COMTECH TELECOMMUNICATIONS CORP /DE/ 10-Q

Item 1. Financial Statements COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) Assets April 30, 2023 July 31, 2022 Current assets: Cash and cash equivalents $ 21,404,000 21,654,000 Accounts receivable, net 144,195,000 123,711,000 Inventories, net 107,311,000 96,317,000 Prepaid expenses and other current assets 17,924,000 21,649,000 Total current assets 290,834,000 263,331,000 Property, plant and equipment, net 53,806,000 50,363,000 Operating lease right-of-use assets, net 45,654,000 49,767,000 Goodwill 347,692,000 347,692,000 Intangibles with finite lives, net 231,256,000 247,303,000 Deferred financing costs, net 2,819,000 1,014,000 Other assets, net 17,798,000 14,827,000 Total assets $ 989,859,000 974,297,000 Liabilities, Convertible Preferred Stock and Stockholders’ Equity Current liabilities: Accounts payable $ 62,776,000 44,591,000 Accrued expenses and other current liabilities 64,944,000 72,662,000 Current portion of long-term debt 3,750,000 — Operating lease liabilities, current 8,359,000 8,685,000 Dividends payable — 2,746,000 Contract liabilities 67,725,000 64,601,000 Interest payable 1,208,000 172,000 Total current liabilities 208,762,000 193,457,000 Non-current portion of long-term debt 155,254,000 130,000,000 Operating lease liabilities, non-current 43,070,000 44,423,000 Income taxes payable 2,069,000 3,007,000 Deferred tax liability, net 10,627,000 15,355,000 Long-term contract liabilities 15,472,000 9,975,000 Other liabilities 3,334,000 6,291,000 Total liabilities 438,588,000 402,508,000 Commitments and contingencies (See Note 18) Convertible preferred stock, par value $ 0.10 per share; authorized 125,000 shares; issued 100,000 at April 30, 2023 and July 31, 2022 (includes accrued dividends of $ 595,000 and $ 566,000 , respectively) 110,417,000 105,204,000 Stockholders’ equity: Preferred stock, par value $ 0.10 per share; authorized and unissued 1,875,000 shares — — Common stock, par value $ 0.10 per share; authorized 100,000,000 shares; issued 42,922,265 and 42,672,827 shares at April 30, 2023 and July 31, 2022, respectively 4,292,000 4,267,000 Additional paid-in capital 634,191,000 625,484,000 Retained earnings 244,220,000 278,683,000 882,703,000 908,434,000 Less: Treasury stock, at cost ( 15,033,317 shares at April 30, 2023 and July 31, 2022) ( 441,849,000 ) ( 441,849,000 ) Total stockholders’ equity 440,854,000 466,585,000 Total liabilities, convertible preferred stock and stockholders’ equity $ 989,859,000 974,297,000 See accompanying notes to condensed consolidated financial statements. 2 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three months ended April 30, Nine months ended April 30, 2023 2022 2023 2022 Net sales $ 136,316,000 122,116,000 $ 401,180,000 359,256,000 Cost of sales 93,170,000 75,452,000 265,307,000 224,999,000 Gross profit 43,146,000 46,664,000 135,873,000 134,257,000 Expenses: Selling, general and administrative 31,397,000 27,626,000 89,649,000 85,695,000 Research and development 11,676,000 14,255,000 36,868,000 39,384,000 Amortization of intangibles 5,349,000 5,349,000 16,047,000 16,047,000 CEO transition costs — — 9,090,000 13,554,000 Proxy solicitation costs — — — 11,248,000 48,422,000 47,230,000 151,654,000 165,928,000 Operating loss ( 5,276,000 ) ( 566,000 ) ( 15,781,000 ) ( 31,671,000 ) Other expenses (income): Interest expense 4,386,000 981,000 10,412,000 3,576,000 Interest (income) and other 728,000 ( 449,000 ) 928,000 ( 260,000 ) Change in fair value of convertible preferred stock purchase option liability — ( 302,000 ) — ( 1,004,000 ) Loss before benefit from income taxes ( 10,390,000 ) ( 796,000 ) ( 27,121,000 ) ( 33,983,000 ) Benefit from income taxes ( 2,932,000 ) ( 771,000 ) ( 3,762,000 ) ( 6,100,000 ) Net loss $ ( 7,458,000 ) ( 25,000 ) $ ( 23,359,000 ) ( 27,883,000 ) Adjustments to reflect redemption value of convertible preferred stock: Dividend on convertible preferred stock ( 1,766,000 ) ( 1,655,000 ) ( 5,213,000 ) ( 3,522,000 ) Convertible preferred stock issuance costs — — — ( 4,007,000 ) Establishment of initial convertible preferred stock purchase option liability — — — ( 1,005,000 ) Net loss attributable to common stockholders $ ( 9,224,000 ) ( 1,680,000 ) $ ( 28,572,000 ) ( 36,417,000 ) Net loss per common share (See Note 5): Basic $ ( 0.33 ) ( 0.06 ) $ ( 1.02 ) ( 1.37 ) Diluted $ ( 0.33 ) ( 0.06 ) $ ( 1.02 ) ( 1.37 ) Weighted average number of common shares outstanding – basic 28,071,000 26,528,000 27,950,000 26,582,000 Weighted average number of common and common equivalent shares outstanding – diluted 28,071,000 26,528,000 27,950,000 26,582,000 See accompanying notes to condensed consolidated financial statements. 3 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Unaudited) Three months ended April 30, 2023 and 2022 Series A Convertible Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Stockholders' Equity Shares Amount Shares Amount Shares Amount Balance as of January 31, 2022 100,000 $ 101,867,000 41,553,244 $ 4,155,000 $ 612,780,000 $ 292,778,000 15,033,317 $ ( 441,849,000 ) $ 467,864,000 Equity-classified stock award compensation — — — — 1,071,000 — — — 1,071,000 Issuance of employee stock purchase plan shares — — 12,131 2,000 160,000 — — — 162,000 Net settlement of stock-based awards — — ( 5,014 ) ( 1,000 ) ( 113,000 ) — — — ( 114,000 ) Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends) 1,655,000 — — — ( 1,655,000 ) — — ( 1,655,000 ) Cash dividends declared, net ($ 0.10 per share) — — — — — ( 2,646,000 ) — — ( 2,646,000 ) Accrual of dividend equivalents, net of reversal ($ 0.10 per share) — — — — — ( 97,000 ) — — ( 97,000 ) Net loss — — — — — ( 25,000 ) — — ( 25,000 ) Balance as of April 30, 2022 100,000 $ 103,522,000 41,560,361 $ 4,156,000 $ 613,898,000 $ 288,355,000 15,033,317 $ ( 441,849,000 ) $ 464,560,000 Balance as of January 31, 2023 100,000 $ 108,651,000 42,900,871 $ 4,290,000 $ 630,233,000 $ 253,422,000 15,033,317 $ ( 441,849,000 ) $ 446,096,000 Equity-classified stock award compensation — — — — 4,126,000 — — — 4,126,000 Issuance of employee stock purchase plan shares — — 12,146 1,000 126,000 — — — 127,000 Net settlement of stock-based awards — — 9,248 1,000 ( 294,000 ) — — — ( 293,000 ) Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends) — 1,766,000 — — — ( 1,766,000 ) — — ( 1,766,000 ) Reversal of dividend equivalents ($ 0.10 per share) — — — — — 22,000 — — 22,000 Net loss — — — — — ( 7,458,000 ) — — ( 7,458,000 ) Balance as of April 30, 2023 100,000 $ 110,417,000 42,922,265 $ 4,292,000 $ 634,191,000 $ 244,220,000 15,033,317 $ ( 441,849,000 ) $ 440,854,000 See accompanying notes to condensed consolidated financial statements. 4 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Unaudited) Nine months ended April 30, 2023 and 2022 Series A Convertible Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Stockholders' Equity Shares Amount Shares Amount Shares Amount Balance as of July 31, 2021 — $ — 41,281,812 $ 4,128,000 $ 605,439,000 $ 333,001,000 15,033,317 $ ( 441,849,000 ) $ 500,719,000 Equity-classified stock award compensation — — — — 3,975,000 — — — 3,975,000 CEO transition costs related to equity-classified stock-based awards (See Note 1) — — — — 7,388,000 — — — 7,388,000 Issuance of employee stock purchase plan shares — — 33,807 4,000 612,000 — — — 616,000 Issuance of restricted stock, net of forfeiture — — 132,854 13,000 ( 13,000 ) — — — — Net settlement of stock-based awards — — 111,888 11,000 ( 3,503,000 ) — — — ( 3,492,000 ) Issuance of convertible preferred stock 100,000 100,000,000 — — — — — — — Convertible preferred stock issuance costs — ( 4,007,000 ) — — — — — — — Establishment of initial convertible preferred stock purchase option liability — ( 1,005,000 ) — — — — — — — Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends) — 8,534,000 — — — ( 8,534,000 ) — — ( 8,534,000 ) Cash dividends declared, net ($ 0.30 per share) — — — — — ( 7,915,000 ) — — ( 7,915,000 ) Accrual of dividend equivalents, net of reversal ($ 0.30 per share) — — — — — ( 314,000 ) — — ( 314,000 ) Net loss — — — — — ( 27,883,000 ) — — ( 27,883,000 ) Balance as of April 30, 2022 100,000 $ 103,522,000 41,560,361 $ 4,156,000 $ 613,898,000 $ 288,355,000 15,033,317 $ ( 441,849,000 ) $ 464,560,000 Balance as of July 31, 2022 100,000 $ 105,204,000 42,672,827 $ 4,267,000 $ 625,484,000 $ 278,683,000 15,033,317 $ ( 441,849,000 ) $ 466,585,000 Equity-classified stock award compensation — — — — 6,298,000 — — — 6,298,000 CEO transition costs related to equity-classified stock-based awards (See Note 1) — — — — 3,764,000 — — — 3,764,000 Issuance of employee stock purchase plan shares — — 41,606 4,000 330,000 — — — 334,000 Issuance of restricted stock, net of forfeiture — — 93,091 9,000 ( 9,000 ) — — — — Net settlement of stock-based awards — — 114,741 12,000 ( 1,676,000 ) — — — ( 1,664,000 ) Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends) — 5,213,000 — — — ( 5,213,000 ) — — ( 5,213,000 ) Cash dividends declared, net ($ 0.20 per share) — — — — — ( 5,549,000 ) — — ( 5,549,000 ) Accrual of dividend equivalents, net of reversal ($ 0.20 per share) — — — — — ( 342,000 ) — — ( 342,000 ) Net loss — — — — — ( 23,359,000 ) — — ( 23,359,000 ) Balance as of April 30, 2023 100,000 $ 110,417,000 42,922,265 $ 4,292,000 $ 634,191,000 $ 244,220,000 15,033,317 $ ( 441,849,000 ) $ 440,854,000 See accompanying notes to condensed consolidated financial statements. 5 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine months ended April 30, 2023 2022 Cash flows from operating activities: Net loss $ ( 23,359,000 ) ( 27,883,000 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization of property, plant and equipment 8,746,000 7,057,000 Amortization of intangible assets with finite lives 16,047,000 16,047,000 Amortization of stock-based compensation 6,298,000 3,975,000 Amortization of cost to fulfill assets 720,000 233,000 CEO transition costs related to equity-classified stock-based awards 3,764,000 7,388,000 Amortization of deferred financing costs 1,257,000 608,000 Change in fair value of convertible preferred stock purchase option liability — ( 1,004,000 ) Changes in other liabilities ( 3,100,000 ) ( 3,099,000 ) Loss (gain) on disposal of property, plant and equipment 48,000 ( 120,000 ) Provision for allowance for doubtful accounts 586,000 316,000 Provision for excess and obsolete inventory 2,753,000 3,299,000 Deferred income tax benefit ( 4,926,000 ) ( 5,253,000 ) Changes in assets and liabilities, net of effects of business acquisitions: Accounts receivable ( 21,070,000 ) 33,709,000 Inventories ( 14,383,000 ) ( 18,184,000 ) Prepaid expenses and other current assets 1,826,000 ( 3,447,000 ) Other assets ( 3,547,000 ) ( 964,000 ) Accounts payable 18,199,000 ( 5,802,000 ) Accrued expenses and other current liabilities ( 797,000 ) ( 3,702,000 ) Contract liabilities 8,621,000 11,487,000 Other liabilities, non-current 142,000 ( 3,698,000 ) Interest payable 1,037,000 ( 73,000 ) Income taxes payable 961,000 ( 2,469,000 ) Net cash (used in) provided by operating activities ( 177,000 ) 8,421,000 Cash flows from investing activities: Purchases of property, plant and equipment ( 14,873,000 ) ( 14,420,000 ) Net cash used in investing activities ( 14,873,000 ) ( 14,420,000 ) Cash flows from financing activities: Net borrowings (payments) of long-term debt under Revolving Loan Facility 31,000,000 ( 74,000,000 ) Repayment of debt under Term Loan ( 1,250,000 ) — Cash dividends paid on common stock ( 8,658,000 ) ( 8,398,000 ) Payment of deferred financing costs ( 3,791,000 ) ( 140,000 ) Remittance of employees' statutory tax withholding for stock awards ( 2,766,000 ) ( 6,088,000 ) Proceeds from issuance of employee stock purchase plan shares 370,000 616,000 Payment of shelf registration costs ( 101,000 ) — Repayment of principal amounts under finance lease liabilities ( 4,000 ) ( 14,000 ) Proceeds from issuance of convertible preferred stock — 100,000,000 Payment of convertible preferred stock issuance costs — ( 4,007,000 ) Net cash provided by financing activities 14,800,000 7,969,000 Net (decrease) increase in cash and cash equivalents ( 250,000 ) 1,970,000 Cash and cash equivalents at beginning of period 21,654,000 30,861,000 Cash and cash equivalents at end of period $ 21,404,000 32,831,000 See accompanying notes to condensed consolidated financial statements. 