What changed in this filing

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Item 1. Financial Statements

2021-12-09 compared with 2021-06-08 · 294 added, 369 removed, 715 unchanged (48% of the section changed)

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CONDENSED CONSOLIDATED BALANCE SHEETS

Assets April 30, 2021 July 31, 2020

Assets October 31, 2021 July 31, 2021

Current assets:

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Total assets $ 982,989,000 993,111,000

Liabilities and Stockholders’ Equity

Liabilities, Convertible Preferred Stock and Stockholders’ Equity

Current liabilities:

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Total current liabilities 197,008,000 203,561,000

Non-current portion of long-term debt, net 215,000,000 149,500,000

Non-current portion of long-term debt 108,000,000 201,000,000

Operating lease liabilities, non-current 43,720,000 39,569,000

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Commitments and contingencies (See Note 19)

Convertible preferred stock, par value $ 0.10 per share;

authorized 125,000 shares;

issued 100,000 at October 31, 2021 (includes accrued dividends of $ 235,000 )

100,235,000 —

Stockholders’ equity:

Preferred stock, par value $ 0.10 per share;

shares authorized and unissued 2,000,000

authorized and unissued 1,875,000 shares

Common stock, par value $ 0.10 per share;

authorized 100,000,000 shares;

issued 41,102,215 shares and 39,924,439 shares at April 30, 2021 and July 31, 2020, respectively

issued 41,380,241 and 41,281,812 shares at October 31, 2021 and July 31, 2021, respectively

4,138,000 4,128,000

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927,643,000 942,568,000

Treasury stock, at cost ( 15,033,317 shares at April 30, 2021 and July 31, 2020)

Treasury stock, at cost ( 15,033,317 shares at October 31, 2021 and July 31, 2021)

( 441,849,000 ) ( 441,849,000 )

Total stockholders’ equity 485,794,000 500,719,000

Total liabilities and stockholders’ equity $ 998,592,000 929,647,000

Total liabilities, convertible preferred stock and stockholders’ equity $ 982,989,000 993,111,000

See accompanying notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Three months ended April 30, Nine months ended April 30,

2021 2020 2021 2020

Three months ended October 31,

Net sales $ 116,759,000 135,218,000

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Amortization of intangibles 5,349,000 5,566,000

Proxy solicitation costs 2,162,000 —

Acquisition plan expenses — 91,183,000

48,250,000 135,924,000

Operating income (loss) 2,350,000 ( 3,136,000 ) ( 77,964,000 ) 12,358,000

Operating loss ( 6,515,000 ) ( 85,716,000 )

Other expenses (income):

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Interest (income) and other 219,000 66,000

Income (loss) before provision for (benefit from) income taxes 1,108,000 ( 4,748,000 ) ( 82,921,000 ) 7,397,000

Provision for (benefit from) income taxes 316,000 ( 759,000 ) ( 2,078,000 ) 1,503,000

Net income (loss) $ 792,000 ( 3,989,000 ) ( 80,843,000 ) 5,894,000

Net income (loss) per share:

Change in fair value of convertible preferred stock

purchase option liability ( 304,000 ) —

Loss before benefit from income taxes ( 8,037,000 ) ( 88,079,000 )

Benefit from income taxes ( 2,053,000 ) ( 2,239,000 )

Net loss $ ( 5,984,000 ) ( 85,840,000 )

Adjustments to reflect redemption value of convertible preferred stock:

Convertible preferred stock issuance costs ( 4,007,000 ) —

Establishment of initial convertible preferred stock

purchase option liability ( 1,005,000 ) —

Dividend on convertible preferred stock ( 235,000 ) —

Net loss attributable to common stockholders $ ( 11,231,000 ) ( 85,840,000 )

Net loss per common share (See Note 6):

Basic $ ( 0.43 ) ( 3.39 )

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Weighted average number of common shares outstanding – basic 26,426,000 25,305,000

Weighted average number of common and common equivalent shares outstanding – diluted 26,266,000 24,982,000 25,875,000 24,892,000

See accompanying notes to condensed consolidated financial statements.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Three months ended April 30, 2021 and 2020

Common Stock Additional

Paid-in Capital Retained Earnings Treasury Stock Stockholders'

Shares Amount Shares Amount

Balance as of January 31, 2020 39,752,559 $ 3,975,000 $ 563,834,000 $ 425,243,000 15,033,317 $ ( 441,849,000 ) $ 551,203,000

Equity-classified stock award compensation

— — 981,000 — — — 981,000

Proceeds from issuance of employee stock purchase plan shares

16,158 2,000 178,000 — — — 180,000

Forfeiture of restricted stock ( 5,539 ) ( 1,000 ) 1,000 — — — —

Net settlement of stock-based awards

2,079 1,000 ( 29,000 ) — — — ( 28,000 )

Cash dividends declared, net ($ 0.10 per share)

— — — ( 2,466,000 ) — — ( 2,466,000 )

Accrual of dividend equivalents, net of reversal ($ 0.10 per share)

— — — ( 56,000 ) — — ( 56,000 )

Net loss — — — ( 3,989,000 ) — — ( 3,989,000 )

Balance as of April 30, 2020 39,765,257 $ 3,977,000 $ 564,965,000 $ 418,732,000 15,033,317 $ ( 441,849,000 ) $ 545,825,000

Balance as of January 31, 2021 40,059,977 $ 4,006,000 $ 570,891,000 $ 330,236,000 15,033,317 $ ( 441,849,000 ) $ 463,284,000

Equity-classified stock award compensation

— — 1,204,000 — — — 1,204,000

Proceeds from issuance of employee stock purchase plan shares

12,113 1,000 204,000 — — — 205,000

Forfeiture of restricted stock ( 480 ) — — — — — —

Net settlement of stock-based awards

4,038 — ( 59,000 ) — — — ( 59,000 )

Common stock issued for acquisition of UHP Networks Inc.

1,026,567 103,000 28,789,000 — — — 28,892,000

Cash dividends declared, net ($ 0.10 per share)

— — — ( 2,600,000 ) — — ( 2,600,000 )

Accrual of dividend equivalents, net of reversal ($ 0.10 per share)

— — — ( 96,000 ) — — ( 96,000 )

Net income — — — 792,000 — — 792,000

Balance as of April 30, 2021 41,102,215 $ 4,110,000 $ 601,029,000 $ 328,332,000 15,033,317 $ ( 441,849,000 ) $ 491,622,000

Weighted average number of common and common equivalent

shares outstanding – diluted 26,426,000 25,305,000

See accompanying notes to condensed consolidated financial statements.

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AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Nine months ended April 30, 2021 and 2020

Common Stock Additional

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

Three months ended October 31, 2021 and 2020

Series A Convertible Preferred Stock Common Stock Additional

Paid-in Capital Retained Earnings Treasury Stock Stockholders'

Shares Amount Shares Amount

Shares Amount Shares Amount Shares Amount

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

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— — — — 699,000 — — — 699,000

Proceeds from exercises of stock options

16,700 2,000 466,000 — — — 468,000

Proceeds from issuance of employee stock purchase plan shares

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— — 68,074 7,000 ( 1,345,000 ) — — — ( 1,338,000 )

Common stock issued for acquisition of CGC Technology Limited 323,504 32,000 11,543,000 — — — 11,575,000

Cash dividends declared, net ($ 0.10 per share)

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— — — — — ( 142,000 ) — — ( 142,000 )

— — — 5,894,000 — — 5,894,000

Balance as of April 30, 2020 39,765,257 $ 3,977,000 $ 564,965,000 $ 418,732,000 15,033,317 $ ( 441,849,000 ) $ 545,825,000

Adoption of current expected credit loss standard — — — — — ( 215,000 ) — — ( 215,000 )

Net loss — — — — — ( 85,840,000 ) — — ( 85,840,000 )

Balance as of October 31, 2020 — $ — 40,043,753 $ 4,004,000 $ 569,422,000 $ 328,575,000 15,033,317 $ ( 441,849,000 ) $ 460,152,000

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

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— — 10,540 1,000 228,000 — — — 229,000

Issuance of restricted stock, net of forfeiture 35,495 4,000 ( 4,000 ) — — — —

Issuance of restricted stock — — 13,428 1,000 ( 1,000 ) — — — —

Net settlement of stock-based awards

— — 74,461 8,000 ( 2,135,000 ) — — — ( 2,127,000 )

Common stock issued for acquisition of UHP 1,026,567 103,000 28,789,000 — — — 28,892,000

