wireless carrier customers could have a material adverse effect.

• If our wireless carrier partners change the pricing and other terms by which they offer our products to their end-customers could have a material adversely affect.

Strategic Growth Risks

• We face a number of risks relating to the expected long-term growth of our business.

• We must service the debt and maintain compliance with various covenants under a Credit Facility that imposes restrictions on our business.

• Acquisitions of companies and investments could prove difficult to integrate, disrupt our business, dilute stockholder value or adversely affect operating results or the market price of our common stock.

• Our investments in recorded goodwill and other intangible assets could be impaired as a result of future business conditions, a deterioration of the global economy or if we change our reporting unit structure.

Cybersecurity Risks

• We could be negatively impacted by a system failure, breach, attack or intrusion of our IT networks or those we operate for certain customers, or third-party data center facilities, servers and related systems.

• The measures we have implemented to secure information we collect and store or enable access to may be breached.

Legal, Regulatory and Litigation Risks

• Changes in U.S.

tax law could adversely affect our business and financial condition.

federal, state and foreign tax returns are subject to audit and a resulting tax assessment or settlement could have a material adverse effect on our business, results of operations and financial condition.

• We may be subject to environmental liabilities.

• The success of our business is dependent on compliance with FCC rules and regulations and similar foreign laws and regulations.

• Regulation of the mobile communications industry and VoIP is evolving, and unfavorable changes or our failure to comply with existing and potential new legislation or regulations could harm our business and operating results.

• Ongoing compliance with the provisions of securities laws, related regulations and financial reporting standards could unexpectedly materially increase our costs and compliance related expenses.

• Indemnification provisions in our contracts could have a material adverse effect on our consolidated results of operations, financial position, or cash flows.

• We are, from time to time, and could become a party to additional litigation or subject to claims.

• Protection of our intellectual property is limited and pursuing infringers of our patents and other intellectual property rights can be costly.

• Third parties may claim we are infringing their intellectual property rights and we could be prevented from selling our products, or suffer significant litigation expense, even if these claims have no merit.

Competitive Risks

• All of our business activities are subject to rapid technological change, new entrants, the introduction of other distribution models and long development and testing periods each of which may harm our competitive position.

• Our business is highly competitive, we are reliant upon the success of our partners, and some of our competitors have significantly greater resources than we do, which could result in a loss of customers, market share and/or market acceptance.

• We rely upon various third-party companies and their technology to provide services to our customers.

• Because our software may contain defects or errors, and our hardware products may incorporate defective components, our sales could decrease if these defects or errors adversely affect our reputation or delay shipments of our products.

Risks Related to our Common Stock

• Our stock price is volatile.

• Future issuances of our shares of common stock could dilute a stockholder's ownership interest in Comtech and reduce the market price of our shares of common stock.

• Provisions in our corporate documents and Delaware law could delay or prevent a change in control of Comtech.

• A disruption in our Common Stock dividend program could negatively impact our stock price.

The ongoing COVID-19 pandemic and supply chain constraints have impacted our business, operating results and financial condition, as well as the operations and financial performance of many of the customers and suppliers in industries that we serve.

We are unable to predict the extent to which the pandemic, supply chain constraints and related effects will adversely impact our business operations, financial performance, results of operations, financial position and the achievement of our strategic objectives.

The COVID-19 pandemic and related disease control measures have significantly impacted the global economy and has created significant supply chain constraints.

These issues have had and could continue to have material adverse effects on our business, financial position, results of operations and cash flows.

Although there has been an increase in vaccinations throughout the United States, vaccinations internationally have progressed at a slower rate and the impact of new strains of the virus are uncertain.

The situation is changing rapidly and there may be additional impacts of which we are currently unaware.

The extent to which the COVID-19 pandemic impacts our business will depend on future developments, which cannot be predicted.

Poor business conditions due to the COVID-19 pandemic have resulted in the suppression of end-market demand for many of our products such as satellite ground station technologies and other short-lead time products.