6 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) Nine months ended April 30, 2023 2022 Supplemental cash flow disclosures: Cash paid (received) during the period for: Interest $ 8,070,000 2,906,000 Income taxes, net $ 123,000 1,631,000 Non-cash investing and financing activities: Accrued additions to property, plant and equipment $ 1,421,000 2,379,000 Cash dividends declared on common stock but unpaid (including accrual of dividend equivalents) $ 342,000 2,960,000 Adjustment to reflect redemption value of convertible preferred stock $ 5,213,000 8,534,000 Accrued deferred financing costs $ 17,000 — Reclassification of finance lease right-of-use assets to property, plant and equipment $ 274,000 — Issuance of restricted stock $ 9,000 13,000 Establishment of initial convertible preferred stock purchase option liability $ — 1,005,000 See accompanying notes to condensed consolidated financial statements. 7 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) General The accompanying condensed consolidated financial statements of Comtech Telecommunications Corp. and its subsidiaries ("Comtech," "we," "us," or "our") as of and for the three and nine months ended April 30, 2023 and 2022 are unaudited. In the opinion of management, the information furnished reflects all material adjustments (which include normal recurring adjustments) necessary for a fair presentation of the results for the unaudited interim periods. Our results of operations for such periods are not necessarily indicative of the results of operations to be expected for the full fiscal year. The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the condensed consolidated financial statements, and the reported amounts of net sales and expenses during the reported period. Actual results may differ from those estimates. Our condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements, filed with the Securities and Exchange Commission ("SEC"), for the fiscal year ended July 31, 2022 and the notes thereto contained in our Annual Report on Form 10-K, and all of our other filings with the SEC. Reclassifications Certain reclassifications have been made to previously reported condensed consolidated financial statements to conform to the fiscal 2023 presentation. See Note (13) - "Segment Information" for additional information. CEO Transition Costs & Related On August 9, 2022, our Board of Directors appointed our Chairman of the Board, Ken Peterman, as President and Chief Executive Officer ("CEO"). Transition costs related to our former President and CEO, Michael D. Porcelain, pursuant to his separation agreement with the Company, were $ 7,424,000 , of which $ 3,764,000 related to the acceleration of unamortized stock based compensation, with the remaining $ 3,660,000 related to his severance payments and benefits upon termination of employment. The cash portion of the transition costs of $ 3,660,000 was paid to Mr. Porcelain in October 2022. Also, in connection with Mr. Peterman entering into an employment agreement with the Company, effective as of August 9, 2022, we incurred a $ 1,000,000 expense related to a cash sign-on bonus, which was paid to Mr. Peterman in January 2023. CEO transition costs related to Mr. Porcelain and Mr. Peterman were expensed in our Unallocated segment during the first quarter of fiscal 2023. During fiscal 2022, we expensed $ 13,554,000 of transition costs related to another former CEO, Fred Kornberg. Since being appointed President and CEO, Mr. Peterman, along with his senior leadership team, has been driving transformational changes at Comtech to, among other things, integrate our individual businesses into two segments and improve operational performance. This transformation, which we refer to as “One Comtech,” has provided insight into opportunities to manage costs, streamline operations, improve efficiency, and accelerate decision making by eliminating management layers and other redundancies – resulting in a reduction in our workforce and the implementation of other lean initiatives during the third and fourth quarters of fiscal 2023. Severance costs relating to these actions are not anticipated to be material to our results of operations. (2) Adoption of Accounting Standards and Updates We are required to prepare our condensed consolidated financial statements in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") which is the source for all authoritative U.S. generally accepted accounting principles, which are commonly referred to as "GAAP." The FASB ASC is subject to updates by the FASB, which are known as Accounting Standards Updates ("ASUs"). ASUs issued, but not effective until after April 30, 2023, are not expected to have a material impact on our condensed consolidated financial statements or disclosures. 8 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (3) Revenue Recognition In accordance with FASB ASC 606 - Revenue from Contracts with Customers ("ASC 606"), we record revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to customers. Under ASC 606, we follow a five-step model to: (1) identify the contract with our customer; (2) identify our performance obligations in our contract; (3) determine the transaction price for our contract; (4) allocate the transaction price to our performance obligations; and (5) recognize revenue using one of the following two methods: • Over time - We recognize revenue using the over time method when there is a continuous transfer of control to the customer over the contractual period of performance. This generally occurs when we enter into a long-term contract relating to the design, development or manufacture of complex equipment or technology platforms to a buyer’s specification (or to provide services related to the performance of such contracts). Continuous transfer of control is typically supported by contract clauses which allow our customers to unilaterally terminate a contract for convenience, pay for costs incurred plus a reasonable profit and take control of work-in-process. Revenue recognized over time is generally based on the extent of progress toward completion of the related performance obligations. The selection of the method to measure progress requires judgment and is based on the nature of the products or services provided. In certain instances, typically for firm fixed-price contracts, we use the cost-to-cost measure because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion, including warranty costs. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Costs to fulfill generally include direct labor, materials, subcontractor costs, other direct costs and an allocation of indirect costs. When these contracts are modified, the additional goods or services are generally not distinct from those already provided. As a result, these modifications form part of an existing contract and we must update the transaction price and our measure of progress for the single performance obligation and recognize a cumulative catch-up to revenue and gross profits. For over time contracts using a cost-to-cost measure of progress, we have an estimate at completion ("EAC") process in which management reviews the progress and execution of our performance obligations. This EAC process requires management judgment relative to assessing risks, estimating contract revenue and costs, and making assumptions for schedule and technical issues. Since certain contracts extend over a long period of time, the impact of revisions in revenue and or cost estimates during the progress of work may impact current period earnings through a cumulative adjustment. Additionally, if the EAC process indicates a loss, a provision is made for the total anticipated loss in the period that it becomes evident. Contract revenue and cost estimates for significant contracts are generally reviewed and reassessed at least quarterly. The cost-to-cost method is principally used to account for contracts in our Satellite and Space Communications segment and, to a lesser extent, certain location-based and messaging infrastructure contracts in our public safety and location technologies product line within our Terrestrial and Wireless Networks segment. For service-based contracts in our Terrestrial and Wireless Networks segment, we also recognize revenue over time. These services are typically recognized as a series of services performed over the contract term using the straight-line method, or based on our customers’ actual usage of the networks and platforms which we provide. • Point in time - When a performance obligation is not satisfied over time, we must record revenue using the point in time accounting method which generally results in revenue being recognized upon shipment or delivery of a promised good or service to a customer. This generally occurs when we enter into short-term contracts or purchase orders where items are provided to customers with relatively quick turn-around times. Modifications to such contracts and or purchase orders, which typically provide for additional quantities or services, are accounted for as a new contract because the pricing for these additional quantities or services are based on standalone selling prices. 9 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Point in time accounting is principally applied to contracts in our satellite ground station technologies product line (which includes satellite modems, solid-state and traveling wave tube amplifiers) and certain contracts for our solid-state, high-power RF amplifiers. The contracts related to these product lines do not meet the requirements for over time revenue recognition because our customers cannot utilize the equipment for its intended purpose during any phase of our manufacturing process; customers do not simultaneously receive and or consume the benefits provided by our performance; customers do not control the asset (i.e., prior to delivery, customers cannot direct the use of the asset, sell or exchange the equipment, etc.); and, although many of our contracts have termination for convenience clauses and or an enforceable right to payment for performance completed to date, our performance creates an asset with an alternative use through the point of delivery. In determining that our equipment has alternative use, we considered the underlying manufacturing process for our products. In the early phases of manufacturing, raw materials and work in process (including subassemblies) consist of common parts that are highly fungible among many different types of products and customer applications. Finished products are either configured to our standard configuration or based on our customers’ specifications. Finished products, whether built to our standard specification or to a customers’ specification, can be sold to a variety of customers and across many different end use applications with minimal rework, if needed, and without incurring a significant economic loss. When identifying a contract with our customer, we consider when it has approval and commitment from both parties, if the rights of the parties are identified, if the payment terms are identified, if it has commercial substance and if collectability is probable. When identifying performance obligations, we consider whether there are multiple promises and how to account for them. In our contracts, multiple promises are separated if they are distinct, both individually and in the context of the contract. If multiple promises in a contract are highly interrelated or comprise a series of distinct services performed over time, they are combined into a single performance obligation. In some cases, we may also provide the customer with an additional service-type warranty, which we recognize as a separate performance obligation. Service-type warranties do not represent a significant portion of our consolidated net sales. When service-type warranties represent a separate performance obligation, the revenue is deferred and recognized ratably over the extended warranty period. Our contracts, from time-to-time, may also include options for additional goods and services. To date, these options have not represented material rights to the customer as the pricing for them reflects standalone selling prices. As a result, we do not consider options we offer to be performance obligations for which we must allocate a portion of the transaction price. In many cases, we provide assurance-type warranty coverage for some of our products for a period of at least one year from the date of delivery. When identifying the transaction price, we typically utilize the contract's stated price as a starting point. The transaction price in certain arrangements may include estimated amounts of variable consideration, including award fees, incentive fees or other provisions that can either increase or decrease the transaction price. We estimate variable consideration as the amount to which we expect to be entitled, and we include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the estimation uncertainty is resolved. The estimation of this variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (e.g., historical, current and forecasted) that is reasonably available to us. When allocating the contract’s transaction price, we consider each distinct performance obligation. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. We determine standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions, including geographic or regional specific factors, competitive positioning, internal costs, profit objectives and internally approved pricing guidelines related to the performance obligations. 10 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Most of our contracts with customers are denominated in U.S. dollars and typically are either firm fixed-price or cost reimbursable type contracts (including fixed-fee, incentive-fee and time-and-material type contracts). In almost all of our contracts with customers, we are the principal in the arrangement and report revenue on a gross basis. Transaction prices for contracts with U.S. domestic and international customers are usually based on specific negotiations with each customer and in the case of the U.S. government, sometimes based on estimated or actual costs of providing the goods or services in accordance with applicable regulations. Sales by geography and customer type, as a percentage of consolidated net sales, are as follows: Three months ended April 30, Nine months ended April 30, 2023 2022 2023 2022 United States U.S. government 29.1 % 23.3 % 30.3 % 26.8 % Domestic 43.8 % 48.6 % 45.7 % 48.2 % Total United States 72.9 % 71.9 % 76.0 % 75.0 % International 27.1 % 28.1 % 24.0 % 25.0 % Total 100.0 % 100.0 % 100.0 % 100.0 % Sales to U.S. government customers include sales to the U.S. Department of Defense ("DoD"), intelligence and civilian agencies, as well as sales directly to or through prime contractors. Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. Except for the U.S. government, there were no customers that represented more than 10.0% of consolidated net sales for the three months ended April 30, 2023. Included in domestic sales are sales to Verizon Communications Inc. ("Verizon"), which accounted for 11.2 % of consolidated net sales for the nine months ended April 30, 2023 and 10.6 % and 11.1 % of consolidated net sales for the three and nine months ended April 30, 2022, respectively. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented more than 10.0% of consolidated net sales for the three and nine months ended April 30, 2023 and 2022. The following tables summarize our disaggregation of revenue consistent with information reviewed by our Chief Operating Decision Maker ("CODM") for the three and nine months ended April 30, 2023 and 2022. We believe these categories best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors which impact our business: Three months ended April 30, 2023 Nine months ended April 30, 2023 Satellite and Space Communications Terrestrial and Wireless Networks Total Satellite and Space Communications Terrestrial and Wireless Networks Total Geographical region and customer type U.S. government $ 38,779,000 855,000 $ 39,634,000 $ 118,739,000 2,841,000 $ 121,580,000 Domestic 12,146,000 47,555,000 59,701,000 41,819,000 141,542,000 183,361,000 Total United States 50,925,000 48,410,000 99,335,000 160,558,000 144,383,000 304,941,000 International 31,324,000 5,657,000 36,981,000 82,971,000 13,268,000 96,239,000 Total $ 82,249,000 54,067,000 $ 136,316,000 $ 243,529,000 157,651,000 $ 401,180,000 Contract type Firm fixed-price $ 68,010,000 54,067,000 $ 122,077,000 $ 210,343,000 157,651,000 $ 367,994,000 Cost reimbursable 14,239,000 — 14,239,000 33,186,000 — 33,186,000 Total $ 82,249,000 54,067,000 $ 136,316,000 $ 243,529,000 157,651,000 $ 401,180,000 Transfer of control Point in time $ 30,870,000 268,000 $ 31,138,000 $ 152,157,000 1,994,000 $ 154,151,000 Over time 51,379,000 53,799,000 105,178,000 91,372,000 155,657,000 247,029,000 Total $ 82,249,000 54,067,000 $ 136,316,000 $ 243,529,000 157,651,000 $ 401,180,000 11 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Three months ended April 30, 2022 Nine months ended April 30, 2022 Satellite and Space Communications Terrestrial and Wireless Networks Total Satellite and Space Communications Terrestrial and Wireless Networks Total Geographical region and customer type U.S. government $ 27,492,000 943,000 $ 28,435,000 $ 92,544,000 3,611,000 $ 96,155,000 Domestic 12,189,000 47,143,000 59,332,000 35,239,000 137,968,000 173,207,000 Total United States 39,681,000 48,086,000 87,767,000 127,783,000 141,579,000 269,362,000 International 29,469,000 4,880,000 34,349,000 75,107,000 14,787,000 89,894,000 Total $ 69,150,000 52,966,000 $ 122,116,000 $ 202,890,000 156,366,000 $ 359,256,000 Contract type Firm fixed-price $ 61,051,000 52,966,000 $ 114,017,000 $ 180,120,000 156,366,000 $ 336,486,000 Cost reimbursable 8,099,000 — 8,099,000 22,770,000 — 22,770,000 Total $ 69,150,000 52,966,000 $ 122,116,000 $ 202,890,000 156,366,000 $ 359,256,000 Transfer of control Point in time $ 46,880,000 465,000 $ 47,345,000 $ 134,018,000 1,889,000 $ 135,907,000 Over time 22,270,000 52,501,000 74,771,000 68,872,000 154,477,000 223,349,000 Total $ 69,150,000 52,966,000 $ 122,116,000 $ 202,890,000 156,366,000 $ 359,256,000 The timing of revenue recognition, billings and collections results in receivables, unbilled receivables and contract liabilities on our Condensed Consolidated Balance Sheet. Under typical payment terms for our contracts accounted for over time, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., monthly) or upon achievement of contractual milestones. For certain contracts with provisions that are intended to protect customers in the event we do not satisfy our performance obligations, billings occur subsequent to revenue recognition, resulting in unbilled receivables. Under ASC 606, unbilled receivables constitute contract assets. There were no material impairment losses recognized on contract assets during the three and nine months ended April 30, 2023 and 2022, respectively. On large long-term contracts, and for contracts with international customers that do not do business with us regularly, payment terms typically require advanced payments and deposits. Under ASC 606, payments received from customers in excess of revenue recognized to-date results in a contract liability. These contract liabilities are not considered to represent a significant financing component of the contract because we believe these cash advances and deposits are generally used to meet working capital demands which can be higher in the earlier stages of a contract. Also, advanced payments and deposits provide us with some measure of assurance that the customer will perform on its obligations under the contract. Under the typical payment terms for our contracts accounted for at a point in time, costs are accumulated in inventory until the time of billing, which generally coincides with revenue recognition. Of the current contract liability balance of $ 64,601,000 at July 31, 2022 and $ 66,130,000 at July 31, 2021, $ 43,125,000 and $ 46,031,000 was recognized as revenue during the nine months ended April 30, 2023 and 2022, respectively. We recognize the incremental costs to obtain or fulfill a contract as an expense when incurred if the amortization period of the asset is one year or less; otherwise, such costs are capitalized and amortized over the estimated life of the contract. During the nine months ended April 30, 2023 and 2022, incremental costs to obtain or fulfill contracts with an amortization period greater than one year were not material. As commissions payable to our internal sales and marketing employees or contractors are contingent upon multiple factors, such commissions are not considered direct costs to obtain or fulfill a contract with a customer and are expensed as incurred in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations. As for commissions payable to our third-party sales representatives related to long-term contracts, we do consider these types of commissions both direct and incremental costs to obtain and fulfill such contracts. Therefore, such types of commissions are included in total estimated costs at completion for such contracts and expensed over time through cost of sales on our Condensed Consolidated Statements of Operations. 12 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Remaining performance obligations represent the transaction price of firm orders for which work has not been performed as of the end of a fiscal period. Remaining performance obligations, which we refer to as backlog, exclude unexercised contract options and potential orders under indefinite delivery / indefinite quantity ("IDIQ") contracts. As of April 30, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 668,405,000 (which represents the amount of our consolidated funded backlog). We estimate that a substantial portion of our remaining performance obligations at April 30, 2023 will be completed and recognized as revenue during the next twenty-four month period, with the rest thereafter. During the nine months ended April 30, 2023, revenue recognized from performance obligations satisfied, or partially satisfied, in previous periods (for example due to changes in the transaction price) was not material. (4) Fair Value Measurements and Financial Instruments Using the fair value hierarchy described in FASB ASC 820 " Fair Value Measurements and Disclosures," we valued our cash and cash equivalents using Level 1 inputs that were based on quoted market prices. We believe that the carrying amounts of our other current financial assets (such as accounts receivable) and other current liabilities (including accounts payable and accrued expenses) approximate their fair values due to their short-term maturities. The fair value of the non-current portion of our credit facility approximates its carrying amount due to its variable interest rate and pricing grid that is dependent upon our leverage ratio as of the end of each fiscal quarter. See Note (9) - "Credit Facility" for more information. As of April 30, 2023 and July 31, 2022, other than the cash and cash equivalents discussed above, we had no other significant assets or liabilities included in our Condensed Consolidated Balance Sheets recorded at fair value, as such term is defined by FASB ASC 820. (5) Earnings Per Share Our basic earnings per share ("EPS") is computed based on the weighted average number of common shares (including vested but unissued stock units, share units, performance shares and restricted stock units ("RSUs")) outstanding during each respective period. Our diluted EPS reflects the dilution from potential common stock issuable pursuant to the exercise of equity-classified stock-based awards, settlement of escrow arrangements related to our acquisition of UHP Networks Inc. ("UHP") and the assumed conversion of Convertible Preferred Stock, if dilutive, outstanding during each respective period. Pursuant to FASB ASC 260 " Earnings Per Share, " shares whose issuance is contingent upon the satisfaction of certain conditions are included in diluted EPS based on the number of shares, if any, that would be issuable if the end of the reporting period were the end of the contingency period. When calculating our diluted earnings per share, we consider the amount an employee must pay upon assumed exercise of stock-based awards and the amount of stock-based compensation cost attributed to future services and not yet recognized. There were no repurchases of our common stock during the three or nine months ended April 30, 2023 or 2022. See Note (17) - " Stockholders’ Equity " for more information. Weighted average stock options, RSUs and restricted stock outstanding of 956,000 and 1,369,000 for the three months ended April 30, 2023 and 2022, respectively, and 1,001,000 and 1,463,000 shares for the nine months ended April 30, 2023 and 2022, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive. Our EPS calculations exclude 429,000 and 339,000 weighted average performance shares outstanding for the three months ended April 30, 2023 and 2022, respectively, and 384,000 and 287,000 for the nine months ended April 30, 2023 and 2022, respectively, as the performance conditions have not yet been satisfied. However, the numerator for EPS calculations for each respective period is reduced by the compensation expense related to these awards. Weighted average common shares of 228,000 and 553,000 for the three months ended April 30, 2023 and 2022, respectively, and 293,000 and 455,000 for the nine months ended April 30, 2023 and 2022, respectively, related to our acquisition of UHP in March 2021 were not included in our diluted EPS calculation because their effect would have been anti-dilutive. 