Issuance of convertible preferred stock 100,000 100,000,000 — — — — — — —

Convertible preferred stock issuance costs — ( 4,007,000 ) — — — — — — —

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

Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends) — 5,247,000 — — — ( 5,247,000 ) — — ( 5,247,000 )

Cash dividends declared, net ($ 0.10 per share)

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— — — — — ( 88,000 ) — — ( 88,000 )

Adoption of current expected credit loss standard — — — ( 215,000 ) — — ( 215,000 )

Net loss — — — — — ( 5,984,000 ) — — ( 5,984,000 )

Balance as of April 30, 2021 41,102,215 $ 4,110,000 $ 601,029,000 $ 328,332,000 15,033,317 $ ( 441,849,000 ) $ 491,622,000

Balance as of October 31, 2021 100,000 $ 100,235,000 41,380,241 $ 4,138,000 $ 604,452,000 $ 319,053,000 15,033,317 $ ( 441,849,000 ) $ 485,794,000

See accompanying notes to condensed consolidated financial statements.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended April 30,

Three months ended October 31,

Cash flows from operating activities:

Net (loss) income $ ( 80,843,000 ) 5,894,000

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

Net loss $ ( 5,984,000 ) ( 85,840,000 )

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

Depreciation and amortization of property, plant and equipment 2,241,000 2,552,000

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Amortization of deferred financing costs 203,000 184,000

Estimated contract settlement costs — 444,000

Change in fair value of convertible preferred stock purchase option liability ( 304,000 ) —

Changes in other liabilities ( 1,033,000 ) ( 1,033,000 )

Loss on disposal of property, plant and equipment 29,000 3,000

Benefit from allowance for doubtful accounts ( 287,000 ) ( 364,000 )

(Benefit from) provision for allowance for doubtful accounts ( 156,000 ) 110,000

Provision for excess and obsolete inventory 1,175,000 1,003,000

Deferred income tax (benefit) expense ( 28,000 ) 1,374,000

Deferred income tax expense 175,000 816,000

Other — ( 225,000 )

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Income taxes payable ( 2,605,000 ) ( 3,077,000 )

Net cash (used in) provided by operating activities ( 56,582,000 ) 39,007,000

Net cash provided by (used in) operating activities 4,779,000 ( 74,229,000 )

Cash flows from investing activities:

Net cash acquired from acquisition of UHP 1,381,000 —

Payment for acquisition of CGC, net of cash acquired ( 750,000 ) ( 11,165,000 )

Payment for acquisition of NG-911 Inc.

— ( 781,000 )

Purchases of property, plant and equipment ( 3,638,000 ) ( 890,000 )

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Cash flows from financing activities:

Net borrowings (payments) of long-term debt under Credit Facility 65,500,000 ( 5,600,000 )

Proceeds from issuance of convertible preferred stock 100,000,000 —

Net (payments) borrowings of long-term debt under Credit Facility ( 93,000,000 ) 67,500,000

Remittance of employees' statutory tax withholding for stock awards ( 4,723,000 ) ( 2,737,000 )

Cash dividends paid ( 7,734,000 ) ( 7,553,000 )

Cash dividends paid on common stock ( 2,916,000 ) ( 5,236,000 )

Payment of convertible preferred stock issuance costs ( 530,000 ) —

Payment of deferred financing costs ( 140,000 ) —

Repayment of principal amounts under finance lease liabilities ( 5,000 ) —

Proceeds from issuance of employee stock purchase plan shares 229,000 182,000

Proceeds from exercises of stock options — 468,000

Net cash provided by (used in) financing activities 55,508,000 ( 17,583,000 )

Net (decrease) increase in cash and cash equivalents ( 8,680,000 ) 5,058,000

Net cash (used in) provided by financing activities ( 1,085,000 ) 59,709,000

Net increase (decrease) in cash and cash equivalents $ 56,000 ( 15,410,000 )

Cash and cash equivalents at beginning of period 30,861,000 47,878,000

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Nine months ended April 30,

Three months ended October 31,

Supplemental cash flow disclosures:

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Non-cash investing and financing activities:

Reclass of finance lease right-of-use assets to property, plant and equipment $ — 698,000

Cash dividends declared but unpaid (including accrual of dividend equivalents) $ 2,887,000 2,635,000

Accrued additions to property, plant and equipment $ 2,068,000 1,201,000

Issuance of restricted stock $ 4,000 —

Common stock issued for acquisitions $ 28,892,000 11,575,000

Fair value of UHP acquisition contingent earn-out consideration $ 8,500,000 —

Accruals related to acquisitions $ — 4,020,000

Unpaid additions to property, plant and equipment $ 1,878,000 1,489,000

Cash dividends declared on common stock but unpaid (including accrual of

dividend equivalents) $ 2,717,000 142,000

Unpaid convertible preferred stock issuance costs $ 3,477,000 —

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

Adjustment to reflect redemption value of convertible preferred stock $ 5,247,000 —

See accompanying notes to condensed consolidated financial statements.

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The accompanying condensed consolidated financial statements of Comtech Telecommunications Corp.

and its subsidiaries ("Comtech," "we," "us," or "our") as of and for the three and nine months ended April 30, 2021 and 2020 are unaudited.

and its subsidiaries ("Comtech," "we," "us," or "our") as of and for the three months ended October 31, 2021 and 2020 are unaudited.

In the opinion of management, the information furnished reflects all material adjustments (which include normal recurring adjustments) necessary for a fair presentation of the results for the unaudited interim periods.

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Our condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements, filed with the Securities and Exchange Commission ("SEC"), for the fiscal year ended July 31, 2021 and the notes thereto contained in our Annual Report on Form 10-K, and all of our other filings with the SEC.

As disclosed in more detail in Note (14) - " Segment Information ," we manage our business in two reportable segments:

Commercial Solutions and Government Solutions.

Certain reclassifications have been made to previously reported condensed consolidated financial statements to conform to the current fiscal period presentation.

Impact of Coronavirus Disease 2019 Pandemic ("COVID-19") on Our Business

Impact of Coronavirus Disease 2019 Pandemic ("COVID-19") and Global Supply Chain Constraints on Our Business

Since March 2020, we have conducted most of our non-production related operations using remote working arrangements, curtailed most business travel, and have established social distancing safeguards.

Additionally, we have experienced order and production delays, minor supply chain disruptions, lower levels of factory utilization and higher logistics and operational costs.

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

We have experienced order and production delays, supply chain disruptions, lower levels of factory utilization and higher logistics and operational costs.

Although the COVID-19 pandemic is by no means over and additional waves of COVID-19 could again alter the business landscape, we believe that the pandemic’s worst impact on our business is largely behind us.

Our long-term fundamentals remain strong and we continue to believe both of our segments are well-positioned for growth.

Our long-term fundamentals remain strong and we continue to believe our business is well-positioned for growth.

COMTECH TELECOMMUNICATIONS CORP.

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("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 network significantly growing, our acquisition of UHP allows us to enhance our Commercial Solutions segment's offerings with low cost time division multiple access ("TDMA") satellite modems.

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.

The acquisition has a preliminary purchase price for accounting purposes of $ 37,470,000 .

The initial upfront payment of approximately $ 23,902,000 was paid primarily in shares of our common stock, with $ 10,000 in cash.

An additional $ 5,000,000 , payable at our option in cash and or shares of our common stock, was placed in escrow and is subject to certain conditions that we expect will be satisfied within twelve months after the acquisition.

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.

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 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 a contingent 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 a defined 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 $ 23,902,000 paid at closing, $ 5,060,000 was placed into escrow to be released once the following conditions are met pursuant to the stock purchase agreement:

(i) $ 500,000 payable upon settlement of net working capital adjustments;

and (ii) $ 4,560,000 payable ratably over three years upon settlement of potential indemnification obligations of the seller.

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 of UHP under the acquisition method of accounting in accordance with FASB ASC 805, "Business Combinations" ("ASC 805").

The terms of the stock purchase agreement provide an ability for us to substitute cash in lieu of the common stock that was initially placed into escrow.

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 condensed consolidated statements of operations for the three and nine months ended April 30, 2021 include a nominal amount of revenue contribution from UHP.

Our condensed consolidated statements of operations for the three months ended October 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed in connection with the UHP acquisition:

March 2, 2021

The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed in connection with the acquisition:

Price Allocation (1)

Measurement Period Adjustments Purchase Price Allocation

(As adjusted)

Initial upfront payment $ 23,979,000 — $ 23,979,000

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Identifiable intangibles, deferred taxes and goodwill:

Estimated Useful Lives

Technology $ 15,300,000 — $ 15,300,000 15 years

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Preliminary allocation of aggregate purchase price $ 37,470,000 — $ 37,470,000

(1) As reported in the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2021.