Because the timing, impact, severity and duration of these conditions are impossible to predict and remain ongoing, there is a risk that such conditions will have a material adverse effect on our future consolidated results of operations.

Further, the COVID-19 pandemic has resulted in a widespread health crisis and numerous disease control measures being taken to limit its spread.

The impact of the pandemic on our business has included or could in the future include:

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• increases in operational expenses and other costs related to requirements implemented to mitigate the impact of the pandemic;

• supply chain disruptions;

• supply chain disruptions, including increased freight costs;

• delays or limitations on the ability of our customers to perform or make timely payments;

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• our management team continuing to commit significant time, attention and resources to monitoring the COVID-19 pandemic and seeking to mitigate its effects on our business and workforce.

The ultimate extent of the impact of COVID-19 on our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted at this time.

The ultimate extent of the impact of COVID-19 and supply chain constraints on our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted at this time.

These impacts, individually or in the aggregate, could have a material and adverse effect on our business, results of operations and financial condition.

Such effect may be exacerbated in the event the pandemic and the measures taken in response to it, and their effects, persist for an extended period of time, or if there is a resurgence of the outbreak.

Such effect may be exacerbated in the event the pandemic and the measures taken in response to it, and their effects, persist for an extended period of time, or if there are periodic resurgences of the outbreak.

Under any of these circumstances, the resumption of normal business operations may be delayed or hampered by lingering effects of COVID-19 on our operations, direct and indirect suppliers, partners, and customers.

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fluctuating market demand;

start-up costs associated with the opening of our two new high-volume technology manufacturing centers;

price competition;

new product introductions by our competitors;

new product introductions by us or our competitors;

customer bankruptcies;

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general global economic conditions, and the impact of natural disasters or global pandemics.

During fiscal 2020, largely as a result of the adverse impact of COVID-19 on business conditions, we ceased providing specific financial targets.

Although we have now reinstated providing specific forward-looking financial targets in fiscal 2021, it remains difficult to predict the timing of customer awards and related shipments and we may not meet our targets.

We have experienced, and will experience in the future, significant fluctuations in bookings, net sales and operating results from period to period.

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Additionally, the relative strength of the U.S.

dollar against many international currencies has negatively impacted the purchasing power for many of our international end-customers because virtually all of our sales are denominated in U.S.

dollar against many international currencies has negatively impacted the purchasing power for many of our international end-customers because most of our sales are denominated in U.S.

We generate significant sales from many emerging and developing countries.

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The United Kingdom ("U.K.") exited from the European Union ("E.U.") on January 31, 2020.

Such exit is commonly referred to as "Brexit".

During its 11 month transition period, the U.K.

are expected to negotiate a free trade agreement which will (i) allow U.K.

goods to move around the E.U.

without extra charges and (ii) keep other barriers (such as border checks) to a minimum.

However, there is no guarantee that the U.K.

will reach an agreement with the E.U.

by December 31, 2020.

If a free trade agreement is not reached, then tariffs (taxes) and full border checks will be applied to U.K.

goods travelling to the E.U.

Such exit, commonly referred to as "Brexit," has created and may continue to create economic and political uncertainties and impacts that could have a material adverse effect on our business, operations and profitability.

Although the U.K.

entered a trade agreement for goods that was approved by the European Parliament in April 2021, there is no guarantee that it will remain in force as other cross-border issues remain contested.

We maintain production, engineering and sales facilities in the U.K.

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• Difficulty in forecasting our results of operations - It is difficult to accurately forecast our results of operations during periods of adverse conditions as we cannot predict the severity or the duration of such conditions or the impact it could have on our current and prospective customers.

If our current or prospective customers materially postpone, reduce or even forgo purchases of our products and services to a greater extent than we anticipate, our business outlook will prove to be inaccurate.

If our current or prospective customers materially postpone, reduce or even forgo purchases of our products and services to a greater extent than we anticipate, or if we are unable to secure certain parts that are currently in limited supply due to supplier constraints, our business outlook will prove to be inaccurate.

• Additional reductions in telecommunications equipment and systems spending may occur - In the past, our businesses have been negatively affected by uncertain economic environments in the overall market and, more specifically, in the telecommunications sector.