13 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Weighted average common shares underlying the assumed conversion of Convertible Preferred Stock, on an if-converted basis, of 4,606,000 and 4,225,000 for the three months ended April 30, 2023 and 2022, respectively, and 4,533,000 and 2,969,000 for the nine months ended April 30, 2023 and 2022, respectively, were not included in our diluted EPS calculation for the respective periods because their effect would have been anti-dilutive. As a result, the numerator for our basic and diluted EPS calculation for the three and nine months ended April 30, 2023 and 2022 is the respective net loss attributable to common stockholders. The following table reconciles the numerators and denominators used in the basic and diluted EPS calculations: Three months ended April 30, Nine months ended April 30, 2023 2022 2023 2022 Numerator: Net loss $ ( 7,458,000 ) ( 25,000 ) $ ( 23,359,000 ) ( 27,883,000 ) Dividend on convertible preferred stock ( 1,766,000 ) ( 1,655,000 ) ( 5,213,000 ) ( 3,522,000 ) Convertible preferred stock issuance costs — — — ( 4,007,000 ) Establishment of initial convertible preferred stock purchase option liability — — — ( 1,005,000 ) Net loss attributable to common stockholders $ ( 9,224,000 ) ( 1,680,000 ) $ ( 28,572,000 ) ( 36,417,000 ) Denominator: Denominator for basic and diluted calculation 28,071,000 26,528,000 27,950,000 26,582,000 As discussed further in Note (16) - " Convertible Preferred Stock ," the Convertible Preferred Stock issued in October 2021 represents a "participating security" as defined in ASC 260. As a result, our EPS calculations for the three and nine months ended April 30, 2023 and 2022 were based on the two-class method. Given the net loss attributable to common stockholders for the three and nine months ended April 30, 2023 and 2022, there was no impact of applying the two-class method to our reported basic or diluted earnings per common share. (6) Accounts Receivable Accounts receivable consist of the following at: April 30, 2023 July 31, 2022 Receivables from commercial and international customers $ 63,924,000 59,922,000 Unbilled receivables from commercial and international customers 49,935,000 39,826,000 Receivables from the U.S. government and its agencies 20,703,000 24,776,000 Unbilled receivables from the U.S. government and its agencies 12,381,000 1,524,000 Total accounts receivable 146,943,000 126,048,000 Less allowance for doubtful accounts 2,748,000 2,337,000 Accounts receivable, net $ 144,195,000 123,711,000 Unbilled receivables as of April 30, 2023 relate to contracts-in-progress for which revenue has been recognized, but for which we have not yet earned the right to bill the customer for work performed to-date. Under ASC 606, unbilled receivables constitute contract assets. Management estimates that a substantial portion of the amounts not yet billed at April 30, 2023 will be billed and collected within one year. Accounts receivable in the table above excludes $ 2,873,000 of long-term unbilled receivables presented within "Other assets, net" in the condensed consolidated balance sheet as of April 30, 2023. As of April 30, 2023, except for the U.S. government (and its agencies) and AT&T, which represented 22.5 % and 13.9 %, of total accounts receivable, respectively, there were no other customers which accounted for greater than 10% of total accounts receivable. 14 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) As of July 31, 2022, except for the U.S. government (and its agencies) and Verizon, which represented 20.9 % and 13.4 % of total accounts receivable, respectively, there were no other customers which accounted for greater than 10% of total accounts receivable. (7) Inventories Inventories consist of the following at: April 30, 2023 July 31, 2022 Raw materials and components $ 89,400,000 78,478,000 Work-in-process and finished goods 42,165,000 40,960,000 Total inventories 131,565,000 119,438,000 Less reserve for excess and obsolete inventories 24,254,000 23,121,000 Inventories, net $ 107,311,000 96,317,000 As of April 30, 2023 and July 31, 2022, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $ 6,006,000 and $ 4,100,000 , respectively, and the amount of inventory related to contracts from third-party commercial customers who outsource their manufacturing to us was $ 3,533,000 and $ 1,866,000 , respectively. (8) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following at: April 30, 2023 July 31, 2022 Accrued wages and benefits $ 19,180,000 25,675,000 Accrued contract costs 14,255,000 15,921,000 Accrued warranty obligations 8,240,000 9,420,000 Accrued commissions and royalties 6,559,000 5,697,000 Accrued legal costs 1,107,000 2,514,000 Other 15,603,000 13,435,000 Accrued expenses and other current liabilities $ 64,944,000 72,662,000 Accrued contract costs represent direct and indirect costs on contracts as well as estimates of amounts owed for invoices not yet received from vendors or reflected in accounts payable. Accrued warranty obligations as of April 30, 2023 relate to estimated liabilities for assurance type warranty coverage that we provide to our customers. We generally provide warranty coverage for some of our products for a period of at least one year from the date of delivery. We record a liability for estimated warranty expense based on historical claims, product failure rates, consideration of contractual obligations, future costs to resolve software issues and other factors. Some of our product warranties are provided under long-term contracts, the costs of which are incorporated into our estimates of total contract costs. 15 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Changes in our accrued warranty obligations during the nine months ended April 30, 2023 and 2022 were as follows: Nine months ended April 30, 2023 2022 Balance at beginning of period $ 9,420,000 17,600,000 Provision (benefit) for warranty obligations 1,756,000 ( 613,000 ) Adjustments for changes in estimates ( 1,500,000 ) ( 2,500,000 ) Charges incurred ( 1,436,000 ) ( 3,655,000 ) Balance at end of period $ 8,240,000 10,832,000 During the nine months ended April 30, 2023 and 2022, we recorded benefits of $ 1,500,000 and $ 2,500,000 , respectively, to cost of sales in our Terrestrial and Wireless Networks segment due to lower than expected warranty claims associated with previously acquired NG-911 technologies. (9) Credit Facility On October 31, 2018, we entered into a First Amended and Restated Credit Agreement (the "Credit Facility") with a syndicate of lenders. As of July 31, 2022, the amount outstanding under our Credit Facility was $ 130,000,000 , which is reflected in the non-current portion of long-term debt on our condensed consolidated balance sheet. On November 30, 2022, we refinanced the amount outstanding under the Credit Facility by entering into a Second Amended and Restated Credit Agreement (also referred to herein as the “Credit Facility”) with the existing lenders. The Credit Facility provides a senior secured loan facility of up to $ 300,000,000 consisting of: (i) a revolving loan facility (“Revolving Loan Facility”) with a borrowing limit of $ 150,000,000 , including a $ 20,000,000 letter of credit sublimit and a swingline loan credit sublimit of $ 15,000,000 ; (ii) a $ 50,000,000 term loan A (“Term Loan”); and (iii) an accordion feature allowing us to make a request to borrow up to an additional $ 100,000,000 subject to the satisfaction of specified conditions, including approval by our lenders. The Credit Facility has a maturity date of October 31, 2024 (“Maturity Date”). In connection with entering the Credit Facility, we capitalized $ 3,809,000 of financing costs, and accounted for the amendment to the Credit Facility as a debt modification. As of April 30, 2023, the amount outstanding under our Credit Facility was as follows: April 30, 2023 Term Loan $ 48,750,000 Less unamortized deferred financing costs related to Term Loan 746,000 Term Loan, net 48,004,000 Revolving Loan Facility 111,000,000 Amount outstanding under Credit Facility, net 159,004,000 Less current portion of long-term debt 3,750,000 Non-current portion of long-term debt $ 155,254,000 At April 30, 2023, we had $ 1,049,000 of standby letters of credit outstanding under our Credit Facility related to guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit. During the nine months ended April 30, 2023, we had outstanding balances under the Credit Facility ranging from $ 130,000,000 to $ 182,375,000 . As of April 30, 2023, total net deferred financing costs related to the Credit Facility were $ 3,565,000 and are being amortized over the term of our Credit Facility through the Maturity Date. 16 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Interest expense related to our Credit Facility, including amortization of deferred financing costs, recorded during the three months ended April 30, 2023 and 2022 was $ 4,400,000 and $ 1,004,000 , respectively. Interest expense related to our Credit Facility, including amortization of deferred financing costs, recorded during the nine months ended April 30, 2023 and 2022 was $ 10,401,000 and $ 3,478,000 , respectively. Our blended interest rate approximated 10.10 % and 3.30 %, respectively, for the three months ended April 30, 2023 and 2022 and approximated 8.34 % and 3.20 %, respectively, for the nine months ended April 30, 2023 and 2022. Under the Credit Facility, borrowings under the Revolving Loan Facility and Term Loan are either: (i) Alternate Base Rate borrowings, which would bear interest from the applicable borrowing date at a rate per annum equal to (x) the highest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.50 % and (c) the Adjusted Term SOFR for a one-month tenor in effect on such day (or, if such day is not a business day, the immediately preceding business day) plus 1.00 %, plus (y) the Applicable Rate, or (ii) SOFR borrowings, which would bear interest from the applicable borrowing date at a rate per annum equal to (x) the Adjusted Term SOFR for such interest period plus (y) the Applicable Rate. Determination of the Applicable Rate is based on a pricing grid that is dependent upon our Leverage Ratio as of the end of each fiscal quarter for which consolidated financial statements have been most recently delivered. The Credit Facility contains customary representations, warranties and affirmative covenants. The Credit Facility also contains customary negative covenants, subject to negotiated exceptions, including but not limited to: (i) liens, (ii) investments, (iii) indebtedness, (iv) significant corporate changes, including mergers and acquisitions, (v) dispositions, (vi) restricted payments, including stockholder dividends, and (vii) certain other restrictive agreements. The Credit Facility also contains certain financial covenants and customary events of default (subject to grace periods, as appropriate), such as payment defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency, the occurrence of a defined change in control and the failure to observe the negative covenants and other covenants related to the operation of our business. In addition, under certain circumstances, we may be required to enter into amendments to the Credit Facility in connection with any further syndication of the Credit Facility. The Credit Facility provides for, among other things: (i) scheduled payments of principal under the Term Loan totaling $ 2,500,000 in the first year after closing (of which $ 1,250,000 was paid through April 30, 2023), and $ 5,000,000 in the second year after closing, with the remaining balance of the Term Loan due upon maturity; (ii) a maximum Leverage Ratio of 4.00 x trailing twelve months ("TTM") Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") at the fiscal quarter ended April 30, 2023, stepping down to 3.75 x at the fiscal quarter ending July 31, 2023, and 3.50 x at the fiscal quarter ending January 31, 2024 and thereafter; (iii) a Minimum Interest Coverage Ratio of 3.25 x TTM Adjusted EBITDA; and (iv) Minimum Liquidity of $ 25,000,000 . As of April 30, 2023, our Secured Leverage Ratio was 3.73 x TTM Adjusted EBITDA compared to the maximum allowable Secured Leverage Ratio of 4.00 x TTM Adjusted EBITDA. Our Interest Expense Coverage Ratio as of April 30, 2023 was 4.11 x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25 x TTM Adjusted EBITDA. Our Minimum Liquidity was $ 32,500,000 compared to the Minimum Liquidity requirement of $ 25,000,000 . The obligations under the Credit Facility are guaranteed by certain of our domestic and foreign subsidiaries (the “Guarantors”). As collateral security under the Credit Facility and the guarantees thereof, we and the Guarantors have granted to the administrative agent, for the benefit of the lenders, a lien on, and first priority security interest in, substantially all of our tangible and intangible assets. Capitalized terms used but not defined herein have the meanings set forth for such terms in the Credit Facility, which