COMTECH TELECOMMUNICATIONS CORP /DE/ 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain information in this Quarterly Report on Form 10-Q contains forward-looking statements. Forward-looking statements can be identified by words such as: "anticipate," "believe," "continue," "could," "estimate," "expect," "future," "goal," "intend," "likely," "may," "plan," "potential," "predict," "project," "seek," "should," "strategy," "target," "will," "would," and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding our future performance and financial condition, plans and objectives of our management and our assumptions regarding such future performance, financial condition, and plans and objectives that involve certain significant known and unknown risks and uncertainties and other factors not under our control which may cause our actual results, future performance and financial condition, and achievement of our plans and objectives of our management to be materially different from the results, performance or other expectations implied by these forward-looking statements. These factors include, among other things: the possibility that the expected synergies and benefits from acquisitions will not be fully realized, or will not be realized within the anticipated time periods; the risk that the acquired businesses will not be integrated successfully; the possibility of disruption from acquisitions, making it more difficult to maintain business and operational relationships or retain key personnel; the risk that we will be unsuccessful in implementing our "One Comtech" transformation and integration of individual businesses into two segments; the risk that we will be unsuccessful in implementing a tactical shift in our Satellite and Space Communications segment away from bidding on large commodity service contracts and toward pursuing contracts for our niche products and solutions with higher margins; the nature and timing of our receipt of, and our performance on, new or existing orders that can cause significant fluctuations in net sales and operating results; the timing and funding of government contracts; adjustments to gross profits on long-term contracts; risks associated with international sales; rapid technological change; evolving industry standards; new product announcements and enhancements; changing customer demands and or procurement strategies; changes in prevailing economic and political conditions, including as a result of Russia's military incursion into Ukraine; changes in the price of oil in global markets; changes in prevailing interest rates and foreign currency exchange rates; risks associated with our legal proceedings, customer claims for indemnification, and other similar matters; risks associated with our obligations under our credit facility; risks associated with our large contracts; risks associated with the COVID-19 pandemic and related supply chain disruptions; and other factors described in this and our other filings with the Securities and Exchange Commission ("SEC"). OVERVIEW We are a leading global provider of next-generation 911 emergency systems ("NG-911") and secure wireless and satellite communications technologies. This includes the critical communications infrastructure that people, businesses, and governments rely on when durable, trusted connectivity is required, no matter where they are – on land, at sea, or in the air – and no matter what the circumstances – from armed conflict to a natural disaster. Our solutions fulfill our customers’ needs for secure wireless communications in the most demanding environments, including those where traditional communications are unavailable or cost-prohibitive, and in mission-critical and other scenarios where performance is crucial. We anticipate future growth in our business due to increasing demand for global voice, video and data usage in recent years. We provide our solutions to both commercial and governmental customers. In the fourth quarter of fiscal 2022, we revised our business segments to better align them with end-markets for our products and services. Our businesses have been re-organized into two new reportable segments: “Satellite and Space Communications” and “Terrestrial and Wireless Networks.” All current and prior periods reflected in this Form 10-Q have been presented according to these two segments, unless otherwise noted. For more information and for financial information about our business segments, including net sales, operating income, Adjusted EBITDA (a non-GAAP financial measure), total assets, and our operations outside the United States, refer to " Notes to Consolidated Financial Statements - Note (13) Segment Information"  included in "Part I - Item 1 - Notes to Condensed Consolidated Financial Statements (Unaudited). " 33 Index We manage our business through two reportable operating segments: • 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 Quarterly Financial Information Quarterly and period-to-period sales and operating results may be significantly affected by either short-term or long-term contracts with our customers. In addition, our gross profit is affected by a variety of factors, including the mix of products, systems and services sold, production efficiencies, estimates of warranty expense, price competition and general economic conditions. Our gross profit may also be affected by the impact of any cumulative adjustments to contracts that are accounted for over time. In particular, our contracts with the U.S. government can be terminated for convenience by it at any time and orders are subject to unpredictable funding, deployment and technology decisions by the U.S. government. Some of these contracts are indefinite delivery/indefinite quantity ("IDIQ") contracts and, as such, the U.S. government is not obligated to purchase any equipment or services under these contracts. We have, in the past, experienced and we continue to expect significant fluctuations in sales and operating results from quarter-to-quarter and period-to-period due to these factors. As such, comparisons between periods and our current results may not be indicative of a trend or future performance. CRITICAL ACCOUNTING POLICIES We consider certain accounting policies to be critical due to the estimation process involved in each. 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. See " Notes to Condensed Consolidated Financial Statements - Note (3) - Revenue Recognition " for further information. Impairment of Goodwill and Other Intangible Assets . As of April 30, 2023, total goodwill recorded on our Condensed Consolidated Balance Sheet aggregated $347.7 million (of which $173.6 million relates to our Satellite and Space Communications segment and $174.1 million relates to our Terrestrial and Wireless Networks segment). Additionally, as of April 30, 2023, net intangibles recorded on our Condensed Consolidated Balance Sheet aggregated $231.3 million (of which $66.9 million relates to our Satellite and Space Communications segment and $164.4 million relates to our Terrestrial and Wireless Networks segment). For purposes of reviewing impairment and the recoverability of goodwill and other intangible assets, our Satellite and Space Communications and Terrestrial and Wireless Networks segments each constitute a reporting unit and we must make various assumptions in determining their estimated fair values. See " Notes to Condensed Consolidated Financial Statements - Note (14) - Goodwill and Note (15) - Intangible Assets " for further information. 34 Index Provision for Warranty Obligations. We provide warranty coverage for most of our products, including products under long-term contracts, for a period of at least one year from the date of shipment. We record a liability for estimated warranty expense based on historical claims, product failure rates and other factors. Costs associated with some of our warranties that are provided under long-term contracts are incorporated into our estimates of total contract costs. There exist inherent risks and uncertainties in estimating warranty expenses, particularly on larger or longer-term contracts. If we do not accurately estimate our warranty costs, any changes to our original estimates could be material to our results of operations and financial condition. Accounting for Income Taxes. Our deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities and applying enacted tax rates expected to be in effect for the year in which we expect the differences to reverse. Our provision for income taxes is based on domestic (including federal and state) and international statutory income tax rates in the tax jurisdictions where we operate, permanent differences between financial reporting and tax reporting and available credits and incentives. We recognize potential interest and penalties related to uncertain tax positions in income tax expense. The U.S. federal government is our most significant income tax jurisdiction. Significant judgment is required in determining income tax provisions and tax positions. We may be challenged upon review by the applicable taxing authority and positions taken by us may not be sustained. We recognize all or a portion of the benefit of income tax positions only when we have made a determination that it is more likely than not that the tax position will be sustained upon examination, based upon the technical merits of the position and other factors. For tax positions that are determined as "more likely than not" to be sustained upon examination, the tax benefit recognized is the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. The development of valuation allowances for deferred tax assets and reserves for income tax positions requires consideration of timing and judgments about future taxable income, tax issues and potential outcomes, and are subjective critical estimates. Valuation allowances are established, when necessary, to reduce net deferred tax assets to the amount "more likely than not" expected to be realized. A portion of our deferred tax assets consist of federal research and experimentation tax credit carryforwards, some of which was acquired in connection with prior acquisitions. No valuation allowance has been established on these deferred tax assets based on our evaluation that our ability to realize such assets has met the criteria of "more likely than not." We continuously evaluate additional facts representing positive and negative evidence in determining our ability to realize these deferred tax assets. In certain circumstances, the ultimate outcome of exposures and risks involves significant uncertainties. If actual outcomes differ materially from these estimates, they could have a material impact on our results of operations and financial condition. 