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In addition, if the economic environment and lack of financing results in insolvencies for our customers, it would adversely impact the recoverability of our accounts receivable which would, in turn, adversely impact our results of operations.

We have significant operations in Arizona, Florida, California, Washington State, Maryland, New York and other locations which could be materially and adversely impacted in the event of a terrorist attack and government responses thereto or significant disruptions (including natural disasters) to our business.

Terrorist attacks, the U.S.

and other governments' responses thereto, and threats of war could materially adversely impact our business, results of operations and financial condition.

For example, our 911 hosted location-based services and satellite teleport services operations depend on our ability to maintain our computer and equipment and systems in effective working order, and to protect our systems against damage from fire, natural disaster, power loss, telecommunications failure, sabotage, unauthorized access to our system or similar events.

Although many of our mission-critical systems and equipment are designed with built-in redundancy and security, any unanticipated interruption or delay in our operations or breach of security could have a material adverse effect on our business, results of operations and financial condition.

Our property and business interruption insurance may not be adequate to compensate us for any losses that may occur in the event of a terrorist attack, threat, system failure or a breach of security.

Insurance may not be available to us at all or, if available, may not be available to us on commercially reasonable terms.

We currently, and intend to continue to, operate a high-volume technology manufacturing center located in Arizona.

The COVID-19 pandemic, a terrorist attack or similar future event may disrupt our operations or those of our customers or suppliers and may affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers.

If a natural disaster or other business interruption occurred with respect to our high-volume technology manufacturing center, we do not have immediate access to other manufacturing facilities and, as a result, our business, results of operations and financial condition would be materially adversely affected.

To support our long-term business goals for our satellite earth station product line, in fiscal 2021, we commenced a 15-year lease for a new 146,000 square foot facility in Chandler, Arizona and began shifting production of our satellite earth station products from our existing Tempe, Arizona locations.

If we are unable to have a smooth transition to our new facility, production and deliveries of our products may be impacted and we may incur unexpected costs.

We design and manufacture our over-the-horizon microwave equipment and systems in Florida, where major hurricanes have occurred in the past, and amplifiers in Santa Clara, California, an area close to major earthquake fault lines, and also manufacture amplifiers in Melville, New York, an area subject to hurricanes.

Additionally, certain of our Commercial Solutions segment activities are conducted in Washington State which is also near a fault line.

We maintain operations in Maryland near a U.S.

Navy facility which is more prone to a terrorist attack.

Our operations in these and other locations (such as in our high-volume technology manufacturing center located in Tempe, Arizona and our antenna production facility in the United Kingdom), could be subject to natural disasters or other significant disruptions, including hurricanes, tornadoes, typhoons, tsunamis, floods, earthquakes, fires, water shortages, other extreme weather conditions, medical epidemics, acts of terrorism, power shortages and blackouts, telecommunications failures, and other natural and man-made disasters or disruptions.

We cannot be sure that our systems will operate appropriately if we experience hardware or software failure, intentional disruptions of service by third parties, an act of God or an act of war.

A failure in our systems could cause delays in transmitting data, and as a result we may lose customers or face litigation that could involve material costs and distract management from operating our business.

In the event of any such disaster or other disruption, we could experience disruptions or interruptions to our operations or the operations of our suppliers, distributors, resellers or customers;

destruction of facilities;

and/or loss of life, all of which could materially increase our costs and expenses and materially adversely affect our business, results of operations and financial condition.

In addition, the ongoing COVID-19 pandemic has resulted in travel restrictions and business shutdowns both domestically and globally, including in locations in which we have significant operations.

These or any further political, governmental or other actions to contain the spread or treat the impact of COVID-19, and the resulting developments, are highly uncertain and unpredictable and could result in social, economic and labor instability.

These uncertainties could have a material adverse effect on the continuity of our business and our financial condition, the results of operations and cash flows.

Business Risks

Our backlog is subject to customer cancellation or modification and such cancellations could result in a decline in sales and increased provisions for excess and obsolete inventory.