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.

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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 final net working capital, 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.

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), a final assessment of assets acquired and liabilities assumed, accrued warranty obligations, income taxes and residual goodwill.

COMTECH TELECOMMUNICATIONS CORP.

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Acquisition Plan Expenses

During the three and nine months ended April 30, 2021 and 2020, we incurred acquisition plan expenses of $ 5,267,000 and $ 5,983,000 and $ 99,807,000 and $ 14,397,000 , respectively.

Of the amount recorded in the nine months ended April 30, 2021, $ 88,343,000 related to the previously announced litigation and merger termination with Gilat Satellite Networks, Ltd.

During the three months ended October 31, 2020, we incurred acquisition plan expenses of $ 91,183,000 .

Of this amount, $ 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.

We do not expect any significant acquisition plan expense during the fourth quarter of fiscal 2021.

Additionally, during the three months ended October 31, 2020, we recorded $ 1,178,000 of incremental interest expense related to a now terminated financing commitment letter.

(3) Adoption of Accounting Standards and Updates

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generally accepted accounting principles, which are commonly referred to as "GAAP." The FASB ASC is subject to updates by the FASB, which are known as Accounting Standards Updates ("ASUs").

During the nine months ended April 30, 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 condensed consolidated financial statements or disclosures.

During the three months ended October 31, 2021, we adopted:

• FASB ASU No.

2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal use software license).

The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU.

On August 1, 2020, we adopted this ASU.

Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.

2019-12, which simplifies various aspects related to accounting for income taxes.

ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application.

Our adoption of this ASU on August 1, 2021 did not have a material impact on our condensed consolidated financial statements or disclosures.

• FASB ASU No.

2018-17, which requires entities to consider indirect interests held through related parties under common control on a proportional basis, rather than as the equivalent of a direct interest in its entirety, when determining whether a decision-making fee is a variable interest.

On August 1, 2020, we adopted this ASU.

Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.

2020-01, which clarifies the interactions between Topics 321, 323 and 815.

This ASU clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method.

In addition, the amendments clarify the accounting for certain forward contracts and purchased options accounted for under Topic 815.

Our adoption of this ASU on August 1, 2021 did not impact our condensed consolidated financial statements or disclosures.

• FASB ASU No.

2018-18, which clarifies when certain transactions between collaborative arrangement participants should be accounted for under ASC 606 and incorporates unit-of-account guidance consistent with ASC 606 to aid in this determination.

The ASU also precludes entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers.

On August 1, 2020, we adopted this ASU.

2020-06, which simplifies the accounting for convertible instruments by removing certain separation models (including the cash conversion model and the beneficial conversion feature model) for convertible instruments.

As a result, for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815 or that do not result in substantial premiums accounted for as paid-in capital, the embedded conversion features are no longer separated from the host contract.

Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, and convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost as long as no other features require bifurcation and recognition as derivatives.

On August 1, 2021, we early adopted this ASU.

Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.

• FASB ASU No.

2019-08, which requires that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718.

The amount recorded as a reduction of the transaction price is required to be measured based on the grant-date fair value of the share-based payment award.

On August 1, 2020, we adopted this ASU.

Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.

2021-08, which requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, as if it had originated the contracts.

Prior to this ASU, an acquirer generally recognized contract assets and contract liabilities assumed that arose from contracts with customers at fair value on the acquisition date.

On August 1, 2021, we early adopted this ASU.

Our early adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.

COMTECH TELECOMMUNICATIONS CORP.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Point in time accounting is principally applied to contracts in our satellite ground station technologies product line in our Commercial Solutions segment (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.

Point in time accounting is principally applied to contracts in our satellite ground station technologies product line (which includes satellite modems, solid-state and traveling wave tube amplifiers) and certain contracts for our solid-state, high-power RF amplifiers.

The contracts related to these product lines do not meet the requirements for over time revenue recognition because our customers cannot utilize the equipment for its intended purpose during any phase of our manufacturing process;

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Substantially all of our contracts with customers are denominated in U.S.

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).

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Sales by geography and customer type, as a percentage of consolidated net sales, are as follows:

Three months ended April 30, Nine months ended April 30,

2021 2020 2021 2020

Three months ended October 31,

United States

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Included in domestic sales are sales to Verizon Communications Inc.

("Verizon"), which accounted for 11.4 % and 11.2 % of consolidated net sales for the three and nine months ended April 30, 2021, respectively.

Except for the U.S.

government, there were no customers that represented more than 10.0% of consolidated net sales during the three and nine months ended April 30, 2020.

("Verizon"), which accounted for 11.7 % and 12.5 % of consolidated net sales for the three months ended October 31, 2021 and 2020, respectively.

Except for the U.S., no individual country (including sales to U.S.

domestic companies for inclusion in products that are sold to a foreign country) represented more than 10.0% of consolidated net sales for the three and nine months ended April 30, 2021 and 2020.

The following tables summarize our disaggregation of revenue consistent with information reviewed by our chief operating decision-maker ("CODM") for the three and nine months ended April 30, 2021 and 2020.

domestic companies for inclusion in products that are sold to a foreign country) represented more than 10.0% of consolidated net sales for the three months ended October 31, 2021 and 2020.

The following tables summarize our disaggregation of revenue consistent with information reviewed by our Chief Operating Decision Maker ("CODM") for the three months ended October 31, 2021 and 2020.

We believe these categories best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors which impact our business:

Three months ended April 30, 2021 Nine months ended April 30, 2021

Commercial Solutions Government Solutions Total Commercial Solutions Government Solutions Total

Three months ended October 31, 2021

Commercial Solutions Government Solutions Total

Geographical region and customer type

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended April 30, 2020 Nine months ended April 30, 2020

Commercial Solutions Government Solutions Total Commercial Solutions Government Solutions Total

Three months ended October 31, 2020

Commercial Solutions Government Solutions Total

Geographical region and customer type

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Under ASC 606, unbilled receivables constitute contract assets.

There were no material impairment losses recognized on contract assets during the nine months ended April 30, 2021 and 2020, respectively.

There were no material impairment losses recognized on contract assets during the three months ended October 31, 2021 and 2020, 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.

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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, $ 30,011,000 and $ 31,000,000 was recognized as revenue during the nine months ended April 30, 2021 and 2020, respectively.

Contract liabilities increased $ 657,000 as a result of our acquisition of UHP discussed in Note ( 2 ) - “ Acquisitions - UHP Networks Inc.

Of the contract liability balance at July 31, 2021 and July 31, 2020, $ 24,973,000 and $ 16,370,000 was recognized as revenue during the three months ended October 31, 2021 and 2020, respectively.

We recognize the incremental costs to obtain or fulfill a contract as an expense when incurred if the amortization period of the asset is one year or less.

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Remaining performance obligations, which we refer to as backlog, exclude unexercised contract options and potential orders under indefinite delivery / indefinite quantity ("IDIQ") contracts.

As of April 30, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 636,460,000 (which represents the amount of our consolidated funded backlog).

We estimate that a substantial portion of our remaining performance obligations at April 30, 2021 will be completed and recognized as revenue during the next twenty-four month period, with the rest thereafter.

During the three and nine months ended April 30, 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.

As of October 31, 2021, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 628,498,000 (which represents the amount of our consolidated funded backlog).

We estimate that a substantial portion of our remaining performance obligations at October 31, 2021 will be completed and recognized as revenue during the next twenty-four month period, with the rest thereafter.

During the three months ended October 31, 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.

(5) Fair Value Measurements and Financial Instruments

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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 April 30, 2021 and July 31, 2020, other than the financial instruments discussed above, we had no other significant assets or liabilities included in our Condensed Consolidated Balance Sheets recorded at fair value, as such term is defined by FASB ASC 820.

The stock purchase agreement for the acquisition of UHP provides for a contingent earn-out payment of up to $ 9,000,000 , if specified sales milestones are reached during a defined period ending September 30, 2022.

The earn-out is accounted for as a contingent consideration liability to be recorded at its fair value.

See Note (2) - " Acquisitions " for more information regarding the estimated fair value of the earn-out.

As of October 31, 2021 and July 31, 2021, other than the financial instruments discussed above, we had no other significant assets or liabilities included in our Condensed Consolidated Balance Sheets recorded at fair value, as such term is defined by FASB ASC 820.