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. Research and Development Costs. We generally expense all research and development costs. Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other personnel-related expenses associated with product development. Research and development expenses also include third-party development and programming costs. Costs incurred internally in researching and developing software to be sold are charged to expense until technological feasibility has been established for the software. Judgment is required in determining when technological feasibility of a product is established. Technological feasibility for our advanced communication software solutions is generally reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to customers and when we are able to validate the marketability of such product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. To date, capitalized internally developed software costs were not material. Provisions for Excess and Obsolete Inventory. We record a provision for excess and obsolete inventory based on historical and projected usage trends. Other factors may also influence our provision, including decisions to exit a product line, technological change and new product development. These factors could result in a change in the amount of excess and obsolete inventory on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory was overvalued, we would be required to recognize such costs in our financial statements at the time of such determination. Any such charge could be material to our results of operations and financial condition. 35 Index Allowance for Doubtful Accounts. We perform credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness, as determined by our review of our customers’ current credit information. Generally, we will require cash in advance or payment secured by irrevocable letters of credit before an order is accepted from an international customer that we do not do business with regularly. In addition, we seek to obtain insurance for certain domestic and international customers. We monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. In light of ongoing tight credit market conditions, we continue to see requests from our customers for higher credit limits and longer payment terms. Because of our cash position and the nominal amount of interest we are earning on our cash and cash equivalents, we have, on a limited basis, approved certain customer requests. We continue to monitor our accounts receivable credit portfolio. To-date, there has been no material changes in our credit portfolio as a result of the COVID-19 pandemic on worldwide business activities. Although our overall credit losses have historically been within the allowances we established, we cannot accurately predict our future credit loss experience, given the current poor business environment. Measurement of credit losses requires consideration of historical loss experience, including the need to adjust for changing business conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and the financial health of specific customers. Future changes to the estimated allowance for doubtful accounts could be material to our results of operations and financial condition. Fiscal 2023: Third Quarter Highlights and Business Outlook Financial highlights for the third quarter of fiscal 2023 include: • Consolidated net sales were $136.3 million, up 1.9% sequentially from the second quarter of fiscal 2023 and up 11.6% from the third quarter of fiscal 2022; • Gross margin was 31.7%, compared to 34.3% in our second quarter of fiscal 2023 and 38.2% in our third quarter of fiscal 2022; • GAAP net loss attributable to common stockholders was $9.2 million, and included $4.1 million of restructuring costs and $1.0 million of strategic emerging technology costs for next-generation satellite technology; • GAAP EPS loss of $0.33 and Non-GAAP EPS income of $0.11; • Adjusted EBITDA (a Non-GAAP financial measure discussed below) of $12.5 million, or 9.2% of consolidated net sales, a sequential increase from the $11.3 million, or 8.5% of consolidated net sales for the second quarter of fiscal 2023; • New bookings (also referred to as orders) of $102.8 million, representing a quarterly book-to-bill ratio of 0.75x (a measure defined as bookings divided by net sales); • Backlog of $668.4 million as of April 30, 2023, compared to $702.0 million as of January 31, 2023 and $602.3 million as of April 30, 2022; • Revenue visibility of approximately $1.1 billion. We measure this revenue visibility as the sum of our $668.4 million of funded backlog, plus the total unfunded value of certain multi-year contracts that we have received and from which we expect future orders; and • Cash flows provided by operating activities of $16.6 million. Non-GAAP financial measures discussed above are reconciled to the most directly comparable GAAP financial measures in the table included in the below section " Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of the Results of Operations for the Three Months Ended April 30, 2023 and 2022" and "Comparison of the Results of Operations for the Nine Months Ended April 30, 2023 and 2022 ." 36 Index In August 2022, we announced that Ken Peterman was appointed President and CEO. Mr. Peterman’s significant experience in satellite technology and decades of experience with U.S. government contracting is expected to enhance our efforts to continually improve commercial success and shareholder value. To advance our CEO’s initiatives to further strengthen and grow our business, we continue to move forward on the operational and cultural transformation that we call "One Comtech." In our third quarter of fiscal 2023, as part of our comprehensive and company-wide "people strategy," we continued to enhance our leadership team with key appointments designed to maximize our ability to compete and deliver across our global market segments. In April 2023, Donald Walther was appointed as Comtech’s new Chief Legal Officer and Nicole Robinson was appointed as Chief Strategy Officer. Mr. Walther has significant technology and aerospace industry experience in both public and private companies in the commercial and defense sectors with his previous experience at ITT Inc. and the Boeing Company. He will focus on ensuring Comtech's competitive differentiation through contracts is preserved and protected. Prior to joining Comtech, Ms. Robinson served as President of Ursa Space Systems, a leading satellite intelligence and data analytics provider. Ms. Robinson also served as Senior Vice President of Global Government for SES, one of the largest commercial satellite operators in the world. Ms. Robinson will focus on creating and implementing priority space business pursuits; oversee the development and implementation of new technologies; orchestrate global growth initiatives and lead other priorities related to geospatial imagery and data, as well as space communications in both U.S. and international markets. Notably, our people strategy extends beyond the organic development of our talent pipeline and the addition of proven leaders to our team. Our strategy also includes regular assessments of the capabilities, experiences and skill sets of our Board members to ensure continued alignment with our short and long-term goals and objectives. To that end, we are very excited to have both Lieutenant General (Retired) Bruce T. Crawford and the Honorable Ellen M. Lord join our Board of Directors, effective June 15, 2023. As planned, during the three months ended April 30, 2023, we completed our migration to our new 146,000 square-foot facility in Chandler, Arizona. We also continued to integrate our individual businesses into two segments and improve operational performance. This transformation 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 our third and fourth quarters of fiscal 2023. Severance costs relating to these actions are not anticipated to be material to our results of operations. We believe that these actions will further streamline and optimize our organization and cost structure as we approach the start of our fiscal 2024. Over the past several months, we established EVOKE as Comtech’s innovation foundry, which is dedicated to creating and accelerating transformational changes in global technologies. We believe that EVOKE will enhance our existing technologies and service offerings (e.g., cloud-native satellite ecosystems, 5G advanced services and “as-a-service” business models) as well as allow us to pioneer entirely new ideas and opportunities with the benefit of multiple perspectives, industry backgrounds and areas of expertise. During our third quarter of fiscal 2023, we were pleased to announce that we added several new partners to EVOKE’s growing roster, including Aarna Networks, Descartes Labs, Inc. and WishKnish Corp. By combining Aarna Networks’ technologies with Comtech’s Dynamic Cloud Platform, the companies anticipate enabling customers to easily add and manage a variety of open architecture cloud-based applications across private, hybrid and public networks, in both terrestrial and non-terrestrial environments. Descartes Labs will work with Comtech to infuse the power of artificial intelligence, machine learning, predictive intelligence and insight monitoring across Comtech’s product offerings. We plan to collaborate with WishKnish on integrating highly secure, flexible distributed ledger (blockchain) technologies across diverse commercial and government applications. As we enter the fourth quarter of fiscal 2023, business conditions continue to be challenging, and the operating environment is largely unpredictable, including factors such as inflation, rising interest rates, the repercussions of the military conflict between Russia and Ukraine and a potential global recession. Order and production delays, disruptions in component availability, increased pricing both for labor and parts, lower levels of factory utilization and higher logistics and operational costs are also continuing to impact our business. Nevertheless, despite these business conditions and resulting challenges and although we anticipate some variability from time to time as we move through our One Comtech transformational change, for our fourth quarter of fiscal 2023, we are targeting consolidated net sales to sequentially increase approximately 2.0% to 4.0% and for our consolidated Adjusted EBITDA margin to range between 9.5% and 10.5%. 