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Any such charges could be materially adverse to our results of operations and financial condition.

We have incurred indebtedness under a Credit Facility, and may incur substantial additional indebtedness in the future, and may not be able to service that debt in the future and we must maintain compliance with various covenants that impose restrictions on our business.

On October 31, 2018, we entered into a First Amended and Restated Credit Agreement (the "Credit Facility") with a syndicate of lenders, replacing our prior Credit Agreement dated as of February 23, 2016.

The Credit Facility provides a senior secured loan facility of up to $550.0 million consisting of:

(i) a revolving loan facility with a borrowing limit of $300.0 million;

(ii) an accordion feature allowing us to borrow up to an additional $250.0 million;

(iii) a $35.0 million letter of credit sublimit;

and (iv) a swingline loan credit sublimit of $25.0 million.

The obligations under the Credit Facility are secured by substantially all of our tangible and intangible assets.

As of July 31, 2020, the amount outstanding under our Credit Facility was $149.5 million, which is reflected in the non-current portion of long-term debt on our Consolidated Balance Sheet.

At July 31, 2020, we also had $3.1 million of standby letters of credit outstanding under our Credit Facility related to guarantees of future performance on certain customer contracts.

The Credit Facility matures on October 31, 2023.

If we do not have sufficient funds to repay our debt when due, it may be necessary to refinance our debt through additional debt or equity financings.

If, at the time of any refinancing, prevailing interest rates or other factors result in higher interest rates on such refinancing, increases in interest expense could have a material adverse effect on our business, results of operations and financial condition.

Our Credit Facility contains various affirmative and negative covenants that may restrict our ability to, among other things, permit liens on our property, change the nature of our business, transact business with affiliates and/or merge or consolidate with any other person or sell or convey certain of our assets to any one person.

As of July 31, 2020, our Secured Leverage Ratio (as defined in the Credit Facility) was 1.99x trailing twelve month ("TTM") Consolidated EBITDA (as defined in the Credit Facility) compared to the maximum allowable Leverage Ratio of 3.75x TTM Consolidated EBITDA.

Our Interest Expense Coverage Ratio as of July 31, 2020 was 14.40x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25x TTM Adjusted EBITDA.

Assuming we are not obligated to complete the Gilat acquisition, we anticipate maintaining compliance with the terms and financial covenants in our Credit Facility for the foreseeable future.

If we complete the Gilat acquisition, we expect to replace our Credit Facility with a new Gilat Acquisition Related Credit Facility, for which terms are still being negotiated.

As such, there can be no assurance that we will be able to meet covenants in this new facility.

Further, our ability to comply with covenants, terms of and conditions of either facility may be affected by events beyond our control.

Failure to comply with covenants could result in an event of default, which, if not cured or waived, could accelerate our repayment obligations.

Our substantial debt obligations could impede, restrict or delay the implementation of our business strategy or prevent us from entering into transactions that would otherwise benefit our business.

• we may be required to dedicate a substantial portion of our cash flows from operations to payments on our indebtedness, thereby reducing the availability of our cash flows for other purposes, including business development efforts, capital expenditures, dividends or strategic acquisitions;

• if we are not able to generate sufficient cash flows to meet our substantial debt service obligations or to fund our other liquidity needs, we may have to take actions such as selling assets or raising additional equity or reducing or delaying capital expenditures, strategic acquisitions, investments and joint ventures, or restructuring our debt;

• we may not be able to fund future working capital, capital investments and other business activities;

• we may not be able to pay dividends or make certain other distributions;

• we may become more vulnerable in the event of a downturn in our business or a worsening of general economic or industry-specific conditions;

• our flexibility in planning for, or reacting to, changes in our business and industry may be limited, thereby placing us at a competitive disadvantage compared to our competitors that have less indebtedness.

Moreover, we may incur substantial additional indebtedness in the future to fund acquisitions or to fund other activities for general business purposes.

If additional new debt is added to the current or planned debt levels, the related risks that we now face could intensify.