(6) Earnings Per Share

Our basic earnings per share ("EPS") is computed based on the weighted average number of common shares (including vested but unissued stock units, share units, performance shares and restricted stock units ("RSUs")) outstanding during each respective period.

Our diluted EPS reflects the dilution from potential common stock issuable pursuant to the exercise of equity-classified stock-based awards, if dilutive, outstanding during each respective period.

Pursuant to FASB ASC 260 " Earnings Per Share, " equity-classified stock-based awards that are subject to performance conditions are not considered in our diluted EPS calculations until the respective performance conditions have been satisfied.

Our diluted EPS reflects the dilution from potential common stock issuable pursuant to the exercise of equity-classified stock-based awards, settlement of escrow and earn-out arrangements related to our acquisition of UHP and the assumed conversion of Convertible Preferred Stock, if dilutive, outstanding during each respective period.

Pursuant to FASB ASC 260 " Earnings Per Share, " shares whose issuance is contingent upon the satisfaction of certain conditions are included in diluted EPS based on the number of shares, if any, that would be issuable if the end of the reporting period were the end of the contingency period.

When calculating our diluted earnings per share, we consider the amount an employee must pay upon assumed exercise of stock-based awards and the amount of stock-based compensation cost attributed to future services and not yet recognized.

There were no repurchases of our common stock during the three and nine months ended April 30, 2021 and 2020.

There were no repurchases of our common stock during the three months ended October 31, 2021 and 2020.

See Note (18) - " Stockholders’ Equity " for more information.

Weighted average stock options, RSUs and restricted stock outstanding of 912,000 and 1,440,000 for the three months ended April 30, 2021 and 2020 and 1,499,000 and 642,000 for the nine months ended April 30, 2021 and 2020, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive.

Our EPS calculations exclude 236,000 and 203,000 weighted average performance shares outstanding for the three months ended April 30, 2021 and 2020, respectively, and 235,000 and 201,000 for the nine months ended April 30, 2021 and 2020, 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.

Weighted average stock options, RSUs and restricted stock outstanding of 1,525,000 and 1,839,000 for the three months ended October 31, 2021 and 2020, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive.

Our EPS calculations exclude 239,000 and 232,000 weighted average performance shares outstanding for the three months ended October 31, 2021 and 2020, respectively, as the performance conditions have not yet been satisfied.

However, the numerator for EPS calculations for each respective period is reduced by the compensation expense related to these awards.

Weighted average common shares of 340,000 related to our acquisition of UHP in March 2021 were not included in our diluted EPS calculation for the three months ended October 31, 2021 because their effect would have been anti-dilutive.

COMTECH TELECOMMUNICATIONS CORP.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Weighted average common shares of 577,000 underlying the assumed conversion of Convertible Preferred Stock, on an if-converted basis, were not included in our diluted EPS calculation for the three months ended October 31, 2021 because their effect would have been anti-dilutive.

As a result, the numerator for our basic and diluted EPS calculation for the three months ended October 31, 2021 is our net loss attributable to common stockholders.

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

Three months ended April 30, Nine months ended April 30,

2021 2020 2021 2020

Net income (loss) for basic calculation $ 792,000 ( 3,989,000 ) $ ( 80,843,000 ) 5,894,000

Numerator for diluted calculation $ 792,000 ( 3,989,000 ) $ ( 80,843,000 ) 5,894,000

Denominator for basic calculation 25,911,000 24,982,000 25,875,000 24,730,000

Effect of dilutive securities:

Stock-based awards 355,000 — — 162,000

Denominator for diluted calculation 26,266,000 24,982,000 25,875,000 24,892,000

Three months ended October 31,

Net loss $ ( 5,984,000 ) ( 85,840,000 )

Convertible preferred stock issuance costs ( 4,007,000 ) —

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

Dividend on convertible preferred stock ( 235,000 ) —

Net loss attributable to common stockholders $ ( 11,231,000 ) ( 85,840,000 )

Denominator for basic and diluted calculation 26,426,000 25,305,000

As discussed further in Note (17) - " Convertible Preferred Stock ," the Convertible Preferred Stock issued in October 2021 represents a "participating security" as defined in ASC 260.

As a result, our EPS calculations for the three months ended October 31, 2021 were based on the two-class method.

Given the net loss attributable to common stockholders for the three months ended October 31, 2021, there was no impact of applying the two-class method to our reported basic or diluted earnings per common share.

(7) Accounts Receivable

Accounts receivable consist of the following at:

April 30, 2021 July 31, 2020

October 31, 2021 July 31, 2021

Receivables from commercial and international customers $ 72,311,000 86,890,000

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Accounts receivable, net $ 136,822,000 158,110,000

Unbilled receivables as of April 30, 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.

Unbilled receivables as of October 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 April 30, 2021 will be billed and collected within one year.

Allowance for doubtful accounts as of April 30, 2021 includes $ 215,000 recorded at August 1, 2020 as a result of our adoption of FASB ASU No.

2016-13, which is discussed in more detail in Note (3) - " Adoption of Accounting Standards and Updates ."

As of April 30, 2021, the U.S.

government (and its agencies) and Verizon represented 30.8 % and 14.6 %, respectively, of total accounts receivable.

As of July 31, 2020, except for the U.S.

government (and its agencies), which represented 31.0 % of total accounts receivable, there were no other customers which accounted for greater than 10.0% of total accounts receivable.

Management estimates that a substantial portion of the amounts not yet billed at October 31, 2021 will be billed and collected within one year.

As of October 31, 2021, 23.0 %, 14.8 % and 12.8 % of total accounts receivable related to the U.S.

government (and its agencies), AT&T, Inc.

and Verizon, respectively.

As of July 31, 2021, 23.0 %, 12.7 % and 12.1 % of total accounts receivable related to the U.S.

government and its agencies, AT&T, Inc.

and Verizon, respectively.

COMTECH TELECOMMUNICATIONS CORP.

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Inventories consist of the following at:

April 30, 2021 July 31, 2020

October 31, 2021 July 31, 2021

Raw materials and components $ 67,151,000 62,249,000

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Inventories, net $ 87,696,000 80,358,000

As of April 30, 2021 and July 31, 2020, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $ 6,442,000 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 $ 1,531,000 and $ 1,387,000 , respectively.

As of October 31, 2021 and July 31, 2021, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $ 7,392,000 and $ 7,028,000 , respectively, and the amount of inventory related to contracts from third-party commercial customers who outsource their manufacturing to us was $ 1,632,000 and $ 1,509,000 , respectively.

(9) Accrued Expenses and Other Current Liabilities

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

April 30, 2021 July 31, 2020

October 31, 2021 July 31, 2021

Accrued wages and benefits $ 23,599,000 26,367,000

Accrued contract costs 17,136,000 15,306,000

Accrued warranty obligations 16,889,000 17,600,000

Accrued legal costs 2,783,000 2,539,000

Accrued commissions and royalties 4,728,000 4,621,000

Accrued contract costs 13,682,000 12,750,000

Accrued acquisition-related costs 8,969,000 9,222,000

Accrued commissions and royalties 4,589,000 5,342,000

Accrued legal costs 2,596,000 2,854,000

Other 17,665,000 15,466,000

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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 April 30, 2021 include $ 8,581,000 of contingent earn-out consideration related to our acquisition of UHP.

Accrued acquisition-related costs as of October 31, 2021 and July 31, 2021 include $ 8,830,000 and $ 8,705,000 , respectively, 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 April 30, 2021 relate to estimated liabilities for assurance type warranty coverage that we provide to our customers.

Accrued warranty obligations as of October 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Changes in our accrued warranty obligations during the nine months ended April 30, 2021 and 2020 were as follows:

Nine months ended April 30,

Changes in our accrued warranty obligations during the three months ended October 31, 2021 and 2020 were as follows:

Three months ended October 31,

Balance at beginning of period $ 17,600,000 15,200,000

Provision for warranty obligations 271,000 1,845,000

Additions (in connection with acquisitions) 750,000 1,000,000

Charges incurred ( 982,000 ) ( 849,000 )

Reclassification from non-current liabilities — 302,000

Balance at end of period $ 16,889,000 16,196,000

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(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 ;

(ii) an accordion feature allowing us to make a request to borrow up to an additional $ 250,000,000 subject to the satisfaction of specified conditions, including approval by our lenders;

(iii) a $ 35,000,000 letter of credit sublimit;

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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 April 30, 2021, the amount outstanding under our Credit Facility was $ 215,000,000 which is reflected in the non-current portion of long-term debt on our Condensed Consolidated Balance Sheet.