37 Index We do not provide forward-looking guidance on a GAAP basis because we are unable to predict certain items contained in the GAAP measure without unreasonable efforts. Because our consolidated Adjusted EBITDA, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each segment as well as unallocated spending, it is inherently difficult to forecast. Please refer to the discussion below under "Adjusted EBITDA" for more information. Additional information related to our Business Outlook for fiscal 2023 and a definition and explanation of Adjusted EBITDA is included in the below section " Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of the Results of Operations for the Three Months Ended April 30, 2023 and 2022" and " Comparison of the Results of Operations for the Nine Months Ended April 30, 2023 and 2022." COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2023 AND 2022 Net Sales. Consolidated net sales were $136.3 million and $122.1 million for the three months ended April 30, 2023 and 2022, respectively, representing an increase of $14.2 million, or 11.6%. The period-over-period increase in net sales primarily reflects significantly higher net sales in our Satellite and Space Communications segment, as further discussed below. Satellite and Space Communications Net sales in our Satellite and Space Communications segment were $82.2 million for the three months ended April 30, 2023 as compared to $69.2 million for the three months ended April 30, 2022, an increase of $13.0 million or 18.9%. Net sales for the three months ended April 30, 2023 primarily reflect significantly higher net sales of our troposcatter and SATCOM solutions to U.S. government customers (including VSAT equipment for the U.S. Army, progress toward delivering next-generation troposcatter terminals to the U.S. Marine Corps and delivery of our COMET TM troposcatter terminals to an international customer), offset in part by lower sales of our satellite ground station technologies, solid-state, RF microwave high-power amplifiers and control components and high reliability EEE satellite-based space components. Our Satellite and Space Communications segment represented 60.3% of consolidated net sales for the three months ended April 30, 2023 as compared to 56.6% for the three months ended April 30, 2022. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the three months ended April 30, 2023 was 0.94x. Bookings, sales and profitability in our Satellite and Space Communications segment can fluctuate substantially from period-to-period due to many factors, including unpredictable funding, deployment and technology decisions by our U.S. and international government customers. Period-to-period fluctuations in bookings are normal for this segment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance. Terrestrial and Wireless Networks Net sales in our Terrestrial and Wireless Networks segment were $54.1 million for the three months ended April 30, 2023, as compared to $53.0 million for the three months ended April 30, 2022, an increase of $1.1 million, or 2.1%. Net sales in the three months ended April 30, 2023 reflect higher sales of our NG-911 solutions and services, offset in part by lower sales of our trusted location and messaging solutions. Our Terrestrial and Wireless Networks segment represented 39.7% of consolidated net sales for the three months ended April 30, 2023 as compared to 43.4% for the three months ended April 30, 2022. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the three months ended April 30, 2023 was 0.47x. Bookings, sales and profitability in our Terrestrial and Wireless Networks segment can fluctuate from period-to-period due to many factors, including changes in the general business environment. Period-to-period fluctuations in bookings are normal for this segment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance. 38 Index Geography and Customer Type Sales by geography and customer type, as a percentage of related sales, for the three months ended April 30, 2023 and 2022 are as follows: Three months ended April 30, 2023 2022 2023 2022 2023 2022 Satellite and Space Communications Terrestrial and Wireless Networks Consolidated U.S. government 47.1 % 39.8 % 1.6 % 1.8 % 29.1 % 23.3 % Domestic 14.8 % 17.6 % 87.9 % 89.0 % 43.8 % 48.6 % Total U.S. 61.9 % 57.4 % 89.5 % 90.8 % 72.9 % 71.9 % International 38.1 % 42.6 % 10.5 % 9.2 % 27.1 % 28.1 % Total 100.0 % 100.0 % 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. No commercial customer accounted for greater than 10% of consolidated net sales for the three months ended April 30, 2023. Included in domestic sales are sales to Verizon, which accounted for 10.6% of consolidated net sales for the three months ended April 30, 2022. International sales for the three months ended April 30, 2023 and 2022 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $37.0 million and $34.3 million, 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% of consolidated net sales for the three months ended April 30, 2023 and 2022. Gross Profit. Gross profit was $43.1 million and $46.7 million for the three months ended April 30, 2023 and 2022, respectively. Gross profit, as a percentage of consolidated net sales, for the three months ended April 30, 2023 was 31.7% as compared to 38.2% for the three months ended April 30, 2022. Our gross profit (both in dollars and as a percentage of consolidated net sales) reflects an increase in net sales and overall product mix changes, including significantly higher net sales of our troposcatter and SATCOM solutions to U.S. government customers, as discussed above. Our gross profit in both periods reflects start-up costs associated with the opening of our new high-volume technology manufacturing centers, as well as increased costs resulting from the ongoing impacts of the COVID-19 pandemic and inflationary pressures. In addition, gross profit during the three months ended April 30, 2022 reflects a lower provision for warranty obligations in light of the reduced level of sales activity during that period. Gross profit, as a percentage of related segment net sales, is further discussed below. Our Satellite and Space Communications segment's gross profit, as a percentage of related segment net sales, for the three months ended April 30, 2023 decreased in comparison to the three months ended April 30, 2022 and reflects changes in product and services mix, as discussed above. Also, during the three months ended April 30, 2022, we incurred $0.1 million of incremental operating costs related to our antenna facility located in the United Kingdom due to the impact of the COVID-19 pandemic. Similar operating costs were not incurred in the three months ended April 30, 2023. Our Terrestrial and Wireless Networks segment's gross profit, as a percentage of related segment net sales, for the three months ended April 30, 2023 decreased in comparison to the three months ended April 30, 2022. The gross profit percentage in the most recent quarter primarily reflects changes in products and services mix, as discussed above. Included in consolidated cost of sales for the three months ended April 30, 2023 and 2022 are provisions for excess and obsolete inventory of $1.5 million and $1.1 million, respectively. As discussed in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Provisions for Excess and Obsolete Inventory," we regularly review our inventory and record a provision for excess and obsolete inventory based on historical and projected usage trends. Our consolidated gross profit, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each segment, and therefore is inherently difficult to forecast. 39 Index Selling, General and Administrative Expenses . Selling, general and administrative expenses were $31.4 million and $27.6 million for the three months ended April 30, 2023 and 2022, respectively. As a percentage of consolidated net sales, selling, general and administrative expenses were 23.0% and 22.6% for the three months ended April 30, 2023 and 2022, respectively. During the three months ended April 30, 2023 and 2022, we incurred $4.1 million and $1.6 million, respectively, of restructuring costs primarily to streamline our operations and improve efficiency, including severance and 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. Excluding restructuring costs, selling, general and administrative expenses for the three months ended April 30, 2023 and 2022 would have been $27.3 million, or 20.0%, and $26.0 million, or 21.3%, respectively, of consolidated net sales. The decrease in our selling, general and administrative expenses, as a percentage of consolidated net sales, is primarily due to higher consolidated net sales, as discussed above. Our selling, general and administrative expenses in the most recent period also reflect higher labor costs associated with a tight global labor market, increased investments in marketing, including new social media activities, and other investments we are making to achieve our long-term business goals. Such spending is expected to continue throughout the remainder of fiscal 2023. Amortization of stock-based compensation expense recorded as selling, general and administrative expenses was $3.9 million in the three months ended April 30, 2023 as compared to $0.9 million in the three months ended April 30, 2022. Such increase 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. Amortization of stock-based compensation is not allocated to our two reportable operating segments. Research and Development Expenses. Research and development expenses were $11.7 million and $14.3 million for the three months ended April 30, 2023 and 2022, respectively. As a percentage of consolidated net sales, research and development expenses were 8.6% and 11.7% for the three months ended April 30, 2023 and 2022, respectively. For the three months ended April 30, 2023 and 2022, research and development expenses of $5.3 million and $7.4 million, respectively, related to our Satellite and Space Communications segment, and $6.3 million and $6.8 million, respectively, related to our Terrestrial and Wireless Networks segment. The remaining research and development expenses of $0.1 million in both the three months ended April 30, 2023 and 2022 related to the amortization of stock-based compensation expense. During the three months ended April 30, 2023 and 2022, we incurred $1.0 million and $0.9 million, respectively, of strategic emerging technology costs in our Satellite and Space Communications segment for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations. We are evaluating this new market in relation to our long-term business strategies, and we may incur additional costs in the future. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the three months ended April 30, 2023 and 2022, customers reimbursed us $4.5 million and $2.7 million, respectively, which is not reflected in the reported research and development expenses but is included in net sales with the related costs included in cost of sales. Amortization of Intangibles. Amortization relating to intangible assets with finite lives for both the three months ended April 30, 2023 and 2022 was $5.3 million (of which $1.8 million was for the Satellite and Space Communications segment and $3.5 million was for the Terrestrial and Wireless Networks segment). Operating Income (Loss). Operating loss for the three months ended April 30, 2023 and 2022 was $5.3 and $0.6 million, respectively. Operating income (loss) by reportable segment is shown in the table below: Three months ended April 30, 2023 2022 2023 2022 2023 2022 2023 2022 ($ in millions) Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Consolidated Operating income (loss) $ 0.1 (0.1) 3.1 4.6 (8.5) (5.1) $ (5.3) (0.6) Percentage of related net sales 0.1 % NA 5.8 % 8.7 % NA NA NA NA 40 Index Our GAAP operating loss of $5.3 million for the three months ended April 30, 2023 reflects: (i) $5.3 million of amortization of intangibles; (ii) $4.1 million of restructuring costs (of which $2.2 million, $0.5 million and $1.4 million related to our Satellite and Space Communications, Terrestrial and Wireless Networks and Unallocated segments, respectively); (iii) $4.1 million of amortization of stock-based compensation; (iv) $1.0 million of strategic emerging technology costs; and (v) $0.2 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating income for the three months ended April 30, 2023 would have been $9.6 million. Our GAAP operating loss of $0.6 million for the three months ended April 30, 2022 reflects: (i) $5.3 million of amortization of intangibles; (ii) $1.6 million of restructuring costs (all of which related to our Satellite and Space Communications segment); (iii) $1.1 million of amortization of stock-based compensation; (iv) $0.9 million of strategic emerging technology costs; (v) $0.2 million of amortization of cost to fulfill assets; and (vi) $0.1 million of incremental operating costs due to the impact of COVID-19, as discussed above. Excluding such items, our consolidated operating income for the three months ended April 30, 2022 would have been $8.7 million. The increase in operating income, excluding the above items, from $8.7 million to $9.6 million for the most recent period reflects the benefit of our One Comtech lean initiatives implemented through April 30, 2023, offset in part by a lower gross profit percentage on higher net sales, as discussed above. Operating income (loss) by reportable segment is further discussed below. The slight increase in our Satellite and Space Communications segment operating income, both in dollars and as a percentage of related segment net sales, for the three months ended April 30, 2023 was driven primarily by lower research and development expenses, offset in part by a lower gross profit percentage on significantly higher related segment net sales and higher restructuring costs, as discussed above. The decrease in our Terrestrial and Wireless Networks segment operating income, both in dollars and as a percentage of related segment net sales, for the three months ended April 30, 2023 was driven primarily by a lower gross profit percentage on higher related segment net sales, offset in part by lower research and development expenses, as discussed above. Excluding the impact of its respective portion of restructuring charges, Unallocated expenses for the three months ended April 30, 2023 would have been $7.1 million, as compared to $5.1 million for the three months ended April 30, 2022. The increase in Unallocated expenses, excluding such items, was primarily due to our increased investments in marketing, including new social media activities, and other investments we are making to achieve our long-term business goals. Interest Expense and Other. Interest expense was $4.4 million and $1.0 million for the three months ended April 30, 2023 and 2022, respectively. The increase is due to a higher average debt balance outstanding during the most recent quarter, as well as higher interest rates under our Credit Facility that we entered into in November 2022. Our effective interest rate (including amortization of deferred financing costs) in the three months ended April 30, 2023 was approximately 10.1%, as compared to 3.3% in the prior year period. Our current cash borrowing rate (which excludes the amortization of deferred financing costs) under our Credit Facility approximates 8.9%, as compared to 2.5% in the prior year period. Interest (Income) and Other. Interest (income) and other for both the three months ended April 30, 2023 and 2022 was nominal. All of our available cash and cash equivalents are currently invested in bank deposits and money market deposit accounts which, at this time, are currently yielding an immaterial interest rate. Change in Fair Value of Convertible Preferred Stock Purchase Option Liability. During the three months ended April 30, 2022, we recorded a $0.3 million non-cash benefit from the remeasurement of the convertible preferred stock purchase option liability. There was no similar adjustment during the three months ended April 30, 2023. See "Notes to Condensed Consolidated Financial Statements - Note (16) - Convertible Preferred Stock" for more information. Benefit from Income Taxes. For the three months ended April 30, 2023 and 2022, we recorded a tax benefit of $2.9 million and $0.8 million, respectively. Our effective tax rate (excluding discrete tax items) for the three months ended April 30, 2023 and 2022 was 14.25% and 28.25%, respectively. The decrease in the rate is primarily due to the recognition of a valuation allowance in a foreign jurisdiction. For purposes of determining our 14.25% 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. During the three months ended April 30, 2023, we recorded a net discrete tax benefit of $1.2 million 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. During the three months ended April 30, 2022, we recorded a net discrete tax expense of $0.2 million, 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. 41 Index Our U.S. federal income tax returns for fiscal 2020 through 2022 are subject to potential future 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. Net Loss Attributable to Common Stockholders. During the three months ended April 30, 2023 and 2022, consolidated net loss attributable to common stockholders was $9.2 million and $1.7 million, respectively. Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both the three months ended April 30, 2023 and 2022 are shown in the table below with a reconciliation to net income (numbers in the table may not foot due to rounding): Three months ended April 30, 2023 2022 2023 2022 2023 2022 2023 2022 ($ in millions) Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Consolidated Net income (loss) $ 0.7 0.3 2.9 4.5 (11.0) (4.8) $ (7.5) — (Benefit from) provision for income taxes (1.2) 0.1 0.1 0.1 (1.8) (0.9) (2.9) (0.8) Interest expense — — — — 4.4 1.0 4.4 1.0 Interest (income) and other 0.6 (0.5) 0.2 — — — 0.7 (0.4) Change in fair value of convertible preferred stock purchase option liability — — — — — (0.3) — (0.3) Amortization of stock-based compensation — — — — 4.1 1.1 4.1 1.1 Amortization of intangibles 1.8 1.8 3.5 3.5 — — 5.3 5.3 Depreciation 1.0 0.8 1.9 1.6 — — 3.0 2.5 Amortization of cost to fulfill assets 0.2 0.2 — — — — 0.2 0.2 Restructuring costs 2.2 1.6 0.5 — 1.4 — 4.1 1.6 COVID-19 related costs — 0.1 — — — — — 0.1 Strategic emerging technology costs 1.0 0.9 — — — — 1.0 0.9 Adjusted EBITDA $ 6.4 5.4 9.2 9.7 (3.0) (3.9) $ 12.5 11.2 Percentage of related net sales 7.7 % 7.8 % 16.9 % 18.4 % NA NA 9.2 % 9.2 % The increase in consolidated Adjusted EBITDA, in dollars, for the three months ended April 30, 2023 as compared to the three months ended April 30, 2022 reflects the benefit of our One Comtech lean initiatives implemented through April 30, 2023, offset in part by a lower gross profit percentage, as discussed above. The increase in our Satellite and Space Communications segment's Adjusted EBITDA, in dollars, is primarily due to lower research and development expenses, offset in part by a lower gross profit percentage on significantly higher related segment net sales, as discussed above. The decrease in our Terrestrial and Wireless Networks segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is primarily due to a lower gross profit percentage on higher related segment net sales, offset in part by lower selling, general and administrative and research and development expenses, as discussed above. Because our consolidated Adjusted EBITDA, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each segment as well as unallocated spending, it is inherently difficult to forecast. 