COMTECH TELECOMMUNICATIONS CORP /DE/ 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this Annual Report on Form 10-K, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was carried out by us under the supervision and with the participation of our management, including our Chief Executive Officer and Chairman and Chief Financial Officer. Based on that evaluation, our Chief Executive Officer and Chairman and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by the report to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure. A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Management’s Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of July 31, 2021. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control – Integrated Framework (2013) . Based on our assessment, we determined that, as of July 31, 2021, our internal control over financial reporting was effective based on those criteria. Deloitte and Touche LLP, our independent registered public accounting firm, has performed an audit of our internal control over financial reporting as of July 31, 2021 based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO. This audit is required to be performed in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our independent auditors were given unrestricted access to all financial records and related data. Deloitte’s audit reports appear on pages F-2 and F-3 of this annual report. Changes In Internal Control Over Financial Reporting There have been no changes in our internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during our fiscal quarter ended July 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATION As described in the supplement to the Company’s Proxy Statement for Fiscal 2020 Annual Meeting of Stockholders filed with the SEC on December 1, 2020, on November 30, 2020, our Executive Compensation Committee approved amending all existing change-in-control agreements to reflect feedback and recommendations of Institutional Shareholder Services regarding payments and benefits provided under such agreements (the “2020 Amendments”). In addition to the changes previously disclosed, the 2020 Amendments also provided that, for our executive officers who are parties to Tier 1 change-in-control agreements (including Messrs. Fred Kornberg, Michael Porcelain and Michael Bondi) (such agreements, the “Amended CIC Agreements”), in the event that the officer’s employment is terminated by us without cause or terminated by the officer for "good reason" or "modified good reason" (as defined in the agreement), the "performance awards" (as defined in the agreement) will vest at the maximum level of performance. The foregoing description of the Amended CIC Agreements in this Annual Report on Form 10-K is a summary of, and is qualified in its entirety by, the terms of the Amended CIC Agreement. A copy of the form of the Amended CIC Agreement is attached hereto as Exhibit 10.(l)(1) and incorporated herein by reference. 79 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Certain information concerning directors and officers is incorporated by reference to our Proxy Statement for the Annual Meeting of Stockholders (the "Proxy Statement") which will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated by reference to the Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information regarding securities authorized for issuance under equity compensation plans and certain information regarding security ownership of certain beneficial owners and management is incorporated by reference to the Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information regarding certain relationships and related transactions is incorporated by reference to the Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information regarding principal accountant fees and services is incorporated by reference to the Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year. 80 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) (1) The Registrant’s financial statements together with a separate index are annexed hereto. (2) The Financial Statement Schedule listed in a separate index is annexed hereto. (3) Exhibits required by Item 601 of Regulation S-K are listed below. Exhibit Number Description of Exhibit Incorporated By Reference to Exhibit 3(a)(i) Restated Certificate of Incorporation of the Registrant Exhibit 3(a)(i) to the Registrant’s 2006 Form 10-K 3(a)(ii) Third Amended and Restated By-Laws of the Registrant, as of September 26, 2017 Exhibit 3(a)(ii) to the Registrant’s 2017 Form 10-K 4 (a) ( vi ) Description of Comtech Telecommunication Corp.'s Securities Registered Pursuant to Section 12 of the Exchange Act 10(a)(1)* Seventh Amended and Restated Employment Agreement, dated March 4, 2020, between the Registrant and Fred Kornberg Exhibit 10.1 to the Registrant’s Form 8-K, filed March 4, 2020 10(a)(2)* Lease agreement, dated September 23, 2011, on the Melville, New York Facility Exhibit 10(s) to the Registrant's 2011 Form 10-K 10(b)* Second Amended and Restated 2001 Employee Stock Purchase Plan Exhibit A to the Registrant’s Proxy Statement, filed November 16, 2018 10(c)* 2000 Stock Incentive Plan, Amended and Restated, Effective November 15, 2019, as amended effective August 4, 2020, as further amended August 10, 2021 10(d)(1)* Form of Stock Option Agreement pursuant to the 2000 Stock Incentive Plan Exhibit 10(f)(7) to the Registrant’s 2005 Form 10-K 10(d)( 2 )* Form of Stock Option Agreement for Non-employee Directors pursuant to the 2000 Stock Incentive Plan - 2020 Exhibit 10(d)(3) to the Registrant's Form 2020 Form 10-K 10(e)* Form of Performance Share Agreement pursuant to the 2000 Stock Incentive Plan Exhibit 10(s) to the Registrant’s 2012 Form 10-K 10(f)( 1 )* Form of Long-Term Performance Share Award Agreement pursuant to the 2000 Stock Incentive Plan - 2018 Exhibit 10(f)(2) to the Registrant's 2019 Form 10-K 10(g)(1)* Form of Restricted Stock Agreement for Employees pursuant to the 2000 Stock Incentive Plan Exhibit 10(y) to the Registrant’s 2016 Form 10-K 10(g)(2)* Form of Restricted Stock Agreement for Non-employee Directors pursuant to the 2000 Stock Incentive Plan Exhibit 10(ab) to the Registrant’s 2016 Form 10-K 10(g)(3)* Form of Restricted Stock Agreement (eligible for dividend equivalents) for Non-employee Directors pursuant to the 2000 Stock Incentive Plan - 2019 Exhibit 10(g)(3) to the Registrant's 2019 Form 10-K 10(h)(1)* Form of Restricted Stock Unit Agreement for Employees pursuant to the 2000 Stock Incentive Plan - 2017 Exhibit 10(h)(1) to the Registrant’s 2017 Form 10-K 10(h)(2)* Form of Restricted Stock Unit Agreement for Employees pursuant to the 2000 Stock Incentive Plan - 2016 Exhibit 10(z) to the Registrant’s 2016 Form 10-K 10(h)( 3 )* Form of Restricted Stock Unit Agreement for Non-employee Directors pursuant to the 2000 Stock Incentive Plan Exhibit 10.2 to the Registrant's Form 10-Q, filed June 7, 2012 10(h)( 4 )* Form of Restricted Stock Unit Agreement (eligible for dividend equivalents) for Non-employee Directors pursuant to the 2000 Stock Incentive Plan Exhibit 10(aa) to the Registrant’s 2016 Form 10-K 10(h)( 5 )* Form of Restricted Stock Unit Agreement (eligible for dividend equivalents) for Non-employee Directors pursuant to the 2000 Stock Incentive Plan - 2013 Exhibit 10(x) to the Registrant's 2013 Form 10-K 81 Exhibit Number Description of Exhibit Incorporated By Reference to Exhibit 10(h)( 6 )* Form of Restricted Stock Unit Agreement (eligible for dividend equivalents) for Non-employee Directors pursuant to the 2000 Stock Incentive Plan - 2020 Exhibit 10.1 to the Registrant's Form 10-Q, filed June 3, 2020 10(i)(1)* Form of Stock Unit Agreement for Non-employee Directors pursuant to the 2000 Stock Incentive Plan Exhibit 10.1 to the Registrant's Form 10-Q, filed June 7, 2012 10(i)(2)* Form of Stock Unit Agreement (eligible for dividend equivalents) for Non-employee Directors pursuant to the 2000 Stock Incentive Plan Exhibit 10(v) to the Registrant's 2013 Form 10-K 10(j)(1)* Form of Share Unit Agreement (eligible for dividend equivalents) for Employees pursuant to the 2000 Stock Incentive Plan Exhibit 10.2 to the Registrant's Form 10-Q, filed December 9, 2013 10(j)(2)* Form of Share Unit Agreement (eligible for dividend equivalents) for Employees pursuant to the 2000 Stock Incentive Plan - 2018 Exhibit 10(j)(2) to the Registrant's 2018 Form 10-K 10(k)* Form of Indemnification Agreement between the Registrant and the Named Executive Officers and Certain Other Executive Officers Exhibit 10.1 to Registrant’s Form 8-K, filed on March 8, 2007 10(l)(1)* Form of Change - in - Control Agreement (Tier 1) 10(l)(2)* Form of Change-in-Control Agreement (Tier 2) between the Registrant and Certain Named Executive Officers (other than the CEO) and Certain Other Executive Officers 10(l)(3)* Form of Change-in-Control Agreement (Tier 2) between the Registrant and Certain Named Executive Officers (other than the CEO) and Certain Other Executive Officers (California Employees) Exhibit 10.3 to the Registrant’s Form 8-K, filed June 7, 2017 10(l)(4)* Form of Change-in-Control Agreement (Tier 2) between the Registrant and Certain Named Executive Officers (other than the CEO) and Certain Other Executive Officers (Divisional/Subsidiary Presidents) Exhibit 10.4 to the Registrant’s Form 8-K, filed June 7, 2017 10(l)(5)* Form of Change-in-Control Agreement (Tier 2) between the Registrant and Certain Named Executive Officers (other than the CEO) and Certain Other Executive Officers (California Divisional/Subsidiary Presidents) Exhibit 10.5 to the Registrant’s Form 8-K, filed June 7, 2017 10(l)(6)* Form of Change-in-Control Agreement (Tier 3) between the Registrant and Certain Non-Executive Officers Exhibit 10.6 to the Registrant’s Form 8-K, filed June 7, 2017 10(m)* Retirement and Transition Agreement Exhibit 10.1 to the Registrant's Form 10-Q, filed December 4, 2019 10( n ) Agreement and Plan of Merger, dated as of November 22, 2015, among Comtech Telecommunications Corp., Typhoon Acquisition Corp. and TeleCommunication Systems, Inc. Exhibit 2.1 to the Registrant’s Form 8-K, filed November 23, 2015 10( o ) First Amended and Restated Credit Agreement, dated as of October 31, 2018, among Comtech Telecommunications Corp., the lenders party thereto and Citibank N.A., as administrative agent, issuing bank and swingline lender. Exhibit 10.1 to the Registrant’s Form 8-K, filed November 5, 2018 21 Subsidiaries of the Registrant 23.1 Consent of Independent Registered Public Accounting Firm 82 Exhibit Number Description of Exhibit Incorporated By Reference to Exhibit 31.1 Certification of CEO and Chairman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of CEO and Chairman pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS The following financial statements from the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2021, formatted in inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Stockholders' Equity, (iv) Consolidated Statement of Cash Flows, and (v) Notes to Consolidated Financial Statements 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Labels Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 104 Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101) * Management contract or compensatory plan or arrangement. ITEM 16. FORM 10-K SUMMARY None. 83 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMTECH TELECOMMUNICATIONS CORP. October 4, 2021 By: /s/Fred Kornberg (Date) Fred Kornberg, Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title October 4, 2021 /s/Fred Kornberg Chairman of the Board (Date) Fred Kornberg Chief Executive Officer (Principal Executive Officer) October 4, 2021 /s/Michael A. Bondi Chief Financial Officer (Date) Michael A. Bondi (Principal Financial and Accounting Officer) October 4, 2021 /s/Judy Chambers Director (Date) Judy Chambers October 4, 2021 /s/Edwin Kantor Director (Date) Edwin Kantor October 4, 2021 /s/Ira S. Kaplan Director (Date) Ira S. Kaplan October 4, 2021 /s/Lisa Lesavoy Director (Date) Lisa Lesavoy October 4, 2021 /s/Robert G. Paul Director (Date) Robert G. Paul October 4, 2021 /s/Dr. Yacov A. Shamash Director (Date) Dr. Yacov A. Shamash October 4, 2021 /s/Lawrence J. Waldman Director (Date) Lawrence J. Waldman 84 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Index to Consolidated Financial Statements and Schedule Page Reports of Independent Registered Public Accounting Firms F- 2 Consolidated Financial Statements: Balance Sheets as of July 31, 2021 and 2020 F- 5 Statements of Operations for each of the years in the three-year period ended July 31, 2021 F- 6 Statements of Stockholders' Equity for each of the years in the three-year period ended July 31, 2021 F- 7 Statements of Cash Flows for each of the years in the three-year period ended July 31, 2021 F- 8 Notes to Consolidated Financial Statements F- 10 Additional Financial Information Pursuant to the Requirements of Form 10-K: Schedule II – Valuation and Qualifying Accounts and Reserves S- 1 Schedules not listed above have been omitted because they are either not applicable or the required information has been provided elsewhere in the consolidated financial statements or notes thereto. F - 