A substantial increase in our indebtedness could also have a negative impact on our credit ratings.

In this regard, failure to maintain our credit ratings could adversely affect the interest rate available to us in future financings, as well as our liquidity, competitive position and access to capital markets.

Any decision regarding future borrowings will be based on the facts and circumstances existing at the time, including market conditions and our credit ratings.

In addition to the pending UHP and Gilat acquisitions, future acquisitions of companies and investments could prove difficult to integrate, disrupt our business, dilute stockholder value or adversely affect operating results or the market price of our common stock.

We expect to continue to evaluate other acquisitions and investments as part of our growth plans.

Such efforts may not result in an acquisition or ultimately be beneficial to us.

Future acquisitions or investments may result in the use of significant amounts of cash, potentially dilutive issuances of equity securities, incurrence of large amounts of debt, increases to amortization expense and future write-offs of the acquired intangibles.

Acquisitions and investments involve risks that include failing to:

• properly evaluate the technology;

• accurately forecast the financial impact of the transaction, including accounting charges and transaction expenses;

• integrate the technologies, products and services, research and development, sales and marketing, support and other operations;

• integrate and retain key management personnel and other key employees;

• retain and cross-sell to acquired customers;

• combine potentially different corporate cultures.

Acquisitions and investments could also:

• divert management’s attention away from the operation of our businesses;

• result in significant goodwill and intangibles write-offs in the event an acquisition or investment does not meet expectations;

• increase expenses, including expenses of managing the growth of such acquired businesses.

There can be no assurance that any future acquisition or investment will be successful within the anticipated time frame, or at all, will be as valuable as the amount we eventually pay to acquire it, and will not adversely affect our business, results of operations or financial condition.

In addition, if we consummate future acquisitions using our equity securities or securities convertible into our equity securities, existing stockholders may be diluted, which could have a material adverse effect on the market price of our common stock.

Contract cost growth on our firm fixed-price contracts, including most of our government contracts, cost reimbursable type contracts and other contracts that cannot be justified as an increase in contract value due from customers exposes us to reduced profitability and the potential loss of future business and other risks.

A substantial portion of our products and services are sold under firm fixed-price contracts.

Firm fixed-price contracts inherently have more risk than flexibly priced contracts.

This means that we bear the risk of unanticipated technological, manufacturing, supply or other problems, price increases or other increases in the cost of performance.

Future events could result in either upward or downward adjustments to those estimates which could negatively impact our profitability.

Operating margin is materially adversely affected when contract costs that cannot be billed to the customer are incurred.

This cost growth can occur if initial estimates used for calculating the contract price were incorrect, or if estimates to complete increase.

To a lesser extent, we provide products and services under cost reimbursable type contracts which carry the entire burden of costs exceeding a negotiated contract ceiling price.

The cost estimation process requires significant judgment and expertise.

Reasons for cost growth may include unavailability and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of any delays in performance, availability and timing of funding from the customer, natural disasters, and the inability to recover any claims included in the estimates to complete.

A significant change in an estimate on one or more programs could have a material adverse effect on our business, results of operations and financial condition.

Our business is highly dependent on the budgetary decisions of our government customers, including the U.S.

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government spending may prove to be incorrect.

The outcome of the national elections to be held in the U.S.

in 2020 may also impact the levels of U.S.

government spending.

The federal debt limit continues to be actively debated as plans for long-term national fiscal policy are discussed.

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government is unable to make timely payments.

A decrease in Department of Defense or Department of Homeland Security expenditures, the elimination or curtailment of a material program in which we are involved, or changes in payment patterns of our customers as a result of changes in U.S.

A decrease in Department of Defense or Department of Homeland Security expenditures, the elimination or curtailment of a material program in which we are involved (such as the withdrawal of troops from Afghanistan or other parts of the world), or changes in payment patterns of our customers as a result of changes in U.S.

government spending could have a material adverse effect on our business, results of operations and financial condition.

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government customers and revenues from sales of our products would decline significantly.

• Our employees may not be able to obtain and maintain the required security clearances for the facilities in which we perform sensitive government work - Certain of our U.S.