42 Index A reconciliation of our fiscal 2022 GAAP Net Loss to Adjusted EBITDA is shown in the table below (numbers in the table may not foot due to rounding): ($ in millions) Fiscal Year 2022 Reconciliation of GAAP Net Loss to Adjusted EBITDA: Net loss $ (33.1) Benefit from income taxes (4.0) Interest (income) and other (0.7) Change in fair value of convertible preferred stock purchase option liability (1.0) Interest expense 5.0 Amortization of stock-based compensation 7.8 Amortization of intangibles 21.4 Depreciation 10.3 Amortization of cost to fulfill assets 0.5 CEO transition costs 13.6 Proxy solicitation costs 11.2 Restructuring costs 6.0 COVID-19 related costs 1.1 Strategic emerging technology costs 1.2 Adjusted EBITDA $ 39.3 Our Adjusted EBITDA is a Non-GAAP measure that represents earnings (loss) before 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 analysis expenses and other. Our definition of Adjusted EBITDA 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. Adjusted EBITDA is also a measure frequently requested by our investors and analysts. We believe that investors and analysts may use Adjusted EBITDA, along with other information contained in our SEC filings, including GAAP measures, in assessing our performance and comparability of our results with other companies. Our Non-GAAP measures reflect the GAAP measures as reported, adjusted for certain items as described herein and also excludes the effects of our outstanding convertible preferred stock. During the first quarter of fiscal 2023, we changed the computation of our Non-GAAP measures of operating (loss) income, net (loss) income attributable to common stockholders and net (loss) income per diluted common share to adjust for amortization of intangibles (including cost to fulfill assets) and stock-based compensation. This change was made to improve the comparability of our results with our peers. Prior period Non-GAAP results have been restated in the tables below to reflect this change. These Non-GAAP financial measures have limitations as an analytical tool as they exclude the financial impact of transactions necessary to conduct our business, such as the granting of equity compensation awards, and are not intended to be an alternative to financial measures prepared in accordance with GAAP. These measures are adjusted as described in the reconciliation of GAAP to Non-GAAP measures in the tables presented herein, but these adjustments should not be construed as an inference that all of these adjustments or costs are unusual, infrequent or non-recurring. Non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, financial measures determined in accordance with GAAP. Investors are advised to carefully review the GAAP financial results that are disclosed in our SEC filings. We have not quantitatively reconciled our fourth quarter fiscal 2023 Adjusted EBITDA target to the most directly comparable GAAP measure because items such as stock-based compensation, adjustments to the provision for income taxes, amortization of intangibles and interest expense, which are specific items that impact these measures, have not yet occurred, are out of our control, or cannot be predicted. For example, quantification of stock-based compensation expense requires inputs such as the number of shares granted and market price that are not currently ascertainable. Accordingly, reconciliations to the Non-GAAP forward looking metrics are not available without unreasonable effort and such unavailable reconciling items could significantly impact our financial results. 43 Index Reconciliations of our GAAP consolidated operating (loss) income, net (loss) income attributable to common stockholders and net (loss) income per diluted common share for the three months ended April 30, 2023 and 2022 to the corresponding Non-GAAP measures are shown in the tables below (numbers and per share amounts in the tables may not foot due to rounding). Non-GAAP net (loss) income attributable to common stockholders and non-GAAP net (loss) income per diluted common share reflect Non-GAAP provisions for income taxes based on year-to-date results, as adjusted for the Non-GAAP reconciling items included in the tables below. We evaluate our Non-GAAP effective income tax rate on an ongoing basis, and it can change from time to time. Our Non-GAAP effective income tax rate can differ materially from our GAAP effective income tax rate. In addition, due to the GAAP net loss for the period, Non-GAAP net (loss) income per diluted common share for the three months ended April 30, 2023 and 2022 was computed using weighted average diluted shares outstanding of 28,498,000 and 27,225,000, respectively, during the period. Three months ended April 30, 2023 ($ in millions, except for per share amount) Operating (Loss) Income Net (Loss) Income Attributable to Common Stockholders Net (Loss) Income per Diluted Common Share Reconciliation of GAAP to Non-GAAP Earnings: GAAP measures, as reported $ (5.3) $ (9.2) $ (0.33) Adjustments to reflect redemption value of convertible preferred stock — 1.8 0.06 Amortization of intangibles 5.3 4.1 0.15 Amortization of stock-based compensation 4.1 3.2 0.11 Restructuring costs 4.1 3.2 0.11 Strategic emerging technology costs 1.0 0.9 0.03 Amortization of costs to fulfill assets 0.2 0.2 0.01 Net discrete tax benefit — (1.2) (0.04) Non-GAAP measures $ 9.6 $ 3.0 $ 0.11 Three months ended April 30, 2022 ($ in millions, except for per share amount) Operating (Loss) Income Net (Loss) Income Attributable to Common Stockholders Net (Loss) Income per Diluted Common Share Reconciliation of GAAP to Non-GAAP Earnings: GAAP measures, as reported $ (0.6) $ (1.7) $ (0.06) Adjustments to reflect redemption value of convertible preferred stock — 1.7 0.06 Amortization of intangibles 5.3 4.1 0.15 Amortization of stock-based compensation 1.1 0.8 0.03 Restructuring costs 1.6 1.1 0.04 Strategic emerging technology costs 0.9 0.7 0.03 Amortization of costs to fulfill assets 0.2 0.2 0.01 COVID-19 related costs 0.1 0.1 — Change in fair value of convertible preferred stock purchase option liability — (0.3) (0.01) Net discrete tax expense — 0.2 0.01 Non-GAAP measures $ 8.7 $ 6.9 $ 0.25 44 Index COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 2023 AND 2022 Net Sales. Consolidated net sales were $401.2 million and $359.3 million for the nine months ended April 30, 2023 and 2022, respectively, representing an increase of $41.9 million, or 11.7%. The period-over-period increase in consolidated net sales primarily reflects significantly higher net sales in our Satellite and Space Communications segment, as further discussed below. Satellite and Space Communications Net sales in our Satellite and Space Communications segment were $243.5 million for the nine months ended April 30, 2023 as compared to $202.9 million for the nine months ended April 30, 2022, an increase of $40.6 million or 20.0%. Related segment net sales for the nine months ended April 30, 2023 primarily reflect significantly higher net sales of our troposcatter and SATCOM solutions to U.S. government customers (including delivery of our COMET TM troposcatter terminals to international customers, VSAT equipment for the U.S. Army and progress toward delivering next-generation troposcatter terminals to the U.S. Marine Corps) and satellite ground station technologies, offset in part by lower sales of our solid-state, RF microwave high-power amplifiers and control components and high reliability EEE satellite-based space components. Our Satellite and Space Communications segment represented 60.7% of consolidated net sales for the nine months ended April 30, 2023 as compared to 56.5% for the nine months ended April 30, 2022. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the nine months ended April 30, 2023 was 1.44x. Bookings, sales and profitability in our Satellite and Space Communications segment can fluctuate substantially from period-to-period due to many factors, including unpredictable funding, deployment and technology decisions by our U.S. and international government customers. Period-to-period fluctuations in bookings are normal for this segment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance. Terrestrial and Wireless Networks Net sales in our Terrestrial and Wireless Networks segment were $157.7 million for the nine months ended April 30, 2023, as compared to $156.4 million for the nine months ended April 30, 2022, an increase of $1.3 million, or 0.8%. Related segment net sales for the nine months ended April 30, 2023 primarily reflect higher sales of our NG-911 solutions and services, offset in part by lower sales of our trusted location and messaging solutions and cyber security training services. Our Terrestrial and Wireless Networks segment represented 39.3% of consolidated net sales for the nine months ended April 30, 2023 as compared to 43.5% for the nine months ended April 30, 2022. Our book-to-bill ratio in this segment for the nine months ended April 30, 2023 was 0.64x. Bookings, sales and profitability in our Terrestrial and Wireless Networks segment can fluctuate from period-to-period due to many factors, including changes in the general business environment. Period-to-period fluctuations in bookings are normal for this segment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance. Geography and Customer Type Sales by geography and customer type, as a percentage of related sales, for the nine months ended April 30, 2023 and 2022 are as follows: Nine months ended April 30, 2023 2022 2023 2022 2023 2022 Satellite and Space Communications Terrestrial and Wireless Networks Consolidated U.S. government 48.7 % 45.6 % 1.8 % 2.3 % 30.3 % 26.8 % Domestic 17.2 % 17.4 % 89.8 % 88.2 % 45.7 % 48.2 % Total U.S. 65.9 % 63.0 % 91.6 % 90.5 % 76.0 % 75.0 % International 34.1 % 37.0 % 8.4 % 9.5 % 24.0 % 25.0 % Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Sales to U.S. government customers include sales to the DoD, intelligence and civilian agencies, as well as sales directly to or through prime contractors. Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. Included in domestic sales are sales to Verizon, which accounted for 11.2% and 11.1% of consolidated net sales for the nine months ended April 30, 2023 and 2022, respectively. 