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Comtech Telecommunications Corp. Melville, New York Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Comtech Telecommunications Corp. and subsidiaries (the "Company") as of July 31, 2021 and 2020, the related consolidated statements of operations, stockholders’ equity, and cash flows, for each of the three years in the period ended July 31, 2021, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of July 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2021, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of July 31, 2021, based on criteria established in Internal Control — Integrated Framework ( 2013 ) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 4, 2021 , expressed an unqualified opinion on the Company’s internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Net Sales – Over Time Accounting Using the Cost-to-Cost Measure for Specific Identified Material Contracts — Refer to Note 1 to the financial statements . Critical Audit Matter Description The Company’s determination of revenue recognition for specific identified material contracts accounted for over time involves estimating the total costs needed to complete the specific identified contracts and updating those estimates throughout the life of those specific identified contracts. This requires management to make significant estimates related to forecasts of future costs for the identified specific contracts. Changes in these estimates for the identified specific contracts could have a significant impact on the Company's results of operations. Given the significant judgment and estimates used in management’s projections, auditing the Company’s estimates at completion and estimates to completion involved especially subjective judgment. F - 2 How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the Company’s determination of revenue recognition for specific identified material contracts accounted for over time included the following, among others: • We tested the design and operating effectiveness of the controls over the development of the initial contract cost to complete estimate and monitoring of estimates at completion and estimates to completion. • For each specific identified material contract selected, we performed the following: ◦ Evaluated whether the contract was properly included in management’s calculation of overtime revenue based on the terms and conditions of each contract, including whether continuous transfer of control to the customer occurred as progress was made toward fulfilling the performance obligation. ◦ Compared the transaction prices to the consideration expected to be received based on current rights and obligations under the contracts and any modifications that were agreed upon with the customers. ◦ Tested management’s identification of distinct performance obligations by evaluating whether the underlying goods, services, or both were highly interdependent and interrelated. ◦ Evaluated the estimates of total cost and profit for the performance obligation by: ▪ Performing a retrospective review by comparing the estimated margins at contract inception to the actual margins as of year-end in order to assess management’s ability to accurately estimate costs. ▪ Inquiring and corroborating the estimates to complete and the estimates at completion with the Project Manager (i.e., someone outside of Finance/Accounting) to understand significant variances in costs and completeness of the estimates at completion and estimates to completion. ▪ Testing the estimates to complete through a combination of tests of details, in which we selected individual costs within the estimate to complete and obtained supporting documentation, and where we developed an expectation of the estimate to complete and compared it to the recorded balance. ◦ Tested the accuracy and completeness of costs incurred during the current fiscal year. This testing included agreeing labor costs to employee timesheets and agreeing the labor rate to either rates agreed upon with the customer in the contract or rates from the Company's payroll records. ◦ Tested the mathematical accuracy of management’s calculation of revenue for the performance obligation. /s/ DELOITTE & TOUCHE LLP Jericho, New York October 4, 2021 We have served as the Company’s auditor since 2015. F - 3 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Comtech Telecommunications Corp. Melville, New York Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Comtech Telecommunications Corp. and subsidiaries (the "Company") as of July 31, 2021, based on criteria established in Internal Control — Integrated Framework ( 2013 ) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2021, based on criteria established in Internal Control — Integrated Framework ( 2013 ) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended July 31, 2021, of the Company and our report dated October 4, 2021 , expressed an unqualified opinion on those financial statements and financial statement schedule. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ DELOITTE & TOUCHE LLP Jericho, New York October 4, 2021 F - 4 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Balance Sheets As of July 31, 2021 and 2020 Assets 2021 2020 Current assets: Cash and cash equivalents $ 30,861,000 47,878,000 Accounts receivable, net 158,110,000 126,816,000 Inventories, net 80,358,000 82,302,000 Prepaid expenses and other current assets 18,167,000 20,101,000 Total current assets 287,496,000 277,097,000 Property, plant and equipment, net 35,286,000 27,037,000 Operating lease right-of-use assets, net 44,486,000 30,033,000 Goodwill 347,698,000 330,519,000 Intangibles with finite lives, net 268,699,000 258,019,000 Deferred financing costs, net 1,824,000 2,391,000 Other assets, net 7,622,000 4,551,000 Total assets $ 993,111,000 929,647,000 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 36,193,000 23,423,000 Accrued expenses and other current liabilities 89,601,000 85,161,000 Operating lease liabilities, current 8,841,000 8,247,000 Dividends payable 2,601,000 2,468,000 Contract liabilities 66,130,000 40,250,000 Interest payable 195,000 163,000 Total current liabilities 203,561,000 159,712,000 Non-current portion of long-term debt, net 201,000,000 149,500,000 Operating lease liabilities, non-current 39,569,000 24,109,000 Income taxes payable 2,717,000 1,963,000 Deferred tax liability, net 21,230,000 17,637,000 Long-term contract liabilities 9,808,000 9,596,000 Other liabilities 14,507,000 17,831,000 Total liabilities 492,392,000 380,348,000 Commitments and contingencies (See Note 12) 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 41,281,812 shares and 39,924,439 shares at July 31, 2021 and 2020, respectively 4,128,000 3,992,000 Additional paid-in capital 605,439,000 569,891,000 Retained earnings 333,001,000 417,265,000 942,568,000 991,148,000 Less: Treasury stock, at cost ( 15,033,317 shares at July 31, 2021 and 2020) ( 441,849,000 ) ( 441,849,000 ) Total stockholders’ equity 500,719,000 549,299,000 Total liabilities and stockholders’ equity $ 993,111,000 929,647,000 See accompanying notes to consolidated financial statements. F - 5 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Operations Fiscal Years Ended July 31, 2021, 2020 and 2019 2021 2020 2019 Net sales $ 581,695,000 616,715,000 671,797,000 Cost of sales 367,737,000 389,882,000 424,357,000 Gross profit 213,958,000 226,833,000 247,440,000 Expenses: Selling, general and administrative 111,796,000 117,130,000 128,639,000 Research and development 49,148,000 52,180,000 56,407,000 Amortization of intangibles 21,020,000 21,595,000 18,320,000 Settlement of intellectual property litigation — — ( 3,204,000 ) Acquisition plan expenses 100,292,000 20,754,000 5,871,000 282,256,000 211,659,000 206,033,000 Operating (loss) income ( 68,298,000 ) 15,174,000 41,407,000 Other expenses (income): Interest expense 6,821,000 6,054,000 9,245,000 Write-off of deferred financing costs — — 3,217,000 Interest (income) and other ( 139,000 ) ( 190,000 ) 35,000 (Loss) income before (benefit from) provision for income taxes ( 74,980,000 ) 9,310,000 28,910,000 (Benefit from) provision for income taxes ( 1,500,000 ) 2,290,000 3,869,000 Net (loss) income $ ( 73,480,000 ) 7,020,000 25,041,000 Net (loss) income per share: Basic $ ( 2.86 ) 0.28 1.04 Diluted $ ( 2.86 ) 0.28 1.03 Weighted average number of common shares outstanding – basic 25,685,000 24,798,000 24,124,000 Weighted average number of common and common equivalent shares outstanding – diluted 25,685,000 24,899,000 24,302,000 See accompanying notes to consolidated financial statements. F - 6 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Stockholders’ Equity Fiscal Years Ended July 31, 2021, 2020 and 2019 Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Stockholders' Equity Shares Amount Shares Amount Balance as of July 31, 2018 38,860,571 $ 3,886,000 $ 538,453,000 $ 405,194,000 15,033,317 $ ( 441,849,000 ) $ 505,684,000 Equity-classified stock award compensation — — 11,427,000 — — — 11,427,000 Proceeds from exercises of stock options 8,100 1,000 215,000 — — — 216,000 Proceeds from issuance of employee stock purchase plan shares 43,316 4,000 922,000 — — — 926,000 Issuance of restricted stock 10,386 1,000 ( 1,000 ) — — — — Net settlement of stock-based awards 145,119 15,000 ( 3,931,000 ) — — — ( 3,916,000 ) Common stock issued for acquisition of Solacom Technologies, Inc. ("Solacom") 208,669 21,000 5,585,000 — — — 5,606,000 Cash dividends declared ($ 0.40 per share) — — — ( 9,575,000 ) — — ( 9,575,000 ) Accrual of dividend equivalents, net of reversal ($ 0.40 per share) — — — ( 327,000 ) — — ( 327,000 ) Net income — — — 25,041,000 — — 25,041,000 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 — — 9,275,000 — — — 9,275,000 Proceeds from exercises of stock options 16,700 2,000 466,000 — — — 468,000 Proceeds from issuance of employee stock purchase plan shares 52,958 5,000 850,000 — — — 855,000 Issuance of restricted stock 3,319 — — — — — — Net settlement of stock-based awards 251,797 25,000 ( 4,913,000 ) — — — ( 4,888,000 ) Common stock issued for acquisition of CGC Technology Limited ("CGC") 323,504 32,000 11,543,000 — — — 11,575,000 Cash dividends declared, net ($ 0.40 per share) — — — ( 9,794,000 ) — — ( 9,794,000 ) Accrual of dividend equivalents, net of reversal ($ 0.40 per share) — — — ( 294,000 ) — — ( 294,000 ) Net income — — — 7,020,000 — — 7,020,000 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 — — 9,983,000 — — — 9,983,000 Proceeds from issuance of employee stock purchase plan shares 54,762 5,000 804,000 — — — 809,000 Issuance of restricted stock, net of forfeiture 35,495 4,000 ( 4,000 ) — — — — Net settlement of stock-based awards 240,549 24,000 ( 4,024,000 ) — — — ( 4,000,000 ) Common stock issued for acquisition of UHP Networks Inc. ("UHP") 1,026,567 103,000 28,789,000 — — — 28,892,000 Cash dividends declared, net ($ 0.40 per share) — — — ( 10,189,000 ) — — ( 10,189,000 ) Accrual of dividend equivalents, net of reversal ($ 0.40 per share) — — — ( 380,000 ) — — ( 380,000 ) Adoption of current expected credit loss standard — — — ( 215,000 ) — — ( 215,000 ) Net loss — — — ( 73,480,000 ) — — ( 73,480,000 ) Balance as of July 31, 2021 41,281,812 $ 4,128,000 $ 605,439,000 $ 333,001,000 15,033,317 $ ( 441,849,000 ) $ 500,719,000 See accompanying notes to consolidated financial statements. F - 7 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows Fiscal Years Ended July 31, 2021, 2020 and 2019 2021 2020 2019 Cash flows from operating activities: Net (loss) income $ ( 73,480,000 ) 7,020,000 25,041,000 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization of property, plant and equipment 9,379,000 10,561,000 11,927,000 Amortization of intangible assets with finite lives 21,020,000 21,595,000 18,320,000 Amortization of stock-based compensation 9,983,000 9,275,000 11,427,000 Amortization of deferred financing costs 736,000 737,000 1,099,000 Estimated contract settlement costs — 444,000 6,351,000 Write-off of deferred financing costs — — 3,217,000 Settlement of intellectual property litigation — — ( 3,204,000 ) Changes in other liabilities ( 6,633,000 ) ( 4,133,000 ) ( 1,056,000 ) Loss on disposal of property, plant and equipment 215,000 — 144,000 (Benefit from) provision for allowance for doubtful accounts ( 18,000 ) ( 431,000 ) 1,136,000 Provision for excess and obsolete inventory 4,364,000 1,647,000 6,015,000 Deferred income tax (benefit) expense ( 3,263,000 ) 860,000 4,283,000 Other ( 225,000 ) — — Changes in assets and liabilities, net of effects of business acquisitions: Accounts receivable ( 31,223,000 ) 20,929,000 6,315,000 Inventories ( 2,338,000 ) ( 9,132,000 ) ( 3,787,000 ) Prepaid expenses and other current assets ( 265,000 ) ( 2,261,000 ) 915,000 Other assets ( 4,215,000 ) ( 719,000 ) 102,000 Accounts payable 11,016,000 ( 2,206,000 ) ( 21,290,000 ) Accrued expenses and other current liabilities ( 7,886,000 ) 4,292,000 3,554,000 Contract liabilities 25,444,000 ( 6,312,000 ) ( 127,000 ) Other liabilities, non-current 3,583,000 2,422,000 ( 84,000 ) Interest payable 32,000 ( 397,000 ) 151,000 Income taxes payable 3,136,000 ( 1,427,000 ) ( 2,418,000 ) Net