Government contracts require our employees to maintain various levels of security clearances, and we are required to maintain certain facility security clearances.

If we cannot maintain or obtain the required security clearances for our facilities and our employees, or obtain these clearances in a timely manner, we may be unable to perform certain U.S.

Government contracts.

Further, loss of a facility clearance, or an employee’s failure to obtain or maintain a security clearance, could result in a U.S.

Government customer terminating an existing contract or choosing not to renew a contract.

Lack of required clearances could also impede our ability to bid on or win new U.S.

Government contracts.

This could damage our reputation and adversely affect our business, financial condition and results of operations.

In addition, all of our U.S.

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Violations of any of these laws, rules or regulations, and other business practices that are regarded as unethical, could interrupt the sales of our products and services, result in the cancellation of orders or the termination of customer relationships, and could damage our reputation, any of which developments could have a material adverse effect on our business, results of operations and financial condition.

• We currently price virtually all of our products in U.S.

dollars - Today, virtually all of our sales are denominated in U.S.

• We price most of our products in U.S.

dollars - Today, most of our sales are denominated in U.S.

Over the last few years, the U.S.

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Additionally, changes in regulatory requirements which could restrict our ability to deliver services to our international customers, including the addition of a country to the list of sanctioned countries under the IEEPA or similar legislation could negatively impact our business.

For the fiscal years ended July 31, 2020, 2019 and 2018, we have conducted no business with states designated as sponsors of terrorism.

For the fiscal years ended July 31, 2021, 2020 and 2019, we conducted no business with states designated as sponsors of terrorism.

• We must maintain a company-wide Office of Trade Compliance - In the past, we have self-reported violations of export control laws or regulations to the U.S.

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In addition, we have made various commitments to U.S.

government agencies that oversee trade and export matters and have committed that we will maintain certain policies and procedures including maintaining a company-wide Office of Trade Compliance.

Additionally, we have agreed to have independent audits in future periods and will report any future violations to those agencies.

government agencies that oversee trade and export matters and have committed that we will maintain certain policies and procedures including maintaining a company-wide Chief Trade Compliance Officer and Office of Trade Compliance and conducting ongoing internal assessment and reporting any future violations to those agencies.

Even though we take precautions to avoid engaging in transactions that may violate U.S.

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• We are subject to future export compliance audits - We continue to implement policies and procedures to ensure that we comply with all applicable export control laws and regulations.

We are subject to future compliance audits that may uncover improper or illegal activities that would subject us to material remediation costs, civil and criminal fines and/or penalties and/or an injunction.

We may be subject to future compliance audits that uncover improper or illegal activities that would subject us to material remediation costs, civil and criminal fines and/or penalties and/or an injunction.

In addition, we could suffer serious reputational harm if allegations of impropriety were made against us.

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• We may be affected by the future imposition of tariffs and trade restrictions - The current U.S.

administration has signaled support for, and in some instances has taken action with respect to, major changes to certain trade policies, such as the imposition of additional tariffs on imported products, the withdrawal from or renegotiation of certain trade agreements and the imposition of certain export sanctions.

Such changes could result in retaliatory actions by the United States’ trade partners.

For example, over the last several months, the U.S.

has increased tariffs on certain imports from China, as well as on steel and aluminum products imported from various countries and imposed export sanctions on certain Chinese entities.

In response, China, the European Union, and several other countries have imposed or proposed additional tariffs on certain exports from the U.S.

Our inability to effectively manage the negative impacts of changing U.S.

administration has generally not amended the trade policies and tariffs on imported products from the prior administration, and increased sanctions against Russia.

Our inability to effectively manage the negative impacts of U.S.

and foreign trade policies, including, in connection with our business with customers outside of the United States or with newly sanctioned entities could adversely affect our business and financial results.

A change in our relationship with our large wireless carrier customers could have a material adverse effect.

Although we have a long history of providing services to many of our wireless carrier partners, a change in purchasing or procurement strategies by a wireless carrier partner could result in the loss of business from that partner.