has been documented and filed with the SEC. 17 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (10) Leases Our leases historically relate to the leasing of facilities and equipment. In accordance with FASB ASC 842 - " Leases " ("ASC 842"), we determine at inception whether an arrangement is, or contains, a lease and whether the lease should be classified as an operating or a financing lease. At lease commencement, we recognize a right-of-use ("ROU") asset and lease liability based on the present value of the future lease payments over the estimated lease term. We have elected to not recognize a ROU asset or lease liability for any leases with terms of twelve months or less. Instead, for such short-term leases, we recognize lease expense on a straight-line basis over the lease term. Certain of our leases include options to extend the term of the lease or to terminate the lease early. When it is reasonably certain that we will exercise a renewal option or will not exercise a termination option, we include the impact of exercising or not exercising such option, respectively, in the estimate of the lease term. As our lease agreements do not explicitly state the discount rate implicit in the lease, we use our incremental borrowing rate ("IBR") on the commencement date to calculate the present value of future lease payments. Such IBR represents our estimated rate of interest to borrow on a collateralized basis over a term commensurate with the expected lease term. Some of our leases include payments that are based on the Consumer Price Index ("CPI") or other similar indices. These variable lease payments are included in the calculation of the ROU asset and lease liability using the index as of the lease commencement date. Other variable lease payments, such as common area maintenance, property taxes, and usage-based amounts, are required by ASC 842 to be excluded from the ROU asset and lease liability and expensed as incurred. In addition to the present value of the future lease payments, the calculation of the ROU asset would also consider, to the extent applicable, any deferred rent upon adoption, lease pre-payments or initial direct costs of obtaining the lease (e.g., such as commissions). For all classes of leased assets, we elected the practical expedient to not separate lease components (i.e., the actual item being leased, such as the facility or piece of equipment) from non-lease components (i.e., the distinct elements of a contract not related to securing the use of the leased asset, such as common area maintenance and consumable supplies). Certain of our facility lease agreements (which are classified as operating leases) contain rent holidays or rent escalation clauses. For rent holidays and rent escalation clauses during the lease term, we record rental expense on a straight-line basis over the term of the lease. As of April 30, 2023, none of our leases contained a residual value guarantee and covenants included in our lease agreements are customary for the types of facilities and equipment being leased. The components of lease expense are as follows: Three months ended April 30, Nine months ended April 30, 2023 2022 2023 2022 Finance lease expense: Amortization of ROU assets $ 1,000 3,000 $ 5,000 10,000 Interest on lease liabilities — 1,000 — 1,000 Operating lease expense 2,495,000 2,933,000 8,088,000 8,797,000 Short-term lease expense 108,000 92,000 326,000 303,000 Variable lease expense 783,000 1,128,000 2,881,000 3,446,000 Sublease income ( 17,000 ) ( 17,000 ) ( 50,000 ) ( 50,000 ) Total lease expense $ 3,370,000 4,140,000 $ 11,250,000 12,507,000 18 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Additional information related to leases is as follows: Nine months ended April 30, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating leases - Operating cash outflows $ 8,183,000 $ 8,910,000 Finance leases - Operating cash outflows — 1,000 Finance leases - Financing cash outflows 4,000 14,000 ROU assets obtained in the exchange for lease liabilities (non-cash): Operating leases $ 2,850,000 $ 15,212,000 The following table is a reconciliation of future cash flows relating to operating lease liabilities presented on our Condensed Consolidated Balance Sheet as of April 30, 2023: Remainder of fiscal 2023 $ 2,291,000 Fiscal 2024 9,271,000 Fiscal 2025 8,655,000 Fiscal 2026 7,232,000 Fiscal 2027 5,184,000 Thereafter 26,009,000 Total future undiscounted cash flows 58,642,000 Less: Present value discount 7,213,000 Lease liabilities $ 51,429,000 Weighted-average remaining lease terms (in years) 8.51 Weighted-average discount rate 3.41 % We lease our Melville, New York production facility from a partnership controlled by our former CEO. Lease payments made during the nine months ended April 30, 2023 and 2022 were $ 516,000 and $ 504,000 , respectively. The current lease provides for our use of the premises as they exist through December 2031. The annual rent of the facility for calendar year 2023 is $ 691,000 and is subject to customary adjustments. We have a right of first refusal in the event of a sale of the facility. As of April 30, 2023, we do not have any material rental commitments that have not already commenced. (11) Income Taxes Our effective tax rate for the three months ended April 30, 2023 was 28.2 %, which includes a net discrete tax benefit of $ 1,203,000 primarily related to the reversal of tax contingencies no longer required due to the expiration of applicable statute of limitations, offset in part by the finalization of certain tax accounts in connection with our fiscal 2022 federal income tax return. Our effective tax rate for the nine months ended April 30, 2023 was 13.9 %, which includes a net discrete tax benefit of $ 1,193,000 primarily related to the reversal of tax contingencies no longer required due to the expiration of applicable statute of limitations and the deductible portion of CEO transition costs, offset in part by the settlement of stock-based awards and the finalization of certain tax accounts in connection with our fiscal 2022 federal income tax return. Our effective tax rate for the three months ended April 30, 2022 was 96.8 %, which includes a net discrete tax expense of $ 166,000 primarily related to the expiration of equity-based awards, offset in part by the finalization of certain tax accounts in connection with our fiscal 2021 federal income tax return. Our effective tax rate for the nine months ended April 30, 2022 was 18.0 %, which includes a net discrete tax benefit of $ 3,506,000 primarily related to proxy solicitation costs, the deductible portion of CEO transition costs and the finalization of certain tax accounts in connection with our fiscal 2021 federal income tax return. 19 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Excluding discrete items, our effective tax rate for the three and nine months ended April 30, 2023 and 2022 was 14.25 % and 28.25 %, respectively. For purposes of determining our estimated annual effective tax rate for fiscal 2023, CEO transition costs are considered significant, unusual or infrequently occurring discrete tax items and are excluded from the computation of our effective tax rate. The 14.25 % reflects the recognition of a valuation allowance in a foreign jurisdiction, offset in part by the recognition of research and experimentation tax credits. The 28.25 % reflects the recognition of research and experimentation tax credits, offset in part by nondeductible executive compensation. At April 30, 2023 and July 31, 2022, total unrecognized tax benefits were $ 8,922,000 and $ 10,008,000 , respectively, including interest of $ 179,000 and $ 330,000 , respectively. Unrecognized tax benefits result from income tax positions taken or expected to be taken on our income tax returns for which a tax benefit has not been recorded in our consolidated financial statements. We believe it is reasonably possible that the gross unrecognized tax benefits could decrease by as much as $ 600,000 in the next twelve months due to the expiration of a statute of limitations related to federal, state and foreign tax positions. Our U.S. federal income tax returns for fiscal 2020 through 2022 are subject to potential future Internal Revenue Service ("IRS") audit. None of our state income tax returns prior to fiscal 2018 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition. (12) Stock-Based Compensation Overview We issue stock-based awards to certain of our employees and our Board of Directors pursuant to our 2000 Stock Incentive Plan, as amended and/or restated from time to time (the "Plan") and our 2001 Employee Stock Purchase Plan, as amended and/or restated from time to time (the "ESPP"), and recognize related stock-based compensation in our condensed consolidated financial statements. The Plan provides for the granting to employees and consultants of Comtech (including prospective employees and consultants): (i) incentive and non-qualified stock options, (ii) restricted stock units ("RSUs"), (iii) RSUs with performance measures (which we refer to as "performance shares"), (iv) restricted stock, (v) stock units (reserved for issuance to non-employee directors) and share units (reserved for issuance to employees) (collectively, "share units") and (vi) stock appreciation rights ("SARs"), among other types of awards. Our non-employee directors are eligible to receive non-discretionary grants of stock-based awards, subject to certain limitations. As of April 30, 2023, the aggregate number of shares of common stock which may be issued, pursuant to the Plan, may not exceed 11,962,500 . Stock options granted may not have a term exceeding ten years or, in the case of an incentive stock award granted to a stockholder who owns stock representing more than 10.0 % of the voting power, no more than five years . We expect to settle all outstanding awards under the Plan and employee purchases under the ESPP with the issuance of new shares of our common stock. As of April 30, 2023, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of 10,107,719 shares (net of 5,704,778 expired and canceled awards), of which an aggregate of 8,172,915 have been exercised or settled. As of April 30, 2023, the following stock-based awards, by award type, were outstanding: April 30, 2023 Stock options 290,320 Performance shares 677,476 RSUs, restricted stock and share units 967,008 Total 1,934,804 Our ESPP provides for the issuance of up to 1,300,000 shares of our common stock. Our ESPP is intended to provide our eligible employees the opportunity to acquire our common stock at 85 % of fair market value on the first or last day of each calendar quarter, whichever is lower. Through April 30, 2023, we have cumulatively issued 985,515 shares of our common stock to participating employees in connection with our ESPP. 20 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Stock-based compensation for awards issued is reflected in the following line items in our Condensed Consolidated Statements of Operations: Three months ended April 30, Nine months ended April 30, 2023 2022 2023 2022 Cost of sales $ 141,000 80,000 $ 452,000 229,000 Selling, general and administrative expenses 3,896,000 886,000 5,559,000 3,494,000 Research and development expenses 89,000 105,000 287,000 252,000 Stock-based compensation expense before CEO transition costs 4,126,000 1,071,000 6,298,000 3,975,000 CEO transition costs related to equity-classified stock-based awards — — 3,764,000 7,388,000 Total stock-based compensation expense before income tax benefit 4,126,000 1,071,000 10,062,000 11,363,000 Estimated income tax benefit ( 915,000 ) ( 226,000 ) ( 1,701,000 ) ( 1,449,000 ) Net stock-based compensation expense $ 3,211,000 845,000 $ 8,361,000 9,914,000 Stock-based compensation for equity-classified awards is measured at the date of grant, based on an estimate of the fair value of the award and is generally expensed over the vesting period of the award. At April 30, 2023, unrecognized stock-based compensation of $ 9,640,000 , net of estimated forfeitures of $ 681,000 , is expected to be recognized over a weighted average period of 2.5 years. Total stock-based compensation capitalized and included in ending inventory at both April 30, 2023 and July 31, 2022 was $ 48,000 . There are no liability-classified stock-based awards outstanding as of April 30, 2023 or July 31, 2022. Stock-based compensation expense, by award type, is summarized as follows: Three months ended April 30, Nine months ended April 30, 2023 2022 2023 2022 Stock options $ 22,000 40,000 $ 66,000 482,000 Performance shares 335,000 300,000 690,000 1,013,000 RSUs, restricted stock and share units 3,738,000 675,000 5,449,000 2,314,000 ESPP 31,000 56,000 93,000 166,000 Stock-based compensation expense before CEO transition costs 4,126,000 1,071,000 6,298,000 3,975,000 CEO transition costs related to equity-classified stock-based awards — — 3,764,000 7,388,000 Total stock-based compensation expense before income tax benefit 4,126,000 1,071,000 10,062,000 11,363,000 Estimated income tax benefit ( 915,000 ) ( 226,000 ) ( 1,701,000 ) ( 1,449,000 ) Net stock-based compensation expense $ 3,211,000 845,000 $ 8,361,000 9,914,000 ESPP stock-based compensation expense primarily relates to the 15 % discount offered to participants in the ESPP. Stock-based compensation expense in the three months and nine months ended April 30, 2023 reflects our assumption that fully vested, unrestricted share units will be granted to certain employees in lieu of fiscal 2023 non-equity incentive compensation. In fiscal 2022 and prior years, fully vested share units granted to certain employees in lieu of non-equity incentive compensation would not be settled until the one-year anniversary of the grant date. The estimated income tax benefit as shown in the above table was computed using income tax rates expected to apply when the awards are settled. Such deferred tax asset was recorded net as part of our non-current deferred tax liability on our Condensed Consolidated Balance Sheet as of April 30, 2023 and July 31, 2022. The actual income tax benefit recognized for tax reporting is based on the fair market value of our common stock at the time of settlement and can significantly differ from the estimated income tax benefit recorded for financial reporting. 