cash (used in) provided by operating activities ( 40,638,000 ) 52,764,000 68,031,000 Cash flows from investing activities: Net cash acquired from acquisition of UHP 1,304,000 — — Payment for acquisition of CGC, net of cash acquired ( 750,000 ) ( 11,165,000 ) — Payment for acquisition of Solacom, net of cash acquired — — ( 25,883,000 ) Payment for acquisition of the GD NG-911 business — ( 1,013,000 ) ( 10,000,000 ) Payment for acquisition of NG-911 Inc. — ( 781,000 ) — Purchases of property, plant and equipment ( 16,037,000 ) ( 7,225,000 ) ( 8,785,000 ) Net cash used in investing activities ( 15,483,000 ) ( 20,184,000 ) ( 44,668,000 ) Cash flows from financing activities: Net borrowings (payments) of long-term debt under Credit Facility 51,500,000 ( 15,500,000 ) 165,000,000 Net payments under Revolving Loan portion of Prior Credit Facility — — ( 48,603,000 ) Repayment of debt under Term Loan portion of Prior Credit Facility — — ( 120,121,000 ) Remittance of employees' statutory tax withholding for stock awards ( 2,803,000 ) ( 5,276,000 ) ( 5,042,000 ) Cash dividends paid ( 10,334,000 ) ( 10,020,000 ) ( 9,789,000 ) Repayment of principal amounts under finance lease and other obligations ( 38,000 ) ( 805,000 ) ( 1,906,000 ) Payment of deferred financing costs ( 30,000 ) — ( 1,813,000 ) Proceeds from issuance of employee stock purchase plan shares 809,000 855,000 935,000 Proceeds from exercises of stock options — 468,000 216,000 Payment of shelf registration costs — — ( 148,000 ) Net cash provided by (used in) financing activities 39,104,000 ( 30,278,000 ) ( 21,271,000 ) (Continued) F - 8 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) Fiscal Years Ended July 31, 2021, 2020 and 2019 2021 2020 2019 Net (decrease) increase in cash and cash equivalents $ ( 17,017,000 ) 2,302,000 2,092,000 Cash and cash equivalents at beginning of year 47,878,000 45,576,000 43,484,000 Cash and cash equivalents at end of year $ 30,861,000 47,878,000 45,576,000 Supplemental cash flow disclosure Cash paid (received) during the year for: Interest $ 5,987,000 5,549,000 7,669,000 Income taxes, net $ ( 1,373,000 ) 2,875,000 2,005,000 Non-cash investing and financing activities: Reclass of finance lease right-of-use assets to property, plant and equipment $ — 698,000 — Accrued remittance of employees' statutory tax withholdings for fully-vested share units $ 2,596,000 1,399,000 1,787,000 Cash dividends declared but unpaid (including accrual of dividend equivalents) $ 2,981,000 2,762,000 2,733,000 Accrued additions to property, plant and equipment $ 2,466,000 1,408,000 902,000 Issuance of restricted stock $ 4,000 — 1,000 Common stock issued for acquisitions $ 28,892,000 11,575,000 5,606,000 Fair value of UHP acquisition contingent earn-out consideration $ 8,500,000 — — Accrued deferred financing costs $ 139,000 — — Accruals related to acquisitions $ — 1,157,000 — See accompanying notes to consolidated financial statements. F - 9 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting and Reporting Policies (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of Comtech Telecommunications Corp. and its subsidiaries ("Comtech," "we," "us," or "our"), all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated in consolidation. (b) Nature of Business We design, develop, produce and market innovative products, systems and services for advanced communications solutions. We conduct our business through two reportable operating segments: Commercial Solutions and Government Solutions. Our business is highly competitive and characterized by rapid technological change. Our growth and financial position depends on our ability to keep pace with such changes and developments and to respond to the sophisticated requirements of an increasing variety of secure wireless communications technology users, among other things. Many of our competitors are substantially larger, and have significantly greater financial, marketing and operating resources and broader product lines than our own. A significant technological or sales breakthrough by others, including smaller competitors or new companies, could have a material adverse effect on our business. In addition, certain of our customers have technological capabilities in our product areas and could choose to replace our products with their own. International sales expose us to certain risks, including barriers to trade, fluctuations in foreign currency exchange rates (which may make our products less price competitive), political and economic instability, availability of suitable export financing, export license requirements, tariff regulations, and other United States ("U.S.") and foreign regulations that may apply to the export of our products, as well as the generally greater difficulties of doing business abroad. We attempt to reduce the risk of doing business in foreign countries by seeking contracts denominated in U.S. dollars, advance or milestone payments, credit insurance and irrevocable letters of credit in our favor. On October 4, 2021, we announced that our Board of Directors has appointed Michael D. Porcelain, our President and Chief Operating Officer, to be Chief Executive Officer, taking over from Fred Kornberg after a short transition period. The change of leadership is expected to occur by the end of calendar 2021, at which point Mr. Porcelain will also join our Board of Directors and continue as President. Mr. Kornberg will serve as non-executive Chairman of the Board and is expect to take on a technology advisory role. Costs associated with this leadership transition will be announced once they are finalized. F - 10 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (c) Revenue Recognition In accordance with FASB ASC 606 - Revenue from Contracts with Customers ("ASC 606"), we record revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to customers. Under ASC 606, we follow a five-step model to: (1) identify the contract with our customer; (2) identify our performance obligations in our contract; (3) determine the transaction price for our contract; (4) allocate the transaction price to our performance obligations; and (5) recognize revenue using one of the following two methods: • Over time - We recognize revenue using the over time method when there is a continuous transfer of control to the customer over the contractual period of performance. This generally occurs when we enter into a long-term contract relating to the design, development or manufacture of complex equipment or technology platforms to a buyer’s specification (or to provide services related to the performance of such contracts). Continuous transfer of control is typically supported by contract clauses which allow our customers to unilaterally terminate a contract for convenience, pay for costs incurred plus a reasonable profit and take control of work-in-process. Revenue recognized over time is generally based on the extent of progress toward completion of the related performance obligations. The selection of the method to measure progress requires judgment and is based on the nature of the products or services provided. In certain instances, typically for firm fixed-price contracts, we use the cost-to-cost measure because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion, including warranty costs. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Costs to fulfill generally include direct labor, materials, subcontractor costs, other direct costs and an allocation of indirect costs. When these contracts are modified, the additional goods or services are generally not distinct from those already provided. As a result, these modifications form part of an existing contract and we must update the transaction price and our measure of progress for the single performance obligation and recognize a cumulative catch-up to revenue and gross profits. For over time contracts using a cost-to-cost measure of progress, we have an estimate at completion ("EAC") process in which management reviews the progress and execution of our performance obligations. This EAC process requires management judgment relative to assessing risks, estimating contract revenue and costs, and making assumptions for schedule and technical issues. Since certain contracts extend over a long period of time, the impact of revisions in revenue and or cost estimates during the progress of work may impact current period earnings through a cumulative adjustment. Additionally, if the EAC process indicates a loss, a provision is made for the total anticipated loss in the period that it becomes evident. Contract revenue and cost estimates for significant contracts are generally reviewed and reassessed at least quarterly. The cost-to-cost method is principally used to account for contracts in our Government Solutions segment and, to a lesser extent, certain location-based and messaging infrastructure contracts in our public safety and location technologies product line within our Commercial Solutions segment. For service-based contracts in our public safety and location technologies product line, we also recognize revenue over time. These services are typically recognized as a series of services performed over the contract term using the straight-line method, or based on our customers’ actual usage of the networks and platforms which we provide. • Point in time - When a performance obligation is not satisfied over time, we must record revenue using the point in time accounting method which generally results in revenue being recognized upon shipment or delivery of a promised good or service to a customer. This generally occurs when we enter into short term contracts or purchase orders where items are provided to customers with relatively quick turn-around times. Modifications to such contracts and or purchase orders, which typically provide for additional quantities or services, are accounted for as a new contract because the pricing for these additional quantities or services are based on standalone selling prices. F - 11 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Point in time accounting is principally applied to contracts in our satellite ground station technologies product line (which includes satellite modems, solid-state and traveling wave tube amplifiers) and certain contracts for our solid-state, high-power RF amplifiers in our Government Solutions segment. The contracts related to these product lines do not meet the requirements for over time revenue recognition because our customers cannot utilize the equipment for its intended purpose during any phase of our manufacturing process; customers do not simultaneously receive and or consume the benefits provided by our performance; customers do not control the asset (i.e., prior to delivery, customers cannot direct the use of the asset, sell or exchange the equipment, etc.); and, although many of our contracts have termination for convenience clauses and or an enforceable right to payment for performance completed to date, our performance creates an asset with an alternative use through the point of delivery. In determining that our equipment has alternative use, we considered the underlying manufacturing process for our products. In the early phases of manufacturing, raw materials and work in process (including subassemblies) consist of common parts that are highly fungible among many different types of products and customer applications. Finished products are either configured to our standard configuration or based on our customers’ specifications. Finished products, whether built to our standard specification or to a customers’ specification, can be sold to a variety of customers and across many different end use applications with minimal rework, if needed, and without incurring a significant economic loss. When identifying a contract with our customer, we consider when it has approval and commitment from both parties, if the rights of the parties are identified, if the payment terms are identified, if it has commercial substance and if collectability is probable. When identifying performance obligations, we consider whether there are multiple promises and how to account for them. In our contracts, multiple promises are separated if they are distinct, both individually and in the context of the contract. If multiple promises in a contract are highly interrelated or comprise a series of distinct services performed over time, they are combined into a single performance obligation. In some cases, we may also provide the customer with an additional service-type warranty, which we recognize as a separate performance obligation. Service-type warranties do not represent a significant portion of our consolidated net sales. When service-type warranties represent a separate performance obligation, the revenue is deferred and recognized ratably over the extended warranty period. Our contracts, from time-to-time, may also include options for additional goods and services. To date, these options have not represented material rights to the customer as the pricing for them reflects standalone selling prices. As a result, we do not consider options we offer to be performance obligations for which we must allocate a portion of the transaction price. In many cases, we provide assurance-type warranty coverage for some of our products for a period of at least one year from the date of delivery. When identifying the transaction price, we typically utilize the contract's stated price as a starting point. The transaction price in certain arrangements may include estimated amounts of variable consideration, including award fees, incentive fees or other provisions that can either increase or decrease the transaction price. We estimate variable consideration as the amount to which we expect to be entitled, and we include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the estimation uncertainty is resolved. The estimation of this variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (e.g., historical, current and forecasted) that is reasonably available to us. When allocating the contract’s transaction price, we consider each distinct performance obligation. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. We determine standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions, including geographic or regional specific factors, competitive positioning, internal costs, profit objectives and internally approved pricing guidelines related to the performance obligations. F - 12 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Most of our contracts with customers are denominated in U.S. dollars and typically are either firm fixed-price or cost reimbursable type contracts (including fixed-fee, incentive-fee and time-and-material type contracts). In almost all of our contracts with customers, we are the principal in the arrangement and report revenue on a gross basis. Transaction prices for contracts with U.S. domestic and international customers are usually based on specific negotiations with each customer and in the case of the U.S. government, sometimes based on estimated or actual costs of providing the goods or services in accordance with applicable regulations. Sales by geography and customer type, as a percentage of consolidated net sales, are as follows: Fiscal Years Ended July 31, 2021 2020 2019 United States U.S. government 34.6 % 36.2 % 40.1 % Domestic 41.5 % 40.3 % 34.5 % Total United States 76.1 % 76.5 % 74.6 % International 23.9 % 23.5 % 25.4 % Total 100.0 % 100.0 % 100.0 % Sales to U.S. government customers include sales to the U.S. Department of Defense ("DoD"), intelligence and civilian agencies, as well as sales directly to or through prime contractors. Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. Included in domestic sales are sales to Verizon Communications Inc. ("Verizon"). Sales to Verizon were 10.7 % of consolidated net sales for fiscal 2021. Except for the U.S. government, there were no customers that represented more than 10.0% of consolidated net sales during fiscal 2020 and 2019. International sales for fiscal 2021, 2020 and 2019 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $ 138,942,000 , $ 145,107,000 and $ 170,607,000 , respectively. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented more than 10.0% of consolidated net sales for fiscal 2021, 2020 and 2019. The following tables summarize our disaggregation of revenue consistent with information reviewed by our chief operating decision-maker ("CODM") for the fiscal years ended July 31, 2021, 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: Fiscal Year Ended July 31, 2021 Commercial Solutions Government Solutions Total Geographical region and customer type U.S. government $ 52,976,000 148,105,000 $ 201,081,000 Domestic 210,493,000 31,178,000 241,671,000 Total United States 263,469,000 179,283,000 442,752,000 International 96,677,000 42,266,000 138,943,000 Total $ 360,146,000 221,549,000 $ 581,695,000 Contract type Firm fixed-price $ 357,521,000 141,367,000 $ 498,888,000 Cost reimbursable 2,625,000 80,182,000 82,807,000 Total $ 360,146,000 221,549,000 $ 581,695,000 Transfer of control Point in time $ 141,707,000 94,687,000 $ 236,394,000 Over time 218,439,000 126,862,000 345,301,000 Total $ 360,146,000 221,549,000 $ 581,695,000 F - 13 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Fiscal Year Ended July 31, 2020 Commercial Solutions Government Solutions Total Geographical region and customer type U.S. government $ 52,327,000 171,036,000 $ 223,363,000 Domestic 208,284,000 39,961,000 248,245,000 Total United States 260,611,000 210,997,000 471,608,000 International 93,119,000 51,988,000 145,107,000 Total $ 353,730,000 262,985,000 $ 616,715,000 Contract type Firm fixed-price $ 349,855,000 178,237,000 $ 528,092,000 Cost reimbursable 3,875,000 84,748,000 88,623,000 Total $ 353,730,000 262,985,000 $ 616,715,000 Transfer of control Point in time $ 142,448,000 136,518,000 $ 278,966,000 Over time 211,282,000 126,467,000 337,749,000 Total $ 353,730,000 262,985,000 $ 616,715,000 Fiscal Year Ended July 31, 2019 Commercial Solutions Government Solutions Total Geographical region and customer type U.S. government $ 68,534,000 200,708,000 $ 269,242,000 Domestic 192,516,000 39,432,000 231,948,000 Total United States 261,050,000 240,140,000 501,190,000 International 96,243,000 74,364,000 170,607,000 Total $ 357,293,000 314,504,000 $ 671,797,000 Contract type Firm fixed-price $ 350,850,000 231,400,000 $ 582,250,000 Cost reimbursable 6,443,000 83,104,000 89,547,000 Total $ 357,293,000 314,504,000 $ 671,797,000 Transfer of control Point in time $ 177,090,000 176,067,000 $ 353,157,000 Over time 180,203,000 138,437,000 318,640,000 Total $ 357,293,000 314,504,000 $ 671,797,000 F - 14 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The timing of revenue recognition, billings and collections results in receivables, unbilled receivables and contract liabilities on our 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 fiscal years ended July 31, 2021, 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, $ 34,545,000 and $ 34,225,000 was recognized as revenue during fiscal years 2021 and 2020, respectively. In fiscal 2021 and 2020, contract liabilities increased $ 648,000 and $ 6,890,000 , respectively, due to business combinations discussed in Note (2) - " Acquisitions ." 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 Consolidated Statements of Operations. As for commissions payable to our third-party sales representatives related to large 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 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 July 31, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 658,896,000 (which represents the amount of our consolidated backlog). We estimate that a substantial portion of our remaining performance obligations at July 31, 2021 will be completed and recognized as revenue during the next twenty-four month period, with the rest thereafter. During fiscal 2021, revenue recognized from performance obligations satisfied, or partially satisfied, in previous periods (for example due to changes in the transaction price) was not material. (d) Cash and Cash Equivalents Our cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and have insignificant risk of change in value as a result of changes in interest rates. Our cash and cash equivalents, as of July 31, 2021 and 2020, amounted to $ 30,861,000 and $ 47,878,000 , respectively, and primarily consist of bank deposits and money market deposit accounts insured by the Federal Deposit Insurance Corporation. Cash equivalents are carried at cost, which approximates fair value. F - 15 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (e) Inventories Our inventories are stated at the lower of cost and net realizable value, the latter of which is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Our inventories are reduced to their estimated net realizable value by a charge to cost of sales in the period such excess costs are determined. Our inventories are principally recorded using either average or standard costing methods. Work-in-process (including our contracts-in-progress) and finished goods inventory reflect all accumulated production costs, which are comprised of direct production costs and overhead, and is reduced by amounts recorded in cost of sales as the related revenue is recognized. Indirect costs relating to long-term contracts, which include expenses such as general and administrative, are charged to expense as incurred and are not included in our cost of sales or work-in-process (including our contracts-in-progress) and finished goods inventory. (f) Long-Lived Assets Our machinery and equipment, which are recorded at cost, are depreciated or amortized over their estimated useful lives ( three to eight years ) under the straight-line method. Capitalized values of properties and leasehold improvements under leases are amortized over the life of the lease or the estimated life of the asset, whichever is less. Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. In accordance with FASB ASC 350 " Intangibles - Goodwill and Other " goodwill is not amortized. We periodically, at least on an annual basis in the first quarter of each fiscal year, review goodwill, considering factors such as projected cash flows and revenue and earnings multiples, to determine whether the carrying value of the goodwill is impaired. 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. We define our reporting units to be the same as our operating segments. We performed our annual goodwill impairment assessment for fiscal 2022 on August 1, 2021 (the first day of our fiscal 2022). See Note (13) - " Goodwill " for more information. Unless there are future indicators that the fair value of a reporting unit is more likely than not less than its carrying value, such as a significant adverse change in our future financial performance, our next impairment assessment for goodwill will be performed and completed in the first quarter of fiscal 2023. Any impairment charges that we may record in the future could be material to our results of operations and financial condition. We assess the recoverability of the carrying value of our other long-lived assets, including identifiable intangible assets with finite useful lives, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We evaluate the recoverability of such assets based upon the expectations of undiscounted cash flows from such assets. If the sum of the expected future undiscounted cash flows were less than the carrying amount of the asset, a loss would be recognized for the difference between the fair value and the carrying amount. (g) Research and Development Costs We charge research and development costs to operations as incurred, except in those cases in which such costs are reimbursable under customer funded contracts. In fiscal 2021, 2020 and 2019, we were reimbursed by customers for such activities in the amount of $ 13,635,000 , $ 11,923,000 and $ 14,679,000 , respectively. These amounts are not reflected in the reported research and development expenses in each of the respective periods but are included in net sales with the related costs included in cost of sales in each of the respective periods. F - 16 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (h) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We determine the uncertain tax positions taken or expected to be taken in income tax returns in accordance with the provisions of FASB ASC 740-10-25 " Income Taxes, " which prescribes a two-step evaluation process for tax positions. The first step is recognition based on a determination of whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is to measure a tax position that meets the more-likely-than-not threshold. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. Our policy is to recognize potential interest and penalties related to uncertain tax positions in income tax expense. (i) 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 fiscal years ended July 31, 2021, 2020 and 2019. See Note (15) - " Stockholders’ Equity " for more information. Weighted average stock options, RSUs and restricted stock outstanding of 1,440,000 , 1,348,000 and 1,347,000 shares for fiscal 2021, 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 , 201,000 and 243,000 weighted average performance shares outstanding for fiscal 2021, 2020 and 2019, respectively, as the performance conditions have not yet been satisfied. However, net income (loss) (the numerator) for EPS calculations for each respective period, is reduced by the compensation expense related to these awards. F - 17 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The following table reconciles the numerators and denominators used in the basic and diluted EPS calculations: Fiscal Years Ended July 31, 2021 2020 2019 Numerator: Net (loss) income for basic calculation $ ( 73,480,000 ) 7,020,000 25,041,000 Numerator for diluted calculation $ ( 73,480,000 ) 7,020,000 25,041,000 Denominator: Denominator for basic calculation 25,685,000 24,798,000 24,124,000 Effect of dilutive securities: Stock-based awards — 101,000 178,000 Denominator for diluted calculation 25,685,000 24,899,000 24,302,000 (j) 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 July 31, 2021 and 2020, other than the financial instruments discussed above, we had no other significant assets or liabilities included in our Consolidated Balance Sheets recorded at fair value, as such term is defined by FASB ASC 820. (k) Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management 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 consolidated financial statements and the reported amounts of net sales and expenses during the reported period. We make significant estimates in many areas of our accounting, including but not limited to the following: long-term contracts, stock-based compensation, intangible assets and liabilities including goodwill, provision for excess and obsolete inventory, allowance for doubtful accounts, warranty obligations and income taxes. Actual results may differ from those estimates. (l) Comprehensive Income In accordance with FASB ASC 220 " Comprehensive Income ," we report all changes in equity during a period, except those resulting from investment by owners and distribution to owners, for the period in which they are recognized. Comprehensive income is the total of net income and all other non-owner changes in equity (or other comprehensive income) such as unrealized gains/losses on securities classified as available-for-sale, foreign currency translation adjustments and minimum pension liability adjustments. Comprehensive income was the same as our net income in fiscal 2021, 2020 and 2019. (m) Reclassifications Certain reclassifications have been made to previously reported consolidated financial statements to conform to the fiscal 2021 presentation. F - 18 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (n) Adoption of Accounting Standards and Updates We are required to prepare our 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 fiscal 2021, 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. • 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 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 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 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 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 consolidated financial statements or disclosures. (2) Acquisitions UHP Networks Inc. On March 2, 2021, we completed our acquisition of UHP Networks Inc. ("UHP"), a leading provider of innovative and disruptive satellite ground station technology solutions, pursuant to a stock purchase agreement initially entered into in November 2019 and amended in June 2020 and on March 1, 2021, respectively. With end-markets for high-speed satellite-based networks anticipated to significantly grow, our acquisition allows us to enhance our Commercial Solutions segment's offerings with low cost time division multiple access ("TDMA") satellite modems. F - 19 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The acquisition has a preliminary purchase price for accounting purposes of $ 37,470,000 . Pursuant to the stock purchase agreement, during fiscal 2021, the initial upfront payment of approximately $ 23,979,000 was paid mostly in shares of our common stock, with $ 87,000 paid in cash. In August 2021, $ 3,991,000 of the $ 4,991,000 hold back amount previously placed into escrow at closing was paid to the seller in shares of our Common Stock, as the conditions pursuant to the stock purchase agreement were met. The stock purchase agreement also provides for an earn-out payment of up to $ 9,000,000 , also payable at our option in cash and or shares of our common stock, if specified sales milestones are reached during the eighteen-month period ending September 30, 2022. The preliminary estimated fair value of such contingent earn-out consideration at the acquisition date was $ 8,500,000 . Of the $ 23,979,000 paid at closing, $ 4,560,000 was placed into escrow to be released ratably over three years upon settlement of potential indemnification obligations of the seller. We issued 1,026,567 shares of our common stock at closing, based on a volume weighted average stock price of approximately $ 28.14 per share, in satisfaction of initial payment and escrow arrangements under the terms of the stock purchase agreement. We are accounting for the acquisition under the acquisition method of accounting in accordance with FASB ASC 805, "Business Combinations" ("ASC 805"). The purchase price was allocated to the assets acquired and liabilities assumed, based on their preliminary fair value as of March 2, 2021 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. Our consolidated statements of operations for the fiscal year ended July 31, 2021 include a nominal amount of revenue contribution from the acquisition. Pro forma financial information is not disclosed, as the acquisition is not material. The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed in connection with the acquisition: Purchase Price Allocation (1) Measurement Period Adjustments Purchase Price Allocation (As adjusted) Initial upfront payment $ 23,902,000 $ 77,000 $ 23,979,000 Hold back amount 5,000,000 ( 9,000 ) 4,991,000 Contingent earn-out consideration 8,500,000 — 8,500,000 Preliminary purchase price at fair value $ 37,402,000 $ 68,000 $ 37,470,000 Preliminary allocation of aggregate purchase price: Cash and cash equivalents $ 1,391,000 $ — $ 1,391,000 Current assets 1,235,000 123,000 1,358,000 Property, plant and equipment 10,000 — 10,000 Deferred tax assets 286,000 27,000 313,000 Contract liabilities ( 657,000 ) 9,000 ( 648,000 ) Accrued warranty obligations ( 750,000 ) — ( 750,000 ) Other current liabilities ( 1,166,000 ) ( 9,000 ) ( 1,175,000 ) Non-current liabilities ( 160,000 ) — ( 160,000 ) Net tangible assets at preliminary fair value $ 189,000 150,000 $ 339,000 Identifiable intangibles, deferred taxes and goodwill: Estimated Useful Lives Technology $ 15,300,000 $ — $ 15,300,000 15 years Customer relationships 15,500,000 — 15,500,000 15 years Trade name 800,000 — 800,000 20 years Deferred tax liabilities ( 8,374,000 ) — ( 8,374,000 ) Goodwill 13,987,000 ( 82,000 ) 13,905,000 Indefinite Preliminary allocation of aggregate purchase price $ 37,402,000 $ 68,000 $ 37,470,000 (1) As reported in the Company's Quarterly Report on Form 10-Q for the three and nine months ended April 30, 2021. F - 20 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 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 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. The preliminary estimated fair value of contingent earn-out consideration represents the present value of the estimated amount payable, based on a probability-weighted amount of net sales, as defined, during the earn-out period, which reflects significant management estimates and assumptions using unobservable Level 3 inputs, including: (i) possible outcomes for targeted net sales during the earn-out period; (ii) timing of each possible outcome; (iii) probability of each possible outcome; and (vi) discount rate reflecting the credit risk of the Company. 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 Commercial Solutions segment based on specific identification and is generally not deductible for income tax purposes. 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. The primary areas of the purchase price allocation not yet finalized include the purchase price (due to customary adjustments for potential indemnification obligations of the seller under the stock purchase agreement and contingent earn-out consideration), a final assessment of assets acquired and liabilities assumed, accrued warranty obligations, income taxes and residual goodwill. 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 provider of high precision full motion fixed and mobile X/Y satellite tracking antennas, reflectors, RF feeds, radomes and other ground station equipment around the world. The acquisition had an aggregate purchase price for accounting purposes of $ 23,650,000 , of which $ 12,075,000 was paid in cash and $ 11,575,000 was paid by the issuance of 323,504 shares of our common stock at a volume weighted average stock price of $ 35.78 . The fair value of consideration transferred in connection with this acquisition was $ 23,490,000 , which was net of $ 160,000 of cash acquired. We accounted 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 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. Acquisition Plan Expenses During fiscal 2021, 2020 and 2019, we incurred acquisition plan expenses of $ 100,292,000 , $ 20,754,000 and $ 5,871,000 , respectively. Of the amount recorded in fiscal 2021, $ 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 April 2021 settlement of litigation associated with the 2019 acquisition of GD NG-911 as well as our acquisition of UHP, which closed in March 2021. Additionally, we recorded $ 1,178,000 of incremental interest expenses in fiscal 2021 related to a now terminated financing commitment letter. F - 21 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (3) Accounts Receivable Accounts receivable consist of the following at July 31, 2021 and 2020: 2021 2020 Receivables from commercial and international customers $ 86,890,000 67,109,000 Unbilled receivables from commercial and international customers 36,131,000 21,588,000 Receivables from the U.S. government and its agencies 33,381,000 32,870,000 Unbilled receivables from the U.S. government and its agencies 3,356,000 7,018,000 Total accounts receivable 159,758,000 128,585,000 Less allowance for doubtful accounts 1,648,000 1,769,000 Accounts receivable, net $ 158,110,000 126,816,000 Unbilled receivables as of July 31, 2021 relate to contracts-in-progress for which revenue has been recognized, but for which we have not yet earned the right to bill the customer for work performed to-date. Under ASC 606, unbilled receivables constitute contract assets. Management estimates that a substantial portion of the amounts not yet billed at July 31, 2021 will be billed and collected within one year. As of July 31, 2021, 23.0 %, 12.7 % and 12.1 % of total accounts receivable related to U.S. government and its agencies, AT&T, Inc. and Verizon Communications Inc., respectively. Except for the U.S. government and its agencies, which represented 31.0 %, respectively, no other customers accounted for greater than 10.0% of total accounts receivable as of July 31, 2020. (4) Inventories Inventories consist of the following at July 31, 2021 and 2020: 2021 2020 Raw materials and components $ 62,249,000 59,175,000 Work-in-process and finished goods 38,338,000 42,203,000 Total inventories 100,587,000 101,378,000 Less reserve for excess and obsolete inventories 20,229,000 19,076,000 Inventories, net $ 80,358,000 82,302,000 As of July 31, 2021 and 2020, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $ 7,028,000 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 $ 1,509,000 and $ 1,387,000 , respectively. (5) Property, Plant and Equipment Property, plant and equipment consist of the following at July 31, 2021 and 2020: 2021 2020 Machinery and equipment $ 170,600,000 156,314,000 Leasehold improvements 15,726,000 15,596,000 186,326,000 171,910,000 Less accumulated depreciation and amortization 151,040,000 144,873,000 Property, plant and equipment, net $ 35,286,000 27,037,000 Depreciation and amortization expense on property, plant and equipment amounted to $ 9,343,000 , $ 10,386,000 and $ 11,927,000 for the fiscal years ended July 31, 2021, 2020 and 2019, respectively. F - 22 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (6) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following at July 31, 2021 and 2020: 2021 2020 Accrued wages and benefits $ 26,367,000 20,857,000 Accrued warranty obligations 17,600,000 15,200,000 Accrued contract costs 12,750,000 15,306,000 Accrued acquisition-related costs 9,222,000 7,014,000 Accrued commissions and royalties 5,342,000 4,621,000 Accrued legal costs 2,854,000 2,539,000 Other 15,466,000 19,624,000 Accrued expenses and other current liabilities $ 89,601,000 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 acquisition-related costs as of July 31, 2021 include $ 8,705,000 of contingent earn-out consideration related to our acquisition of UHP. See Note (2) - “ Acquisitions - UHP Networks Inc. ” for further discussion. Accrued warranty obligations as of July 31, 2021 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. Changes in our accrued warranty obligations during the fiscal years ended July 31, 2021 and 2020 were as follows: 2021 2020 Balance at beginning of year $ 15,200,000 15,968,000 Provision for warranty obligations 4,360,000 2,277,000 Additions (in connection with acquisitions) 750,000 1,000,000 Charges incurred ( 2,710,000 ) ( 4,347,000 ) Reclassification of non-current liabilities — 302,000 Balance at end of year $ 17,600,000 15,200,000 (7) 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 . F - 23 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 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 July 31, 2021, the amount outstanding under our Credit Facility was $ 201,000,000 which is reflected in the non-current portion of long-term debt on our Consolidated Balance Sheet. At July 31, 2021, we had $ 1,503,000 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 fiscal year ended July 31, 2021, we had outstanding balances under the Credit Facility ranging from $ 125,000,000 to $ 219,000,000 . As of July 31, 2021, total net deferred financing costs related to the Credit Facility were $ 1,824,000 and are being amortized over the term of our Credit Facility through October 31, 2023. In fiscal 2019, we wrote off $ 3,217,000 of deferred financing costs primarily related to the Term Loan Facility of our Prior Credit Facility. Interest expense related to our Credit Facility, including amortization of deferred financing costs, recorded during the fiscal years ended July 31, 2021, 2020 and 2019 was $ 5,628,000 , $ 5,905,000 and $ 8,859,000 , respectively. The amount for the fiscal year ended July 31, 2019 relates to both our Prior Credit Facility and our existing Credit Facility. Our blended interest rate approximated 2.84 %, 3.87 % and 5.25 %, respectively, for fiscal 2021, 2020 and 2019. 