Additionally, from time to time, we routinely perform services without a multi-period contract while we negotiate new and extended contract terms and pricing.

These negotiations are complex and may take long periods of time.

Even when we successfully negotiate a multi-period contract, our wireless carrier contracts, such as the ones with Verizon which accounted for 10.7% of our sales in fiscal 2021, provide for terminations with notice and provide a mechanism for the wireless carrier to renegotiate lower fees and/or change services.

Fee pressure from these carriers is constant and ongoing.

Thus, even when we obtain a multi-period contract term, our revenues could be suddenly and materially reduced.

Competitors offer technology that has functionality similar to ours for free, under different business models.

Competition from such free offerings may reduce our revenue and harm our business.

If our wireless carrier partners or our competition can offer such technology to their subscribers or customers for free, they may elect to cease their relationships with us, alter or reduce the manner or extent to which they market or offer our services or require us to substantially reduce our subscription fees or pursue other business strategies that may not prove successful for us and could have a material adverse effect on our business, results of operations and financial condition.

If our wireless carrier partners change the pricing and other terms by which they offer our products to their end-customers or do not continue to provide our services at all or renegotiate lower fees with us, our business, results of operations, and financial condition could be suddenly and materially adversely affected.

We generate a significant portion of our revenue from customers that are wireless carriers, such as Verizon which accounted for 10.7% of our revenues in fiscal 2021.

In addition, a portion of our revenue is derived from subscription fees that we receive from our wireless carrier partners for end-users who subscribe to our service on a standalone basis or in a bundle with other services.

Future revenue will depend on the pricing and quality of those services and subscriber demand for those services, which may vary by market, and the level of subscriber turnover experienced by our wireless carrier partners.

If subscriber turnover increases more than we anticipate, our financial results could be materially adversely affected.

Poor performance in or disruptions of the services included in our advanced communication solutions could harm our reputation, delay market acceptance of our services and subject us to liabilities (including breach of contract claims brought by our customers and third-party damages claims brought by end-users).

Our wireless carrier agreements and certain customers require us to meet specific requirements including operational uptime requirements or be subject to penalties.

If we are unable to meet contractual requirements with our wireless carrier partners, such as Verizon, they could terminate our agreements or we may be required to refund a portion of monthly subscriptions fees they have paid us.

Strategic Growth Risks

We face a number of risks relating to the expected long-term growth of our business.

Our business and operating results may be negatively impacted if we are unable to manage this growth.

These risks include:

• The loss of key technical and/or management personnel could adversely affect our business - Our future success depends on the continued contributions of key technical and management personnel.

Many of our key and technical management personnel would be difficult to replace and are not subject to employment or non-competition agreements.

We currently have research and development employees in areas that are located a great distance away from our U.S.

headquarters and some work out of their respective homes.

Managing remote product development operations is difficult and we may not be able to manage the employees in these remote centers successfully.

Our expected growth and future success will depend, in large part, upon our ability to attract and retain highly qualified engineering, sales and marketing personnel.

Competition for such personnel from other companies, academic institutions, government entities and other organizations is intense.

Although we believe that we have been successful to-date in recruiting and retaining key personnel, we may not be successful in attracting and retaining the personnel we will need to grow and operate profitably.

Also, the management skills that have been appropriate for us in the past may not continue to be appropriate if we grow and diversify.

• We may not be able to improve our processes and systems to keep pace with anticipated growth - The future growth of our business may place significant demands on our managerial, operational, production and financial resources.

In order to manage that growth, we must be prepared to improve and expand our management, operational and financial systems and controls, as well as our production capabilities.

We also need to continue to recruit and retain personnel and train and manage our employee base.

We must carefully manage research and development capabilities and production and inventory levels to meet product demand, new product introductions and product and technology transitions.

Our planned moves to new high volume manufacturing facilities in Chandler, Arizona and Basingstoke, U.K.

may be delayed and subject to unforeseen costs (both capital and operational), which could impede our ability to complete customer orders and thereby have a material adverse effect on our business, results of operations and financial condition.