At April 30, 2021, we had $ 2,022,000 of standby letters of credit outstanding under our Credit Facility related to guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit.

During the nine months ended April 30, 2021, we had outstanding balances under the Credit Facility ranging from $ 125,000,000 to $ 217,000,000 .

As of April 30, 2021, total net deferred financing costs related to the Credit Facility were $ 1,839,000 and are being amortized over the term of our Credit Facility through October 31, 2023.

Interest expense related to our Credit Facility, including amortization of deferred financing costs, recorded during the three months ended April 30, 2021 and 2020 was $ 1,515,000 and $ 1,470,000 , respectively.

Interest expense related to our Credit Facility, including amortization of deferred financing costs, recorded during the nine months ended April 30, 2021 and 2020 was $ 4,040,000 and $ 4,795,000 , respectively.

Our blended interest rate approximated 2.97 % and 3.73 %, respectively, for the three months ended April 30, 2021 and 2020.

Our blended interest rate approximated 2.80 % and 4.24 %, respectively, for the nine months ended April 30, 2021 and 2020.

As of October 31, 2021, the amount outstanding under our Credit Facility was $ 108,000,000 , which is reflected in the non-current portion of long-term debt on our Condensed Consolidated Balance Sheet.

At October 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 three months ended October 31, 2021, we had outstanding balances under the Credit Facility ranging from $ 100,000,000 to $ 212,000,000 .

As of October 31, 2021, total net deferred financing costs related to the Credit Facility were $ 1,622,000 and are being amortized over the term of our Credit Facility through October 31, 2023.

Interest expense related to our Credit Facility, including amortization of deferred financing costs, recorded during the three months ended October 31, 2021 and 2020 was $ 1,493,000 and $ 1,111,000 , respectively.

Our blended interest rate approximated 2.94 % and 2.70 %, respectively, for the three months ended October 31, 2021 and 2020.

Borrowings under the Credit Facility shall be either:

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and (iii) a Minimum Interest Expense Coverage Ratio of 3.25 x TTM Adjusted EBITDA.

As of April 30, 2021, our Secured Leverage Ratio was 2.78 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 April 30, 2021 was 13.78 x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25 x TTM Adjusted EBITDA.

As of October 31, 2021, our Secured Leverage Ratio was 1.57 x TTM Adjusted EBITDA compared to the maximum allowable Secured Leverage Ratio of 3.75 x TTM Adjusted EBITDA.

Our Interest Expense Coverage Ratio as of October 31, 2021 was 12.78 x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25 x TTM Adjusted EBITDA.

Given our expected future business performance, we anticipate maintaining compliance with the terms and financial covenants in our Credit Facility for the foreseeable future.

The obligations under the Credit Facility are guaranteed by certain of our domestic subsidiaries (the "Guarantors").

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.

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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, which has been documented and filed with the SEC.

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For rent holidays and rent escalation clauses during the lease term, we record rental expense on a straight-line basis over the term of the lease.

As of April 30, 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.

As of October 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.

The components of lease expense are as follows:

Three months ended April 30, Nine months ended April 30,

2021 2020 2021 2020

Three months ended October 31,

Finance lease expense:

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Additional information related to leases is as follows:

Nine months ended April 30,

Three months ended October 31,

Cash paid for amounts included in the measurement of lease liabilities:

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Operating leases $ 6,667,000 $ 478,000

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 Condensed Consolidated Balance Sheet as of April 30, 2021.

COMTECH TELECOMMUNICATIONS CORP.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table is a reconciliation of future cash flows relating to operating and financing lease liabilities presented on our Condensed Consolidated Balance Sheet as of April 30, 2021:

The following table is a reconciliation of future cash flows relating to operating and financing lease liabilities presented on our Condensed Consolidated Balance Sheet as of October 31, 2021:

Operating Finance Total

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We lease our Melville, New York production facility from a partnership controlled by our CEO and Chairman.

Lease payments made during the nine months ended April 30, 2021 and 2020 were $ 494,000 and $ 486,000 , respectively.

Lease payments made during the three months ended October 31, 2021 and 2020 were $ 166,000 and $ 163,000 , respectively.

The current lease provides for our use of the premises as they exist through December 2031.

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We have a right of first refusal in the event of a sale of the facility.

There are no other rental commitments that have not commenced as of April 30, 2021.

As of October 31, 2021, we do not have any material rental commitments that have not commenced.

(12) Income Taxes

At April 30, 2021 and July 31, 2020, total unrecognized tax benefits were $ 9,170,000 and $ 8,345,000 , respectively, including interest of $ 150,000 and $ 75,000 , respectively.

At April 30, 2021 and July 31, 2020, $ 2,588,000 and 1,963,000 , respectively, of our unrecognized tax benefits were recorded as non-current income taxes payable on our Condensed Consolidated Balance Sheets.

The remaining unrecognized tax benefits of $ 6,582,000 and $ 6,382,000 at April 30, 2021 and July 31, 2020, respectively, were presented as an offset to the associated non-current deferred tax assets on our Condensed Consolidated Balance Sheets.

Of the total unrecognized tax benefits, $ 8,406,000 and $ 7,700,000 at April 30, 2021 and July 31, 2020, respectively, net of the reversal of the federal benefit recognized as a deferred tax asset relating to state reserves, would favorably impact our effective tax rate, if recognized.

At October 31, 2021 and July 31, 2021, total unrecognized tax benefits were $ 9,393,000 and $ 9,172,000 , respectively, including interest of $ 193,000 and $ 163,000 , respectively.

At October 31, 2021 and July 31, 2021, $ 3,105,000 and $ 2,717,000 , respectively, of our unrecognized tax benefits were recorded as non-current income taxes payable on our Condensed Consolidated Balance Sheets.

The remaining unrecognized tax benefits of $ 6,288,000 and $ 6,455,000 at October 31, 2021 and July 31, 2021, respectively, were presented as an offset to the associated non-current deferred tax assets on our Condensed Consolidated Balance Sheets.

Of the total unrecognized tax benefits, $ 8,589,000 and $ 8,408,000 at October 31, 2021 and July 31, 2021, respectively, net of the reversal of the federal benefit recognized as a deferred tax asset relating to state reserves, would favorably impact our effective tax rate, if recognized.

Unrecognized tax benefits result from income tax positions taken or expected to be taken on our income tax returns for which a tax benefit has not been recorded in our condensed consolidated financial statements.

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Our non-employee directors are eligible to receive non-discretionary grants of stock-based awards, subject to certain limitations.

As of April 30, 2021, the aggregate number of shares of common stock which may be issued, pursuant to the Plan, may not exceed 10,962,500 .

As of October 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 April 30, 2021, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of 9,361,233 shares (net of 4,446,870 expired and canceled awards), of which an aggregate of 6,936,724 have been exercised or settled.

As of April 30, 2021, the following stock-based awards, by award type, were outstanding:

April 30, 2021

As of October 31, 2021, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of 9,481,727 shares (net of 4,813,779 expired and canceled awards), of which an aggregate of 7,400,421 have been exercised or settled.

As of October 31, 2021, the following stock-based awards, by award type, were outstanding:

October 31, 2021

Stock options 1,015,965

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Our ESPP is intended to provide our eligible employees the opportunity to acquire our common stock at 85 % of fair market value on the first or last day of each calendar quarter, whichever is lower.

Through April 30, 2021, we have cumulatively issued 883,244 shares of our common stock to participating employees in connection with our ESPP.

Through October 31, 2021, we have cumulatively issued 905,311 shares of our common stock to participating employees in connection with our ESPP.

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

Three months ended April 30, Nine months ended April 30,

2021 2020 2021 2020

Three months ended October 31,

Cost of sales $ 73,000 73,000

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Stock-based compensation for equity-classified awards is measured at the date of grant, based on an estimate of the fair value of the award and is generally expensed over the vesting period of the award.

At April 30, 2021, unrecognized stock-based compensation of $ 11,162,000 , net of estimated forfeitures of $ 1,124,000 , is expected to be recognized over a weighted average period of 3.2 years.

Total stock-based compensation capitalized and included in ending inventory at both April 30, 2021 and July 31, 2020 was $ 48,000 .

There are no liability-classified stock-based awards outstanding as of April 30, 2021 or July 31, 2020.