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 July 31, 2021, our Secured Leverage Ratio was 2.53 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 July 31, 2021 was 13.05 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 and foreign subsidiaries (the "Guarantors"). As collateral security under the Credit Facility and the guarantees thereof, we and the Guarantors have granted to the administrative agent, for the benefit of the lenders, a lien on, and first priority security interest in, substantially all of our tangible and intangible assets. F - 24 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued On December 6, 2018, we entered into an amendment to the Credit Facility 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. On January 14, 2021, we entered into a further amendment of the Credit Facility to update the LIBO Rate replacement mechanism language and other definitional items. On July 30, 2021, we entered into an amendment to incorporate certain foreign subsidiaries as loan parties and Guarantors into the Credit Facility and added certain definitional items. 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. (8) 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 July 31, 2021, 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. F - 25 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The components of lease expense are as follows: Fiscal years ended July 31, 2021 2020 Finance lease expense: Amortization of ROU assets $ 36,000 $ 175,000 Interest on lease liabilities 3,000 4,000 Operating lease expense 12,152,000 10,728,000 Short-term lease expense 819,000 3,045,000 Variable lease expense 4,523,000 4,033,000 Sublease income ( 67,000 ) ( 22,000 ) Total lease expense $ 17,466,000 $ 17,963,000 Additional information related to leases is as follows: Fiscal years ended July 31, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating leases - Operating cash outflows $ 10,868,000 $ 11,437,000 Finance leases - Operating cash outflows 3,000 4,000 Finance leases - Financing cash outflows 38,000 322,000 ROU assets obtained in the exchange for lease liabilities (non-cash): Operating leases $ 24,987,000 $ 3,561,000 The following table is a reconciliation of future cash flows relating to operating and financing lease liabilities presented on our Consolidated Balance Sheet as of July 31, 2021: Operating Finance Total Fiscal 2022 $ 10,376,000 $ 32,000 $ 10,408,000 Fiscal 2023 8,029,000 3,000 8,032,000 Fiscal 2024 6,657,000 — 6,657,000 Fiscal 2025 6,123,000 — 6,123,000 Fiscal 2026 4,675,000 — 4,675,000 Thereafter 20,810,000 — 20,810,000 Total future undiscounted cash flows 56,670,000 35,000 56,705,000 Less: Present value discount 8,260,000 1,000 8,261,000 Lease liabilities $ 48,410,000 $ 34,000 $ 48,444,000 Weighted-average remaining lease terms (in years) 8.89 1.49 Weighted-average discount rate 3.52 % 7.37 % F - 26 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued In fiscal 2021, we commenced a 15 -year operating lease for a facility in Chandler, Arizona and a 10 -year operating lease for a facility in the United Kingdom. Accordingly, amounts related to both leases are reflected as an operating lease right-of-use asset or related operating lease liability in our Consolidated Balance Sheet as of July 31, 2021. We lease our Melville, New York production facility from a partnership controlled by our CEO and Chairman. Lease payments made during the fiscal year ended July 31, 2021 and 2020 were $ 660,000 and $ 649,000 , respectively. The current lease provides for our use of the premises as they exist through December 2031. The annual rent of the facility for calendar year 2022 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. As of July 31, 2021, we do not have any rental commitments that have not commenced. (9) Income Taxes (Loss) income before (benefit from) provision for income taxes consists of the following: Fiscal Years Ended July 31, 2021 2020 2019 U.S. $ ( 73,153,000 ) 7,226,000 28,813,000 Foreign ( 1,827,000 ) 2,084,000 97,000 $ ( 74,980,000 ) 9,310,000 28,910,000 The (benefit from) provision for income taxes included in the accompanying Consolidated Statements of Operations consists of the following: Fiscal Years Ended July 31, 2021 2020 2019 Federal – current $ 608,000 1,053,000 ( 2,190,000 ) Federal – deferred ( 877,000 ) 721,000 4,782,000 State and local – current 466,000 1,137,000 1,715,000 State and local – deferred ( 598,000 ) ( 1,312,000 ) ( 321,000 ) Foreign – current 688,000 298,000 62,000 Foreign – deferred ( 1,787,000 ) 393,000 ( 179,000 ) (Benefit from) provision for income taxes $ ( 1,500,000 ) 2,290,000 3,869,000 F - 27 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The (benefit from) provision for income taxes differed from the amounts computed by applying the U.S. Federal income tax rate as a result of the following: Fiscal Years Ended July 31, 2021 2020 2019 Amount Rate Amount Rate Amount Rate Computed "expected" tax expense (benefit) $ ( 15,746,000 ) 21.0 % 1,955,000 21.0 % 6,071,000 21.0 % Increase (reduction) in income taxes resulting from: State and local income taxes, net of federal benefit ( 1,371,000 ) 1.8 ( 278,000 ) ( 3.0 ) 967,000 3.3 Stock-based compensation ( 20,000 ) — 308,000 3.3 ( 44,000 ) ( 0.1 ) Research and experimentation credits ( 1,018,000 ) 1.4 ( 1,210,000 ) ( 13.0 ) ( 1,129,000 ) ( 3.9 ) Foreign-derived intangible income deduction 164,000 ( 0.2 ) ( 162,000 ) ( 1.7 ) ( 632,000 ) ( 2.2 ) Nondeductible transaction costs 402,000 ( 0.5 ) 301,000 3.2 394,000 1.4 Nondeductible executive compensation 628,000 ( 0.8 ) 595,000 6.4 330,000 1.1 Fines and penalties — — 189,000 2.0 2,000 — Audit settlements 6,000 — 1,000 — ( 2,081,000 ) ( 7.2 ) Change in the beginning of the year valuation allowance for deferred tax assets ( 805,000 ) 1.1 — — — — Change in valuation allowance 15,582,000 ( 20.8 ) — — — — Remeasurement of deferred taxes ( 224,000 ) 0.3 ( 135,000 ) ( 1.5 ) — — Foreign income taxes 676,000 ( 0.9 ) 453,000 4.9 5,000 — Other, net 226,000 ( 0.4 ) 273,000 3.0 ( 14,000 ) — (Benefit from) provision for income taxes $ ( 1,500,000 ) 2.0 % 2,290,000 24.6 % 3,869,000 13.4 % F - 28 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at July 31, 2021 and 2020 are presented below: 2021 2020 Deferred tax assets: Inventory and warranty reserves $ 6,774,000 5,786,000 Compensation and commissions 4,338,000 3,210,000 Federal, state and foreign research and experimentation credits 19,324,000 19,656,000 Stock-based compensation 4,979,000 4,955,000 Foreign scientific research and experimental development expenditures 1,496,000 1,765,000 Federal, state and foreign net operating losses 5,413,000 3,942,000 Federal and state capital losses 15,582,000 28,000 Lease liabilities 10,980,000 7,335,000 Other 4,550,000 6,572,000 Less: valuation allowance ( 28,384,000 ) ( 11,471,000 ) Total deferred tax assets 45,052,000 41,778,000 Deferred tax liabilities: Plant and equipment ( 1,146,000 ) ( 801,000 ) Lease right-of-use assets ( 10,085,000 ) ( 7,080,000 ) Intangibles ( 54,635,000 ) ( 50,368,000 ) Total deferred tax liabilities ( 65,866,000 ) ( 58,249,000 ) Net deferred tax liabilities $ ( 20,814,000 ) ( 16,471,000 ) At July 31, 2021, our net deferred tax liability of $ 20,814,000 includes $ 416,000 of foreign net deferred tax assets that were recorded as other assets, net in our Consolidated Balance Sheets. At July 31, 2020, our net deferred tax liability of $ 16,471,000 includes $ 1,166,000 of foreign net deferred tax assets that were recorded as other assets, net in our Consolidated Balance Sheets. We provide for income taxes under the provisions of ASC 740 which requires an asset and liability based approach in accounting for income taxes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of them will not be realized. If management determines that it is more likely than not that some or all of its deferred tax assets will not be realized, a valuation allowance will be recorded against such deferred tax assets. At July 31, 2021, we have federal research and experimentation credits of $ 9,471,000 that will begin to expire in 2028. The timing and manner in which we may utilize tax credits in future tax years will be limited by the amounts and timing of future taxable income and by the application of the ownership change rules under Section 383 of the Internal Revenue Code. F - 29 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued We have state net operating loss carryforwards available of $ 3,267,000 , which expire through 2040, utilization of which will be limited by the amounts and timing of future taxable income and by the application of the ownership change rules under Section 382 of the Internal Revenue Code. We believe that it is more likely than not that the benefit from certain state net operating loss carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $ 3,178,000 on the deferred tax assets relating to these state net operating loss carryforwards. We have state research and experimentation credit carryforwards of $ 8,038,000 , which expire through 2040. We believe that it is more likely than not that the benefit from certain state research and experimentation credits will not be realized. In recognition of this risk, we have provided a valuation allowance of $ 7,451,000 on the deferred tax assets relating to these state credits. We have federal and state capital loss carryforwards of $ 15,582,000 , which begin to expire in 2026. We believe that it is more likely than not that the benefit from these capital losses will not be realized. In recognition of this risk, we have provided a valuation allowance of $ 15,582,000 on the deferred tax assets relating to these capital losses. At July 31, 2021, we had foreign deferred tax assets relating to net operating loss carryforwards of $ 2,116,000 , which will begin to expire in 2032. We believe that it is more likely than not that certain net operating loss carryforwards may not be realized. In recognition of this risk, we have provided a valuation allowance of $ 656,000 on the deferred tax assets relating to these net operating loss carryforwards. We have foreign deferred tax assets relating to research and experimentation credits of $ 1,814,000 , which will begin to expire in 2024. Our foreign earnings and profits are insignificant and, as such, we have not recorded any deferred tax liability on unremitted foreign earnings. We must generate $ 193,800,000 of taxable income in the future to fully utilize our net deferred tax assets as of July 31, 2021. Management believes it is more likely than not that the results of future operations will generate sufficient taxable income to realize the net deferred tax assets. At July 31, 2021 and 2020, total unrecognized tax benefits were $ 9,172,000 and $ 8,345,000 , respectively, including interest of $ 163,000 and $ 75,000 , respectively. At July 31, 2021 and 2020, $ 2,717,000 and 1,963,000 , respectively, of our unrecognized tax benefits were recorded as non-current income taxes payable on our Consolidated Balance Sheets. The remaining unrecognized tax benefits of $ 6,455,000 and $ 6,382,000 at July 31, 2021 and 2020, respectively, were presented as an offset to the associated non-current deferred tax assets on our Consolidated Balance Sheets. Of the total unrecognized tax benefits, $ 8,408,000 and $ 7,700,000 at July 31, 2021 and 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 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 policy is to recognize potential interest and penalties relating to uncertain tax positions in income tax expense. The following table summarizes the activity related to our unrecognized tax benefits for fiscal years 2021, 2020 and 2019 (excluding interest): 2021 2020 2019 Balance at beginning of period $ 8,270,000 7,203,000 9,137,000 Increase related to current period 528,000 684,000 893,000 Increase related to prior periods 338,000 464,000 17,000 Expiration of statute of limitations ( 48,000 ) ( 73,000 ) ( 394,000 ) Decrease related to prior periods ( 79,000 ) ( 8,000 ) ( 2,450,000 ) Balance at end of period $ 9,009,000 8,270,000 7,203,000 Our U.S. federal income tax returns for fiscal 2018 through 2020 are subject to potential future Internal Revenue Service ("IRS") audit. None of our state income tax returns prior to fiscal 2017 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition. F - 30 