45 Index International sales for the nine months ended April 30, 2023 and 2022 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $96.2 million and $89.9 million, 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% of consolidated net sales for the nine months ended April 30, 2023 and 2022. Gross Profit. Gross profit was $135.9 million and $134.3 million for the nine months ended April 30, 2023 and 2022, respectively, an increase of $1.6 million. Gross profit, as a percentage of consolidated net sales, for the nine months ended April 30, 2023 was 33.9% as compared to 37.4% for the nine months ended April 30, 2022. Our gross profit (both in dollars and as a percentage of consolidated net sales) reflects an increase in net sales and overall product mix changes, including significantly higher net sales of our troposcatter and SATCOM solutions to U.S. government customers, as discussed above. In addition, during the nine months ended April 30, 2023 and 2022, respectively, we recorded a $1.5 million and $2.5 million benefit to cost of sales as we reduced a warranty accrual due to lower than expected warranty claims in our NG-911 product line. Our gross profit in both periods reflects start-up costs associated with the opening of our new high-volume technology manufacturing centers, as well as increased costs resulting from the ongoing impacts of the COVID-19 pandemic and inflationary pressures. Gross profit, as a percentage of related segment net sales, is further discussed below. Our Satellite and Space Communications segment's gross profit, as a percentage of related segment net sales, for the nine months ended April 30, 2023 is comparable to the nine months ended April 30, 2022 and reflects changes in products and services mix, as discussed above. Also, during the nine months ended April 30, 2022, we incurred $1.1 million of incremental operating costs related to our antenna facility located in the United Kingdom due to the impact of the COVID-19 pandemic. Similar operating costs were not incurred in the nine months ended April 30, 2023. Our Terrestrial and Wireless Networks segment's gross profit, as a percentage of related segment net sales, for the nine months ended April 30, 2023 decreased in comparison to the nine months ended April 30, 2022. The gross profit percentage in the most recent nine-month period primarily reflects changes in products and services mix, as discussed above. Included in consolidated cost of sales for the nine months ended April 30, 2023 and 2022 are provisions for excess and obsolete inventory of $2.8 million and $3.3 million, respectively. As discussed in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Provisions for Excess and Obsolete Inventory," we regularly review our inventory and record a provision for excess and obsolete inventory based on historical and projected usage trends. Our consolidated gross profit, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each segment, and therefore is inherently difficult to forecast. Selling, General and Administrative Expenses . Selling, general and administrative expenses were $89.6 million and $85.7 million for the nine months ended April 30, 2023 and 2022, respectively. As a percentage of consolidated net sales, selling, general and administrative expenses were 22.3% and 23.9% for the nine months ended April 30, 2023 and 2022, respectively. During the nine months ended April 30, 2023 and 2022, we incurred $7.0 million and $4.0 million, respectively, of restructuring costs primarily to streamline our operations and improve efficiency, including severance and 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. Excluding restructuring costs, selling, general and administrative expenses for the nine months ended April 30, 2023 and 2022 would have been $82.6 million or 20.6% and $81.7 million or 22.7%, respectively, of consolidated net sales. The decrease in our selling, general and administrative expenses, as a percentage of consolidated net sales, is primarily due to higher consolidated net sales, as discussed above. Our selling, general and administrative expenses in the most recent period also reflect higher labor costs associated with a tight global labor market, increased investments in marketing, including new social media activities and other investments we are making to achieve our long-term business goals. Such spending is expected to continue throughout the remainder of fiscal 2023. Amortization of stock-based compensation expense recorded as selling, general and administrative expenses was $5.6 million in the nine months ended April 30, 2023 as compared to $3.5 million in the nine months ended April 30, 2022. The most recent period reflects our assumption that fully vested, unrestricted share units will be granted to certain employees in lieu of fi scal 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. Amortization of stock-based compensation expense for the prior year period includes $0.8 million related to the retirement, in December 2021, of three long-standing members of the Board of Directors. Amortization of stock-based compensation is not allocated to our two reportable operating segments. 46 Index Research and Development Expenses. Research and development expenses were $36.9 million and $39.4 million for the nine months ended April 30, 2023 and 2022, respectively, representing a decrease of $2.5 million or 6.4%. As a percentage of consolidated net sales, research and development expenses were 9.2% and 11.0% for the nine months ended April 30, 2023 and 2022, respectively. For the nine months ended April 30, 2023 and 2022, research and development expenses of $17.3 million and $20.6 million, respectively, related to our Satellite and Space Communications segment and $19.3 million and $18.5 million, respectively, related to our Terrestrial and Wireless Networks segment. The remaining research and development expenses of $0.3 million in both the nine months ended April 30, 2023 and 2022, respectively, related to the amortization of stock-based compensation expense. During the nine months ended April 30, 2023 and 2022, we incurred $2.5 million and $0.9 million, respectively, of strategic emerging technology costs in our Satellite and Space Communications segment for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations. We are evaluating this new market in relation to our long-term business strategies, and we may incur additional costs in the future. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the nine months ended April 30, 2023 and 2022, customers reimbursed us $10.1 million and $8.0 million, respectively, which is not reflected in the reported research and development expenses but is included in net sales with the related costs included in cost of sales. Amortization of Intangibles . Amortization relating to intangible assets with finite lives for both the nine months ended April 30, 2023 and 2022 was $16.0 million (of which $5.5 million was for the Satellite and Space Communications segment and $10.5 million was for the Terrestrial and Wireless Networks segment). Proxy Solicitation Costs . During the nine months ended April 30, 2022, we incurred $11.2 million of proxy solicitation costs (including legal and advisory fees and costs associated with a related lawsuit) in our Unallocated segment as a result of a now settled proxy contest initiated by a shareholder. During our first quarter of fiscal 2022, we also entered into a Cooperation Agreement with such shareholder. There were no similar costs during the nine months ended April 30, 2023. CEO Transition Costs . CEO transition costs were $9.1 million for the nine months ended April 30, 2023. On August 9, 2022, our Board of Directors appointed our Chairman of the Board, Mr. Peterman, as President and CEO. Transition costs related to our former President and CEO, Mr. Porcelain, pursuant to his separation agreement with the Company, were $7.4 million, of which $3.8 million related to the acceleration of unamortized stock-based compensation, with the remaining $3.6 million related to his severance payments and benefits upon termination of employment. The cash portion of the transition costs of $3.6 million 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 $1.0 million expense related to a cash sign-on bonus, which was paid in January 2023. CEO transition costs related to Mr. Porcelain and Mr. Peterman were expensed in our Unallocated segment. CEO transition costs were $13.6 million for the nine months ended April 30, 2022 and related to our former CEO, Fred Kornberg. Of such amount, $10.3 million related to Mr. Kornberg's severance payments and benefits upon termination of his employment; the remainder related to him agreeing to serve as a Senior Technology Advisor for a minimum of two years. CEO transition costs related to Mr. Kornberg were expensed in our Unallocated segment. Operating Income (Loss). Operating loss for the nine months ended April 30, 2023 and 2022 was $15.8 million and $31.7 million, respectively. Operating income (loss) by reportable segment is shown in the table below: Nine months ended April 30, 2023 2022 2023 2022 2023 2022 2023 2022 ($ in millions) Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Consolidated Operating income (loss) $ 8.4 (7.9) 7.2 17.6 (31.4) (41.4) $ (15.8) (31.7) Percentage of related net sales 3.4 % NA 4.6 % 11.2 % NA NA NA NA 47 Index Our GAAP operating loss of $15.8 million for the nine months ended April 30, 2023 reflects: (i) $16.0 million of amortization of intangibles; (ii) $9.1 million of CEO transition costs; (iii) $7.0 million of restructuring costs (of which $4.4 million, $0.5 million and $2.1 million related to our Satellite and Space Communications, Terrestrial and Wireless Networks and Unallocated segments, respectively); (iv) $6.3 million of amortization of stock-based compensation; (v) $2.5 million of strategic emerging technology costs; and (vi) $0.7 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating income for the nine months ended April 30, 2023 would have been $25.9 million, or 6.4% of consolidated net sales. Our GAAP operating loss of $31.7 million for the nine months ended April 30, 2022 reflects: (i) $16.0 million of amortization of intangibles; (ii) $13.6 million of CEO transition costs; (iii) $11.2 million of proxy solicitation costs; (iv) $4.0 million of restructuring costs (all of which related to our Satellite and Space Communications segment); (v) $4.0 million of amortization of stock-based compensation; (vi) $1.1 million of incremental operating costs due to the impact of COVID-19; (vii) $0.9 million of strategic emerging technology costs; and (viii) $0.2 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating income for the nine months ended April 30, 2022 would have been $19.5 million, or 5.4% of consolidated net sales. The increase in operating income, excluding the above items, from $19.5 million to $25.9 million for the most recent period reflects the benefit of our One Comtech lean initiatives implemented through April 30, 2023 and, to a lesser extent, higher consolidated net sales, as discussed above. Operating income (loss) by reportable segment is further discussed below. The increase in our Satellite and Space Communications segment operating income, both in dollars and as a percentage of the related segment net sales, for the nine months ended April 30, 2023 was driven primarily by an increase in related segment net sales and lower research and development expenses, as discussed above. The decrease in our Terrestrial and Wireless Networks segment operating income, both in dollars and as a percentage of the related segment net sales, for the nine months ended April 30, 2023 was driven primarily by changes in products and services mix and higher research and development expenses, as discussed above. Excluding the impact of CEO transition costs, proxy solicitation costs and its respective portion of restructuring charges, Unallocated expenses for the nine months ended April 30, 2023 would have been $20.2 million, as compared to $16.5 million for the nine months ended April 30, 2022. The increase in Unallocated expenses excluding such items was primarily due to our increased investments in marketing, including new social media activities, and other investments we are making to achieve our long-term business goals. Interest Expense and Other. Interest expense was $10.4 million and $3.6 million for the nine months ended April 30, 2023 and 2022, respectively. The increase is due to a higher average debt balance outstanding during the most recent period, as well as higher interest rates under our Credit Facility that we entered into in November 2022. Our effective interest rate (including amortization of deferred financing costs) in the nine months ended April 30, 2023 was approximately 8.3%, as compared to 3.2% in the prior year period. Our current cash borrowing rate (which excludes the amortization of deferred financing costs) under our existing Credit Facility approximates 8.9%, as compared to 2.5% in the prior year period. Interest (Income) and Other. Interest (income) and other for both the nine months ended April 30, 2023 and 2022 was nominal. All of our available cash and cash equivalents are currently invested in bank deposits and money market deposit accounts which, at this time, are currently yielding an immaterial interest rate. Change in Fair Value of Convertible Preferred Stock Purchase Option Liability. During the nine months ended April 30, 2022, we recorded a $1.0 million non-cash benefit from the remeasurement of the convertible preferred stock purchase option liability. There was no similar adjustment during the nine months ended April 30, 2023. See "Notes to Condensed Consolidated Financial Statements - Note (16) - Convertible Preferred Stock" for more information. Benefit from Income Taxes. For the nine months ended April 30, 2023 and 2022, we recorded a tax benefit of $3.8 million and $6.1 million, respectively. Our effective tax rate (excluding discrete tax items) for the nine months ended April 30, 2023 and 2022 was 14.25% and 28.25%, respectively. The decrease in the rate is primarily due to the recognition of a valuation allowance in a foreign jurisdiction. For purposes of determining our 14.25% 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. 48 Index During the nine months ended April 30, 2023, we recorded a net discrete tax benefit of $1.2 million 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. During the nine months ended April 30, 2022, we recorded a net discrete tax benefit of $3.5 million 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. Our U.S. federal income tax returns for fiscal 2020 through 2022 are subject to potential future 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. Net Loss Attributable to Common Stockholders. During the nine months ended April 30, 2023 and 2022, consolidated net loss attributable to common stockholders was $28.6 million and $36.4 million, respectively. Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both the nine months ended April 30, 2023 and 2022 are shown in the table below (numbers in the table may not foot due to rounding): Nine months ended April 30, 2023 2022 2023 2022 2023 2022 2023 2022 ($ in millions) Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Consolidated Net income (loss) $ 9.6 (7.3) 7.1 17.4 (40.0) (38.0) $ (23.4) (27.9) Benefit from income taxes (1.8) (0.5) (0.2) — (1.7) (5.7) (3.8) (6.1) Interest expense — 0.1 — — 10.4 3.5 10.4 3.6 Interest (income) and other 0.6 (0.3) 0.3 0.1 — (0.1) 0.9 (0.3) Change in fair value of convertible preferred stock purchase option liability — — — — — (1.0) — (1.0) Amortization of stock-based compensation — — — — 6.3 4.0 6.3 4.0 Amortization of intangibles 5.5 5.5 10.6 10.6 — — 16.0 16.0 Depreciation 3.1 2.4 5.6 4.5 0.1 0.2 8.7 7.1 Amortization of cost to fulfill assets 0.7 0.2 — — — — 0.7 0.2 Restructuring costs 4.4 4.0 0.5 — 2.1 — 7.0 4.0 COVID-19 related costs — 1.1 — — — — — 1.1 Strategic emerging technology costs 2.5 0.9 — — — — 2.5 0.9 CEO transition costs — — — — 9.1 13.6 9.1 13.6 Proxy solicitation costs — — — — — 11.2 — 11.2 Adjusted EBITDA $ 24.5 6.3 23.9 32.6 (13.8) (12.4) $ 34.6 26.5 Percentage of related net sales 10.1 % 3.1 % 15.2 % 20.8 % NA NA 8.6 % 7.4 % The increase in consolidated Adjusted EBITDA, both in dollars and as a percentage of consolidated net sales, for the nine months ended April 30, 2023 as compared to the nine months ended April 30, 2022 reflects the benefit of our One Comtech lean initiatives implemented through April 30, 2023, as discussed above. The increase in our Satellite and Space Communications segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is primarily due to an increase in related segment net sales and lower research and development expenses, as discussed above. The decrease in our Terrestrial and Wireless Networks segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is primarily due to changes in products and services mix and higher research and development expenses, as discussed above. A reconciliation of our fiscal 2022 GAAP net loss to Adjusted EBITDA, and our definition of Adjusted EBITDA, is presented above in "Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of the Results of Operations for the Three Months Ended April 30, 2023 and 2022." 49 Index Reconciliations of our GAAP consolidated operating (loss) income, net (loss) income attributable to common stockholders and net (loss) income per diluted common share for the nine months ended April 30, 2023 and 2022 to the corresponding Non-GAAP measures are shown in the tables below (numbers and per share amounts in the tables may not foot due to rounding). Non-GAAP net (loss) income attributable to common stockholders and non-GAAP net (loss) income per diluted common share reflect Non-GAAP provisions for income taxes based on year-to-date results, as adjusted for the Non-GAAP reconciling items included in the tables below. We evaluate our Non-GAAP effective income tax rate on an ongoing basis, and it can change from time to time. Our Non-GAAP effective income tax rate can differ materially from our GAAP effective income tax rate. In addition, due to the GAAP net loss for the period, Non-GAAP net (loss) income per diluted common share for the nine months ended April 30, 2023 and 2022 was computed using weighted average diluted shares outstanding of 28,353,000 and 27,160,000 respectively, during the period. Nine months ended April 30, 2023 ($ in millions, except for per share amount) Operating (Loss) Income Net (Loss) Income Attributable to Common Stockholders Net (Loss) Income per Diluted Common Share Reconciliation of GAAP to Non-GAAP Earnings: GAAP measures, as reported $ (15.8) $ (28.6) $ (1.02) Adjustments to reflect redemption value of convertible preferred stock — 5.2 0.19 CEO transition costs 9.1 8.6 0.31 Amortization of intangibles 16.0 12.4 0.44 Amortization of stock-based compensation 6.3 4.9 0.18 Restructuring costs 7.0 5.4 0.19 Strategic emerging technology costs 2.5 2.2 0.08 Amortization of cost to fulfill assets 0.7 0.7 0.03 Net discrete tax benefit — (0.7) (0.03) Non-GAAP measures $ 25.9 $ 10.2 $ 0.36 Nine months ended April 30, 2022 ($ in millions, except for per share amount) Operating (Loss) Income Net (Loss) Income Attributable to Common Stockholders Net (Loss) Income per Diluted Common Share Reconciliation of GAAP to Non-GAAP Earnings: GAAP measures, as reported $ (31.7) $ (36.4) $ (1.37) Adjustment to reflect redemption value of convertible preferred stock — 8.5 0.32 CEO transition costs 13.6 13.0 0.49 Proxy solicitation costs 11.2 8.7 0.33 Amortization of intangibles 16.0 12.3 0.45 Amortization of stock-based compensation 4.0 3.1 0.12 Restructuring costs 4.0 3.1 0.12 Strategic emerging technology costs 0.9 0.7 0.03 Amortization of cost to fulfill assets 0.2 0.2 0.01 COVID-19 related costs 1.1 0.9 0.03 Change in fair value of convertible preferred stock purchase option liability — (1.0) (0.04) Net discrete tax benefit — (0.3) (0.01) Non-GAAP measures $ 19.5 $ 12.7 $ 0.47 50 Index LIQUIDITY AND CAPITAL RESOURCES Our cash and cash equivalents were $21.4 million and $21.7 million at April 30, 2023 and July 31, 2022, respectively. For the nine months ended April 30, 2023, our cash flows reflect the following: • Net cash used in operating activities was $0.2 million for the nine months ended April 30, 2023 as compared to net cash provided by operating activities of $8.4 million for the nine months ended April 30, 2022. The period-over-period decrease in cash flow from operating activities reflects overall changes in net working capital requirements, principally the timing of shipments, billings and payments. • Net cash used in investing activities for the nine months ended April 30, 2023 and 2022 was $14.9 million and $14.4 million, respectively. Net cash used in investing activities for the nine months ended April 30, 2023 primarily reflects capital expenditures to build-out cloud-based computer networks to support our previously announced NG-911 contract wins and capital investments and building improvements in connection with the opening of our new high-volume technology manufacturing centers. Net cash used in both periods also relates to expenditures for property, plant and equipment upgrades and enhancements. • Net cash provided by financing activities was $14.8 million and $8.0 million for the nine months ended April 30, 2023 and 2022, respectively. During the nine months ended April 30, 2023, we had net borrowings under our Credit Facility of $29.8 million, as compared to net payments under our Credit Facility of $74.0 million during the nine months ended April 30, 