21 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Stock Options The following table summarizes the Plan’s activity: Awards (in Shares) Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Outstanding at July 31, 2022 483,480 $ 24.43 Expired/canceled ( 9,460 ) 26.55 Outstanding at October 31, 2022 474,020 24.38 Expired/canceled ( 182,400 ) 24.75 Outstanding at January 31, 2023 291,620 24.15 Expired/canceled ( 1,300 ) 25.51 Outstanding at April 30, 2023 290,320 $ 24.15 3.74 $ — Exercisable at April 30, 2023 245,740 $ 25.28 3.18 $ — Vested and expected to vest at April 30, 2023 288,205 $ 24.19 3.72 $ — Stock options outstanding as of April 30, 2023 have exercise prices ranging from $ 17.88 - $ 33.94 , representing the fair market value of our common stock on the date of grant, a contractual term of ten years and a vesting period of five years . The total intrinsic value relating to stock options exercised during the nine months ended April 30, 2022 was $ 7,000 . There were no stock options exercised during the nine months ended April 30, 2023. Performance Shares, RSUs, Restricted Stock and Share Unit Awards The following table summarizes the Plan’s activity relating to performance shares, RSUs, restricted stock and share units: Awards (in Shares) Weighted Average Grant Date Fair Value Aggregate Intrinsic Value Outstanding at July 31, 2022 1,110,750 $ 19.05 Granted 785,092 11.13 Settled ( 256,069 ) 24.55 Canceled/Forfeited ( 37,805 ) 16.44 Outstanding at October 31, 2022 1,601,968 14.35 Granted 105,887 12.40 Settled ( 16,374 ) 19.01 Canceled/Forfeited ( 23,236 ) 17.98 Outstanding at January 31, 2023 1,668,245 14.13 Granted 56,402 11.38 Settled ( 48,614 ) 14.45 Canceled/Forfeited ( 31,549 ) 17.11 Outstanding at April 30, 2023 1,644,484 $ 13.97 $ 17,020,000 Vested at April 30, 2023 534,171 $ 15.70 $ 5,529,000 Vested and expected to vest at April 30, 2023 1,597,645 $ 13.96 $ 16,536,000 22 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The total intrinsic value relating to fully-vested awards settled during the three and nine months ended April 30, 2023 was $ 669,000 and $ 3,633,000 , respectively. The total intrinsic value relating to fully-vested awards settled during the three and nine months ended April 30, 2022 was $ 262,000 and $ 9,726,000 , respectively. The performance shares granted to employees principally vest over a three-year performance period, if pre-established performance goals are attained, or as specified pursuant to the Plan and related agreements. As of April 30, 2023, the number of outstanding performance shares included in the above table, and the related compensation expense prior to consideration of estimated pre-vesting forfeitures, assume achievement of the pre-established goals at a target level. RSUs and restricted stock granted to non-employee directors prior to August 2022 had a vesting period of five years and are convertible into shares of our common stock generally at the time of termination, on a one -for-one basis for no cash consideration, or earlier under certain circumstances. Commencing in August 2022, such awards have a vesting period of one year . RSUs granted to employees prior to August 2022 have a vesting period of five years and are convertible into shares of our common stock generally at the time of vesting, on a one -for-one basis for no cash consideration. Commencing in August 2022, such RSUs have a vesting period of three years . Share units granted to certain employees in fiscal 2022 in lieu of non-equity incentive compensation are convertible into shares of our common stock on the one-year anniversary of the respective grant date. The fair value of performance shares, RSUs, restricted stock and share units is determined using the closing market price of our common stock on the date of grant, less the present value of any estimated future dividend equivalents such awards are not entitled to receive and an applicable estimated discount for any post-vesting transfer restrictions. RSUs, performance shares and restricted stock are entitled to dividend equivalents, as applicable, unless forfeited before vesting occurs. Share units would be entitled to dividend equivalents while the underlying shares are unissued. Dividend equivalents are subject to forfeiture, similar to the terms of the underlying stock-based awards, and are payable in cash generally at the time of settlement of the underlying award. During the three months ended April 30, 2023, we reversed $ 22,000 of previously accrued dividend equivalents due to forfeitures and paid out $ 13,000 . During the nine months ended April 30, 2023, we accrued $ 342,000 of dividend equivalents (net of forfeitures) and paid out $ 363,000 . Accrued dividend equivalents were recorded as a reduction to retained earnings. As of April 30, 2023 and July 31, 2022, accrued dividend equivalents were $ 721,000 and $ 742,000 , respectively. With respect to the actual settlement of stock-based awards for income tax reporting, during the three and nine months ended April 30, 2023, we recorded an income tax expense of $ 15,000 and $ 560,000 , respectively, and during the three and nine months ended April 30, 2022, we recorded an income tax expense of $ 483,000 and $ 344,000 , respectively. (13) Segment Information Reportable operating segments are determined based on Comtech’s management approach. The management approach, as defined by FASB ASC 280 "Segment Reporting" is based on the way that the CODM organizes the segments within an enterprise for making decisions about resources to be allocated and assessing their performance. Our CODM, for purposes of FASB ASC 280, is our Chief Executive Officer. In the fourth quarter of fiscal 2022, we revised our business segments to better align them with end-markets for our products and services and our CODM began managing our business in two new reportable segments: “Satellite and Space Communications” and “Terrestrial and Wireless Networks.” As a result, the segment information for the prior fiscal year has been recast to conform to the current year presentation. 23 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Satellite and Space Communications is organized into four technology areas: satellite modem technologies and amplifier technologies, troposcatter and SATCOM solutions, space components and antennas, and high-power amplifiers and switches technologies. This segment offers customers: satellite ground station technologies, services and system integration that facilitate the transmission of voice, video and data over GEO, MEO and LEO satellite constellations, including solid-state and traveling wave tube power amplifiers, modems, VSAT platforms and frequency converters; satellite communications and tracking antenna systems, including high precision full motion fixed and mobile X/Y tracking antennas, RF feeds, reflectors and radomes; over-the-horizon microwave equipment that can transmit digitized voice, video, and data over distances up to 200 miles using the troposphere and diffraction, including the Comtech COMET™; solid-state, RF microwave high-power amplifiers and control components designed for radar, electronic warfare, data link, medical and aviation applications; and procurement and supply chain management of high reliability Electrical, Electronic and Electromechanical ("EEE") parts for satellite, launch vehicle and manned space applications. Terrestrial and Wireless Networks is organized into three service areas: next generation 911 and call delivery, Solacom call handling solutions, and trusted location and messaging solutions. This segment offers customers: SMS text to 911 services, providing alternate paths for individuals who need to request assistance (via text messaging) a method to reach Public Safety Answering Points ("PSAPs"); next generation 911 solutions, providing emergency call routing, location validation, policy-based routing rules, logging and security functionality; Emergency Services IP Network transport infrastructure for emergency services communications and support of next generation 911 services; call handling applications for PSAPs; wireless emergency alerts solutions for network operators; and software and equipment for location-based and text messaging services for various applications, including for public safety, commercial and government services. Our CODM primarily uses a metric that we refer to as Adjusted EBITDA to measure an operating segment’s performance and to make decisions about resources to be allocated. Our Adjusted EBITDA metric for the Satellite and Space Communications and Terrestrial and Wireless Networks segments do not consider any allocation of indirect expense, or any of the following: income taxes, interest, change in fair value of the convertible preferred stock purchase option liability, write-off of deferred financing costs, amortization of stock-based compensation, amortization of intangibles, depreciation expense, amortization of cost to fulfill assets, acquisition plan expenses, restructuring costs, COVID-19 related costs, strategic emerging technology costs (for next-generation satellite technology), facility exit costs, CEO transition costs, proxy solicitation costs, strategic alternatives expenses and other. These items, while periodically affecting our results, may vary significantly from period to period and may have a disproportionate effect in a given period, thereby affecting the comparability of results. Any amounts shown in the Adjusted EBITDA calculation for our Satellite and Space Communications and Terrestrial and Wireless Networks segments are directly attributable to those segments. Our Adjusted EBITDA is also used by our management in assessing the Company's operating results. Although closely aligned, the Company's definition of Adjusted EBITDA is different than the Consolidated EBITDA (as such term is defined in our Credit Facility) utilized for financial covenant calculations and also may differ from the definition of EBITDA or Adjusted EBITDA used by other companies and, therefore, may not be comparable to similarly titled measures used by other companies. 