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (10) Stock-Based Compensation Overview We issue stock-based awards to certain of our employees and our Board of Directors pursuant to our 2000 Stock Incentive Plan, as amended and/or restated from time to time (the "Plan") and our 2001 Employee Stock Purchase Plan, as amended and/or restated from time to time (the "ESPP"), and recognize related stock-based compensation in our 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 July 31, 2021, the aggregate number of shares of common stock which may be issued, pursuant to the Plan, may not exceed 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 July 31, 2021, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of 9,350,696 shares (net of 4,716,649 expired and canceled awards), of which an aggregate of 7,208,891 have been exercised or settled. As of July 31, 2021, the following stock-based awards, by award type, were outstanding: July 31, 2021 Stock options 1,073,435 Performance shares 236,464 RSUs and restricted stock 568,399 Share units 263,507 Total 2,141,805 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 July 31, 2021, we have cumulatively issued 894,771 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 Consolidated Statements of Operations: Fiscal Years Ended July 31, 2021 2020 2019 Cost of sales $ 929,000 823,000 1,047,000 Selling, general and administrative expenses 8,091,000 7,527,000 9,336,000 Research and development expenses 963,000 925,000 1,044,000 Stock-based compensation expense before income tax benefit 9,983,000 9,275,000 11,427,000 Estimated income tax benefit ( 2,164,000 ) ( 2,042,000 ) ( 2,553,000 ) Net stock-based compensation expense $ 7,819,000 7,233,000 8,874,000 F - 31 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 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 July 31, 2021, unrecognized stock-based compensation of $ 9,625,000 , net of estimated forfeitures of $ 1,040,000 , is expected to be recognized over a weighted average period of 3.0 years. Total stock-based compensation capitalized and included in ending inventory at both July 31, 2021 and 2020 was $ 48,000 . There are no liability-classified stock-based awards outstanding as of July 31, 2021 or 2020. Stock-based compensation expense (benefit), by award type, is summarized as follows: Fiscal Years Ended July 31, 2021 2020 2019 Stock options $ 370,000 442,000 739,000 Performance shares 1,345,000 1,491,000 1,554,000 RSUs and restricted stock 2,985,000 2,543,000 2,149,000 ESPP 208,000 222,000 215,000 Share units 5,075,000 4,577,000 6,770,000 Stock-based compensation expense before income tax benefit 9,983,000 9,275,000 11,427,000 Estimated income tax benefit ( 2,164,000 ) ( 2,042,000 ) ( 2,553,000 ) Net stock-based compensation expense $ 7,819,000 7,233,000 8,874,000 ESPP stock-based compensation expense primarily relates to the 15 % discount offered to participants in the ESPP. During the fiscal years ended July 31, 2021, 2020 and 2019 we recorded benefits of $ 616,000 , $ 310,000 and $ 130,000 respectively, which primarily represents the recoupment of certain share units. 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 Consolidated Balance Sheet as of July 31, 2021 and 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. F - 32 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 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, 2018 1,668,975 $ 28.72 Expired/canceled ( 32,490 ) 30.11 Exercised ( 80,930 ) 28.18 Outstanding at July 31, 2019 1,555,555 28.72 Granted 327,100 17.88 Expired/canceled ( 174,840 ) 29.06 Exercised ( 285,790 ) 28.82 Outstanding at July 31, 2020 1,422,025 26.17 Expired/canceled ( 348,590 ) 27.44 Outstanding at July 31, 2021 1,073,435 $ 25.76 4.31 $ 2,178,000 Exercisable at July 31, 2021 835,755 $ 28.00 3.03 $ 492,000 Vested and expected to vest at July 31, 2021 1,060,830 $ 25.85 4.26 $ 2,088,000 Stock options outstanding as of July 31, 2021 have exercise prices ranging from $ 17.88 - $ 33.94 , representing the fair market value of our common stock on the date of grant, a contractual term of ten years and a vesting period of five years . The total intrinsic value relating to stock options exercised during the fiscal years ended July 31 2020 and 2019 was $ 1,869,000 and $ 576,000 , respectively. There were no stock options exercised during the fiscal year ended July 31, 2021. During fiscal 2020 and 2019, at the election of certain holders of vested stock options, 269,090 and 72,830 , respectively, of stock options were net settled upon exercise. As a result, 27,994 and 9,345 shares of our common stock were issued during the fiscal years ended July 31, 2020 and 2019, respectively, net of shares retained to satisfy the exercise price and minimum statutory tax withholding requirements. There were no stock options granted during fiscal years ended July 31, 2021 or 2019. The estimated per-share weighted average grant-date fair value of stock options granted during fiscal 2020 was $ 5.52 , which was determined using the Black-Scholes option pricing model, and included weighted average assumptions as follows: (i) expected dividend yield of 2.24 %, (ii) expected volatility of 40.03 %, (iii) risk-free interest rate of 0.54 %, and (iv) expected life of 6.5 years. Expected dividend yield is the expected annual dividend as a percentage of the fair market value of our common stock on the date of grant, based on our Board's annual dividend target at the time of grant. We estimate expected volatility by considering the historical volatility of our stock and the implied volatility of publicly-traded call options on our stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for an instrument which closely approximates the expected term. The expected term is the number of years we estimate that awards will be outstanding prior to exercise and is determined by employee groups with sufficiently distinct behavior patterns. Assumptions used in computing the fair value of stock-based awards reflect our best estimates, but involve uncertainties relating to market and other conditions, many of which are outside of our control. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by recipients of stock-based awards. F - 33 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 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, 2018 818,438 $ 19.78 Granted 442,363 29.76 Settled ( 275,619 ) 26.05 Canceled/Forfeited ( 30,506 ) 25.52 Outstanding at July 31, 2019 954,676 22.40 Granted 560,361 19.93 Settled ( 431,581 ) 22.02 Canceled/Forfeited ( 83,882 ) 22.84 Outstanding at July 31, 2020 999,574 21.15 Granted 644,272 19.06 Settled ( 455,564 ) 17.09 Canceled/Forfeited ( 119,912 ) 18.42 Outstanding at July 31, 2021 1,068,370 $ 21.93 $ 26,677,000 Vested at July 31, 2021 373,522 $ 21.84 $ 9,327,000 Vested and expected to vest at July 31, 2021 1,023,923 $ 21.93 $ 25,567,000 The total intrinsic value relating to fully-vested awards settled during the fiscal years ended July 31, 2021, 2020 and 2019 was $ 9,878,000 , $ 9,635,000 and $ 8,772,000 respectively. The performance shares granted to employees principally vest over a three-year performance period, if pre-established performance goals are attained, or as specified pursuant to the Plan and related agreements. As of July 31, 2021, the number of outstanding performance shares included in the above table, and the related compensation expense prior to consideration of estimated pre-vesting forfeitures, assume achievement of the pre-established goals at a target level. RSUs and restricted stock granted to non-employee directors prior to 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. On July 31, 2021, 253,257 fully vested share units were granted to certain employees in lieu of fiscal 2021 non-equity incentive compensation. Also, on July 31, 2021, 266,354 fully vested share units (previously granted in lieu of fiscal 2020 non-equity incentive compensation) were settled by delivery of 98,502 shares of our common stock after reduction of share units retained to satisfy employees’ statutory tax withholding requirements. Cumulatively, through July 31, 2021, 949,357 share units granted have been settled. F - 34 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 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 fiscal 2021, 2020 and 2019, we accrued $ 380,000 , $ 294,000 and $ 327,000 , respectively, of dividend equivalents (net of forfeitures) and paid out $ 279,000 , $ 288,000 and $ 263,000 , respectively. Accrued dividend equivalents were recorded as a reduction to retained earnings. As of July 31, 2021 and 2020, accrued dividend equivalents were $ 884,000 and $ 783,000 , respectively. With respect to the actual settlement of stock-based awards for income tax reporting, during the fiscal year ended July 31, 2021, we recorded an income tax benefit of $ 142,000 , and during the fiscal years ended July 31, 2020 and 2019 we recorded an income tax expense of $ 224,000 and an income tax benefit of $ 479,000 , respectively. Subsequent Events In the first quarter of fiscal 2022, our Board of Directors authorized the issuance of stock-based awards with a total unrecognized compensation expense, net of estimated forfeitures, of approximately $ 6,185,000 . (11) 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. We manage our business through the following reportable operating segments: 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, 911 call handling 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 tactical satellite-based networks and ongoing support for complicated communications networks, 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. 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, restructuring costs, COVID-19 related costs, strategic emerging technology costs (for next-generation satellite technology), facility exit costs, strategic alternatives expenses, proxy solicitation related costs and other. These items, while periodically affecting our results, may vary significantly from period to period and may have a disproportionate effect in a given period, thereby affecting the comparability of results. Any amounts shown in the Adjusted EBITDA calculation for our 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. F - 35 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Operating segment information, along with a reconciliation of segment net income (loss) and consolidated net income to Adjusted EBITDA is presented in the tables below: Fiscal Year Ended July 31, 2021 Commercial Solutions Government Solutions Unallocated Total Net sales $ 360,146,000 221,549,000 — $ 581,695,000 Operating income (loss) $ 41,064,000 8,402,000 ( 117,764,000 ) $ ( 68,298,000 ) Net income (loss) $ 39,200,000 9,553,000 ( 122,233,000 ) $ ( 73,480,000 ) Provision for (benefit from) income taxes 1,794,000 ( 1,376,000 ) ( 1,918,000 ) ( 1,500,000 ) Interest (income) and other 68,000 161,000 ( 368,000 ) ( 139,000 ) Interest expense 2,000 64,000 6,755,000 6,821,000 Amortization of stock-based compensation — — 9,983,000 9,983,000 Amortization of intangibles 17,054,000 3,966,000 — 21,020,000 Depreciation 7,451,000 1,586,000 342,000 9,379,000 Acquisition plan expenses ( 1,052,000 ) — 101,344,000 100,292,000 Restructuring costs 1,804,000 978,000 — 2,782,000 COVID-19 related costs — 1,046,000 — 1,046,000 Strategic emerging technology costs — 315,000 — 315,000 Adjusted EBITDA $ 66,321,000 16,293,000 ( 6,095,000 ) $ 76,519,000 Purchases of property, plant and equipment $ 10,899,000 5,055,000 83,000 $ 16,037,000 Long-lived assets acquired in connection with acquisitions $ 45,515,000 2,443,000 — $ 47,958,000 Total assets at July 31, 2021 $ 738,095,000 232,763,000 22,253,000 $ 993,111,000 Fiscal Year Ended July 31, 2020 Commercial Solutions Government Solutions Unallocated Total Net sales $ 353,730,000 262,985,000 — $ 616,715,000 Operating income (loss) $ 34,820,000 19,988,000 ( 39,634,000 ) $ 15,174,000 Net income (loss) $ 34,414,000 20,232,000 ( 47,626,000 ) $ 7,020,000 Provision for (benefit from) income taxes 410,000 ( 100,000 ) 1,980,000 2,290,000 Interest (income) and other ( 31,000 ) ( 169,000 ) 10,000 ( 190,000 ) Interest expense 27,000 25,000 6,002,000 6,054,000 Amortization of stock-based compensation — — 9,275,000 9,275,000 Amortization of intangibles 17,325,000 4,270,000 — 21,595,000 Depreciation 8,347,000 1,446,000 768,000 10,561,000 Estimated contract settlement costs 444,000 — — 444,000 Acquisition plan expenses 751,000 — 20,003,000 20,754,000 Adjusted EBITDA $ 61,687,000 $ 25,704,000 $ ( 9,588,000 ) $ 77,803,000 Purchases of property, plant and equipment $ 5,281,000 1,617,000 327,000 $ 7,225,000 Long-lived assets acquired in connection with acquisitions $ 6,060,000 32,391,000 — $ 38,451,000 Total assets at July 31, 2020 $ 647,964,000 232,052,000 49,631,000 $ 929,647,000 F - 36 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Fiscal Year Ended July 31, 2019 Commercial Solutions Government Solutions Unallocated Total Net sales $ 357,293,000 314,504,000 — $ 671,797,000 Operating income (loss) $ 36,053,000 28,997,000 ( 23,643,000 ) $ 41,407,000 Net income (loss) $ 35,888,000 29,029,000 ( 39,876,000 ) $ 25,041,000 Provision for income taxes 19,000 — 3,850,000 