If we are not able to timely and effectively manage our growth and maintain the quality standards required by our existing and potential customers, it could have a material adverse effect on our business, results of operations and financial condition.

• Our markets are highly competitive and there can be no assurance that we can continue to compete effectively - The markets for our products are highly competitive.

There can be no assurance that we will be able to continue to compete successfully on price or other terms, or that our competitors will not develop new technologies and products that are more effective than our own.

We expect the Department of Defense’s increased use of commercial off-the-shelf products and components in military equipment will encourage new competitors to enter the market.

Also, although the implementation of advanced telecommunications services is in its early stages in many developing countries, we believe competition will continue to intensify as businesses and foreign governments realize the market potential of telecommunications services.

Many of our competitors have financial, technical, marketing, sales and distribution resources greater than ours.

Recently, we have seen increased requests for proposals from large wireless carriers for sole-source solutions and have responded to several such requests.

In order to induce retention of existing customer contracts and obtain business on a sole-source basis, we may ultimately agree to adjust pricing on a retroactive basis.

If our sole-source proposals are rejected in favor of a competitor’s proposal, it could result in the termination of existing contracts, which could have a material adverse effect on our business, results of operations and financial condition.

• We may not be able to obtain sufficient components to meet expected demand - Our dependence on component availability, government furnished equipment, subcontractors and key suppliers, including the core manufacturing expertise of our high-volume technology manufacturing center located in Arizona exposes us to risk.

Although we obtain certain components and subsystems from a single source or a limited number of sources, we believe that most components and subsystems are available from alternative suppliers and subcontractors.

During the past two years or so, partly driven by the COVID-19 pandemic and as a result of overall increased industry-wide demand, lead times for many components have increased as well as freight costs.

In addition, threats of or actual tariffs could limit our ability to obtain certain parts on a cost-effective basis, or at all.

A significant interruption in the delivery of such items could have a material adverse effect on our business, results of operations and financial condition.

Similarly, if our high-volume technology manufacturing center located in Arizona is unable to produce sufficient product or maintain quality, it could have a material adverse effect on our business, results of operations and financial condition.

• Our ability to maintain affordable credit insurance may become more difficult - In the normal course of our business, we purchase credit insurance to mitigate some of our domestic and international credit risk.

Although credit insurance remains generally available, upon renewal, it may become more expensive to obtain or may not be available for existing or new customers in certain international markets and it might require higher deductibles than in the past.

If we acquire a company with a different customer base, we may not be able to obtain credit insurance for those sales.

As such, there can be no assurance that, in the future, we will be able to obtain credit insurance on a basis consistent with our past practices.

The Credit Facility provides a senior secured loan facility of up to $550.0 million consisting of:

(i) a revolving loan facility with a borrowing limit of $300.0 million;

(ii) an accordion feature allowing us to borrow up to an additional $250.0 million;

(iii) a $35.0 million letter of credit sublimit;

and (iv) a swingline loan credit sublimit of $25.0 million.

The obligations under the Credit Facility are secured by substantially all of our tangible and intangible assets.

As of July 31, 2021, the amount outstanding under our Credit Facility was $201.0 million, which is reflected in the non-current portion of long-term debt on our Consolidated Balance Sheet.

As of July 31, 2021, we also had $1.5 million of standby letters of credit outstanding under our Credit Facility related to guarantees of future performance on certain customer contracts.

The Credit Facility matures on October 31, 2023.

If we do not have sufficient funds to repay our debt when due, it may be necessary to refinance our debt through additional debt or equity financings.

As of July 31, 2021, our Secured Leverage Ratio (as defined in the Credit Facility) was 2.53x trailing twelve month ("TTM") Consolidated EBITDA (as defined in the Credit Facility) compared to the maximum allowable Leverage Ratio of 3.75x TTM Consolidated EBITDA.

Our Interest Expense Coverage Ratio as of July 31, 2021 was 13.05x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25x TTM Adjusted EBITDA.

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

Further, our ability to comply with covenants, terms of and conditions our facility may be affected by events beyond our control.