At October 31, 2021, unrecognized stock-based compensation of $ 13,766,000 , net of estimated forfeitures of $ 1,217,000 , is expected to be recognized over a weighted average period of 3.4 years.

Total stock-based compensation capitalized and included in ending inventory at both October 31, 2021 and July 31, 2021 was $ 48,000 .

There are no liability-classified stock-based awards outstanding as of October 31, 2021 or July 31, 2021.

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

Three months ended April 30, Nine months ended April 30,

2021 2020 2021 2020

Three months ended October 31,

Stock options $ 78,000 120,000

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

During the three months ended October 31, 2021 and 2020, we recorded benefits of $ 417,000 and $ 616,000 , 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 Condensed Consolidated Balance Sheet as of April 30, 2021 and July 31, 2020.

Such deferred tax asset was recorded net as part of our non-current deferred tax liability on our Condensed Consolidated Balance Sheet as of October 31, 2021 and July 31, 2021.

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.

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Expired/canceled ( 56,250 ) 27.59

Exercised ( 1,220 ) 17.88

Outstanding at October 31, 2021 1,015,965 $ 25.66 4.19 $ 1,087,000

Expired/canceled ( 12,800 ) 25.86

Outstanding at January 31, 2021 1,331,835 25.96

Expired/canceled ( 19,050 ) 20.89

Outstanding at April 30, 2021 1,312,785 $ 26.03 3.88 $ 1,941,000

Exercisable at April 30, 2021 1,001,485 $ 28.56 2.27 $ 48,000

Vested and expected to vest at April 30, 2021 1,300,153 $ 26.11 3.83 $ 1,864,000

Stock options outstanding as of April 30, 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 five or ten years and a vesting period of three or five years .

Exercisable at October 31, 2021 780,525 $ 28.01 2.87 $ 218,000

Vested and expected to vest at October 31, 2021 1,003,360 $ 25.76 4.13 $ 1,041,000

COMTECH TELECOMMUNICATIONS CORP.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Stock options outstanding as of October 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 three months ended October 31, 2021 was $ 7,000 .

There were no stock options exercised during the three months ended October 31, 2020.

Performance Shares, RSUs, Restricted Stock and Share Unit Awards

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Outstanding at October 31, 2021 1,065,341 $ 22.56 $ 22,979,000

Settled ( 526 ) 11.40

Canceled/Forfeited ( 7,229 ) 20.15

Outstanding at January 31, 2021 1,133,890 20.04

Granted 1,693 28.97

Settled ( 6,820 ) 15.59

Canceled/Forfeited ( 17,039 ) 21.62

Outstanding at April 30, 2021 1,111,724 $ 20.05 $ 26,652,000

Vested at April 30, 2021 391,134 $ 16.64 $ 9,372,000

Vested and expected to vest at April 30, 2021 1,063,198 $ 19.98 $ 25,488,000

The total intrinsic value relating to fully-vested awards settled during the three and nine months ended April 30, 2021 was $ 178,000 and $ 3,083,000 , respectively.

The total intrinsic value relating to fully-vested awards settled during the three and nine months ended April 30, 2020 was $ 70,000 and $ 5,895,000 .

Vested at October 31, 2021 353,816 $ 21.94 $ 7,632,000

Vested and expected to vest at October 31, 2021 1,015,655 $ 22.54 $ 21,908,000

The total intrinsic value relating to fully-vested awards settled during the three months ended October 31, 2021 and 2020 was $ 4,895,000 and $ 2,896,000 , respectively.

The performance shares granted to employees principally vest over a three-year performance period, if pre-established performance goals are attained, or as specified pursuant to the Plan and related agreements.

As of April 30, 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.

As of October 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.

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Share units granted on or after July 31, 2017 were granted to certain employees in lieu of non-equity incentive compensation and are convertible into shares of our common stock on the one-year anniversary of the respective grant date.

Cumulatively, through April 30, 2021, 677,562 share units granted have been settled.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Cumulatively, through October 31, 2021, 956,576 share units granted have been settled.

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

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Share units granted since fiscal 2014 are entitled to dividend equivalents while the underlying shares are unissued.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Dividend equivalents are subject to forfeiture, similar to the terms of the underlying stock-based awards, and are payable in cash generally at the time of settlement of the underlying award.

During the three and nine months ended April 30, 2021, we accrued $ 96,000 and $ 286,000 , respectively, of dividend equivalents (net of forfeitures) and paid out $ 3,000 and $ 278,000 , respectively.

During the three months ended October 31, 2021 and 2020, we accrued $ 88,000 and $ 142,000 , respectively, of dividend equivalents (net of forfeitures) and paid out $ 315,000 and $ 275,000 , respectively.

Accrued dividend equivalents were recorded as a reduction to retained earnings.

As of April 30, 2021 and July 31, 2020, accrued dividend equivalents were $ 791,000 and $ 783,000 , respectively.

With respect to the actual settlement of stock-based awards for income tax reporting, during the three and nine months ended April 30, 2021, we recorded an income tax benefit of $ 18,000 and an income tax expense of $ 189,000 , respectively, and during the three and nine months ended April 30, 2020, we recorded an income tax expense of $ 122,000 and an income tax benefit of $ 349,000 , respectively.

As of October 31, 2021 and July 31, 2021, accrued dividend equivalents were $ 657,000 and $ 884,000 , respectively.

With respect to the actual settlement of stock-based awards for income tax reporting, during the three months ended October 31, 2021 and 2020, we recorded an income tax benefit of $ 53,000 and an income tax expense of $ 199,000 , respectively.

(14) Segment Information

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The management approach, as defined by FASB ASC 280 - "Segment Reporting" is based on the way that the CODM organizes the segments within an enterprise for making decisions about resources to be allocated and assessing their performance.

Our CODM, for purposes of FASB ASC 280, is our Chief Executive Officer.

Our Commercial Solutions segment offers satellite ground station technologies (such as modems and amplifiers) and public safety and location technologies (such as 911 call routing and mapping solutions) to commercial customers and smaller government customers, such as state and local governments.

Our CODM, for purposes of FASB ASC 280, is our current Chief Executive Officer.

We currently 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.

3 unchanged sentences

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 analysis expenses and other.

income taxes, interest (income) and other, change in fair value of the convertible preferred stock purchase option liability, write-off of deferred financing costs, interest expense, amortization of stock-based compensation, amortization of intangibles, 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, proxy solicitation costs, strategic alternatives analysis expenses and other.

These items, while periodically affecting our results, may vary significantly from period to period and may have a disproportionate effect in a given period, thereby affecting the comparability of results.

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Although closely aligned, the Company's definition of Adjusted EBITDA is different than the Consolidated EBITDA (as such term is defined in our Credit Facility) utilized for financial covenant calculations and also may differ from the definition of EBITDA or Adjusted EBITDA used by other companies and, therefore, may not be comparable to similarly titled measures used by other companies.

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

COMTECH TELECOMMUNICATIONS CORP.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended April 30, 2021

Commercial Solutions Government Solutions Unallocated Total

Net sales $ 91,364,000 48,012,000 — $ 139,376,000

Operating income (loss) $ 9,318,000 768,000 ( 7,736,000 ) $ 2,350,000

Net income (loss)

$ 9,020,000 752,000 ( 8,980,000 ) $ 792,000

Provision for (benefit from) income taxes

302,000 ( 85,000 ) 99,000 316,000

Interest (income) and other

( 7,000 ) 101,000 ( 370,000 ) ( 276,000 )

Interest expense 3,000 — 1,515,000 1,518,000

Amortization of stock-based compensation

— — 1,204,000 1,204,000

Amortization of intangibles

4,221,000 1,089,000 — 5,310,000

1,779,000 439,000 56,000 2,274,000

Acquisition plan expenses

— — 5,267,000 5,267,000

Restructuring costs 594,000 — — 594,000

COVID-19 related costs — 416,000 — 416,000

Strategic emerging technology costs — 315,000 — 315,000

Adjusted EBITDA

$ 15,912,000 3,027,000 ( 1,209,000 ) $ 17,730,000

Purchases of property, plant and equipment

$ 3,159,000 1,389,000 3,000 $ 4,551,000

Long-lived assets acquired in connection with acquisitions $ 45,597,000 — — $ 45,597,000