3,869,000 Interest (income) and other 75,000 ( 41,000 ) 1,000 35,000 Write-off of deferred financing costs — — 3,217,000 3,217,000 Interest expense 71,000 9,000 9,165,000 9,245,000 Amortization of stock-based compensation — — 11,427,000 11,427,000 Amortization of intangibles 14,944,000 3,376,000 — 18,320,000 Depreciation 9,265,000 1,891,000 771,000 11,927,000 Estimated contract settlement costs 6,351,000 — — 6,351,000 Settlement of intellectual property litigation — — ( 3,204,000 ) ( 3,204,000 ) Acquisition plan expenses — — 5,871,000 5,871,000 Facility exit costs — 1,373,000 — 1,373,000 Adjusted EBITDA $ 66,613,000 35,637,000 ( 8,778,000 ) $ 93,472,000 Purchases of property, plant and equipment $ 6,293,000 1,902,000 590,000 $ 8,785,000 Long-lived assets acquired in connection with acquisitions $ 60,693,000 — — $ 60,693,000 Total assets at July 31, 2019 $ 662,580,000 186,438,000 38,693,000 $ 887,711,000 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 fiscal 2021, 2020 and 2019, we recorded $ 100,292,000 , $ 20,754,000 and $ 5,871,000 of acquisition plan expenses, respectively, most of which were recorded primarily in our unallocated expenses. See Note (2) -" Acquisitions " for further information. In addition, offsetting unallocated expenses in fiscal 2019 is a $ 3,204,000 benefit as a result of a favorable ruling issued by the U.S. Court of Appeals for the Federal Circuit related to a legacy TCS intellectual property matter. During fiscal 2021, our Commercial Solutions segment recorded $ 1,804,000 of restructuring costs incurred to shift production of our key satellite earth station products to a new 146,000 square foot facility in Chandler, Arizona. There were no such charges recorded in fiscal 2020 or 2019. During fiscal 2021, our Government Solutions segment recorded $ 978,000 of restructuring costs incurred to consolidate certain administrative and operating functions in our tactical communications technologies product line. In addition, during fiscal 2021, this segment also recorded $ 1,046,000 of incremental operating costs related to our antenna facility located in the United Kingdom due to the impact of the COVID-19 pandemic, which resulted in a temporary but complete shut-down of this facility. There were no such charges recorded in fiscal 2020 or 2019. Interest expense in the tables above primarily relates to our Credit Facility, and includes the amortization of deferred financing costs. See Note (7) - " Credit Facility " for further discussion. In addition, interest expense for fiscal 2021 includes $ 1,178,000 of incremental interest expense related to a now terminated financing commitment letter, as discussed in more detail in Note (2) - " Acquisitions ." During fiscal 2019, we recorded a $ 3,217,000 loss from the write-off of deferred financing costs primarily related to the Term Loan Facility portion of our Prior Credit Facility. See Note (7) - " Credit Facility " for further discussion. F - 37 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Intersegment sales in fiscal 2021, 2020 and 2019 by the Commercial Solutions segment to the Government Solutions segment were $ 3,481,000 , $ 9,837,000 and $ 17,371,000 , respectively. There were nominal sales by the Government Solutions segment to the Commercial Solutions segment for these fiscal periods. All intersegment sales are eliminated in consolidation and are excluded from the tables above. Unallocated assets at July 31, 2021 consist principally of cash and cash equivalents, income taxes receivable, corporate property, plant and equipment and deferred financing costs. The large majority of our long-lived assets are located in the U.S. (12) Commitments and Contingencies (a) Legal Proceedings and Other Matters April 2021 Settlement of Litigation Related to the 2019 Acquisition of GD NG-911 In April 2021, we fully and finally settled two related lawsuits with a former employee and Motorola Solutions, Inc. ("Motorola"), and the cases were dismissed with the Court's approval. The resolution of this litigation, which related to our 2019 acquisition of GD NG-911, did not have a material negative impact on our consolidated results of operations, cash flows, or financial position. Other Matters In March 2021, Comtech Xicom Technology, Inc. (“Xicom”) reached an agreement with the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) resolving a previously disclosed matter pending since 2017, which we made a voluntarily disclosure to the U.S. Department of Commerce Office of Export Enforcement (“OEE”). Based on our own audit of approximately 7,800 transactions, it was determined that for three (3) separate transactions between December 2015 and March 2017, Xicom engaged in conduct prohibited by the Export Administration Regulations (the “Regulations”) when it exported items subject to the Regulations from the United States to Russia, the United Arab Emirates, and Brazil without obtaining the necessary BIS authorizations required for exports to each of these countries. The exports were valued at $ 154,000 . Upon discovery of this issue, we implemented additional controls and procedures and increased awareness of these specific export requirements throughout Comtech to help avoid similar occurrences in the future. Pursuant to the agreement with BIS, Xicom made a payment to BIS of $ 122,000 in April 2021. No other actions are to be taken by BIS or required of Xicom or Comtech in connection with this matter and we now considered the matter closed. 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. (b) Employment Change of Control and Indemnification Agreements We have an employment agreement with our CEO and Chairman. The employment agreement generally provides for an annual salary and bonus award. We have also entered into change of control agreements with certain of our executive officers and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of our Company or termination of the employee. F - 38 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (13) Goodwill The following table represents goodwill by reportable operating segment, including the changes in the net carrying value of goodwill as of July 31, 2021: Commercial Solutions Government Solutions Total Balance as of July 31, 2020 $ 255,432,000 75,087,000 $ 330,519,000 Changes related to CGC acquisition — 2,222,000 2,222,000 Changes related to Solacom Technologies Inc. ("Solacom") 1,052,000 — 1,052,000 UHP acquisition 13,905,000 — 13,905,000 Balance as of July 31, 2021 $ 270,389,000 77,309,000 $ 347,698,000 During fiscal 2021, 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, 2021 (the first day of our fiscal 2022), 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, 2021 total public market capitalization and assessed implied control premiums based on our common stock price of $ 24.97 as of August 1, 2021. 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 22.7 % and 94.1 %, 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. It is possible that, during fiscal 2022 or beyond, business conditions (both in the U.S. and internationally) could deteriorate from the current state, our current or prospective customers could materially postpone, reduce or even forgo purchases of our products and services to a greater extent than we currently anticipate, or our common stock price could fluctuate. Such fluctuation could be caused by uncertainty about the severity and length of the COVID-19 pandemic, and its impact on global activity. F - 39 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued 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 2022 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, 2022 (the start of our fiscal 2023). 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. (14) Intangible Assets Intangible assets with finite lives as of July 31, 2021 and 2020 are as follows: July 31, 2021 Weighted Average Amortization Period Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships 20.2 $ 302,058,000 93,215,000 $ 208,843,000 Technologies 14.8 114,949,000 70,924,000 44,025,000 Trademarks and other 16.7 32,926,000 17,095,000 15,831,000 Total $ 449,933,000 181,234,000 $ 268,699,000 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 fiscal years ended July 31, 2021, 2020 and 2019 was $ 21,020,000 , $ 21,595,000 and $ 18,320,000 , respectively. The estimated amortization expense consists of the following for the fiscal years ending July 31: 2022 $ 21,781,000 2023 21,781,000 2024 21,154,000 2025 21,041,000 2026 19,888,000 We review net intangible assets with finite lives for impairment when an event occurs indicating the potential for impairment. Based on our last assessment, we believe that the carrying values of our net intangible assets were recoverable as of July 31, 2021. However, if business conditions deteriorate, we may be required to record impairment losses, and or increase the amortization of intangibles in the future. Any impairment charges that we may record in the future could be material to our results of operations and financial condition. F - 40 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (15) 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. On March 3, 2021, in connection with our acquisition of UHP, we filed a shelf registration statement with the SEC for the sale by the selling stockholder of UHP of up to 1,381,567 shares of our common stock. See Note (2) - " Acquisitions - UHP Networks Inc. " for further information. 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 fiscal years ended July 31, 2021 or 2020. 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, December 9, 2020, March 11, 2021 and June 8, 2021, our Board of Directors declared a dividend of $ 0.10 per common share, which were paid on October 27, 2020, February 19, 2021, May 21, 2021 and August 20, 2021, respectively. On October 4, 2021, our Board of Directors declared a dividend of $ 0.10 per common share, payable on November 12, 2021 to stockholders of record at the close of business on October 13, 2021. Future Common Stock dividends remain subject to compliance with financial covenants under our Credit Facility, as well as Board approval. F - 41 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (16) Unaudited Quarterly Financial Data The following is a summary of unaudited quarterly operating results: Fiscal 2021 First Quarter Second Quarter Third Quarter Fourth Quarter Total Net sales $ 135,218,000 161,292,000 139,376,000 145,809,000 $ 581,695,000 Gross profit 50,208,000 55,680,000 53,016,000 55,054,000 213,958,000 Net (loss) income ( 85,840,000 ) 4,205,000 792,000 7,363,000 ( 73,480,000 ) Diluted (loss) income per share ( 3.39 ) 0.17 0.03 0.28 ( 2.86 ) * Fiscal 2020 First Quarter Second Quarter Third Quarter Fourth Quarter Total Net sales $ 170,267,000 161,654,000 135,121,000 149,673,000 $ 616,715,000 Gross profit 63,567,000 60,602,000 53,001,000 49,663,000 226,833,000 Net income (loss) 6,388,000 3,495,000 ( 3,989,000 ) 1,126,000 7,020,000 Diluted income (loss) per share 0.26 0.14 ( 0.16 ) 0.04 0.28 * Fiscal 2019 First Quarter Second Quarter Third Quarter Fourth Quarter Total Net sales $ 160,844,000 164,133,000 170,448,000 176,372,000 $ 671,797,000 Gross profit 57,769,000 61,245,000 64,416,000 64,010,000 247,440,000 Net income 3,468,000 7,826,000 7,612,000 6,135,000 25,041,000 Diluted income per share 0.14 0.32 0.31 0.25 1.03 * * The per share information is computed independently for each quarter and the full year based on the respective weighted average number of common shares outstanding. Therefore, income per share information for the full fiscal year may not equal the total of the quarters within the year. F - 42 Schedule II COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Valuation and Qualifying Accounts and Reserves Fiscal Years Ended July 31, 2021, 2020 and 2019 Column A Column B Column C Additions Column D Column E Description Balance at beginning of period Charged to cost and expenses Charged to other accounts - describe Transfers (deductions) - describe Balance at end of period Allowance for doubtful accounts receivable: Year ended July 31, 2021 $ 1,769,000 ( 18,000 ) (A) 215,000 (B) ( 318,000 ) (C) $ 1,648,000 2020 1,867,000 45,000 (A) — ( 143,000 ) (C) 1,769,000 2019 1,761,000 1,136,000 (A) — ( 1,030,000 ) (C) 1,867,000 Inventory reserves: Year ended July 31, 2021 $ 19,076,000 4,364,000 (D) — ( 3,211,000 ) (E) $ 20,229,000 2020 19,696,000 1,647,000 (D) — ( 2,267,000 ) (E) 19,076,000 2019 17,427,000 6,015,000 (D) — ( 3,746,000 ) (E) 19,696,000 Valuation allowance for deferred tax assets: Year ended July 31, 2021 $ 11,471,000 17,750,000 (F) — ( 837,000 ) (F) $ 28,384,000 2020 12,568,000 750,000 (F) — ( 1,847,000 ) (F) 11,471,000 2019 11,854,000 58,000 (F) 656,000 (G) — 12,568,000 (A) Provision for doubtful accounts. (B) Increase due to our adoption FASB ASU No. 2016-13 ("CECL”). See Note (1)(n) "Summary of Significant Accounting and Reporting Policies" for further discussion (C) Write-off of uncollectible receivables. (D) Provision for excess and obsolete inventory. (E) Write-off of inventory. (F) Change in valuation allowance. See Note (9) - "Income Taxes" for further discussion. (G) Acquisition related valuation allowance charged to goodwill. S - 1