24 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Operating segment information, along with a reconciliation of segment net income (loss) and consolidated net income (loss) to Adjusted EBITDA is presented in the tables below: Three months ended April 30, 2023 Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Total Net sales $ 82,249,000 54,067,000 — $ 136,316,000 Operating income (loss) $ 37,000 3,160,000 ( 8,473,000 ) $ ( 5,276,000 ) Net income (loss) $ 650,000 2,902,000 ( 11,010,000 ) $ ( 7,458,000 ) (Benefit from) provision for income taxes ( 1,188,000 ) 84,000 ( 1,828,000 ) ( 2,932,000 ) Interest expense ( 25,000 ) — 4,411,000 4,386,000 Interest (income) and other 600,000 174,000 ( 46,000 ) 728,000 Amortization of stock-based compensation — — 4,126,000 4,126,000 Amortization of intangibles 1,828,000 3,521,000 — 5,349,000 Depreciation 1,027,000 1,921,000 33,000 2,981,000 Amortization of cost to fulfill assets 240,000 — — 240,000 Restructuring costs 2,191,000 548,000 1,357,000 4,096,000 Strategic emerging technology costs 1,029,000 — — 1,029,000 Adjusted EBITDA $ 6,352,000 9,150,000 ( 2,957,000 ) $ 12,545,000 Purchases of property, plant and equipment $ 1,106,000 3,549,000 300,000 $ 4,955,000 Total assets at April 30, 2023 $ 488,814,000 475,380,000 25,665,000 $ 989,859,000 Three months ended April 30, 2022 Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Total Net sales $ 69,150,000 52,966,000 — $ 122,116,000 Operating (loss) income $ ( 120,000 ) 4,616,000 ( 5,062,000 ) $ ( 566,000 ) Net income (loss) $ 297,000 4,502,000 ( 4,824,000 ) $ ( 25,000 ) Provision for (benefit from) income taxes 59,000 98,000 ( 928,000 ) ( 771,000 ) Interest expense ( 22,000 ) — 1,003,000 981,000 Interest (income) and other ( 454,000 ) 16,000 ( 11,000 ) ( 449,000 ) Change in fair value of convertible preferred stock purchase option liability — — ( 302,000 ) ( 302,000 ) Amortization of stock-based compensation — — 1,071,000 1,071,000 Amortization of intangibles 1,828,000 3,521,000 — 5,349,000 Depreciation 846,000 1,588,000 48,000 2,482,000 Amortization of cost to fulfill assets 233,000 — — 233,000 Restructuring costs 1,600,000 — — 1,600,000 COVID-19 related costs 115,000 — — 115,000 Strategic emerging technology costs 912,000 — — 912,000 Adjusted EBITDA $ 5,414,000 9,725,000 ( 3,943,000 ) $ 11,196,000 Purchases of property, plant and equipment $ 2,297,000 3,311,000 — $ 5,608,000 Total assets at April 30, 2022 $ 485,620,000 469,075,000 28,942,000 $ 983,637,000 25 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Nine months ended April 30, 2023 Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Total Net sales $ 243,529,000 157,651,000 — $ 401,180,000 Operating income (loss) $ 8,380,000 7,216,000 ( 31,377,000 ) $ ( 15,781,000 ) Net income (loss) $ 9,588,000 7,070,000 ( 40,017,000 ) $ ( 23,359,000 ) Benefit from income taxes ( 1,832,000 ) ( 197,000 ) ( 1,733,000 ) ( 3,762,000 ) Interest expense 2,000 — 10,410,000 10,412,000 Interest (income) and other 622,000 343,000 ( 37,000 ) 928,000 Amortization of stock-based compensation — — 6,298,000 6,298,000 Amortization of intangibles 5,484,000 10,563,000 — 16,047,000 Depreciation 3,057,000 5,579,000 110,000 8,746,000 Amortization of cost to fulfill assets 720,000 — — 720,000 Restructuring costs 4,336,000 548,000 2,080,000 6,964,000 Strategic emerging technology costs 2,513,000 — — 2,513,000 CEO transition costs — — 9,090,000 9,090,000 Adjusted EBITDA $ 24,490,000 23,906,000 ( 13,799,000 ) $ 34,597,000 Purchases of property, plant and equipment $ 5,660,000 8,505,000 708,000 $ 14,873,000 Total assets at April 30, 2023 $ 488,814,000 475,380,000 25,665,000 $ 989,859,000 Nine months ended April 30, 2022 Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Total Net sales $ 202,890,000 156,366,000 — $ 359,256,000 Operating (loss) income $ ( 7,933,000 ) 17,574,000 ( 41,312,000 ) $ ( 31,671,000 ) Net (loss) income $ ( 7,285,000 ) 17,445,000 ( 38,043,000 ) $ ( 27,883,000 ) (Benefit from) provision for income taxes ( 458,000 ) 30,000 ( 5,672,000 ) ( 6,100,000 ) Interest expense 98,000 — 3,478,000 3,576,000 Interest (income) and other ( 287,000 ) 98,000 ( 71,000 ) ( 260,000 ) Change in fair value of convertible preferred stock purchase option liability — — ( 1,004,000 ) ( 1,004,000 ) Amortization of stock-based compensation — — 3,975,000 3,975,000 Amortization of intangibles 5,484,000 10,563,000 — 16,047,000 Depreciation 2,444,000 4,462,000 151,000 7,057,000 Amortization of cost to fulfill assets 233,000 — — 233,000 Restructuring costs 4,038,000 — — 4,038,000 COVID-19 related costs 1,144,000 — — 1,144,000 Strategic emerging technology costs 912,000 — — 912,000 CEO transition costs — — 13,554,000 13,554,000 Proxy solicitation costs — — 11,248,000 11,248,000 Adjusted EBITDA $ 6,323,000 32,598,000 ( 12,384,000 ) $ 26,537,000 Purchases of property, plant and equipment $ 6,522,000 7,898,000 — $ 14,420,000 Total assets at April 30, 2022 $ 485,620,000 469,075,000 28,942,000 $ 983,637,000 26 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Unallocated expenses result from corporate expenses such as executive compensation, accounting, legal and other regulatory compliance related costs and also includes all of our amortization of stock-based compensation. See Note (1) - " General - CEO Transition Costs & Related " for information related to such costs. During the three and nine months ended April 30, 2023, our Unallocated segment incurred $ 1,357,000 and $ 2,080,000 , respectively, of restructuring costs focused on streamlining our operations. There were no similar costs incurred in fiscal 2022. Also, during the nine months ended April 30, 2022, we incurred $ 11,248,000 of proxy solicitation costs (including legal and advisory fees and costs associated with a related lawsuit) as a result of a now-settled proxy contest. There were no similar costs incurred in fiscal 2023. During the three and nine months ended April 30, 2023, our Satellite and Space Communications segment recorded $ 2,191,000 and $ 4,336,000 , respectively, of restructuring costs primarily incurred to streamline our operations and improve efficiency, including costs related to the relocation of certain of our satellite ground station production facilities to our new 146,000 square foot facility in Chandler, Arizona. Similar restructuring costs of $ 1,600,000 and $ 4,038,000 were incurred during the three and nine months ended April 30, 2022, respectively. In addition, during the three and nine months ended April 30, 2023, we incurred $ 1,029,000 and $ 2,513,000 of strategic emerging technology costs for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations. Similar strategic emerging technology costs of $ 912,000 were incurred during both the three and nine months ended April 30, 2022. During the three and nine months ended April 30, 2022, our Satellite and Space Communications segment recorded $ 115,000 and $ 1,144,000 , respectively, of incremental operating costs related to our antenna facility located in the United Kingdom due to the impact of the COVID-19 pandemic. There were no similar incremental operating costs during the corresponding periods in fiscal 2023. During both the three and nine months ended April 30, 2023, our Terrestrial and Wireless Networks segment recorded $ 548,000 of restructuring costs primarily incurred to streamline our operations and improve efficiency. There were no similar costs incurred in fiscal 2022. Interest expense in the tables above primarily relates to our Credit Facility, and includes the amortization of deferred financing costs. See Note (9) - " Credit Facility " for further discussion. Intersegment sales for both the three and nine months ended April 30, 2023 and 2022 between the Satellite and Space Communications segment and the Terrestrial and Wireless Networks segment were nominal. All intersegment sales are eliminated in consolidation and are excluded from the tables above. Unallocated assets at April 30, 2023 consist principally of cash and cash equivalents, income taxes receivable, corporate property, plant and equipment and deferred financing costs. The large majority of our long-lived assets are located in the U.S. (14) Goodwill The following table represents goodwill by reportable operating segment as of April 30, 2023 and July 31, 2022. Satellite and Space Communications Terrestrial and Wireless Networks Total Goodwill $ 173,602,000 174,090,000 $ 347,692,000 In accordance with FASB ASC 350, we perform a goodwill impairment analysis at least annually (in the first quarter of each fiscal year), unless indicators of impairment exist in interim periods. If we fail the quantitative assessment of goodwill impairment ("quantitative assessment"), we would be required to recognize an impairment loss equal to the amount that a reporting unit's carrying value exceeded its fair value; however, any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. 27 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) As discussed in Note (13) - "Segment Information, " as a result of our segment restructuring in the fourth quarter of fiscal 2022 from the Commercial Solutions and Government Solutions segments to the Satellite and Space Communications and Terrestrial and Wireless Networks segments, we performed an interim quantitative assessment as of July 29, 2022 and estimated the fair value of each of our reporting units, both before and after the change, using a combination of the income and market approaches. We performed our quantitative assessment using market participant assumptions to determine if the fair value of each of our reporting units with goodwill exceeded its carrying value. In making this assessment, we considered, among other things, expectations of projected net sales and cash flows, assumptions impacting the weighted average cost of capital, trends in trading multiples of comparable companies, changes in our stock price and changes in the carrying values of our reporting units with goodwill. We also considered overall business conditions. The income approach, also known as the discounted cash flow ("DCF") method, utilizes the present value of cash flows to estimate fair value. The future cash flows for our reporting units were projected based on our estimates, at that time, of future revenues, operating income and other factors (such as working capital and capital expenditures). For purposes of conducting our impairment analysis, we assumed revenue growth rates and cash flow projections that are below our actual long-term expectations. The discount rates used in our DCF method were based on a weighted-average cost of capital ("WACC") determined from relevant market comparisons, adjusted upward for specific reporting unit risks (primarily the uncertainty of achieving projected operating cash flows). A terminal value growth rate was applied to the final year of the projected period, which reflects our estimate of stable, perpetual growth. We then calculated a present value of the respective cash flows for each reporting unit to arrive at an estimate of fair value under the income approach. Under the market approach, we estimated a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization and factored in a control premium. Finally, we compared our estimates of fair values to our total public market capitalization and assessed implied control premiums based on our common stock price of $ 11.62 as of the date of testing. Ultimately, based on our quantitative evaluations, we determined that our Satellite and Space Communications and Terrestrial and Wireless Networks reporting units had estimated fair values in excess of their carrying values of at least 18.4 % and 11.6 %, respectively, and concluded that our goodwill was not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment. Also, given its proximity to our next regularly scheduled annual goodwill impairment testing date, we utilized our July 29, 2022 interim quantitative assessment to conclude that our goodwill was not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment as of August 1, 2022. Additionally, the carrying value of goodwill was reallocated to our new reporting units based on their respective estimated relative fair value. It is possible that, during the remainder of fiscal 2023 or beyond, business conditions (both in the U.S. and internationally) could deteriorate from the current state, our current or prospective customers could materially postpone, reduce or even forgo purchases of our products and services to a greater extent than we currently anticipate, or our common stock price could fluctuate. A significant decline in our customers' spending that is greater than we anticipate or a shift in funding priorities may also have a negative effect on future orders, sales, income and cash flows and we might be required to perform a quantitative assessment during fiscal 2023 or beyond. If assumed net sales and cash flow projections are not achieved in future periods or our common stock price significantly declines from current levels, our Satellite and Space Communications and Terrestrial and Wireless Networks reporting units could be at risk of failing the quantitative assessment and goodwill assigned to the respective reporting units could be impaired. In any event, we are required to perform our next annual goodwill impairment analysis on August 1, 2023 (the start of our fiscal 2024). If our assumptions and related estimates change in the future, or if we change our reporting unit structure or other events and circumstances change (e.g., a sustained decrease in the price of our common stock (considered on both absolute terms and relative to peers)), we may be required to record impairment charges when we perform these tests, or in other future periods. Any impairment charges that we may record in the future could be material to our results of operations and financial condition. 28 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (15) Intangible Assets Intangible assets with finite lives are as follows: April 30, 2023 Weighted Average Amortization Period Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships 20.2 $ 302,058,000 118,215,000 $ 183,843,000 Technologies 14.8 114,949,000 79,453,000 35,496,000 Trademarks and other 16.7 32,926,000 21,009,000 11,917,000 Total $ 449,933,000 218,677,000 $ 231,256,000 July 31, 2022 Weighted Average Amortization Period Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships 20.2 $ 302,058,000 107,500,000 $ 194,558,000 Technologies 14.8 114,949,000 75,798,000 39,151,000 Trademarks and other 16.7 32,926,000 19,332,000 13,594,000 Total $ 449,933,000 202,630,000 $ 247,303,000 The weighted average amortization period in the above table excludes fully amortized intangible assets. Amortization expense for both the three months ended April 30, 2023 and 2022 was $ 5,349,000 and for both the nine months ended April 30, 2023 and 2022 was $ 16,047,000 . The estimated amortization expense consists of the following for the fiscal years ending July 31: 2023 $ 21,460,000 2024 21,154,000 2025 21,039,000 2026 19,888,000 2027 18,534,000 We review net intangible assets with finite lives for impairment when an event occurs indicating the potential for impairment. Based on our last assessment, we believe that the carrying values of our net intangible assets were recoverable as of April 30, 2023. However, if business conditions deteriorate, we may be required to record impairment losses, and or increase the amortization of intangibles in the future. Any impairment charges that we may record in the future could be material to our results of operations and financial condition. (16) Convertible Preferred Stock On October 18, 2021, we entered into a Subscription Agreement (the “Subscription Agreement”) with certain affiliates and related funds of White Hat Capital Partners LP and Magnetar Capital LLC (collectively, the “Investors”), relating to the issuance and sale of up to 125,000 shares of a new series of the Company's Series A Convertible Preferred Stock, par value $ 0.10 per share (the “Convertible Preferred Stock”), for an aggregate purchase price of up to $ 125,000,000 , or $ 1,000 per share. On October 19, 2021 (the “Initial Closing Date”), pursuant to the terms of the Subscription Agreement, the Investors purchased an aggregate of 100,000 shares of Convertible Preferred Stock (the “Initial Issuance”) for an aggregate purchase price of $ 100,000,000 . The Investors had a one-time option exercisable at any time on or prior to March 31, 2023 to purchase additional shares of Convertible Preferred Stock for an aggregate purchase price of $ 25,000,000 . This purchase option, commonly referred to as a “Green Shoe” expired unexercised and together with the Initial Issuance, is collectively referred to as the “Issuance.” 29 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The adjusted conversion price for the shares issued in the Initial Issuance is $ 23.97 , subject to certain adjustments set forth in the Certificate of Designations filed with the Secretary of State of the State of Delaware. The Convertible Preferred Stock ranks senior to the shares of our common stock, with respect to the payment of dividends and the distribution of assets upon a liquidation, dissolution or winding up of the Company. The Convertible Preferred Stock initially had a liquidation preference of $ 1,000 per share with each share entitled to a cumulative dividend (the “Dividend”) at the rate of 6.5 % per annum, compounding quarterly, paid-in-kind or paid in cash, at our election. For any quarter in which we elect not to pay the Dividend in cash with respect to a share of Convertible Preferred Stock, such Dividend becomes part of the liquidation preference of such share. In addition, no dividend or other distribution on our common stock in excess of $ 0.10 per share per quarter will be declared or paid on the common stock unless, at the time of such declaration and payment, an equivalent dividend or distribution is declared and paid on the Convertible Preferred Stock (the “Participating Dividend”), provided that in the case of any such dividend in the form of cash, in lieu of a cash payment, such Participating Dividend will become part of the liquidation preference of the shares of the Convertible Preferred Stock. Such Participating Dividend results in the Convertible Preferred Stock meeting the definition of a "participating security" for purposes of our earnings per share calculations. Effective September 29, 2022, the Convertible Preferred Stock is convertible into shares of common stock at the option of the holders. At any time after October 19, 2024, we have the right to mandate the conversion of the Convertible Preferred Stock, subject to certain restrictions, based on the price of the common stock in the preceding thirty trading days. Holders of the Convertible Preferred Stock are entitled to vote with the holders of the common stock on an as-converted basis, as well as are entitled to a separate class vote with respect to, among other things, amendments to our organizational documents that have an adverse effect on the Convertible Preferred Stock, authorizations or issuances of securities of the Company, the payment of dividends other than dividends on common stock in the ordinary course consistent with past practice on a quarterly basis in an amount not to exceed our current dividend rate of $ 0.10 per share per quarter, related party transactions, repurchases or redemptions of securities of the Company (other than the repurchase of up to $ 25,000,000 of shares of common stock), dispositions of businesses or assets, the incurrence of certain indebtedness and certain amendments or extensions of our existing Credit Facility. Holders will have the right to require the Company to repurchase such holder's Convertible Preferred Stock on a date occurring either (a) on or after October 19, 2026 (the “Optional Repurchase Trigger Date”) at a price equal to the liquidation preference or (b) in connection with a conversion of Convertible Preferred Stock, pursuant to which the number of shares of common stock issuable upon such conversion would exceed 19.99 % of the issued and outstanding shares of common stock as of October 18, 2021 (such excess shares, "Excess Conversion Shares"), at any time after the date that is 91 days after the maturity date of the Company's existing Credit Facility, at a price per share equal to the number of Excess Conversion Shares multiplied by the Last Reported Sales Price (as defined) of common stock on the applicable conversion date. In addition, each holder will have the right to cause the Company to repurchase its shares of Convertible Preferred Stock in connection with a Change of Control, at a price equal to the liquidation preference. We determined that our obligation to issue the Green Shoe at any time on or prior to March 31, 2023 met the definition of a freestanding financial instrument that should be accounted for as a liability. As such, we established an initial convertible preferred stock purchase option liability of $ 1,005,000 and reduced the proceeds from the Initial Issuance by such amount. The liability was remeasured to its estimated fair value each reporting period until such instrument expired. Changes in its estimated fair value were recognized as a non-cash charge or benefit and presented on the condensed consolidated statement of operations. 30 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) In accordance with ASC 480, " Distinguishing Liabilities from Equity ," specifically ASC 480-10-S99-3A(2), SEC Staff Announcement: Classification and Measurement of Redeemable Securities , we have classified the Convertible Preferred Stock outside of permanent equity as temporary equity since the redemption of such shares is not solely within our control and we could be required by the holder to redeem the shares for cash or other assets, at their option. Upon the Initial Issuance, we recorded the Convertible Preferred Stock, net of issuance costs of $ 4,007,000 and net of the portion of such proceeds allocated to the convertible preferred stock purchase option liability described above, which resulted in an initial carrying value of the Convertible Preferred Stock less than its initial redemption value of $ 100,000,000 . We have elected to adjust the carrying value of the Convertible Preferred Stock to its current redemption value of $ 110,417,000 , which includes $ 9,822,000 of cumulative dividends paid in kind and $ 595,000 of accumulated and unpaid dividends. As such, a total adjustment of $ 5,213,000 to increase the carrying value of the Convertible Preferred Stock was recorded against retained earnings during the nine months ended April 30, 2023. (17) Stockholders’ Equity Shelf Registration On July 13, 2022, we filed a $ 200,000,000 shelf registration statement with the SEC for the sale of various types of securities, including debt securities. This shelf registration statement was declared effective by the SEC as of July 25, 2022 and expires on July 25, 2025. To-date, we have not issued any securities pursuant to our $ 200,000,000 shelf registration statement. Common Stock Repurchase Program On September 29, 2020, our Board of Directors authorized a new $ 100,000,000 stock repurchase program, which replaced our prior program. The new $ 100,000,000 stock repurchase program has no time restrictions and repurchases may be made from time to time in open-market or privately negotiated transactions, or by other means in accordance with federal securities laws. There were no repurchases of our common stock during the nine months ended April 30, 2023 or 2022. Common Stock Dividends On September 29, 2022 and December 8, 2022, our Board of Directors declared a dividend of $ 0.10 per common share, which was paid on November 18, 2022 and February 17, 2023, respectively. In connection with our CEO transition and One Comtech transformation, discussed further in Note (1) – “General – CEO Transition Costs & Related ,” the Board, together with management, adjusted the Company’s capital allocation plans during the third quarter of fiscal 2023 and determined to forgo a common stock dividend, thereby increasing our financial flexibility. Future common stock dividends, if any, remain subject to compliance with financial covenants under our Credit Facility, as well as Board approval and certain voting rights of holders of our Series A Convertible Preferred Stock. (18) Legal Proceedings and Other Matters Other Matters In the ordinary course of business, we include indemnification provisions in certain of our customer contracts to indemnify, hold harmless and reimburse such customers for certain losses, including but not limited to losses related to third-party claims of intellectual property infringement arising from the customer’s use of our products or services. We may also, from time to time, receive indemnification requests from customers related to third-party claims that 911 calls were improperly routed during an emergency. We evaluate such claims as and when they arise. We do not always agree with customers that they are entitled to indemnification and in such cases reject their claims. Despite maintaining that we have properly carried out our duties, we may seek coverage under our various insurance policies; however, we cannot be sure that we will be able to maintain or obtain insurance coverage at acceptable costs or in sufficient amounts or that our insurer will not disclaim coverage as to such claims. Accordingly, pending or future claims asserted against us by a party that we are obligated to indemnify could result in legal costs and damages that could have a material adverse effect on our consolidated results of operations and financial condition. There are certain other pending and threatened legal actions which arise in the normal course of business. Although the ultimate outcome of litigation is difficult to accurately predict, we believe that the outcome of these other pending and threatened actions will not have a material adverse effect on our consolidated financial condition or results of operations. 31 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Employment Change of Control and Indemnification Agreements On August 9, 2022, our Board of Directors appointed our Chairman of the Board, Ken Peterman, as President and CEO, and the Company entered an employment agreement with Mr. Peterman generally providing for an annual salary, bonus award, sign-on bonus, equity incentive awards and, under certain terminations of employment, severance payment. We have also entered into legacy change of control agreements prior to 2022 with certain of our executive officers and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of the Company or termination of the employee. 32 Index