Total assets at April 30, 2021

$ 721,857,000 237,798,000 38,937,000 $ 998,592,000

Three months ended April 30, 2020

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

Three months ended October 31, 2021

Commercial Solutions Government Solutions Unallocated Total

7 unchanged sentences

( 25,000 ) 254,000 ( 10,000 ) 219,000

Interest expense 9,000 6,000 1,489,000 1,504,000

Amortization of stock-based compensation

— — 981,000 981,000

Amortization of intangibles

4,313,000 1,204,000 — 5,517,000

1,993,000 447,000 210,000 2,650,000

Estimated contract settlement costs 476,000 — — 476,000

Acquisition plan expenses

701,000 — 5,282,000 5,983,000

Adjusted EBITDA

$ 11,524,000 5,845,000 ( 4,898,000 ) $ 12,471,000

Purchases of property, plant and equipment

$ 1,263,000 531,000 118,000 $ 1,912,000

Long-lived assets acquired in connection with acquisitions $ 4,023,000 4,402,000 — $ 8,425,000

Total assets at April 30, 2020

$ 663,455,000 235,739,000 52,538,000 $ 951,732,000

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nine months ended April 30, 2021

Commercial Solutions Government Solutions Unallocated Total

Net sales $ 260,991,000 174,895,000 — $ 435,886,000

Operating income (loss) $ 27,439,000 8,813,000 ( 114,216,000 ) $ ( 77,964,000 )

Net income (loss)

$ 26,618,000 9,138,000 ( 116,599,000 ) $ ( 80,843,000 )

Provision for (benefit from) income taxes

858,000 ( 497,000 ) ( 2,439,000 ) ( 2,078,000 )

Interest (income) and other

Change in fair value of convertible preferred stock purchase option liability

— — ( 304,000 ) ( 304,000 )

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1,808,000 381,000 52,000 2,241,000

Acquisition plan expenses

( 1,052,000 ) — 100,859,000 99,807,000

Proxy solicitation costs — — 2,162,000 2,162,000

Restructuring costs 813,000 ( 101,000 ) — 712,000

COVID-19 related costs — 674,000 — 674,000

Strategic emerging technology costs 315,000 315,000

Adjusted EBITDA

2 unchanged sentences

$ 2,696,000 942,000 — $ 3,638,000

Long-lived assets acquired in connection with acquisitions $ 45,597,000 2,443,000 — $ 48,040,000

Total assets at April 30, 2021

Total assets at October 31, 2021

$ 721,897,000 235,048,000 26,044,000 $ 982,989,000

Nine months ended April 30, 2020

Three months ended October 31, 2020

Commercial Solutions Government Solutions Unallocated Total

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1,996,000 403,000 153,000 2,552,000

Estimated contract settlement costs

444,000 — — 444,000

Acquisition plan expenses

4 unchanged sentences

$ 389,000 421,000 80,000 $ 890,000

Long-lived assets acquired in connection with acquisitions

$ 6,060,000 34,609,000 — $ 40,669,000

Total assets at April 30, 2020

Total assets at October 31, 2020

$ 646,264,000 238,172,000 34,075,000 $ 918,511,000

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Unallocated expenses result from corporate expenses such as executive compensation, accounting, legal and other regulatory compliance related costs and also includes all of our amortization of stock-based compensation.

During the three months ended April 30, 2021 and 2020, we recorded $ 5,267,000 and $ 5,983,000 of acquisition plan expenses, respectively, and during the nine months ended April 30, 2021 and 2020, we recorded $ 99,807,000 and $ 14,397,000 of acquisition plan expenses, respectively, most of which were recorded in our unallocated expenses.

During the three months ended October 31, 2020, we recorded $ 91,183,000 of acquisition plan expenses, most of which were recorded in our unallocated expenses.

See Note (2) - " Acquisitions " for further information.

During the three and nine months ended April 30, 2021, our Commercial Solutions segment recorded $ 594,000 and $ 1,195,000 , respectively, 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.

In addition, during the three and nine months ended April 30, 2021, our Government Solutions segment recorded $ 416,000 and $ 576,000 , respectively, of incremental operating costs incurred for 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 the three and nine months ended April 30, 2020.

There were no such charges recorded in the three months ended October 31, 2021.

During the three months ended October 31, 2021, we incurred $ 2,162,000 of proxy solicitation costs (including legal and advisory fees) as a result of a proxy contest initiated by a shareholder during the most recently completed fiscal quarter.

There were no similar costs in the comparable period of the prior year.

During the three months ended October 31, 2021, our Commercial Solutions segment recorded $ 813,000 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.

In addition, during the three months ended October 31, 2021, our Government Solutions segment recorded $ 674,000 of incremental operating costs related to our antenna facility located in the United Kingdom due to the impact of the COVID-19 pandemic.

There were no such charges recorded in the three months ended October 31, 2020.

Interest expense in the tables above primarily relates to our Credit Facility, and includes the amortization of deferred financing costs.

See Note (10) - " Credit Facility " for further discussion.

In addition, interest expense for the nine months ended April 30, 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 ."

Intersegment sales for the three months ended April 30, 2021 and 2020 by the Commercial Solutions segment to the Government Solutions segment were $ 827,000 and $ 3,115,000 , respectively.

Intersegment sales for the nine months ended April 30, 2021 and 2020 by the Commercial Solutions segment to the Government Solutions segment were $ 2,622,000 and $ 6,876,000 , respectively.

Interest expense for the three months ended October 31, 2020 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 ."

Intersegment sales for the three months ended October 31, 2021 and 2020 by the Commercial Solutions segment to the Government Solutions segment were $ 1,132,000 and $ 851,000 , respectively.

There were nominal sales by the Government Solutions segment to the Commercial Solutions segment for these periods.

All intersegment sales are eliminated in consolidation and are excluded from the tables above.

Unallocated assets at April 30, 2021 consist principally of cash and cash equivalents, income taxes receivable, corporate property, plant and equipment and deferred financing costs.

Unallocated assets at October 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.

(15) Goodwill

The following table represents goodwill by reportable operating segment, including the changes in the net carrying value of goodwill during the nine months ended April 30, 2021:

The following table represents goodwill by reportable operating segment, including the changes in the net carrying value of goodwill during the three months ended October 31, 2021:

Commercial Solutions Government Solutions Total

1 unchanged sentence

$ 270,389,000 77,309,000 $ 347,698,000

Change related to CGC acquisition — 2,222,000 2,222,000

Change related to Solacom Technologies Inc.

("Solacom") 1,052,000 — 1,052,000

UHP acquisition ( 6,000 ) — ( 6,000 )

Balance as of April 30, 2021

Balance as of October 31, 2021

$ 270,383,000 77,309,000 $ 347,692,000

During the nine months ended April 30, 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.

1 unchanged sentence

however, any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

1 unchanged sentence

We also considered overall business conditions.

We also considered overall business conditions, including both the potential short-term and long-term effects of the COVID-19 pandemic.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

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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.

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.

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Intangible assets with finite lives are as follows:

April 30, 2021

October 31, 2021

Weighted Average

16 unchanged sentences

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

Amortization expense for the three months ended April 30, 2021 and 2020 was $ 5,310,000 and $ 5,517,000 , respectively.

Amortization expense for the nine months ended April 30, 2021 and 2020 was $ 15,671,000 and $ 15,952,000 , respectively.

Amortization expense for the three months ended October 31, 2021 and 2020 was $ 5,349,000 and $ 5,566,000 , respectively.

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

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We review net intangible assets with finite lives for impairment when an event occurs indicating the potential for impairment.

Based on our last assessment, we believe that the carrying values of our net intangible assets were recoverable as of April 30, 2021.

Based on our last assessment, we believe that the carrying values of our net intangible assets were recoverable as of October 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.

(17) Convertible Preferred Stock

On October 18, 2021, we entered into a Subscription Agreement (the “Subscription Agreement”) with certain affiliates and related funds of White Hat Capital Partners LP and Magnetar Capital LLC (collectively, the “Investors”), relating to the issuance and sale of up to 125,000 shares of a new series of the Company’s Convertible Preferred Stock, par value $ 0.10 per share (the “Convertible Preferred Stock”), for an aggregate purchase price of up to $ 125,000,000 , or $ 1,000 per share.

On October 19, 2021 (the “Initial Closing Date”), pursuant to the terms of the Subscription Agreement, the Investors purchased an aggregate of 100,000 shares of Convertible Preferred Stock (the “Initial Issuance”) for an aggregate purchase price of $ 100,000,000 .

The Investors have a one-time option exercisable at any time on or prior to March 31, 2023 to purchase additional shares of Convertible Preferred Stock for an aggregate purchase price of $ 25,000,000 .