2022. During the nine months ended April 30, 2022, we received an aggregate of $100.0 million in proceeds related to the issuance of a new series of Convertible Preferred Stock to certain investors. During the nine months ended April 30, 2023, we paid deferred financing costs of $3.8 million in connection with the amendment of our Credit Facility. During the nine months ended April 30, 2023 and 2022, we paid $8.7 million and $8.4 million, respectively, in cash dividends to our common stockholders. We also made $2.8 million and $6.1 million of payments to remit employees' statutory tax withholding requirements related to the net settlement of stock-based awards during the nine months ended April 30, 2023 and 2022, respectively. The Credit Facility is discussed below and in " Notes to Condensed Consolidated Financial Statements – Note (9) – Credit Facility." The Convertible Preferred Stock is discussed below and in " Notes to Condensed Consolidated Financial Statements – Note (16) – Convertible Preferred Stock." Our investment policy relating to our cash and cash equivalents is intended to minimize principal loss while at the same time maximize the income we receive without significantly increasing risk. To minimize risk, we generally invest our cash and cash equivalents in money market mutual funds (both government and commercial), certificates of deposit, bank deposits and U.S. Treasury securities. Many of our money market mutual funds invest in direct obligations of the U.S. government, bank securities guaranteed by the Federal Deposit Insurance Corporation, certificates of deposit and commercial paper and other securities issued by other companies. While we cannot predict future market conditions or market liquidity, we believe our investment policies are appropriate in the current environment. Ultimately, the availability of our cash and cash equivalents is dependent on a well-functioning liquid market. In addition to making capital investments for our new high-volume manufacturing centers, we have been making significant capital expenditures and building out cloud-based computer networks to support our previously announced NG-911 contract wins for the states of Pennsylvania, South Carolina and Arizona. We expect capital investments for these and other initiatives to continue for the remainder of fiscal 2023 as we look to complete such projects. On July 13, 2022, we filed a $200.0 million shelf registration statement with the SEC for the sale of various types of securities, including debt securities. This new shelf registration statement was declared effective by the SEC as of July 25, 2022 and expires on July 25, 2025. On September 29, 2020, our Board of Directors authorized a new $100.0 million stock repurchase program, which replaced our prior program. The new $100.0 million 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 and 2022. 51 Index 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. Encouraged by the progress that we have made related to our One Comtech transformation, our launch of EVOKE and our emerging growth opportunities, as previously disclosed, during the third quarter of fiscal 2023, the Board, together with management, adjusted the Company’s capital allocation plans 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. Our material cash requirements are for working capital, capital expenditures, income tax payments, debt service (including interest), facilities lease payments and dividends related to our Convertible Preferred Stock, which are payable in kind or in cash at our election. We have historically met our cash requirements with funds provided by a combination of cash and cash equivalent balances, cash generated from operating activities and cash generated from equity and debt financing transactions. In our first quarter of fiscal 2022, we secured a $100.0 million strategic growth investment to enhance our financial flexibility and strengthen our ability to capitalize on recent large contract awards and growing customer demand by making crucial investments in our satellite and space communications and terrestrial and wireless networks solutions. Based on our current revenue visibility and anticipated benefits of our One Comtech profit improvement initiatives, we believe that our existing cash and cash equivalent balances, our cash generated from operating activities and amounts potentially available under our Credit Facility will be sufficient to meet our currently anticipated cash requirements in the next twelve months and beyond. Our material cash requirements could increase beyond our current expectations due to factors such as general economic conditions, a change in government spending priorities, larger than usual customer orders or a future redemption by the holders of our Series A Convertible Preferred Stock. Also, in light of our CEO's initiatives to grow the Company, we continue to review and evaluate our capital allocation plans. Furthermore, we may choose to raise additional funds through equity and debt financing transactions to provide additional flexibility or to pursue acquisitions. Although it is difficult in the current economic and credit environment to predict the terms and conditions of financing that may be available in the future, we believe that we would have sufficient access to credit from financial institutions and/or financing from public and private debt and equity markets. Credit Facility On October 31, 2018, we entered into a First Amended and Restated Credit Agreement (the "Credit Facility") with a syndicate of lenders. 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. See " Notes to Condensed Consolidated Financial Statements – Note (9) – Credit Facility " for further information. Capitalized terms used but not defined herein have the meanings set forth for such terms in the Credit Facility, which have been documented and filed with the SEC. As of April 30, 2023, the amount outstanding under our Credit Facility was $159.8 million, comprised of $111.0 million under the Revolving Loan Facility and $48.8 million under the Term Loan. At April 30, 2023, we had $1.0 million of standby letters of credit outstanding under our Credit Facility related to our 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 $130.0 million to $182.4 million. As of April 30, 2023, our Secured Leverage Ratio was 3.73x trailing twelve months ("TTM") Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") compared to the maximum allowable Secured Leverage Ratio of 4.00x TTM Adjusted EBITDA. Our Interest Expense Coverage Ratio as of April 30, 2023 was 4.11x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25x TTM Adjusted EBITDA. Our Minimum Liquidity was $32.5 million compared to the Minimum Liquidity requirement of $25.0 million. Given our expected future business performance, we anticipate maintaining compliance with the terms and financial covenants in our Credit Facility for the foreseeable future, however there can be no assurance that we will be able to satisfy these covenants. 52 Index Convertible Preferred Stock As discussed further in " Notes to Condensed Consolidated Financial Statements - Note (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 $125.0 million, 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 $100.0 million. Commitments In the normal course of business, other than as discussed below, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment. We do not expect that these commitments, as of April 30, 2023, will materially adversely affect our liquidity. At April 30, 2023, cash payments due under contractual obligations (including estimated interest expense on our Credit Facility), excluding purchase orders that we entered into in our normal course of business, are as follows: Total Due Within 1 Year Credit Facility - principal payments $ 159,750 3,750 Credit Facility - interest payments 21,331 14,323 Operating lease obligations 58,642 9,343 Contractual cash obligations $ 239,723 27,416 The commitments under our Credit Facility are described in detail above. As discussed in " Notes to Condensed Consolidated Financial Statements - Note (16) - Convertible Preferred Stock ," the holders of the Convertible Preferred Stock have the option to redeem such shares for cash commencing in October 2026. As the Convertible Preferred Stock are not mandatorily redeemable for cash, the redemption value of such shares are not presented in the table above. In the ordinary course of business, we include indemnification provisions in certain of our customer contracts. Pursuant to these agreements, we have agreed to indemnify, hold harmless and reimburse the indemnified party for certain losses suffered or incurred by the indemnified party, including but not limited to losses related to third-party intellectual property claims. It is not possible to determine the maximum potential amount under these agreements due to a history of nominal claims and the unique facts and circumstances involved in each particular agreement. As discussed further in " Notes to Condensed Consolidated Financial Statements - Note (18) - Legal Proceedings and Other Matters ," we are subject to a number of indemnification demands and we are incurring ongoing legal expenses in connection with these matters. Our insurance policies may not cover the cost of defending indemnification claims or providing indemnification. As a result, pending or future claims asserted against us by a party that we may agree or have agreed 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. We 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. Our Condensed Consolidated Balance Sheet at April 30, 2023 includes total liabilities of $8.9 million for uncertain tax positions, including interest, any or all of which may result in a cash payment. The future payments related to uncertain tax positions have not been presented in the table above due to the uncertainty of the amounts and timing of any potential cash settlement with the taxing authorities. 53 Index RECENT ACCOUNTING PRONOUNCEMENTS 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 is commonly referred to as "GAAP." The FASB ASC is subject to updates by the FASB, which are known as Accounting Standards Updates ("ASUs"). As further discussed in " Notes to Condensed Consolidated Financial Statements – Note (2) - Adoption of Accounting Standards and Updates, " 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.