This purchase option is commonly referred to as a “Green Shoe” and together with the Initial Issuance, is collectively referred to as the “Issuance”.

COMTECH TELECOMMUNICATIONS CORP.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The initial conversion price for the shares issued in the Initial Issuance is $ 24.50 , subject to an increase in the conversion price to $ 26.00 upon the achievement of $ 76.0 million of Adjusted EBITDA (as defined in the Subscription Agreement) for our fiscal 2022 year, and the initial conversion price for the Green Shoe is $ 32.00 .

The Convertible Preferred Stock ranks senior to the shares of our common stock, with respect to the payment of dividends and the distribution of assets upon a liquidation, dissolution or winding up of the Company.

The Convertible Preferred Stock initially had a liquidation preference of $ 1,000 per share with each share entitled to a cumulative dividend (the “Dividend”) at the rate of 6.5 % per annum, compounding quarterly, paid-in-kind or paid in cash, at our election.

For any quarter in which we elect not to pay the Dividend in cash with respect to a share of Convertible Preferred Stock, such Dividend becomes part of the liquidation preference of such share.

In addition, no dividend or other distribution on our common stock in excess of our $ 0.10 per share per quarter will be declared or paid on the common stock unless, at the time of such declaration and payment, an equivalent dividend or distribution is declared and paid on the Convertible Preferred Stock (the “Participating Dividend”), provided that in the case of any such dividend in the form of cash, in lieu of a cash payment, such Participating Dividend will become part of the liquidation preference of the shares of the Convertible Preferred Stock.

Such Participating Dividend results in the Convertible Preferred Stock meeting the definition of a "participating security" for purposes of our earnings per share calculations.

The Convertible Preferred Stock is convertible into shares of common stock at the option of the holders thereof at or following the earlier to occur of (a) the filing of our Annual Report on Form 10-K for the fiscal year ending July 31, 2022 but no later than October 19, 2022, or (b) immediately prior to (and conditioned upon) the consummation of a Change of Control.

At any time after October 19, 2024, we have the right to mandate the conversion of the Convertible Preferred Stock, subject to certain restrictions, based on the price of the common stock in the preceding thirty trading days.

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

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

In addition, each holder will have the right to cause the Company to repurchase its shares of Convertible Preferred Stock in connection with a Change of Control, at a price equal to the liquidation preference.

We determined that our obligation to issue the Green Shoe at any time on or prior to March 31, 2023 meets the definition of a freestanding financial instrument that should be accounted for as a liability.

As such, we established an initial convertible preferred stock purchase option liability of $ 1,005,000 and reduced the proceeds from the Initial Issuance by such amount.

The liability will be remeasured to its estimated fair value each reporting period until such instrument is exercised or expires.

Changes in its estimated fair value are recognized as a non-cash charge or benefit and presented on the condensed consolidated statement of operations.

As the estimated fair value of the convertible preferred stock purchase option liability was $ 701,000 as of October 31, 2021, we recorded a $ 304,000 benefit from the remeasurement in the three months ended October 31, 2021.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In accordance with ASC 480, " Distinguishing Liabilities from Equity ," specifically ASC 480-10-S99-3A(2), SEC Staff Announcement:

Classification and Measurement of Redeemable Securities , we have classified the Convertible Preferred Stock outside of permanent equity as temporary equity since the redemption of such shares is not solely within our control and we could be required by the holder to redeem the shares for cash or other assets, at their option.

Upon the Initial Issuance, we recorded the Convertible Preferred Stock, net of issuance costs of $ 4,007,000 and net of the portion of such proceeds allocated to the convertible preferred stock purchase option liability described above, which resulted in an initial carrying value of the Convertible Preferred Stock less than its initial redemption value of $ 100,000,000 .

We have elected to adjust the carrying value of the Convertible Preferred Stock to its current redemption value of $ 100,235,000 , which includes $ 235,000 of accumulated and unpaid dividends.

As such, an adjustment of $ 5,247,000 to increase the carrying value of the Convertible Preferred Stock was recorded against retained earnings in the three months ended October 31, 2021.

(18) Stockholders’ Equity

5 unchanged sentences

See Note (2) - " Acquisitions - UHP Networks Inc ." for further information.

Stock Repurchase Program

Common Stock Repurchase Program

On September 29, 2020, our Board of Directors authorized a new $ 100,000,000 stock repurchase program, which replaced our prior program.

The new $ 100,000,000 stock repurchase program has no time restrictions and repurchases may be made from time to time in open-market or privately negotiated transactions, or by other means in accordance with federal securities laws.

There were no repurchases made during the nine months ended April 30, 2021 or 2020.

There were no repurchases of our common stock during the three months ended October 31, 2021 or 2020.

Common Stock 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 and March 11, 2021, our Board of Directors declared a dividend of $ 0.10 per common share, which were paid on October 27, 2020, February 19, 2021 and May 21, 2021, respectively.

On June 8, 2021, our Board of Directors declared a dividend of $ 0.10 per common share, payable on August 20, 2021 to stockholders of record at the close of business on July 21, 2021.

On October 4, 2021, our Board of Directors declared a dividend of $ 0.10 per common share, which was paid on November 12, 2021.

On December 9, 2021, our Board of Directors declared a dividend of $ 0.10 per common share, payable on February 18, 2022 to stockholders of record at the close of business on January 19, 2022.

Future dividends remain subject to compliance with financial covenants under our Credit Facility, as well as Board approval.

(18) 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.

COMTECH TELECOMMUNICATIONS CORP.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(19) Legal Proceedings and Other Matters

Settled Litigation Related to the Convertible Preferred Stock Issuance

On October 25, 2021, Anthony Franchi (the “Plaintiff”) brought a putative class action in the Court of Chancery of the State of Delaware against the Company’s current directors, the Company (as nominal defendant), White Hat Capital Partners LP (“White Hat”) and Magnetar Capital LLC (“Magnetar”), which was amended on November 1, 2021.

On November 10, 2021, the parties filed a Stipulation and Proposed Order in the Franchi matter, pursuant to which, among other things, the parties agreed, that:

(a) Plaintiff’s claims that Comtech's preliminary proxy statement omitted material information regarding the White Hat and Magnetar investments would be dismissed with prejudice and claim that such investments included an implied voting agreement in connection with the 2021 Annual Meeting would be dismissed without prejudice;

(b) Plaintiff withdrew his motion seeking expedited proceedings and an order directing the parties to negotiate a schedule leading to a preliminary injunction hearing;

(c) Comtech agreed to make additional disclosures about the preferred stock transaction and Plaintiff’s lawsuit in its definitive proxy statement for the 2021 Annual Meeting of Stockholders (the “2021 Annual Meeting”);

(d) Comtech agreed that the voting obligations imposed by the voting agreements with White Hat and Magnetar will not apply with respect to director elections during the terms of the voting agreements;

(e) if White Hat and or Magnetar’s votes of the Convertible Preferred Stock are outcome-determinative in the director elections at the 2021 Annual Meeting and if Plaintiff thereafter brings an action containing a claim challenging the election of the directors at the 2021 Annual Meeting, the Defendants agreed to accept service of such a complaint and agreed to ask the court to schedule a final merits-based hearing within 60 days of the filing of the complaint;

(f) Plaintiff reserved the right to pursue claims for money damages or other, non-expedited equitable remedies relating to the Convertible Preferred Stock transaction after the 2021 Annual Meeting;

and (g) Comtech agreed to provide Plaintiff with certain agreed-upon document discovery.

While we disputed all Plaintiff’s allegations and believed them to be without merit, we believed that entering into the aforementioned Stipulation and Proposed Order would avoid unnecessary litigation and is in the best interests of Comtech’s stockholders.

Other Matters

In the ordinary course of business, we include indemnification provisions in certain of our customer contracts to indemnify, hold harmless and reimburse such customers for certain losses, including but not limited to losses related to third-party claims of intellectual property infringement arising from the customer’s use of our products or services.

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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.

Employment Change of Control and Indemnification Agreements

We have an employment agreement and change of control agreement with Fred Kornberg, our Chief Executive Officer ("CEO") and Chairman of the Board.

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 a termination of the employee.

In October 2021, we announced that our Board of Directors has appointed Michael D.

Porcelain, our President and Chief Operating Officer, to be CEO by the end of calendar 2021, at which point Mr.

Porcelain will also join our Board of Directors and continue as President.

Kornberg will serve as non-executive Chairman and is expected to take on a technology advisory role.

Costs associated with this leadership transition will be announced once they are finalized.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements