COMTECH TELECOMMUNICATIONS CORP /DE/ 10-K

ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this Form 10-K, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was carried out by us under the supervision and with the participation of our management, including our President, Chief Executive Officer and Chairman and Chief Financial Officer. Based on that evaluation, our President, Chief Executive Officer and Chairman and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by the report to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure. A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Management’s Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of our internal control over financial reporting as of July 31, 2023. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control – Integrated Framework (2013) . Based on our assessment, we determined that, as of July 31, 2023, our internal control over financial reporting was effective based on those criteria. Deloitte and Touche LLP, our independent registered public accounting firm, has performed an audit of our internal control over financial reporting as of July 31, 2023 based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO. This audit is required to be performed in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our independent auditors were given unrestricted access to all financial records and related data. Deloitte’s audit reports appear on pages F-2 and F-3 of this annual report. Changes In Internal Control Over Financial Reporting There have been no changes in our internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during our fiscal quarter ended July 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 68 ITEM 9B. OTHER INFORMATION Securities Trading Plans of Directors and Officers During the three months ended July 31, 2023, none of our directors or officers adopted or terminated a Rule 10b5-1 trading plan or adopted or terminated a non-Rule 10b5-1 trading arrangement (as each term is defined in Item 408(a) of Regulation S-K). ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS Not applicable. 69 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Certain information concerning directors and officers is incorporated by reference to our Proxy Statement for the Annual Meeting of Stockholders (the "Proxy Statement") which will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year. ITEM 11. EXECUTIVE COMPENSATION Information regarding executive compensation is incorporated by reference to the Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information regarding securities authorized for issuance under equity compensation plans and certain information regarding security ownership of certain beneficial owners and management is incorporated by reference to the Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information regarding certain relationships and related transactions is incorporated by reference to the Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information regarding principal accountant fees and services is incorporated by reference to the Proxy Statement, which will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year. 70 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) (1) The Registrant’s financial statements together with a separate index are annexed hereto. (2) The Financial Statement Schedule listed in a separate index is annexed hereto. (3) Exhibits required by Item 601 of Regulation S-K are listed below. Exhibit Number Description of Exhibit Incorporated By Reference to Exhibit 3(a)(i) Restated Certificate of Incorporation of the Registrant, dated August 18, 2006 Exhibit 3(a)(i) to the Registrant’s 2006 Form 10-K 3(a)(ii) Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Comtech Telecommunications Corp., dated December 28, 2021 Exhibit 3.1 to the Registrant's Form 8-K, filed December 30, 2021 3(a)(iii) Third Amended and Restated By-Laws of the Registrant, dated September 26, 2017 Exhibit 3(a)(ii) to the Registrant’s 2017 Form 10-K 3(a)(iv) Amended and Restated Certificate of Designations of Series A Convertible Preferred Stock, dated November 30, 2022 Exhibit 3.1 to the Registrant's Form 8-K filed December 1, 2022 4(a)(vi) Description of Comtech Telecommunication Corp.'s Securities Registered Pursuant to Section 12 of the Exchange Act Exhibit 4(a)(vi) to the Registrant's 2022 Form 10-K 10(a)(1)* Seventh Amended and Restated Employment Agreement, dated March 4, 2020, between the Registrant and Fred Kornberg Exhibit 10.1 to the Registrant’s Form 8-K, filed March 4, 2020 10(a)(2)* Lease Agreement, dated September 23, 2011, between TM Squared and Comtech PST Corp. (with respect to the Melville, New York facility ) Exhibit 10(s) to the Registrant's 2011 Form 10-K 10(a)(3)* Consulting Agreement, dated January 3, 2022, between Comtech and Fred Kornberg Exhibit 10.2 to the Registrant's Form 8-K, filed January 5, 2022 10(a)(4)* Restricted Stock Award Agreement with Fred Kornberg Pursuant to the Comtech Telecommunications Corp. 2000 Stock Incentive Plan Exhibit 10.1 to the Registrant's Form 10-Q, filed March 10, 2022 10(b)* Third Amended and Restated 2001 Employee Stock Purchase Plan Appendix B to the Registrant’s Proxy Statement, filed November 18, 2022 10(c)* 2000 Stock Incentive Plan, Amended and Restated, dated December 15, 2022 Appendix A to the Registrant’s Proxy Statement, filed November 18, 2022 10(d)(1)* Form of Stock Option Agreement pursuant to the 2000 Stock Incentive Plan Exhibit 10(f)(7) to the Registrant’s 2005 Form 10-K 10(d)(2)* Form of Stock Option Agreement for Non-employee Directors pursuant to the 2000 Stock Incentive Plan - 2020 Exhibit 10(d)(3) to the Registrant's Form 2020 Form 10-K 10(e)(1)* Form of Performance Share Agreement pursuant to the 2000 Stock Incentive Plan Exhibit 10(s) to the Registrant’s 2012 Form 10-K 10(e)(2) * Form of Cash-Settled Performance Unit Agreement pursuant to the 2000 Stock Incentive Plan 10(f)(1)* Form of Long-Term Performance Share Award Agreement pursuant to the 2000 Stock Incentive Plan - 2018 Exhibit 10(f)(2) to the Registrant's 2019 Form 10-K 10(g)(1)* Form of Restricted Stock Agreement for Employees pursuant to the 2000 Stock Incentive Plan Exhibit 10(y) to the Registrant’s 2016 Form 10-K 10(g)(2)* Form of Restricted Stock Agreement for Non-employee Directors pursuant to the 2000 Stock Incentive Plan Exhibit 10(ab) to the Registrant’s 2016 Form 10-K 10(g)(3)* Form of Restricted Stock Agreement (eligible for dividend equivalents) for Non-employee Directors pursuant to the 2000 Stock Incentive Plan - 2019 Exhibit 10(g)(3) to the Registrant's 2019 Form 10-K 71 Exhibit Number Description of Exhibit Incorporated By Reference to Exhibit 10(g)(4)* Form of Restricted Stock Agreement (eligible for dividend equivalents) for Non-employee Directors pursuant to the 2000 Stock Incentive Plan - 2022 Exhibit 10(g)(4) to the Registrant's 2022 Form 10-K 10(h)(1)* Form of Restricted Stock Unit Agreement for Employees pursuant to the 2000 Stock Incentive Plan - 2017 Exhibit 10(h)(1) to the Registrant’s 2017 Form 10-K 10(h)(2)* Form of Restricted Stock Unit Agreement for Employees pursuant to the 2000 Stock Incentive Plan - 2016 Exhibit 10(z) to the Registrant’s 2016 Form 10-K 10(h)(3)* Form of Restricted Stock Unit Agreement for Non-employee Directors pursuant to the 2000 Stock Incentive Plan Exhibit 10.2 to the Registrant's Form 10-Q, filed June 7, 2012 10(h)(4)* Form of Restricted Stock Unit Agreement (eligible for dividend equivalents) for Non-employee Directors pursuant to the 2000 Stock Incentive Plan Exhibit 10(aa) to the Registrant’s 2016 Form 10-K 10(h)(5)* Form of Restricted Stock Unit Agreement (eligible for dividend equivalents) for Non-employee Directors pursuant to the 2000 Stock Incentive Plan - 2013 Exhibit 10(x) to the Registrant's 2013 Form 10-K 10(h)(6)* Form of Restricted Stock Unit Agreement (eligible for dividend equivalents) for Non-employee Directors pursuant to the 2000 Stock Incentive Plan - 2020 Exhibit 10.1 to the Registrant's Form 10-Q, filed June 3, 2020 10(h)(7)* Form of Restricted Stock Unit Agreement (eligible for dividend equivalents) for Non-employee Directors pursuant to the 2000 Stock Incentive Plan - 2022 Exhibit 10(h)(7) to the Registrant's 2022 Form 10-K 10(h)(8)* Form of Restricted Stock Unit Agreement (eligible for dividend equivalents) for Employees pursuant to the 2000 Stock Incentive Plan - 2022 Exhibit 10(h)(8) to the Registrant's 2022 Form 10-K 10(i)(1)* Form of Stock Unit Agreement for Non-employee Directors pursuant to the 2000 Stock Incentive Plan Exhibit 10.1 to the Registrant's Form 10-Q, filed June 7, 2012 10(i)(2)* Form of Stock Unit Agreement (eligible for dividend equivalents) for Non-employee Directors pursuant to the 2000 Stock Incentive Plan Exhibit 10(v) to the Registrant's 2013 Form 10-K 10(i)(3) * Form of Other Stock-Based Award Agreement pursuant to the 2000 Stock Incentive Plan 10(j)(1)* Form of Share Unit Agreement (eligible for dividend equivalents) for Employees pursuant to the 2000 Stock Incentive Plan Exhibit 10.2 to the Registrant's Form 10-Q, filed December 9, 2013 10(j)(2)* Form of Share Unit Agreement (eligible for dividend equivalents) for Employees pursuant to the 2000 Stock Incentive Plan - 2018 Exhibit 10(j)(2) to the Registrant's 2018 Form 10-K 10(k)* Form of Indemnification Agreement between the Registrant and the Named Executive Officers and Certain Other Executive Officers Exhibit 10.1 to Registrant’s Form 8-K, filed on March 8, 2007 10(l)(1)* Form of Change-in-Control Agreement (Tier 1) Exhibit 10(l)(1) to the Registrant's 2022 Form 10-K 10(l)(2)* Form of Change-in-Control Agreement (Tier 2) between the Registrant and Certain Named Executive Officers (other than the CEO) and Certain Other Executive Officers Exhibit 10(l)(2) to the Registrant's 2022 Form 10-K 72 Exhibit Number Description of Exhibit Incorporated By Reference to Exhibit 10(l)(3)* Form of Change-in-Control Agreement (Tier 2) between the Registrant and Certain Named Executive Officers (other than the CEO) and Certain Other Executive Officers (California Employees) Exhibit 10.3 to the Registrant’s Form 8-K, filed June 7, 2017 10(l)(4)* Form of Change-in-Control Agreement (Tier 2) between the Registrant and Certain Named Executive Officers (other than the CEO) and Certain Other Executive Officers (Divisional/Subsidiary Presidents) Exhibit 10.4 to the Registrant’s Form 8-K, filed June 7, 2017 10(l)(5)* Form of Change-in-Control Agreement (Tier 2) between the Registrant and Certain Named Executive Officers (other than the CEO) and Certain Other Executive Officers (California Divisional/Subsidiary Presidents) Exhibit 10.5 to the Registrant’s Form 8-K, filed June 7, 2017 10(l)(6)* Form of Change-in-Control Agreement (Tier 3) between the Registrant and Certain Non-Executive Officers Exhibit 10.6 to the Registrant’s Form 8-K, filed June 7, 2017 10(m)* Retirement and Transition Agreement, dated September 30 2019 Exhibit 10.1 to the Registrant's Form 10-Q, filed December 4, 2019 10(n) Agreement and Plan of Merger, dated November 22, 2015, among Comtech Telecommunications Corp., Typhoon Acquisition Corp. and TeleCommunication Systems, Inc. Exhibit 2.1 to the Registrant’s Form 8-K, filed November 23, 2015 10(o) Second Amended and Restated Credit Agreement, dated November 30, 2022, among Comtech Telecommunications Corp., the lenders party thereto and Citibank N.A., as administrative agent, issuing bank and swingline lender. Exhibit 10.1 to the Registrant’s Form 8-K, filed December 1, 2022 10(p)(1) Subscription Agreement, dated October 18, 2021, by and among Comtech Telecommunications Corp. and the Investors named therein Exhibit 10.1 to the Registrant's Form 8-K filed October 22, 2021 10(p)(2) Registration Rights Agreement, dated October 19, 2021, by and among Comtech Telecommunications Corp. and the Investors named therein Exhibit 99.2 to the Registrant's Form 8-K filed October 22, 2021 10(p)(3) Form of Amended and Restated Voting Agreement Exhibit 3.1 to the Registrant's Form 8-K, filed November 12, 2021 10(q) Cooperation Agreement dated December 16, 2021, by and among Comtech Telecommunications Corp., Outerbridge Partners, LP, Outerbridge Capital Management, LLC, Outerbridge Partners GP, LLC, Outerbridge Bartleby Fund, LP, Outerbridge Bartleby GP, LLC, and Rory Wallace Exhibit 10.1 to the Registrant's Form 8-K, filed December 21, 2021 10(r)(1)* Employment Agreement, dated December 31, 2021, between Comtech and Michael Porcelain Exhibit 10.1 to the Registrant's Form 8-K, filed January 5, 2022 10(r)(2)* Restricted Stock Unit Agreement with Michael Porcelain Pursuant to the Comtech Telecommunications Corp. 2000 Stock Incentive Plan Exhibit 10.2 to the Registrant's Form 10-Q, filed March 10, 2022 10(r)(3)* Separation Agreement and General Release with Michael Porcelain, dated August 9, 2022 Exhibit 10.1 to the Registrant's Form 8-K, filed August 10, 2022 10(s)(1)* CEO Employment Agreement with Ken Peterman, dated September 12, 2022 Exhibit 10.1 to the Registrant’s Form 8-K, filed September 13, 2022 10(s)(2)* Restricted Stock Unit Agreement with Ken Peterman Pursuant to the Comtech Telecommunications Corp. 2000 Stock Incentive Plan Exhibit 10.2 to the Registrant’s Form 8-K, filed September 13, 2022 73 Exhibit Number Description of Exhibit Incorporated By Reference to Exhibit 10(s)(3)* Long-Term Performance Share Award Agreement with Ken Peterman Pursuant to the Comtech Telecommunications Corp. 2000 Stock Incentive Plan Exhibit 10.3 to the Registrant’s Form 8-K, filed September 13, 2022 10(s)(4)* Long-Term Performance Share Award (VWAP) Agreement with Ken Peterman Pursuant to the Comtech Telecommunications Corp. 2000 Stock Incentive Plan Exhibit 10.4 to the Registrant’s Form 8-K, filed September 13, 2022 21 Subsidiaries of the Registrant 23.1 Consent of Independent Registered Public Accounting Firm 31.1 Certification of CEO and Chairman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of CEO and Chairman pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS The following financial statements from the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 2023, formatted in inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Stockholders' Equity, (iv) Consolidated Statement of Cash Flows, and (v) Notes to Consolidated Financial Statements 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Labels Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 104 Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101) * Management contract or compensatory plan or arrangement. ITEM 16. FORM 10-K SUMMARY None. 74 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMTECH TELECOMMUNICATIONS CORP. October 12, 2023 By: /s/Ken Peterman (Date) Ken Peterman, Chairman of the Board President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title October 12, 2023 /s/Ken Peterman Chairman of the Board (Date) Ken Peterman President and Chief Executive Officer (Principal Executive Officer) October 12, 2023 /s/Michael A. Bondi Chief Financial Officer (Date) Michael A. Bondi (Principal Financial and Accounting Officer) October 12, 2023 /s/Wendi Carpenter Director (Date) Wendi Carpenter October 12, 2023 /s/Judy Chambers Director (Date) Judy Chambers October 12, 2023 /s/Bruce T. Crawford Director (Date) Bruce T. Crawford October 12, 2023 /s/Lisa Lesavoy Director (Date) Lisa Lesavoy October 12, 2023 /s/Ellen M. Lord Director (Date) Ellen M. Lord October 12, 2023 /s/Mark Quinlan Director (Date) Mark Quinlan October 12, 2023 /s/Dr. Yacov A. Shamash Director (Date) Dr. Yacov A. Shamash October 12, 2023 /s/Lawrence J. Waldman Director (Date) Lawrence J. Waldman 75 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Index to Consolidated Financial Statements and Schedule Page Reports of Independent Registered Public Accounting Firm (PCAOB ID: 34 ) F- 2 Consolidated Financial Statements: Balance Sheets as of July 31, 2023 and 2022 F- 6 Statements of Operations for each of the years in the three-year period ended July 31, 2023 F- 7 Statements of Convertible Preferred Stock and Stockholders' Equity for each of the years in the three-year period ended July 31, 2023 F- 8 Statements of Cash Flows for each of the years in the three-year period ended July 31, 2023 F- 9 Notes to Consolidated Financial Statements F- 11 Additional Financial Information Pursuant to the Requirements of Form 10-K: Schedule II – Valuation and Qualifying Accounts and Reserves S- 1 Schedules not listed above have been omitted because they are either not applicable or the required information has been provided elsewhere in the consolidated financial statements or notes thereto. F - 1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Comtech Telecommunications Corp. Melville, New York Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Comtech Telecommunications Corp. and subsidiaries (the "Company") as of July 31, 2023 and 2022, the related consolidated statements of operations, convertible preferred stock and stockholders’ equity, and cash flows, for each of the three years in the period ended July 31, 2023, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of July 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended July 31, 2023, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of July 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 12, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Net Sales – Over Time Accounting Using the Cost-to-Cost Measure for Specific Identified Material Contracts — Refer to Note 1 to the financial statements . Critical Audit Matter Description The Company’s determination of revenue recognition for specific identified material contracts accounted for over time involves estimating the total costs needed to complete the specific identified contracts and updating those estimates throughout the life of those specific identified contracts. This requires management to make significant estimates related to forecasts of future costs for the identified specific contracts. Changes in these estimates for the identified specific contracts could have a significant impact on the Company’s results of operations. Given the significant judgment and estimates used in management’s projections, auditing the Company’s estimates at completion and estimates to completion involved especially subjective judgment. F - 2 How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the Company’s determination of revenue recognition for specific identified material contracts accounted for over time included the following, among others: • We tested the effectiveness of the controls over the development of the initial contract cost to complete estimate and monitoring of estimates at completion and estimates to completion. • For each specific identified material contract selected, we performed the following: ◦ Evaluated whether the contract was properly included in management’s calculation of overtime revenue based on the terms and conditions of each contract, including whether continuous transfer of control to the customer occurred as progress was made toward fulfilling the performance obligation. ◦ Compared the transaction prices to the consideration expected to be received based on current rights and obligations under the contracts and any modifications that were agreed upon with the customers. ◦ Tested management’s identification of distinct performance obligations by evaluating whether the underlying goods, services, or both were highly interdependent and interrelated. ◦ Evaluated the estimates of total cost and profit for the performance obligation by: ▪ Performing a retrospective review by comparing the estimated margins at contract inception to the actual margins as of year-end in order to assess management’s ability to accurately estimate costs. ▪ Inquiring and corroborating the estimates to complete and the estimates at completion with the Project Manager (i.e., someone outside of Finance/Accounting) to understand significant variances in costs and completeness of the estimates at completion and estimates to completion. ▪ Testing the estimates to complete through a combination of tests of details, in which we selected individual costs within the estimate to complete and obtained supporting documentation, and where we developed an expectation of the estimate to complete and compared it to the recorded balance. ◦ Tested the accuracy and completeness of costs incurred during the current fiscal year. This testing included agreeing labor costs to employee timesheets and agreeing the labor rate to either rates agreed upon with the customer in the contract or rates from the Company’s payroll records. ◦ Tested the mathematical accuracy of management’s calculation of revenue for the performance obligation. Goodwill - Terrestrial and Wireless Networks Reporting Unit - Refer to Note 13 to the financial statements Critical Audit Matter Description The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying value. The Company used the income approach, also known as the discounted cash flow ("DCF") method, to determine the present value of cash flows to estimate fair value. The future cash flows for the Company’s reporting units were projected based on their estimates, at that time, of future revenues, operating income and other factors (such as working capital and capital expenditures). Changes in these assumptions could have a significant impact on either the fair value, the amount of any goodwill impairment charge, or both. The goodwill balance was $347.7 million as of July 31, 2023, of which $174.1 million was allocated to the Terrestrial and Wireless Networks Reporting Unit (“Terrestrial and Wireless Networks”). The fair value of Terrestrial and Wireless Networks exceeded its carrying value by 8.9% as of the measurement date and, therefore, no impairment was recognized. We identified goodwill for Terrestrial and Wireless Networks as a critical audit matter because of the significant judgments made by management to estimate the fair value of the reporting unit and the differences between their fair value and carrying value. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to selection of the discount rate and forecasts of future revenue and operating margins. F - 3 How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to the discount rate and forecasts of future revenue and operating margins used by management to estimate the fair value of Terrestrial and Wireless Networks included the following, among others: • We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the determination of the fair value of the reporting units, such as controls related to management’s selection of the discount rate and forecasts of future revenue and operating margins. • We evaluated management’s ability to accurately forecast future revenues and operating margins by comparing actual results to management’s historical forecasts. • We evaluated the reasonableness of management’s revenue forecasts and forecasts of operating margins by comparing the forecasts to: ◦ Historical revenues and operating margins. ◦ Internal communications to management and the Board of Directors. ◦ Forecasted information included in Company press releases as well as in analyst and industry reports for the Company and certain of its peer companies. • With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2) discount rate by: ◦ Testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation. ◦ Developing a range of independent estimates and comparing those to the discount rate selected by management. /s/ DELOITTE & TOUCHE LLP Jericho, New York October 12, 2023 We have served as the Company’s auditor since 2015. F - 4 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Comtech Telecommunications Corp. Melville, New York Opinion on Internal Control over Financial Reporting We have audited the internal control over financial reporting of Comtech Telecommunications Corp. and subsidiaries (the “Company”) as of July 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and financial statement schedule as of and for the year ended July 31, 2023, of the Company and our report dated October 12, 2023, expressed an unqualified opinion on those financial statements and financial statement schedule. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ DELOITTE & TOUCHE LLP Jericho, New York October 12, 2023 F - 5 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Balance Sheets As of July 31, 2023 and 2022 Assets 2023 2022 Current assets: Cash and cash equivalents $ 18,961,000 21,654,000 Accounts receivable, net 163,159,000 123,711,000 Inventories, net 105,845,000 96,317,000 Prepaid expenses and other current assets 17,521,000 21,649,000 Total current assets 305,486,000 263,331,000 Property, plant and equipment, net 53,029,000 50,363,000 Operating lease right-of-use assets, net 44,410,000 49,767,000 Goodwill 347,692,000 347,692,000 Intangibles with finite lives, net 225,907,000 247,303,000 Deferred financing costs, net 2,349,000 1,014,000 Other assets, net 17,364,000 14,827,000 Total assets $ 996,237,000 974,297,000 Liabilities, Convertible Preferred Stock and Stockholders’ Equity Current liabilities: Accounts payable $ 64,241,000 44,591,000 Accrued expenses and other current liabilities 66,990,000 72,662,000 Current portion of long-term debt 4,375,000 — Operating lease liabilities, current 8,645,000 8,685,000 Dividends payable — 2,746,000 Contract liabilities 66,351,000 64,601,000 Interest payable 1,368,000 172,000 Total current liabilities 211,970,000 193,457,000 Non-current portion of long-term debt, net 160,029,000 130,000,000 Operating lease liabilities, non-current 41,763,000 44,423,000 Income taxes payable 2,208,000 3,007,000 Deferred tax liability, net 9,494,000 15,355,000 Long-term contract liabilities 18,419,000 9,975,000 Other liabilities 1,844,000 6,291,000 Total liabilities 445,727,000 402,508,000 Commitments and contingencies (See Note 12) Convertible preferred stock, par value $ 0.10 per share; authorized 125,000 shares; issued 100,000 at July 31, 2023 and 2022 (includes accrued dividends of $ 604,000 and $ 566,000 , respectively) 112,211,000 105,204,000 Stockholders’ equity: Preferred stock, par value $ 0.10 per share; authorized and unissued 1,875,000 shares — — Common stock, par value $ 0.10 per share; authorized 100,000,000 shares; issued 43,096,271 shares and 42,672,827 shares at July 31, 2023 and 2022, respectively 4,310,000 4,267,000 Additional paid-in capital 636,925,000 625,484,000 Retained earnings 238,913,000 278,683,000 880,148,000 908,434,000 Less: Treasury stock, at cost ( 15,033,317 shares at July 31, 2023 and 2022) ( 441,849,000 ) ( 441,849,000 ) Total stockholders’ equity 438,299,000 466,585,000 Total liabilities, convertible preferred stock and stockholders’ equity $ 996,237,000 974,297,000 See accompanying notes to consolidated financial statements. F - 6 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Operations Fiscal Years Ended July 31, 2023, 2022 and 2021 2023 2022 2021 Net sales $ 549,994,000 486,239,000 581,695,000 Cost of sales 365,534,000 306,403,000 367,737,000 Gross profit 184,460,000 179,836,000 213,958,000 Expenses: Selling, general and administrative 120,003,000 114,858,000 111,796,000 Research and development 48,631,000 52,532,000 49,148,000 Amortization of intangibles 21,396,000 21,396,000 21,020,000 CEO transition costs 9,090,000 13,554,000 — Proxy solicitation costs — 11,248,000 — Acquisition plan expenses — — 100,292,000 199,120,000 213,588,000 282,256,000 Operating loss ( 14,660,000 ) ( 33,752,000 ) ( 68,298,000 ) Other expenses (income): Interest expense 14,961,000 5,031,000 6,821,000 Interest (income) and other 1,226,000 ( 703,000 ) ( 139,000 ) Change in fair value of convertible preferred stock purchase option liability — ( 1,005,000 ) — Loss before benefit from income taxes ( 30,847,000 ) ( 37,075,000 ) ( 74,980,000 ) Benefit from income taxes ( 3,948,000 ) ( 4,023,000 ) ( 1,500,000 ) Net loss $ ( 26,899,000 ) ( 33,052,000 ) ( 73,480,000 ) Adjustments to reflect redemption value of convertible preferred stock: Dividend on convertible preferred stock ( 7,007,000 ) ( 5,204,000 ) — Convertible preferred stock issuance costs — ( 4,007,000 ) — Establishment of initial convertible preferred stock purchase option liability — ( 1,005,000 ) — Net loss attributable to common stockholders $ ( 33,906,000 ) ( 43,268,000 ) ( 73,480,000 ) Net loss per share: Basic $ ( 1.21 ) ( 1.63 ) ( 2.86 ) Diluted $ ( 1.21 ) ( 1.63 ) ( 2.86 ) Weighted average number of common shares outstanding – basic 28,002,000 26,506,000 25,685,000 Weighted average number of common and common equivalent shares outstanding – diluted 28,002,000 26,506,000 25,685,000 See accompanying notes to consolidated financial statements. F - 7 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity Fiscal Years Ended July 31, 2023, 2022 and 2021 Series A Convertible Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Stockholders' Equity Shares Amount Shares Amount Shares Amount Balance as of July 31, 2020 — $ — 39,924,439 $ 3,992,000 $ 569,891,000 $ 417,265,000 15,033,317 $ ( 441,849,000 ) $ 549,299,000 Equity-classified stock award compensation — — — — 9,983,000 — — — 9,983,000 Issuance of employee stock purchase plan shares — — 54,762 5,000 804,000 — — — 809,000 Issuance of restricted stock — — 35,495 4,000 ( 4,000 ) — — — — Net settlement of stock-based awards — — 240,549 24,000 ( 4,024,000 ) — — — ( 4,000,000 ) Common stock issued for acquisition of UHP Networks Inc. ("UHP") — — 1,026,567 103,000 28,789,000 — — — 28,892,000 Cash dividends declared ($ 0.40 per share) — — — — — ( 10,189,000 ) — — ( 10,189,000 ) Accrual of dividend equivalents, net of reversal ($ 0.40 per share) — — — — — ( 380,000 ) — — ( 380,000 ) Adoption of current expected credit loss standard — — — — — ( 215,000 ) — — ( 215,000 ) Net loss — — — — — ( 73,480,000 ) — — ( 73,480,000 ) Balance as of July 31, 2021 — — 41,281,812 4,128,000 605,439,000 333,001,000 15,033,317 ( 441,849,000 ) 500,719,000 Equity-classified stock award compensation — — — — 7,767,000 — — — 7,767,000 CEO transition costs related to equity-classified stock-based awards (See Note 11) — — — — 7,388,000 — — — 7,388,000 Issuance of employee stock purchase plan shares — — 49,138 5,000 725,000 — — — 730,000 Issuance of restricted stock, net of forfeiture — — 132,854 13,000 ( 13,000 ) — — — — Net settlement of stock-based awards — — 247,721 25,000 ( 4,640,000 ) — — — ( 4,615,000 ) Common stock issued for settlement of UHP earn-out liability — — 961,302 96,000 8,818,000 — — — 8,914,000 Issuance of convertible preferred stock 100,000 100,000,000 — — — — — — — Convertible preferred stock issuance costs — ( 4,007,000 ) — — — — — — — Establishment of initial convertible preferred stock purchase option liability — ( 1,005,000 ) — — — — — — — Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends) — 10,216,000 — — — ( 10,216,000 ) — — ( 10,216,000 ) Cash dividends declared ($ 0.40 per share) — — — — — ( 10,661,000 ) — — ( 10,661,000 ) Accrual of dividend equivalents, net of reversal ($ 0.40 per share) — — — — — ( 389,000 ) — — ( 389,000 ) Net loss — — — — — ( 33,052,000 ) — — ( 33,052,000 ) Balance as of July 31, 2022 100,000 105,204,000 42,672,827 4,267,000 625,484,000 278,683,000 15,033,317 ( 441,849,000 ) 466,585,000 Equity-classified stock award compensation — — — — 10,257,000 — — — 10,257,000 CEO transition costs related to equity-classified stock-based awards (See Note 11) — — — — 3,764,000 — — — 3,764,000 Issuance of employee stock purchase plan shares — — 54,617 5,000 429,000 — — — 434,000 Issuance of restricted stock, net of forfeiture — — 93,091 9,000 ( 9,000 ) — — — — Net settlement of stock-based awards — — 275,736 29,000 ( 3,000,000 ) — — — ( 2,971,000 ) Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends) — 7,007,000 — — — ( 7,007,000 ) — — ( 7,007,000 ) Cash dividends declared ($ 0.20 per share) — — — — — ( 5,549,000 ) — — ( 5,549,000 ) Accrual of dividend equivalents, net of reversal ($ 0.20 per share) — — — — — ( 315,000 ) — — ( 315,000 ) Net loss — — — — — ( 26,899,000 ) — — ( 26,899,000 ) Balance as of July 31, 2023 100,000 $ 112,211,000 43,096,271 $ 4,310,000 $ 636,925,000 $ 238,913,000 15,033,317 $ ( 441,849,000 ) $ 438,299,000 See accompanying notes to consolidated financial statements. F - 8 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows Fiscal Years Ended July 31, 2023, 2022 and 2021 2023 2022 2021 Cash flows from operating activities: Net loss $ ( 26,899,000 ) ( 33,052,000 ) ( 73,480,000 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization of property, plant and equipment 11,922,000 10,314,000 9,379,000 Amortization of intangible assets with finite lives 21,396,000 21,396,000 21,020,000 Amortization of stock-based compensation 10,107,000 7,767,000 9,983,000 Amortization of cost to fulfill assets 959,000 469,000 — CEO transition costs related to equity-classified stock-based awards 3,764,000 7,388,000 — Amortization of deferred financing costs 1,852,000 811,000 736,000 Change in fair value of convertible preferred stock purchase option liability — ( 1,005,000 ) — Changes in other liabilities ( 4,133,000 ) ( 4,132,000 ) ( 6,633,000 ) Loss (gain) on disposal of property, plant and equipment 48,000 ( 310,000 ) 215,000 Provision for (benefit from) allowance for doubtful accounts 261,000 838,000 ( 18,000 ) Provision for excess and obsolete inventory 4,871,000 4,447,000 4,364,000 Deferred income tax benefit ( 6,060,000 ) ( 5,856,000 ) ( 3,263,000 ) Other — — ( 225,000 ) Changes in assets and liabilities, net of effects of business acquisitions: Accounts receivable ( 39,709,000 ) 33,567,000 ( 31,223,000 ) Inventories ( 14,885,000 ) ( 20,406,000 ) ( 2,338,000 ) Prepaid expenses and other current assets 1,656,000 ( 3,190,000 ) ( 265,000 ) Other assets ( 3,356,000 ) ( 6,656,000 ) ( 4,215,000 ) Accounts payable 20,362,000 6,833,000 11,016,000 Accrued expenses and other current liabilities 671,000 ( 11,081,000 ) ( 7,886,000 ) Contract liabilities 10,194,000 ( 1,362,000 ) 25,444,000 Other liabilities, non-current ( 324,000 ) ( 3,690,000 ) 3,583,000 Interest payable 1,197,000 ( 22,000 ) 32,000 Income taxes payable 1,673,000 ( 1,071,000 ) 3,136,000 Net cash (used in) provided by operating activities ( 4,433,000 ) 1,997,000 ( 40,638,000 ) Cash flows from investing activities: Net cash acquired from acquisition of UHP — — 1,304,000 Payment for acquisition of CGC, net of cash acquired — — ( 750,000 ) Purchases of property, plant and equipment ( 18,311,000 ) ( 19,619,000 ) ( 16,037,000 ) Net cash used in investing activities ( 18,311,000 ) ( 19,619,000 ) ( 15,483,000 ) Cash flows from financing activities: Net borrowings (payments) of long-term debt under Revolving Loan Facility 36,900,000 ( 71,000,000 ) 51,500,000 Cash dividends paid on common stock ( 8,661,000 ) ( 11,048,000 ) ( 10,334,000 ) Payment of deferred financing costs ( 3,809,000 ) ( 140,000 ) ( 30,000 ) Remittance of employees' statutory tax withholding for stock awards ( 2,869,000 ) ( 6,109,000 ) ( 2,803,000 ) Repayment of debt under Term Loan ( 1,875,000 ) — — Proceeds from issuance of employee stock purchase plan shares 470,000 734,000 809,000 Payment of shelf registration costs ( 101,000 ) — — Repayment of principal amounts under finance lease and other obligations ( 4,000 ) ( 15,000 ) ( 38,000 ) Proceeds from issuance of convertible preferred stock — 100,000,000 — Payment of convertible preferred stock issuance costs — ( 4,007,000 ) — Net cash provided by financing activities 20,051,000 8,415,000 39,104,000 (Continued) F - 9 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Consolidated Statements of Cash Flows (continued) Fiscal Years Ended July 31, 2023, 2022 and 2021 2023 2022 2021 Net decrease in cash and cash equivalents $ ( 2,693,000 ) ( 9,207,000 ) ( 17,017,000 ) Cash and cash equivalents at beginning of year 21,654,000 30,861,000 47,878,000 Cash and cash equivalents at end of year $ 18,961,000 21,654,000 30,861,000 Supplemental cash flow disclosure Cash paid (received) during the year for: Interest $ 11,914,000 4,094,000 5,987,000 Income taxes, net $ 361,000 2,913,000 ( 1,373,000 ) Non-cash investing and financing activities: Accrued remittance of employees' statutory tax withholdings for fully-vested share units $ 1,204,000 1,102,000 2,596,000 Cash dividends declared on common stock but unpaid (including accrual of dividend equivalents) $ 315,000 3,135,000 2,981,000 Adjustment to reflect redemption value of convertible preferred stock $ 7,007,000 10,216,000 — Establishment of initial convertible preferred stock purchase option liability $ — 1,005,000 — Accrued additions to property, plant and equipment $ 993,000 5,586,000 2,466,000 Issuance of restricted stock $ 9,000 13,000 4,000 Common stock issued for acquisitions $ — 9,000,000 28,892,000 Fair value of UHP acquisition contingent earn-out consideration $ — — 8,500,000 Accrued deferred financing costs $ — — 139,000 See accompanying notes to consolidated financial statements. F - 10 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements (1) Summary of Significant Accounting and Reporting Policies (a) Principles of Consolidation The accompanying consolidated financial statements include the accounts of Comtech Telecommunications Corp. and its subsidiaries ("Comtech," "we," "us," or "our"), all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated in consolidation. (b) Nature of Business We design, produce and market innovative products, systems and services for advanced communications solutions. We conduct our business through two reportable operating segments: Satellite and Space Communications and Terrestrial and Wireless Networks. Our business is highly competitive and characterized by rapid technological change. Our growth and financial position depends on our ability to keep pace with such changes and developments and to respond to the sophisticated requirements of an increasing variety of secure wireless communications technology users, among other things. Many of our competitors are substantially larger, and have significantly greater financial, marketing and operating resources and broader product lines than our own. A significant technological or sales breakthrough by others, including smaller competitors or new companies, could have a material adverse effect on our business. In addition, certain of our customers have technological capabilities in our product areas and could choose to replace our products with their own. International sales expose us to certain risks, including barriers to trade, fluctuations in foreign currency exchange rates (which may make our products less price competitive), political and economic instability, availability of suitable export financing, export license requirements, tariff regulations, and other United States ("U.S.") and foreign regulations that may apply to the export of our products, as well as the generally greater difficulties of doing business abroad. We attempt to reduce the risk of doing business in foreign countries by seeking contracts denominated in U.S. dollars, advance or milestone payments, credit insurance and irrevocable letters of credit in our favor. F - 11 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (c) Revenue Recognition In accordance with FASB ASC 606 - Revenue from Contracts with Customers ("ASC 606"), we record revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to customers. Under ASC 606, we follow a five-step model to: (1) identify the contract with our customer; (2) identify our performance obligations in our contract; (3) determine the transaction price for our contract; (4) allocate the transaction price to our performance obligations; and (5) recognize revenue using one of the following two methods: • Over time - We recognize revenue using the over time method when there is a continuous transfer of control to the customer over the contractual period of performance. This generally occurs when we enter into a long-term contract relating to the design, development or manufacture of complex equipment or technology platforms to a buyer’s specification (or to provide services related to the performance of such contracts). Continuous transfer of control is typically supported by contract clauses which allow our customers to unilaterally terminate a contract for convenience, pay for costs incurred plus a reasonable profit and take control of work-in-process. Revenue recognized over time is generally based on the extent of progress toward completion of the related performance obligations. The selection of the method to measure progress requires judgment and is based on the nature of the products or services provided. In certain instances, typically for firm fixed-price contracts, we use the cost-to-cost measure because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion, including warranty costs. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Costs to fulfill generally include direct labor, materials, subcontractor costs, other direct costs and an allocation of indirect costs. When these contracts are modified, the additional goods or services are generally not distinct from those already provided. As a result, these modifications form part of an existing contract and we must update the transaction price and our measure of progress for the single performance obligation and recognize a cumulative catch-up to revenue and gross profits. For over time contracts using a cost-to-cost measure of progress, we have an estimate at completion ("EAC") process in which management reviews the progress and execution of our performance obligations. This EAC process requires management judgment relative to assessing risks, estimating contract revenue and costs, and making assumptions for schedule and technical issues. Since certain contracts extend over a long period of time, the impact of revisions in revenue and or cost estimates during the progress of work may impact current period earnings through a cumulative adjustment. Additionally, if the EAC process indicates a loss, a provision is made for the total anticipated loss in the period that it becomes evident. Contract revenue and cost estimates for significant contracts are generally reviewed and reassessed at least quarterly. The cost-to-cost method is principally used to account for contracts in our Satellite and Space Communications segment and, to a lesser extent, certain location-based and messaging infrastructure contracts in our Terrestrial and Wireless Networks segment. For service-based contracts in our Terrestrial and Wireless Networks segment, we also recognize revenue over time. These services are typically recognized as a series of services performed over the contract term using the straight-line method, or based on our customers’ actual usage of the networks and platforms which we provide. • Point in time - When a performance obligation is not satisfied over time, we must record revenue using the point in time accounting method which generally results in revenue being recognized upon shipment or delivery of a promised good or service to a customer. This generally occurs when we enter into short term contracts or purchase orders where items are provided to customers with relatively quick turn-around times. Modifications to such contracts and or purchase orders, which typically provide for additional quantities or services, are accounted for as a new contract because the pricing for these additional quantities or services are based on standalone selling prices. F - 12 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Point in time accounting is principally applied to contracts in our Satellite and Space Communications segment, which includes satellite modems, solid-state and traveling wave tube amplifiers and to certain contracts for our solid-state, high-power RF amplifiers. The contracts related to these products do not meet the requirements for over time revenue recognition because our customers cannot utilize the equipment for its intended purpose during any phase of our manufacturing process; customers do not simultaneously receive and or consume the benefits provided by our performance; customers do not control the asset (i.e., prior to delivery, customers cannot direct the use of the asset, sell or exchange the equipment, etc.); and, although many of our contracts have termination for convenience clauses and or an enforceable right to payment for performance completed to date, our performance creates an asset with an alternative use through the point of delivery. In determining that our equipment has alternative use, we considered the underlying manufacturing process. In the early phases of manufacturing, raw materials and work in process (including subassemblies) consist of common parts that are highly fungible among many different types of products and customer applications. Finished products are either configured to our standard configuration or based on our customers’ specifications. Finished products, whether built to our standard specification or to a customers’ specification, can be sold to a variety of customers and across many different end use applications with minimal rework, if needed, and without incurring a significant economic loss. When identifying a contract with our customer, we consider when it has approval and commitment from both parties, if the rights of the parties are identified, if the payment terms are identified, if it has commercial substance and if collectability is probable. When identifying performance obligations, we consider whether there are multiple promises and how to account for them. In our contracts, multiple promises are separated if they are distinct, both individually and in the context of the contract. If multiple promises in a contract are highly interrelated or comprise a series of distinct services performed over time, they are combined into a single performance obligation. In some cases, we may also provide the customer with an additional service-type warranty, which we recognize as a separate performance obligation. Service-type warranties do not represent a significant portion of our consolidated net sales. When service-type warranties represent a separate performance obligation, the revenue is deferred and recognized ratably over the extended warranty period. Our contracts, from time-to-time, may also include options for additional goods and services. To date, these options have not represented material rights to the customer as the pricing for them reflects standalone selling prices. As a result, we do not consider options we offer to be performance obligations for which we must allocate a portion of the transaction price. In many cases, we provide assurance-type warranty coverage for some of our products for a period of at least one year from the date of delivery. When identifying the transaction price, we typically utilize the contract's stated price as a starting point. The transaction price in certain arrangements may include estimated amounts of variable consideration, including award fees, incentive fees or other provisions that can either increase or decrease the transaction price. We estimate variable consideration as the amount to which we expect to be entitled, and we include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the estimation uncertainty is resolved. The estimation of this variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (e.g., historical, current and forecasted) that is reasonably available to us. When allocating the contract’s transaction price, we consider each distinct performance obligation. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. We determine standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions, including geographic or regional specific factors, competitive positioning, internal costs, profit objectives and internally approved pricing guidelines related to the performance obligations. F - 13 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Most of our contracts with customers are denominated in U.S. dollars and typically are either firm fixed-price or cost reimbursable type contracts (including fixed-fee, incentive-fee and time-and-material type contracts). In almost all of our contracts with customers, we are the principal in the arrangement and report revenue on a gross basis. Transaction prices for contracts with U.S. domestic and international customers are usually based on specific negotiations with each customer and in the case of the U.S. government, sometimes based on estimated or actual costs of providing the goods or services in accordance with applicable regulations. Sales by geography and customer type, as a percentage of consolidated net sales, are as follows: Fiscal Years Ended July 31, 2023 2022 2021 United States U.S. government 31.3 % 27.2 % 34.6 % Domestic 44.7 % 47.8 % 41.5 % Total United States 76.0 % 75.0 % 76.1 % International 24.0 % 25.0 % 23.9 % Total 100.0 % 100.0 % 100.0 % Sales to U.S. government customers include sales to the U.S. Department of Defense ("DoD"), intelligence and civilian agencies, as well as sales directly to or through prime contractors. Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. Included in domestic sales are sales to Verizon Communications Inc. ("Verizon"), which were 10.6 %, 11.1 % and 10.7 % of consolidated net sales for fiscal 2023, 2022 and 2021, respectively. International sales for fiscal 2023, 2022 and 2021 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $ 132,117,000 , $ 121,392,000 and $ 138,943,000 , respectively. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented more than 10.0% of consolidated net sales for fiscal 2023, 2022 and 2021. The following tables summarize our disaggregation of revenue consistent with information reviewed by our Chief Operating Decision Maker ("CODM") for the fiscal years ended July 31, 2023, 2022 and 2021. We believe these categories best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors which impact our business. See Note (11) - "Segment Information " for more information related to our segments. Fiscal Year Ended July 31, 2023 Satellite and Space Communications Terrestrial and Wireless Networks Total Geographical region and customer type U.S. government $ 168,411,000 3,567,000 $ 171,978,000 Domestic 56,568,000 189,331,000 245,899,000 Total United States 224,979,000 192,898,000 417,877,000 International 112,777,000 19,340,000 132,117,000 Total $ 337,756,000 212,238,000 $ 549,994,000 Contract type Firm fixed-price $ 288,482,000 212,238,000 $ 500,720,000 Cost reimbursable 49,274,000 — 49,274,000 Total $ 337,756,000 212,238,000 $ 549,994,000 Transfer of control Point in time $ 197,808,000 2,968,000 $ 200,776,000 Over time 139,948,000 209,270,000 349,218,000 Total $ 337,756,000 212,238,000 $ 549,994,000 F - 14 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Fiscal Year Ended July 31, 2022 Satellite and Space Communications Terrestrial and Wireless Networks Total Geographical region and customer type U.S. government $ 127,536,000 5,061,000 $ 132,597,000 Domestic 50,274,000 181,976,000 232,250,000 Total United States 177,810,000 187,037,000 364,847,000 International 101,868,000 19,524,000 121,392,000 Total $ 279,678,000 206,561,000 $ 486,239,000 Contract type Firm fixed-price $ 249,497,000 206,561,000 $ 456,058,000 Cost reimbursable 30,181,000 — 30,181,000 Total $ 279,678,000 206,561,000 $ 486,239,000 Transfer of control Point in time $ 186,052,000 2,633,000 $ 188,685,000 Over time 93,626,000 203,928,000 297,554,000 Total $ 279,678,000 206,561,000 $ 486,239,000 Fiscal Year Ended July 31, 2021 Satellite and Space Communications Terrestrial and Wireless Networks Total Geographical region and customer type U.S. government $ 198,157,000 2,924,000 $ 201,081,000 Domestic 57,246,000 184,425,000 241,671,000 Total United States 255,403,000 187,349,000 442,752,000 International 119,447,000 19,496,000 138,943,000 Total $ 374,850,000 206,845,000 $ 581,695,000 Contract type Firm fixed-price $ 292,043,000 206,845,000 $ 498,888,000 Cost reimbursable 82,807,000 — 82,807,000 Total $ 374,850,000 206,845,000 $ 581,695,000 Transfer of control Point in time $ 234,690,000 1,704,000 $ 236,394,000 Over time 140,160,000 205,141,000 345,301,000 Total $ 374,850,000 206,845,000 $ 581,695,000 F - 15 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The timing of revenue recognition, billings and collections results in receivables, unbilled receivables and contract liabilities on our Consolidated Balance Sheet. Under typical payment terms for our contracts accounted for over time, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., monthly) or upon achievement of contractual milestones. For certain contracts with provisions that are intended to protect customers in the event we do not satisfy our performance obligations, billings occur subsequent to revenue recognition, resulting in unbilled receivables. Under ASC 606, unbilled receivables constitute contract assets. There were no material impairment losses recognized on contract assets during the fiscal years ended July 31, 2023, 2022 and 2021. On large long-term contracts, and for contracts with international customers that do not do business with us regularly, payment terms typically require advanced payments and deposits. Under ASC 606, payments received from customers in excess of revenue recognized to-date results in a contract liability. These contract liabilities are not considered to represent a significant financing component of the contract because we believe these cash advances and deposits are generally used to meet working capital demands which can be higher in the earlier stages of a contract. Also, advanced payments and deposits provide us with some measure of assurance that the customer will perform on its obligations under the contract. Under the typical payment terms for our contracts accounted for at a point in time, costs are accumulated in inventory until the time of billing, which generally coincides with revenue recognition. Of the current contract liability balance of $ 64,601,000 at July 31, 2022 and $ 66,130,000 at July 31, 2021, $ 53,079,000 and $ 51,762,000 was recognized as revenue during fiscal years 2023 and 2022, respectively. We recognize the incremental costs to obtain or fulfill a contract as an expense when incurred if the amortization period of the asset is one year or less. During fiscal years 2023 and 2022, incremental costs to obtain or fulfill contracts with an amortization period greater than one year were not material. As commissions payable to our internal sales and marketing employees or contractors are contingent upon multiple factors, such commissions are not considered direct costs to obtain or fulfill a contract with a customer and are expensed as incurred in selling, general and administrative expenses on our Consolidated Statements of Operations. As for commissions payable to our third-party sales representatives related to large long-term contracts, we do consider these types of commissions both direct and incremental costs to obtain and fulfill such contracts. Therefore, such commissions are included in total estimated costs at completion for such contracts and expensed over time through cost of sales on our Consolidated Statements of Operations. Remaining performance obligations represent the transaction price of firm orders for which work has not been performed as of the end of a fiscal period. Remaining performance obligations, which we refer to as backlog, exclude unexercised contract options and potential orders under indefinite delivery / indefinite quantity ("IDIQ") contracts. As of July 31, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 662,215,000 (which represents the amount of our consolidated backlog). We estimate that a substantial portion of our remaining performance obligations at July 31, 2023 will be completed and recognized as revenue during the next twenty-four month period, with the rest thereafter. During fiscal 2023, revenue recognized from performance obligations satisfied, or partially satisfied, in previous periods (for example due to changes in the transaction price) was not material. (d) Cash and Cash Equivalents Our cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and have insignificant risk of change in value as a result of changes in interest rates. Our cash and cash equivalents, as of July 31, 2023 and 2022, amounted to $ 18,961,000 and $ 21,654,000 , respectively, and primarily consist of bank deposits and money market deposit accounts insured by the Federal Deposit Insurance Corporation. Cash equivalents are carried at cost, which approximates fair value. (e) Inventories Our inventories are stated at the lower of cost and net realizable value, the latter of which is defined as the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Our inventories are reduced to their estimated net realizable value by a charge to cost of sales in the period such excess costs are determined. Our inventories are principally recorded using either average or standard costing methods. F - 16 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Work-in-process (including our contracts-in-progress) and finished goods inventory reflect all accumulated production costs, which are comprised of direct production costs and overhead, and is reduced by amounts recorded in cost of sales as the related revenue is recognized. Indirect costs relating to long-term contracts, which include expenses such as general and administrative, are charged to expense as incurred and are not included in our cost of sales or work-in-process (including our contracts-in-progress) and finished goods inventory. (f) Long-Lived Assets Our machinery and equipment, which are recorded at cost, are depreciated or amortized over their estimated useful lives ( three to eight years ) under the straight-line method. Capitalized values of properties and leasehold improvements under leases are amortized over the life of the lease or the estimated life of the asset, whichever is less. Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. In accordance with FASB ASC 350 " Intangibles - Goodwill and Other " goodwill is not amortized. We periodically, at least on an annual basis in the first quarter of each fiscal year, review goodwill, considering factors such as projected cash flows and revenue and earnings multiples, to determine whether the carrying value of the goodwill is impaired. If we fail the quantitative assessment of goodwill impairment ("quantitative assessment"), we would be required to recognize an impairment loss equal to the amount that a reporting unit's carrying value exceeded its fair value; however, any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. We define our reporting units to be the same as our operating segments. We performed our annual goodwill impairment assessment for fiscal 2024 on August 1, 2023 (the first day of our fiscal 2024). See Note (13) - " Goodwill " for more information. Unless there are future indicators that the fair value of a reporting unit is more likely than not less than its carrying value, such as a significant adverse change in our future financial performance, our next impairment assessment for goodwill will be performed and completed in the first quarter of fiscal 2025. Any impairment charges that we may record in the future could be material to our results of operations and financial condition. We assess the recoverability of the carrying value of our other long-lived assets, including identifiable intangible assets with finite useful lives, whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. We evaluate the recoverability of such assets based upon the expectations of undiscounted cash flows from such assets. If the sum of the expected future undiscounted cash flows were less than the carrying amount of the asset, a loss would be recognized for the difference between the fair value and the carrying amount. (g) Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We determine the uncertain tax positions taken or expected to be taken in income tax returns in accordance with the provisions of FASB ASC 740-10-25 " Income Taxes, " which prescribes a two-step evaluation process for tax positions. The first step is recognition based on a determination of whether it is more-likely-than-not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. The second step is to measure a tax position that meets the more-likely-than-not threshold. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. If a tax position does not meet the more-likely-than-not recognition threshold, the benefit of that position is not recognized in the financial statements. Our policy is to recognize potential interest and penalties related to uncertain tax positions in income tax expense. F - 17 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (h) Earnings Per Share Our basic earnings per share ("EPS") is computed based on the weighted average number of common shares (including vested but unissued stock units, share units, performance shares and restricted stock units ("RSUs")) outstanding during each respective period. Our diluted EPS reflects the dilution from potential common stock issuable pursuant to the exercise of equity-classified stock-based awards, settlement of escrow arrangements related to our acquisition of UHP Networks Inc. ("UHP") and the assumed conversion of Convertible Preferred Stock, if dilutive, outstanding during each respective period. Pursuant to FASB ASC 260 " Earnings Per Share, " shares whose issuance is contingent upon the satisfaction of certain conditions are included in diluted EPS based on the number of shares, if any, that would be issuable if the end of the reporting period were the end of the contingency period. When calculating our diluted earnings per share, we consider the amount an employee must pay upon assumed exercise of stock-based awards and the amount of stock-based compensation cost attributed to future services and not yet recognized. There were no repurchases of our common stock during the fiscal years ended July 31, 2023, 2022 and 2021. See Note (16) - " Stockholders’ Equity " for more information. Weighted average stock options, RSUs and restricted stock outstanding of 972,000 , 1,656,000 and 1,440,000 shares for fiscal 2023, 2022 and 2021, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive. Our EPS calculations exclude 385,000 , 293,000 and 232,000 weighted average performance shares outstanding for fiscal 2023, 2022 and 2021, respectively, as the performance conditions have not yet been satisfied. However, the numerator for EPS calculations for each respective period is reduced by the compensation expense related to these awards. Weighted average common shares of 260,000 , 591,000 and 82,000 related to our acquisition of UHP in March 2021 were not included in our diluted EPS calculation for fiscal 2023, 2022 and 2021, respectively, because their effect would have been anti-dilutive. Weighted average common shares of 4,570,000 and 3,342,000 underlying the assumed conversion of Convertible Preferred Stock, on an if-converted basis, were not included in our diluted EPS calculation for fiscal 2023 and 2022, respectively, because their effect would have been anti-dilutive. As a result, the numerator for our basic and diluted EPS calculation for fiscal 2023 and 2022 is the respective net loss attributable to common stockholders. F - 18 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The following table reconciles the numerators and denominators used in the basic and diluted EPS calculations: Fiscal Years Ended July 31, 2023 2022 2021 Numerator: Net loss $ ( 26,899,000 ) ( 33,052,000 ) ( 73,480,000 ) Convertible preferred stock issuance costs — ( 4,007,000 ) — Establishment of initial convertible preferred stock purchase option liability — ( 1,005,000 ) — Dividend on convertible preferred stock ( 7,007,000 ) ( 5,204,000 ) — Net loss attributable to common stockholders $ ( 33,906,000 ) ( 43,268,000 ) ( 73,480,000 ) Denominator: Denominator for basic and diluted calculation 28,002,000 26,506,000 25,685,000 As discussed further in Note (15) - " Convertible Preferred Stock ," the Convertible Preferred Stock issued in October 2021 represents a "participating security" as defined in ASC 260. As a result, our EPS calculations for fiscal 2023 and 2022 were based on the two-class method. Given the net loss attributable to common stockholders for fiscal 2023 and 2022, there was no impact of applying the two-class method to our reported basic or diluted earnings per common share. (i) Fair Value Measurements and Financial Instruments Using the fair value hierarchy described in FASB ASC 820 " Fair Value Measurements and Disclosures," we valued our cash and cash equivalents using Level 1 inputs that were based on quoted market prices. We believe that the carrying amounts of our other current financial assets (such as accounts receivable) and other current liabilities (including accounts payable and accrued expenses) approximate their fair values due to their short-term maturities. The fair value of our Credit Facility that we entered into on October 31, 2018 approximates its carrying amount due to its variable interest rate and pricing grid that is dependent upon our leverage ratio as of the end of each fiscal quarter. As of July 31, 2023 and 2022, other than the financial instruments discussed above, we had no other significant assets or liabilities included in our Consolidated Balance Sheets recorded at fair value, as such term is defined by FASB ASC 820. (j) Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the consolidated financial statements and the reported amounts of net sales and expenses during the reported period. We make significant estimates in many areas of our accounting, including but not limited to the following: long-term contracts, stock-based compensation, intangible assets and liabilities including goodwill, provision for excess and obsolete inventory, allowance for doubtful accounts, warranty obligations and income taxes. Actual results may differ from those estimates. (k) Comprehensive Income In accordance with FASB ASC 220 " Comprehensive Income ," we report all changes in equity during a period, except those resulting from investment by owners and distribution to owners, for the period in which they are recognized. Comprehensive income is the total of net income and all other non-owner changes in equity (or other comprehensive income) such as unrealized gains/losses on securities classified as available-for-sale, foreign currency translation adjustments and minimum pension liability adjustments. Comprehensive income was the same as our net income in fiscal 2023, 2022 and 2021. F - 19 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (l) Reclassifications Certain reclassifications have been made to previously reported consolidated financial statements to conform to the fiscal 2023 presentation. (m) Adoption of Accounting Standards and Updates We are required to prepare our consolidated financial statements in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") which is the source for all authoritative U.S. generally accepted accounting principles, which are commonly referred to as "GAAP." The FASB ASC is subject to updates by the FASB, which are known as Accounting Standards Updates ("ASUs"). ASUs issued, but not effective until after July 31, 2023, are not expected to have a material impact on our consolidated financial statements or disclosures. (2) CEO Transition Costs On August 9, 2022, our Board of Directors appointed our Chairman of the Board, Ken Peterman, as President and Chief Executive Officer ("CEO"). Transition costs related to our former President and CEO, Michael D. Porcelain, pursuant to his separation agreement with the Company, were $ 7,424,000 , of which $ 3,764,000 related to the acceleration of unamortized stock based compensation, with the remaining $ 3,660,000 related to his severance payments and benefits upon termination of employment. The cash portion of the transition costs of $ 3,660,000 was paid to Mr. Porcelain in October 2022. Also, in connection with Mr. Peterman entering into an employment agreement with the Company, effective as of August 9, 2022, we incurred a $ 1,000,000 expense related to a cash sign-on bonus, which was paid to Mr. Peterman in January 2023. CEO transition costs related to Mr. Porcelain and Mr. Peterman were expensed in our Unallocated segment during the first quarter of fiscal 2023. During fiscal 2022, we expensed $ 13,554,000 of transition costs related to another former CEO, Fred Kornberg. (3) Accounts Receivable Accounts receivable consists of the following at July 31, 2023 and 2022: 2023 2022 Receivables from commercial and international customers $ 52,438,000 59,922,000 Unbilled receivables from commercial and international customers 54,469,000 39,826,000 Receivables from the U.S. government and its agencies 31,149,000 24,776,000 Unbilled receivables from the U.S. government and its agencies 27,192,000 1,524,000 Total accounts receivable 165,248,000 126,048,000 Less allowance for doubtful accounts 2,089,000 2,337,000 Accounts receivable, net $ 163,159,000 123,711,000 Unbilled receivables as of July 31, 2023 relate to contracts-in-progress for which revenue has been recognized, but we have not yet earned the right to bill the customer for work performed to-date. Under ASC 606, unbilled receivables constitute contract assets. Management estimates that a substantial portion of the amounts not yet billed at July 31, 2023 will be billed and collected within one year. Accounts receivable in the table above excludes $ 2,993,000 of long-term unbilled receivables presented within "Other assets, net" in the consolidated balance sheet as of July 31, 2023. As of July 31, 2023, except for the U.S. government (and its agencies) and AT&T, which represented 35.3 % and 11.0 % of total accounts receivable, respectively, there were no other customers which accounted for greater than 10.0% of total accounts receivable. As of July 31, 2022, except for the U.S. government (and its agencies) and Verizon, which represented 20.9 % and 13.4 % of total accounts receivable, respectively, there were no other customers which accounted for greater than 10.0% of total accounts receivable. F - 20 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (4) Inventories Inventories consist of the following at July 31, 2023 and 2022: 2023 2022 Raw materials and components $ 87,139,000 78,478,000 Work-in-process and finished goods 43,365,000 40,960,000 Total inventories 130,504,000 119,438,000 Less reserve for excess and obsolete inventories 24,659,000 23,121,000 Inventories, net $ 105,845,000 96,317,000 As of July 31, 2023 and 2022, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $ 5,911,000 and $ 4,100,000 , respectively, and the amount of inventory related to contracts from third-party commercial customers who outsource their manufacturing to us was $ 3,277,000 and $ 1,866,000 , respectively. (5) Property, Plant and Equipment Property, plant and equipment consist of the following at July 31, 2023 and 2022: 2023 2022 Machinery and equipment $ 193,832,000 186,935,000 Leasehold improvements 9,680,000 14,260,000 203,512,000 201,195,000 Less accumulated depreciation and amortization 150,483,000 150,832,000 Property, plant and equipment, net $ 53,029,000 50,363,000 Depreciation and amortization expense on property, plant and equipment amounted to $ 11,917,000 , $ 10,303,000 and $ 9,343,000 for the fiscal years ended July 31, 2023, 2022 and 2021, respectively. (6) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities consist of the following at July 31, 2023 and 2022: 2023 2022 Accrued wages and benefits $ 21,994,000 25,675,000 Accrued contract costs 19,041,000 15,921,000 Accrued warranty obligations 8,285,000 9,420,000 Accrued commissions and royalties 4,659,000 5,697,000 Accrued legal costs 688,000 2,514,000 Other 12,323,000 13,435,000 Accrued expenses and other current liabilities $ 66,990,000 72,662,000 Accrued contract costs represent direct and indirect costs on contracts as well as estimates of amounts owed for invoices not yet received from vendors or reflected in accounts payable. Accrued warranty obligations as of July 31, 2023 relate to estimated liabilities for assurance type warranty coverage that we provide to our customers. We generally provide warranty coverage for some of our products for a period of at least one year from the date of delivery. We record a liability for estimated warranty expense based on historical claims, product failure rates, consideration of contractual obligations, future costs to resolve software issues and other factors. Some of our product warranties are provided under long-term contracts, the costs of which are incorporated into our estimates of total contract costs. F - 21 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Changes in our accrued warranty obligations during the fiscal years ended July 31, 2023 and 2022 were as follows: 2023 2022 Balance at beginning of year $ 9,420,000 17,600,000 Provision for (benefit from) warranty obligations 3,158,000 ( 1,255,000 ) Adjustments for changes in estimates ( 2,300,000 ) ( 2,500,000 ) Charges incurred ( 1,993,000 ) ( 4,425,000 ) Balance at end of year $ 8,285,000 9,420,000 During fiscal 2023 and 2022, we recorded benefits of $ 2,300,000 and $ 2,500,000 , respectively, to cost of sales in our Terrestrial and Wireless Networks segment due to lower than expected warranty claims associated with previously acquired NG-911 technologies. (7) Credit Facility On October 31, 2018, we entered into a First Amended and Restated Credit Agreement (the "Credit Facility") with a syndicate of lenders. As of July 31, 2022, the amount outstanding under our Credit Facility was $ 130,000,000 , which is reflected in the non-current portion of long-term debt on our consolidated balance sheet. On November 30, 2022, we refinanced the amount outstanding under the Credit Facility by entering into a Second Amended and Restated Credit Agreement (also referred to herein as the “Credit Facility”) with the existing lenders. The Credit Facility provides a senior secured loan facility of up to $ 300,000,000 consisting of: (i) a revolving loan facility (“Revolving Loan Facility”) with a borrowing limit of $ 150,000,000 , including a $ 20,000,000 letter of credit sublimit and a swingline loan credit sublimit of $ 15,000,000 ; (ii) a $ 50,000,000 term loan A (“Term Loan”); and (iii) an accordion feature allowing us to make a request to borrow up to an additional $ 100,000,000 subject to the satisfaction of specified conditions, including approval by our lenders. In connection with entering the Credit Facility, we capitalized $ 3,809,000 of financing costs, and accounted for the amendment to the Credit Facility as a debt modification. As of July 31, 2023, the amount outstanding under our Credit Facility was as follows: July 31, 2023 Term Loan $ 48,125,000 Less unamortized deferred financing costs related to Term Loan 621,000 Term Loan, net 47,504,000 Revolving Loan Facility 116,900,000 Amount outstanding under Credit Facility, net 164,404,000 Less current portion of long-term debt 4,375,000 Non-current portion of long-term debt $ 160,029,000 At July 31, 2023, we had $ 1,049,000 of standby letters of credit outstanding under our Credit Facility related to guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit. During the fiscal year ended July 31, 2023, we had outstanding balances under the Credit Facility ranging from $ 130,000,000 to $ 183,250,000 . As of July 31, 2023, total net deferred financing costs related to the Credit Facility were $ 2,971,000 and are being amortized over the term of our Credit Facility through the Maturity Date. Interest expense related to our Credit Facility, including amortization of deferred financing costs, recorded during the fiscal years ended July 31, 2023, 2022 and 2021 was $ 14,931,000 , $ 4,933,000 and $ 5,628,000 , respectively. Our blended interest rate approximated 8.89 %, 3.41 % and 2.84 %, respectively, for fiscal 2023, 2022 and 2021. F - 22 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Borrowings under the Revolving Loan Facility and Term Loan are either: (i) Alternate Base Rate borrowings, which would bear interest from the applicable borrowing date at a rate per annum equal to (x) the highest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.50% and (c) the Adjusted Term SOFR for a one-month tenor in effect on such day (or, if such day is not a business day, the immediately preceding business day) plus 1.00%, plus (y) the Applicable Rate, or (ii) SOFR borrowings, which would bear interest from the applicable borrowing date at a rate per annum equal to (x) the Adjusted Term SOFR for such interest period plus (y) the Applicable Rate. Determination of the Applicable Rate is based on a pricing grid that is dependent upon our Leverage Ratio as of the end of each fiscal quarter for which consolidated financial statements have been most recently delivered. The Credit Facility contains customary representations, warranties and affirmative covenants. The Credit Facility also contains customary negative covenants, subject to negotiated exceptions, including but not limited to: (i) liens, (ii) investments, (iii) indebtedness, (iv) significant corporate changes, including mergers and acquisitions, (v) dispositions, (vi) restricted payments, including stockholder dividends, and (vii) certain other restrictive agreements. The Credit Facility also contains certain financial covenants and customary events of default (subject to grace periods, as appropriate), such as payment defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency, the occurrence of a defined change in control and the failure to observe the negative covenants and other covenants related to the operation of our business. In addition, under certain circumstances, we may be required to enter into amendments to the Credit Facility in connection with any further syndication of the Credit Facility. The Credit Facility provides for, among other things: (i) scheduled payments of principal under the Term Loan totaling $ 2,500,000 in the first year after closing (of which $ 1,875,000 was paid through July 31, 2023), and $ 5,000,000 in the second year after closing, with the remaining balance of the Term Loan due upon maturity; (ii) a maximum Leverage Ratio of 3.75 x trailing twelve months ("TTM") Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") at the fiscal quarter ended July 31, 2023, stepping down to 3.5 x at the fiscal quarter ending January 31, 2024 and thereafter; (iii) a Minimum Interest Coverage Ratio of 3.25 x TTM Adjusted EBITDA; and (iv) Minimum Liquidity of $ 25,000,000 . As of July 31, 2023, our Secured Leverage Ratio was 3.54 x TTM Adjusted EBITDA compared to the maximum allowable Secured Leverage Ratio of 3.75 x TTM Adjusted EBITDA. Our Interest Expense Coverage Ratio as of July 31, 2023 was 3.54 x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25 x TTM Adjusted EBITDA. Our Minimum Liquidity was $ 28,500,000 compared to the Minimum Liquidity requirement of $ 25,000,000 . The obligations under the Credit Facility are guaranteed by certain of our domestic and foreign subsidiaries (the "Guarantors"). As collateral security under the Credit Facility and the guarantees thereof, we and the Guarantors have granted to the administrative agent, for the benefit of the lenders, a lien on, and first priority security interest in, substantially all of our tangible and intangible assets. Capitalized terms used but not defined herein have the meanings set forth for such terms in the Credit Facility, which has been documented and filed with the SEC. The Credit Facility has a maturity date of October 31, 2024 (“Maturity Date”), which is approximately one year out from now. In anticipation of the upcoming Maturity Date, we engaged a third-party financial advisor to assist us with both the refinancing of our existing Credit Facility, as well as with our evaluation of other capital structure-related alternatives. F - 23 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (8) Leases Our leases historically relate to the leasing of facilities and equipment. In accordance with FASB ASC 842 - "Leases" ("ASC 842"), we determine at inception whether an arrangement is, or contains, a lease and whether the lease should be classified as an operating or a financing lease. At lease commencement, we recognize a right-of-use ("ROU") asset and lease liability based on the present value of the future lease payments over the estimated lease term. We have elected to not recognize a ROU asset or lease liability for any leases with terms of twelve months or less. Instead, for such short-term leases, we recognize lease expense on a straight-line basis over the lease term. Certain of our leases include options to extend the term of the lease or to terminate the lease early. When it is reasonably certain that we will exercise a renewal option or will not exercise a termination option, we include the impact of exercising or not exercising such option, respectively, in the estimate of the lease term. As our lease agreements do not explicitly state the discount rate implicit in the lease, we use our incremental borrowing rate ("IBR") on the commencement date to calculate the present value of future lease payments. Such IBR represents our estimated rate of interest to borrow on a collateralized basis over a term commensurate with the expected lease term. Some of our leases include payments that are based on the Consumer Price Index ("CPI") or other similar indices. These variable lease payments are included in the calculation of the ROU asset and lease liability using the index as of the lease commencement date. Other variable lease payments, such as common area maintenance, property taxes, and usage-based amounts, are required by ASC 842 to be excluded from the ROU asset and lease liability and expensed as incurred. In addition to the present value of the future lease payments, the calculation of the ROU asset would also consider, to the extent applicable, any deferred rent upon adoption, lease pre-payments or initial direct costs of obtaining the lease (e.g., such as commissions). For all classes of leased assets, we elected the practical expedient to not separate lease components (i.e., the actual item being leased, such as the facility or piece of equipment) from non-lease components (i.e., the distinct elements of a contract not related to securing the use of the leased asset, such as common area maintenance and consumable supplies). Certain of our facility lease agreements (which are classified as operating leases) contain rent holidays or rent escalation clauses. For rent holidays and rent escalation clauses during the lease term, we record rental expense on a straight-line basis over the term of the lease. As of July 31, 2023, none of our leases contained a residual value guarantee and covenants included in our lease agreements are customary for the types of facilities and equipment being leased. The components of lease expense are as follows: Fiscal years ended July 31, 2023 2022 2021 Finance lease expense: Amortization of ROU assets $ 5,000 13,000 36,000 Interest on lease liabilities — 1,000 3,000 Operating lease expense 10,439,000 11,658,000 12,152,000 Short-term lease expense 435,000 402,000 819,000 Variable lease expense 4,031,000 4,619,000 4,523,000 Sublease income ( 67,000 ) ( 67,000 ) ( 67,000 ) Total lease expense $ 14,843,000 16,626,000 17,466,000 F - 24 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Additional information related to leases is as follows: Fiscal years ended July 31, 2023 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating leases - Operating cash outflows $ 10,604,000 11,864,000 10,868,000 Finance leases - Operating cash outflows — 1,000 3,000 Finance leases - Financing cash outflows 4,000 15,000 38,000 ROU assets obtained in the exchange for lease liabilities (non-cash): Operating leases $ 3,211,000 15,233,000 24,987,000 The following table is a reconciliation of future cash flows relating to operating lease liabilities presented on our Consolidated Balance Sheet as of July 31, 2023: Operating Fiscal 2024 $ 9,478,000 Fiscal 2025 8,872,000 Fiscal 2026 7,445,000 Fiscal 2027 5,351,000 Fiscal 2028 4,622,000 Thereafter 21,572,000 Total future undiscounted cash flows 57,340,000 Less: Present value discount 6,932,000 Lease liabilities $ 50,408,000 Weighted-average remaining lease terms (in years) 8.31 Weighted-average discount rate 3.46 % In fiscal 2022, we modified our existing lease for a facility in Seattle, Washington, increasing the lease term through October 2033. Accordingly, amounts related to the modified lease are reflected as an operating lease right-of-use asset or related operating lease liability in our Consolidated Balance Sheets as of July 31, 2023 and July 31, 2022. We lease our Melville, New York production facility from a partnership controlled by our former CEO. Lease payments made during the fiscal year ended July 31, 2023 and 2022 were $ 688,000 and $ 675,000 , respectively. The current lease provides for our use of the premises as they exist through December 2031. The annual rent of the facility for calendar year 2024 is $ 691,000 and is subject to customary adjustments. We have a right of first refusal in the event of a sale of the facility. As of July 31, 2023, we do not have any material rental commitments that have not commenced. F - 25 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (9) Income Taxes Loss before benefit from income taxes consists of the following: Fiscal Years Ended July 31, 2023 2022 2021 U.S. $ ( 21,327,000 ) ( 31,772,000 ) ( 73,153,000 ) Foreign ( 9,520,000 ) ( 5,303,000 ) ( 1,827,000 ) $ ( 30,847,000 ) ( 37,075,000 ) ( 74,980,000 ) The (benefit from) provision for income taxes included in the accompanying Consolidated Statements of Operations consists of the following: Fiscal Years Ended July 31, 2023 2022 2021 Federal – current $ ( 258,000 ) 287,000 608,000 Federal – deferred ( 4,623,000 ) ( 4,888,000 ) ( 877,000 ) State and local – current 1,412,000 348,000 466,000 State and local – deferred ( 815,000 ) ( 442,000 ) ( 598,000 ) Foreign – current 958,000 1,197,000 688,000 Foreign – deferred ( 622,000 ) ( 525,000 ) ( 1,787,000 ) Benefit from income taxes $ ( 3,948,000 ) ( 4,023,000 ) ( 1,500,000 ) The benefit from income taxes differed from the amounts computed by applying the U.S. Federal income tax rate as a result of the following: Fiscal Years Ended July 31, 2023 2022 2021 Amount Rate Amount Rate Amount Rate Computed "expected" tax benefit $ ( 6,478,000 ) 21.0 % ( 7,786,000 ) 21.0 % ( 15,746,000 ) 21.0 % Increase (reduction) in income taxes resulting from: State and local income taxes, net of federal benefit 440,000 ( 1.4 ) 227,000 ( 0.6 ) ( 1,371,000 ) 1.8 Stock-based compensation 692,000 ( 2.2 ) 1,049,000 ( 2.8 ) ( 20,000 ) — Research and experimentation credits ( 2,576,000 ) 8.4 ( 1,484,000 ) 4.0 ( 1,018,000 ) 1.4 Foreign-derived intangible income deduction ( 517,000 ) 1.7 — — 164,000 ( 0.2 ) Revaluation of convertible preferred stock option liability — — ( 211,000 ) 0.6 — — Nondeductible transaction costs — — — — 402,000 ( 0.5 ) Nondeductible executive compensation 1,484,000 ( 4.8 ) 2,801,000 ( 7.6 ) 628,000 ( 0.8 ) Fines and penalties — — ( 1,000 ) — — — Audit settlements — — 18,000 — 6,000 — Change in the beginning of the year valuation allowance for deferred tax assets — — — — ( 805,000 ) 1.1 Change in valuation allowance 2,834,000 ( 9.2 ) 2,009,000 ( 5.4 ) 15,582,000 ( 20.8 ) Remeasurement of deferred taxes — — ( 396,000 ) 1.1 ( 224,000 ) 0.3 Foreign income taxes ( 269,000 ) 0.9 ( 478,000 ) 1.3 676,000 ( 0.9 ) Other, net 442,000 ( 1.6 ) 229,000 ( 0.7 ) 226,000 ( 0.4 ) Benefit from income taxes $ ( 3,948,000 ) 12.8 % ( 4,023,000 ) 10.9 % ( 1,500,000 ) 2.0 % F - 26 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at July 31, 2023 and 2022 are presented below: 2023 2022 Deferred tax assets: Inventory and warranty reserves $ 6,147,000 5,970,000 Compensation and commissions 3,221,000 4,376,000 Federal, state and foreign research and experimentation credits 19,308,000 19,476,000 Capitalized U.S. research and experimental expenditures 8,784,000 — Stock-based compensation 4,774,000 3,950,000 Foreign scientific research and experimental development expenditures 2,118,000 1,890,000 Federal, state and foreign net operating losses 13,011,000 14,481,000 Federal and state capital losses 15,582,000 15,582,000 Lease liabilities 11,986,000 12,595,000 Deferred revenue, non-current 4,463,000 2,194,000 Other 2,417,000 3,725,000 Less: valuation allowance ( 34,478,000 ) ( 31,227,000 ) Total deferred tax assets 57,333,000 53,012,000 Deferred tax liabilities: Plant and equipment ( 4,883,000 ) ( 3,489,000 ) Lease right-of-use assets ( 10,510,000 ) ( 11,801,000 ) Intangibles ( 50,843,000 ) ( 52,681,000 ) Total deferred tax liabilities ( 66,236,000 ) ( 67,971,000 ) Net deferred tax liabilities $ ( 8,903,000 ) ( 14,959,000 ) At July 31, 2023, our net deferred tax liability of $ 8,903,000 includes $ 591,000 of foreign net deferred tax assets that were recorded as other assets, net in our Consolidated Balance Sheets. At July 31, 2022, our net deferred tax liability of $ 14,959,000 includes $ 396,000 of foreign net deferred tax assets that were recorded as other assets, net in our Consolidated Balance Sheets. We provide for income taxes under the provisions of ASC 740 which requires an asset and liability based approach in accounting for income taxes. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of them will not be realized. If management determines that it is more likely than not that some or all of its deferred tax assets will not be realized, a valuation allowance will be recorded against such deferred tax assets. At July 31, 2023, we have federal research and experimentation credits of $ 9,995,000 that will begin to expire in 2031. We have a nominal amount of federal net operating loss carryforward that will begin to expire in 2038. We have state net operating loss carryforwards available of $ 3,864,000 , which expire through 2043, utilization of which will be limited by the amounts and timing of future taxable income and by the application of the ownership change rules under Section 382 of the Internal Revenue Code. We believe it to be more likely than not that the benefit from certain state net operating loss carryforwards will not be realized. In recognition of this risk, we have provided a valuation allowance of $ 3,757,000 on the deferred tax assets relating to these state net operating loss carryforwards. We have state research and experimentation credit carryforwards of $ 8,936,000 , which expire through 2043. We believe that it is more likely than not that the benefit from certain state research and experimentation credits will not be realized. In recognition of this risk, we have provided a valuation allowance of $ 8,246,000 on the deferred tax assets relating to these state credits. In addition, we have provided a valuation allowance of $ 1,094,000 on certain other state deferred tax assets. We have federal and state capital loss carryforwards of $ 15,582,000 , which begin to expire in 2026, and for which a full valuation allowance has been provided as we believe it to be more likely than not that the benefit from these capital losses will not be realized. F - 27 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued At July 31, 2023, we had foreign deferred tax assets relating to net operating loss carryforwards of $ 9,186,000 , which will begin to expire in 2032. We believe that it is more likely than not that certain net operating loss carryforwards may not be realized. In recognition of this risk, we have provided a valuation allowance of $ 5,799,000 on the deferred tax assets relating to these net operating loss carryforwards. We have foreign deferred tax assets relating to research and experimentation credits of $ 377,000 , which will begin to expire in 2038. Our foreign earnings and profits are insignificant and, as such, we have not recorded any deferred tax liability on unremitted foreign earnings. At July 31, 2023 and 2022, total unrecognized tax benefits were $ 9,166,000 and $ 10,008,000 , respectively, including interest of $ 210,000 and $ 330,000 , respectively. At July 31, 2023 and 2022, $ 2,208,000 and $ 3,007,000 , respectively, of our unrecognized tax benefits were recorded as non-current income taxes payable on our Consolidated Balance Sheets. The remaining unrecognized tax benefits of $ 6,958,000 and $ 7,001,000 at July 31, 2023 and 2022, respectively, were presented as an offset to the associated non-current deferred tax assets on our Consolidated Balance Sheets. Of the total unrecognized tax benefits, $ 8,286,000 and $ 9,034,000 at July 31, 2023 and 2022, respectively, net of the reversal of the federal benefit recognized as a deferred tax asset relating to state reserves, would favorably impact our effective tax rate, if recognized. Unrecognized tax benefits result from income tax positions taken or expected to be taken on our income tax returns for which a tax benefit has not been recorded in our consolidated financial statements. We believe it is reasonably possible that the gross unrecognized tax benefits could decrease by as much as $ 622,000 in the next 12 months due to the expiration of a statute of limitations related to federal, state and foreign tax positions. Our policy is to recognize potential interest and penalties relating to uncertain tax positions in income tax expense. The following table summarizes the activity related to our unrecognized tax benefits for fiscal years 2023, 2022 and 2021 (excluding interest): 2023 2022 2021 Balance at beginning of period $ 9,675,000 9,009,000 8,270,000 Increase related to current period 681,000 598,000 528,000 Increase related to prior periods 51,000 153,000 338,000 Expiration of statute of limitations ( 1,406,000 ) ( 83,000 ) ( 48,000 ) Decrease related to prior periods ( 45,000 ) ( 2,000 ) ( 79,000 ) Balance at end of period $ 8,956,000 9,675,000 9,009,000 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 2019 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition. (10) Stock-Based Compensation Overview We issue stock-based awards to certain of our employees and our Board of Directors pursuant to our 2000 Stock Incentive Plan, as amended and/or restated from time to time (the "Plan") and our 2001 Employee Stock Purchase Plan, as amended and/or restated from time to time (the "ESPP"), and recognize related stock-based compensation in our consolidated financial statements. The Plan provides for the granting to employees and consultants of Comtech (including prospective employees and consultants): (i) incentive and non-qualified stock options, (ii) restricted stock units ("RSUs"), (iii) RSUs with performance measures (which we refer to as "performance shares"), (iv) restricted stock, (v) stock units (reserved for issuance to non-employee directors) and share units (reserved for issuance to employees) (collectively, "share units") and (vi) stock appreciation rights ("SARs"), among other types of awards. Our non-employee directors are eligible to receive non-discretionary grants of stock-based awards, subject to certain limitations. F - 28 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued As of July 31, 2023, the aggregate number of shares of common stock which may be issued, pursuant to the Plan, may not exceed 11,962,500 . Stock options granted may not have a term exceeding ten years or, in the case of an incentive stock award granted to a stockholder who owns stock representing more than 10.0 % of the voting power, no more than five years . We expect to settle all outstanding awards under the Plan and employee purchases under the ESPP with the issuance of new shares of our common stock. As of July 31, 2023, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of 10,600,865 shares (net of 5,815,202 expired and canceled awards), of which an aggregate of 8,484,125 have been exercised or settled. As of July 31, 2023, the following stock-based awards, by award type, were outstanding: July 31, 2023 Stock options 240,510 Performance shares 666,324 RSUs, restricted stock, share units and other stock-based awards 1,209,906 Total 2,116,740 Our ESPP provides for the issuance of up to 1,300,000 shares of our common stock. Our ESPP is intended to provide our eligible employees the opportunity to acquire our common stock at 85 % of fair market value on the first or last day of each calendar quarter, whichever is lower. Through July 31, 2023, we have cumulatively issued 998,526 shares of our common stock to participating employees in connection with our ESPP. Stock-based compensation for awards issued is reflected in the following line items in our Consolidated Statements of Operations: Fiscal Years Ended July 31, 2023 2022 2021 Cost of sales $ 1,110,000 692,000 929,000 Selling, general and administrative expenses 7,960,000 6,312,000 8,091,000 Research and development expenses 1,037,000 763,000 963,000 Stock-based compensation expense before CEO transition costs 10,107,000 7,767,000 9,983,000 CEO transition costs related to equity-classified stock-based awards 3,764,000 7,388,000 — Total stock-based compensation expense before income tax benefit 13,871,000 15,155,000 9,983,000 Estimated income tax benefit ( 2,552,000 ) ( 2,260,000 ) ( 2,164,000 ) Net stock-based compensation expense $ 11,319,000 12,895,000 7,819,000 Stock-based compensation for equity-classified awards is measured at the date of grant, based on an estimate of the fair value of the award and is generally expensed over the vesting period of the award. At July 31, 2023, unrecognized stock-based compensation of $ 7,812,000 , net of estimated forfeitures of $ 530,000 , is expected to be recognized over a weighted average period of 2.3 years. Total stock-based compensation capitalized and included in ending inventory at July 31, 2023 and 2022 was $ 198,000 and $ 48,000 , respectively. There are no liability-classified stock-based awards outstanding as of July 31, 2023 or 2022. Selling, general and administrative expenses included in the table above, for fiscal 2022, includes $ 827,000 of amortization of stock-based compensation related to three , long-standing members of our Board of Directors who retired in December 2021. F - 29 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Stock-based compensation expense, by award type, is summarized as follows: Fiscal Years Ended July 31, 2023 2022 2021 Stock options $ 87,000 519,000 370,000 Performance shares 973,000 1,136,000 1,345,000 RSUs, restricted stock, share units and other stock-based awards 8,926,000 5,912,000 8,060,000 ESPP 121,000 200,000 208,000 Stock based compensation expense 10,107,000 7,767,000 9,983,000 CEO transition costs related to equity-classified stock-based awards 3,764,000 7,388,000 — Total stock-based compensation expense before income tax benefit 13,871,000 15,155,000 9,983,000 Estimated income tax benefit ( 2,552,000 ) ( 2,260,000 ) ( 2,164,000 ) Net stock-based compensation expense $ 11,319,000 12,895,000 7,819,000 ESPP stock-based compensation expense primarily relates to the 15 % discount offered to participants in the ESPP. The estimated income tax benefit as shown in the above table was computed using income tax rates expected to apply when the awards are settled. Such deferred tax asset was recorded net as part of our non-current deferred tax liability on our Consolidated Balance Sheet as of July 31, 2023 and 2022. The actual income tax benefit recognized for tax reporting is based on the fair market value of our common stock at the time of settlement and can significantly differ from the estimated income tax benefit recorded for financial reporting. Stock Options The following table summarizes the Plan's activity: Awards (in Shares) Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Outstanding at July 31, 2020 1,422,025 $ 26.17 Expired/canceled ( 348,590 ) 27.44 Outstanding at July 31, 2021 1,073,435 25.76 Expired/canceled ( 588,735 ) 26.86 Exercised ( 1,220 ) 17.88 Outstanding at July 31, 2022 483,480 24.43 Expired/canceled ( 242,970 ) 24.89 Outstanding at July 31, 2023 240,510 $ 23.96 3.97 $ — Exercisable at July 31, 2023 211,870 $ 24.78 3.63 $ — Vested and expected to vest at July 31, 2023 238,868 $ 24.00 3.96 $ — Stock options outstanding as of July 31, 2023 have exercise prices ranging from $ 17.88 - $ 33.94 , representing the fair market value of our common stock on the date of grant, a contractual term of ten years and a vesting period of five years . The total intrinsic value relating to stock options exercised during the fiscal year ended July 31 2022 was $ 7,000 . There were no stock options exercised during the fiscal years ended July 31, 2023 and 2021. F - 30 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued During fiscal 2022, at the election of certain holders of vested stock options, 1,220 stock options were net settled upon exercise. As a result, 220 shares of our common stock were issued during the fiscal year ended July 31, 2022, net of shares retained to satisfy the exercise price and minimum statutory tax withholding requirements. There were no stock options granted during fiscal years ended July 31, 2023, 2022 or 2021. Performance Shares, RSUs, Restricted Stock, Share Unit Awards and Other Stock-based Awards The following table summarizes the Plan's activity relating to performance shares, RSUs, restricted stock, share units and other stock-based awards: Awards (in Shares) Weighted Average Grant Date Fair Value Aggregate Intrinsic Value Outstanding at July 31, 2020 999,574 $ 21.15 Granted 644,272 19.06 Settled ( 455,564 ) 17.09 Canceled/Forfeited ( 119,912 ) 18.42 Outstanding at July 31, 2021 1,068,370 21.93 Granted 797,771 18.77 Settled ( 641,747 ) 22.83 Canceled/Forfeited ( 113,644 ) 22.78 Outstanding at July 31, 2022 1,110,750 19.05 Granted 1,550,951 10.79 Settled ( 632,267 ) 16.69 Canceled/Forfeited ( 153,204 ) 16.67 Outstanding at July 31, 2023 1,876,230 $ 13.21 $ 19,062,000 Vested at July 31, 2023 847,243 $ 13.53 $ 8,608,000 Vested and expected to vest at July 31, 2023 1,836,835 $ 13.21 $ 18,662,000 The total intrinsic value relating to fully-vested awards settled during the fiscal years ended July 31, 2023, 2022 and 2021 was $ 6,782,000 , $ 12,560,000 and $ 9,878,000 , respectively. The performance shares granted to employees principally vest over a three-year performance period, if pre-established performance goals are attained, or as specified pursuant to the Plan and related agreements. As of July 31, 2023, the number of outstanding performance shares included in the above table, and the related compensation expense prior to consideration of estimated pre-vesting forfeitures, assume achievement of the pre-established goals at a target level, except for our former CEO's, whose achievement was based on maximum performance pursuant to their pre-existing change-in-control agreements. RSUs and restricted stock granted to non-employee directors prior to August 2022 had a vesting period of five years and are convertible into shares of our common stock generally at the time of termination, on a one -for-one basis for no cash consideration, or earlier under certain circumstances. Commencing in August 2022, such awards have a vesting period of one year . Also, restricted stock granted to our former non-executive Chairman of the Board of Directors, pursuant to his Senior Technology Advisor consulting agreement, vests 1/12 on the date of grant and in eleven equal monthly installments thereafter. RSUs granted to employees prior to August 2022 have a vesting period of five years and are convertible into shares of our common stock generally at the time of vesting, on a one -for-one basis for no cash consideration. Commencing in August 2022, such RSUs have a vesting period of three years . F - 31 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Share units granted prior to July 31, 2017 were vested when issued and are convertible into shares of our common stock, generally at the time of termination, on a one -for-one basis for no cash consideration, or earlier under certain circumstances. Share units granted on or after July 31, 2017 were granted to certain employees in lieu of non-equity incentive compensation and are convertible into shares of our common stock on the one-year anniversary of the respective grant date. On July 27, 2023, 595,890 both fully vested share units and other stock-based awards were granted to certain employees in lieu of fiscal 2023 non-equity incentive compensation. Also, on July 31, 2023, 252,452 fully vested share units (previously granted in lieu of fiscal 2022 non-equity incentive compensation) were settled by delivery of 153,045 shares of our common stock after reduction of share units retained to satisfy employees’ statutory tax withholding requirements. Cumulatively, through July 31, 2023, 1,482,324 share units granted have been settled. The fair value of performance shares, RSUs, restricted stock, share units and other stock-based awards is determined using the closing market price of our common stock on the date of grant, less the present value of any estimated future dividend equivalents such awards are not entitled to receive and an applicable estimated discount for any post-vesting transfer restrictions. RSUs, performance shares and restricted stock are entitled to dividend equivalents, as applicable, unless forfeited before vesting occurs. Share units and other stock-based awards would be entitled to dividend equivalents while the underlying shares are unissued. Dividend equivalents are subject to forfeiture, similar to the terms of the underlying stock-based awards, and are payable in cash generally at the time of settlement of the underlying award. During fiscal 2023, 2022 and 2021, we accrued $ 315,000 , $ 389,000 and $ 380,000 , respectively, of dividend equivalents (net of forfeitures) and paid out $ 366,000 , $ 531,000 and $ 279,000 , respectively. Accrued dividend equivalents were recorded as a reduction to retained earnings. As of July 31, 2023 and 2022, accrued dividend equivalents were $ 691,000 and $ 742,000 , respectively. With respect to the actual settlement of stock-based awards for income tax reporting, during the fiscal years ended July 31, 2023 and 2022, we recorded an income tax expense of $ 591,000 and $ 924,000 , respectively. During the fiscal year ended July 31, 2021, we recorded an income tax benefit of $ 142,000 . Subsequent Events In the first quarter of fiscal 2024, our Board of Directors authorized the issuance of stock-based awards with a total unrecognized compensation expense, net of estimated forfeitures, of approximately $ 8,600,000 . (11) Segment Information Reportable operating segments are determined based on Comtech’s management approach. The management approach, as defined by FASB ASC 280 "Segment Reporting" is based on the way that the CODM organizes the segments within an enterprise for making decisions about resources to be allocated and assessing their performance. Our CODM, for purposes of FASB ASC 280, is our Chief Executive Officer. 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. F - 32 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Terrestrial and Wireless Networks is organized into three service areas: next generation 911 and call delivery, Solacom call handling solutions, and trusted location and messaging solutions. This segment offers customers: SMS text to 911 services, providing alternate paths for individuals who need to request assistance (via text messaging) a method to reach Public Safety Answering Points ("PSAPs"); next generation 911 solutions, providing emergency call routing, location validation, policy-based routing rules, logging and security functionality; Emergency Services IP Network transport infrastructure for emergency services communications and support of next generation 911 services; call handling applications for PSAPs; wireless emergency alerts solutions for network operators; and software and equipment for location-based and text messaging services for various applications, including for public safety, commercial and government services. Our CODM primarily uses a metric that we refer to as Adjusted EBITDA to measure an operating segment’s performance and to make decisions about resources to be allocated. Our Adjusted EBITDA metric for the Satellite and Space Communications and Terrestrial and Wireless Networks segments do not consider any allocation of indirect expense, or any of the following: income taxes, interest, change in fair value of the convertible preferred stock purchase option liability, write-off of deferred financing costs, amortization of stock-based compensation, amortization of intangibles, depreciation expense, amortization of cost to fulfill assets, acquisition plan expenses, restructuring costs, COVID-19 related costs, strategic emerging technology costs (for next-generation satellite technology), facility exit costs, CEO transition costs, proxy solicitation costs, strategic alternatives expenses and other. These items, while periodically affecting our results, may vary significantly from period to period and may have a disproportionate effect in a given period, thereby affecting the comparability of results. Any amounts shown in the Adjusted EBITDA calculation for our Satellite and Space Communications and Terrestrial and Wireless Networks segments are directly attributable to those segments. Our Adjusted EBITDA is also used by our management in assessing the Company's operating results. Although closely aligned, the Company's definition of Adjusted EBITDA is different than the Consolidated EBITDA (as such term is defined in our Credit Facility) utilized for financial covenant calculations and also may differ from the definition of EBITDA or Adjusted EBITDA used by other companies and, therefore, may not be comparable to similarly titled measures used by other companies. Operating segment information, along with a reconciliation of segment net income (loss) and consolidated net income to Adjusted EBITDA is presented in the tables below: Fiscal Year Ended July 31, 2023 Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Total Net sales $ 337,756,000 212,238,000 — $ 549,994,000 Operating income (loss) $ 15,041,000 12,323,000 ( 42,024,000 ) $ ( 14,660,000 ) Net income (loss) $ 15,539,000 12,297,000 ( 54,735,000 ) $ ( 26,899,000 ) Benefit from income taxes ( 1,724,000 ) ( 193,000 ) ( 2,031,000 ) ( 3,948,000 ) Interest expense 2,000 — 14,959,000 14,961,000 Interest (income) and other 1,224,000 219,000 ( 217,000 ) 1,226,000 Amortization of stock-based compensation — — 10,107,000 10,107,000 Amortization of intangibles 7,312,000 14,084,000 — 21,396,000 Depreciation 4,121,000 7,637,000 164,000 11,922,000 Amortization of cost to fulfill assets 959,000 — — 959,000 Restructuring costs 5,725,000 1,220,000 3,907,000 10,852,000 Strategic emerging technology costs 3,833,000 — — 3,833,000 CEO transition costs — — 9,090,000 9,090,000 Adjusted EBITDA $ 36,991,000 35,264,000 ( 18,756,000 ) $ 53,499,000 Purchases of property, plant and equipment $ 7,244,000 10,075,000 992,000 $ 18,311,000 Total assets at July 31, 2023 $ 515,449,000 460,034,000 20,754,000 $ 996,237,000 F - 33 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Fiscal Year Ended July 31, 2022 Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Total Net sales $ 279,678,000 206,561,000 — $ 486,239,000 Operating (loss) income $ ( 5,671,000 ) 18,925,000 ( 47,006,000 ) $ ( 33,752,000 ) Net (loss) income $ ( 3,852,000 ) 18,796,000 ( 47,996,000 ) $ ( 33,052,000 ) (Benefit from) provision for income taxes ( 1,120,000 ) 19,000 ( 2,922,000 ) ( 4,023,000 ) Interest expense 98,000 — 4,933,000 5,031,000 Interest (income) and other ( 797,000 ) 110,000 ( 16,000 ) ( 703,000 ) Change in fair value of convertible preferred stock purchase option liability — — ( 1,005,000 ) ( 1,005,000 ) Amortization of stock-based compensation — — 7,767,000 7,767,000 Amortization of intangibles 7,312,000 14,084,000 — 21,396,000 Depreciation 4,049,000 6,069,000 196,000 10,314,000 Amortization of cost to fulfill assets 469,000 — — 469,000 Restructuring costs 5,666,000 — 299,000 5,965,000 COVID-19 related costs 1,105,000 — — 1,105,000 Strategic emerging technology costs 1,197,000 — — 1,197,000 CEO transition costs — — 13,554,000 13,554,000 Proxy solicitation costs — — 11,248,000 11,248,000 Adjusted EBITDA $ 14,127,000 39,078,000 ( 13,942,000 ) $ 39,263,000 Purchases of property, plant and equipment $ 8,915,000 10,704,000 — $ 19,619,000 Total assets at July 31, 2022 $ 487,235,000 461,443,000 25,619,000 $ 974,297,000 Fiscal Year Ended July 31, 2021 Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Total Net sales $ 374,850,000 206,845,000 — $ 581,695,000 Operating income (loss) $ 24,281,000 25,185,000 ( 117,764,000 ) $ ( 68,298,000 ) Net income (loss) $ 24,357,000 24,396,000 ( 122,233,000 ) $ ( 73,480,000 ) (Benefit from) provision for income taxes ( 377,000 ) 795,000 ( 1,918,000 ) ( 1,500,000 ) Interest expense 66,000 — 6,755,000 6,821,000 Interest (income) and other 235,000 ( 6,000 ) ( 368,000 ) ( 139,000 ) Amortization of stock-based compensation — — 9,983,000 9,983,000 Amortization of intangibles 5,695,000 15,325,000 — 21,020,000 Depreciation 3,721,000 5,316,000 342,000 9,379,000 Restructuring costs 2,782,000 — — 2,782,000 COVID-19 related costs 1,046,000 — — $ 1,046,000 Strategic emerging technology costs 315,000 — — $ 315,000 Acquisition plan expenses — ( 1,052,000 ) 101,344,000 100,292,000 Adjusted EBITDA $ 37,840,000 44,774,000 ( 6,095,000 ) $ 76,519,000 Purchases of property, plant and equipment $ 8,456,000 7,498,000 83,000 $ 16,037,000 Long-lived assets acquired in connection with acquisitions $ 47,958,000 — — $ 47,958,000 Total assets at July 31, 2021 $ 507,981,000 462,877,000 22,253,000 $ 993,111,000 F - 34 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued Unallocated expenses result from corporate expenses such as executive compensation, accounting, legal and other regulatory compliance related costs and also includes all of our amortization of stock-based compensation. See Note (2) - " CEO Transition Costs and Related " for information related to such costs. During fiscal 2023, our Unallocated segment incurred $ 3,907,000 of restructuring costs focused on streamlining our operations. During fiscal 2022, we incurred $ 11,248,000 of proxy solicitation costs (including legal and advisory fees and costs associated with a related lawsuit) as a result of a now-settled proxy contest and expensed $ 13,554,000 of transition costs related to the former CEO, Fred Kornberg. During fiscal 2021, we recorded $ 100,292,000 of acquisition plan expenses, most of which were recorded in our unallocated expenses and related to the previously announced litigation and merger termination with Gilat Satellite Networks, Ltd. ("Gilat"), costs associated with the settlement of litigation associated with the 2019 acquisition of GD NG-911 and our acquisition of UHP Networks Inc. During fiscal 2023, 2022 and 2021, our Satellite and Space Communications segment recorded $ 5,725,000 , $ 5,666,000 and $ 2,782,000 , respectively, of restructuring costs primarily incurred to streamline our operations and improve efficiency, including costs related to the relocation of certain of our satellite ground station production facilities to our new 146,000 square foot facility in Chandler, Arizona. In addition, during fiscal 2023, 2022 and 2021, we incurred $ 3,833,000 , $ 1,197,000 and $ 315,000 , respectively, of strategic emerging technology costs for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations. Furthermore, during fiscal 2022 and 2021, this segment recorded $ 1,105,000 and $ 1,046,000 , respectively of incremental operating costs related to our antenna facility located in the United Kingdom due to the impact of the COVID-19 pandemic. There were no similar incremental operating costs recorded in fiscal 2023. Interest expense in the tables above primarily relates to our Credit Facility, and includes the amortization of deferred financing costs. See Note (7) - " Credit Facility " for further discussion. In addition, interest expense for fiscal 2021 includes $ 1,178,000 of incremental interest expense related to a now terminated financing commitment letter related to the previously announced litigation and merger termination with Gilat. Intersegment sales in fiscal 2023, 2022 and 2021 between the Satellite and Space Communications segment and the Terrestrial and Wireless Networks segment were nominal. All intersegment sales are eliminated in consolidation and are excluded from the tables above. Unallocated assets at July 31, 2023 consist principally of cash and cash equivalents, income taxes receivable, corporate property, plant and equipment and deferred financing costs. The large majority of our long-lived assets are located in the U.S. (12) Commitments and Contingencies (a) Legal Proceedings and Other Matters Settled Litigation Related to the Convertible Preferred Stock Issuance In October 2021, Anthony Franchi (the “Plaintiff”) brought a putative class action in the Court of Chancery of the State of Delaware against the Company's current directors, the Company, White Hat Capital Partners LP (“White Hat”) and Magnetar Capital LLC (“Magnetar”), which was fully resolved by the parties and the case dismissed by court order on May 3, 2022. The ultimate resolution of this matters did not result in a material adverse effect on our consolidated results of operations and financial condition. Other Matters In the ordinary course of business, we include indemnification provisions in certain of our customer contracts to indemnify, hold harmless and reimburse such customers for certain losses, including but not limited to losses related to third-party claims of intellectual property infringement arising from the customer’s use of our products or services. We may also, from time to time, receive indemnification requests from customers related to third-party claims that 911 calls were improperly routed during an emergency. We evaluate such claims as and when they arise. We do not always agree with customers that they are entitled to indemnification and in such cases reject their claims. Despite maintaining that we have properly carried out our duties, we may seek coverage under our various insurance policies; however, we cannot be sure that we will be able to maintain or obtain insurance coverage at acceptable costs or in sufficient amounts or that our insurer will not disclaim coverage as to such claims. Accordingly, pending or future claims asserted against us by a party that we agree to indemnify could result in legal costs and damages that could have a material adverse effect on our consolidated results of operations and financial condition. F - 35 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued There are certain other pending and threatened legal actions which arise in the normal course of business. Although the ultimate outcome of litigation is difficult to accurately predict, we believe that the outcome of these other pending and threatened actions will not have a material adverse effect on our consolidated financial condition or results of operations. (b) Employment Change of Control and Indemnification Agreements As of July 31, 2022, we had an employment agreement with Michael Porcelain, our former President and CEO. The employment agreement generally provided for an annual salary and bonus award. On August 10, 2022, we announced the mutually agreed separation between the Company and Mr. Porcelain as President and CEO and member of the Board of Directors. The Company entered into a separation agreement with Mr. Porcelain. On August 9, 2022, our Board of Directors appointed our Chairman of the Board, Ken Peterman, as President and CEO, and the Company entered an employment agreement with Mr. Peterman generally providing for an annual salary, bonus award, sign-on bonus, equity incentive awards and, under certain termination of employment, severance payment. Transition costs related to Mr. Porcelain, pursuant to his separation agreement with the Company, were approximately $ 7,424,000 , of which $ 3,764,000 related to the acceleration of unamortized stock-based compensation, with the remaining $ 3,660,000 related to his severance payments and benefits upon termination of employment. The cash portion of the transition costs of $ 3,660,000 was paid to Mr. Porcelain in October 2022. Also, in connection with Mr. Peterman entering into an employment agreement with the Company, effective as of August 9, 2022, we incurred a $ 1,000,000 expense related to a cash sign-on bonus. CEO transition costs related to Mr. Porcelain and Mr. Peterman were expensed in our Unallocated segment during fiscal 2023. We have also entered into change of control agreements with certain of our executive officers and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of our Company or termination of the employee. (13) Goodwill The following table represents goodwill by reportable operating segment, including the changes in the net carrying value of goodwill as of July 31, 2023 and July 31, 2022: Satellite and Space Communications Terrestrial and Wireless Networks Total Goodwill $ 173,602,000 174,090,000 $ 347,692,000 In accordance with FASB ASC 350, we perform a goodwill impairment analysis at least annually (in the first quarter of each fiscal year), unless indicators of impairment exist in interim periods. If we fail the quantitative assessment of goodwill impairment ("quantitative assessment"), we would be required to recognize an impairment loss equal to the amount that a reporting unit's carrying value exceeded its fair value; however, any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. On August 1, 2023 (the first day of fiscal 2024), we performed our annual quantitative assessment using market participant assumptions to determine if the fair value of each of our reporting units with goodwill exceeded its carrying value. In making this assessment, we considered, among other things, expectations of projected net sales and cash flows, assumptions impacting the weighted average cost of capital, trends in trading multiples of comparable companies, changes in our stock price and changes in the carrying values of our reporting units with goodwill. We also considered overall business conditions. F - 36 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued In performing the quantitative assessment, we estimated the fair value of each of our reporting units using a combination of the income and market approaches. The income approach, also known as the discounted cash flow ("DCF") method, utilizes the present value of cash flows to estimate fair value. The future cash flows for our reporting units were projected based on our estimates, at that time, of future revenues, operating income and other factors (such as working capital and capital expenditures). For purposes of conducting our impairment analysis, we assumed revenue growth rates and cash flow projections that are below our actual long-term expectations. The discount rates used in our DCF method were based on a weighted-average cost of capital ("WACC") determined from relevant market comparisons, adjusted upward for specific reporting unit risks (primarily the uncertainty of achieving projected operating cash flows). A terminal value growth rate was applied to the final year of the projected period, which reflects our estimate of stable, perpetual growth. We then calculated a present value of the respective cash flows for each reporting unit to arrive at an estimate of fair value under the income approach. Under the market approach, we estimated a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization and factored in a control premium. Finally, we compared our estimates of fair values to our total public market capitalization and assessed implied control premiums based on our common stock price of $ 10.09 as of the date of testing. Ultimately, based on our quantitative evaluation, we determined that our Satellite and Space Communications and Terrestrial and Wireless Networks reporting units had estimated fair values in excess of their carrying values of at least 18.3 % and 8.9 %, respectively, and concluded that our goodwill was not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment. It is possible that, during fiscal 2024 or beyond, business conditions (both in the U.S. and internationally) could deteriorate from the current state, our current or prospective customers could materially postpone, reduce or even forgo purchases of our products and services to a greater extent than we currently anticipate, or our common stock price could fluctuate. A significant decline in our customers' spending that is greater than we anticipate or a shift in funding priorities may also have a negative effect on future orders, sales, income and cash flows and we might be required to perform a quantitative assessment during fiscal 2024 or beyond. If assumed net sales and cash flow projections are not achieved in future periods or our common stock price significantly declines from current levels, our Satellite and Space Communications and Terrestrial and Wireless Networks reporting units could be at risk of failing the quantitative assessment and goodwill assigned to the respective reporting units could be impaired. In any event, we are required to perform the next annual goodwill impairment analysis on August 1, 2024 (the start of our fiscal 2025). If our assumptions and related estimates change in the future, or if we change our reporting unit structure or other events and circumstances change (e.g., a sustained decrease in the price of our common stock (considered on both absolute terms and relative to peers)), we may be required to record impairment charges when we perform these tests, or in other future periods. Any impairment charges that we may record in the future could be material to our results of operations and financial condition. F - 37 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (14) Intangible Assets Intangible assets with finite lives as of July 31, 2023 and 2022 are as follows: July 31, 2023 Weighted Average Amortization Period Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships 20.2 $ 302,058,000 121,786,000 $ 180,272,000 Technologies 14.8 114,949,000 80,672,000 34,277,000 Trademarks and other 16.7 32,926,000 21,568,000 11,358,000 Total $ 449,933,000 224,026,000 $ 225,907,000 July 31, 2022 Weighted Average Amortization Period Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships 20.2 $ 302,058,000 107,500,000 $ 194,558,000 Technologies 14.8 114,949,000 75,798,000 39,151,000 Trademarks and other 16.7 32,926,000 19,332,000 13,594,000 Total $ 449,933,000 202,630,000 $ 247,303,000 The weighted average amortization period in the above table excludes fully amortized intangible assets. Amortization expense for the fiscal years ended July 31, 2023, 2022 and 2021 was $ 21,396,000 , $ 21,396,000 and $ 21,020,000 , respectively. The estimated amortization expense consists of the following for the fiscal years ending July 31: 2024 $ 21,154,000 2025 21,039,000 2026 19,888,000 2027 18,534,000 2028 18,534,000 We review net intangible assets with finite lives for impairment when an event occurs indicating the potential for impairment. Based on our last assessment, we believe that the carrying values of our net intangible assets were recoverable as of July 31, 2023. However, if business conditions deteriorate, we may be required to record impairment losses, and or increase the amortization of intangibles in the future. Any impairment charges that we may record in the future could be material to our results of operations and financial condition. (15) Convertible Preferred Stock On October 18, 2021, we entered into a Subscription Agreement (the “Subscription Agreement”) with certain affiliates and related funds of White Hat Capital Partners LP and Magnetar Capital LLC (collectively, the “Investors”), relating to the issuance and sale of up to 125,000 shares of a new series of the Company's Series A Convertible Preferred Stock, par value $ 0.10 per share (the “Convertible Preferred Stock”), for an aggregate purchase price of up to $ 125,000,000 , or $ 1,000 per share. On October 19, 2021 (the “Initial Closing Date”), pursuant to the terms of the Subscription Agreement, the Investors purchased an aggregate of 100,000 shares of Convertible Preferred Stock (the “Initial Issuance”) for an aggregate purchase price of $ 100,000,000 . The Investors had a one-time option exercisable at any time on or prior to March 31, 2023 to purchase additional shares of Convertible Preferred Stock for an aggregate purchase price of $ 25,000,000 . This purchase option, commonly referred to as a “Green Shoe” expired unexercised and together with the Initial Issuance, is collectively referred to as the “Issuance.” F - 38 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued The adjusted conversion price for the shares issued in the Initial Issuance is $ 23.97 , subject to certain adjustments set forth in the Certificate of Designations filed with the Secretary of State of the State of Delaware. The Convertible Preferred Stock ranks senior to the shares of our common stock, with respect to the payment of dividends and the distribution of assets upon a liquidation, dissolution or winding up of the Company. The Convertible Preferred Stock initially had a liquidation preference of $ 1,000 per share with each share entitled to a cumulative dividend (the “Dividend”) at the rate of 6.5 % per annum, compounding quarterly, paid-in-kind or paid in cash, at our election. For any quarter in which we elect not to pay the Dividend in cash with respect to a share of Convertible Preferred Stock, such Dividend becomes part of the liquidation preference of such share. In addition, no dividend or other distribution on our common stock in excess of our $ 0.10 per share per quarter will be declared or paid on the common stock unless, at the time of such declaration and payment, an equivalent dividend or distribution is declared and paid on the Convertible Preferred Stock (the “Participating Dividend”), provided that in the case of any such dividend in the form of cash, in lieu of a cash payment, such Participating Dividend will become part of the liquidation preference of the shares of the Convertible Preferred Stock. Such Participating Dividend results in the Convertible Preferred Stock meeting the definition of a "participating security" for purposes of our earnings per share calculations. As of October 12, 2023, the Convertible Preferred Stock is convertible into shares of common stock at the option of the holders. At any time after October 19, 2024, we have the right to mandate the conversion of the Convertible Preferred Stock, subject to certain restrictions, based on the price of the common stock in the preceding thirty trading days. Holders of the Convertible Preferred Stock are entitled to vote with the holders of the common stock on an as-converted basis, as well as are entitled to a separate class vote with respect to, among other things, amendments to our organizational documents that have an adverse effect on the Convertible Preferred Stock, authorizations or issuances of securities of the Company, the payment of dividends other than dividends on common stock in the ordinary course consistent with past practice on a quarterly basis in an amount not to exceed our current dividend rate of $ 0.10 per share per quarter, related party transactions, repurchases or redemptions of securities of the Company (other than the repurchase of up to $ 25,000,000 of shares of common stock), dispositions of businesses or assets, the incurrence of certain indebtedness and certain amendments or extensions of our existing Credit Facility. Holders will have the right to require the Company to repurchase such holder's Convertible Preferred Stock on a date occurring either (a) on or after October 19, 2026 (the “Optional Repurchase Trigger Date”) at a price equal to the liquidation preference or (b) in connection with a conversion of Convertible Preferred Stock, pursuant to which the number of shares of common stock issuable upon such conversion would exceed 19.99 % of the issued and outstanding shares of common stock as of October 18, 2021 (such excess shares, "Excess Conversion Shares"), at any time after the date that is 91 days after the maturity date of the Company's existing Credit Facility, at a price per share equal to the number of Excess Conversion Shares multiplied by the Last Reported Sales Price (as defined) of common stock on the applicable conversion date. In addition, each holder will have the right to cause the Company to repurchase its shares of Convertible Preferred Stock in connection with a Change of Control, at a price equal to the liquidation preference. We determined that our obligation to issue the Green Shoe at any time on or prior to March 31, 2023 met the definition of a freestanding financial instrument that should be accounted for as a liability. As such, we established an initial convertible preferred stock purchase option liability of $ 1,005,000 and reduced the proceeds from the Initial Issuance by such amount. The liability was remeasured to its estimated fair value each reporting period until such instrument expired. Changes in its estimated fair value were recognized as a non-cash charge or benefit and presented on the consolidated statement of operations. F - 39 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued In accordance with ASC 480, " Distinguishing Liabilities from Equity ," specifically ASC 480-10-S99-3A(2), SEC Staff Announcement: Classification and Measurement of Redeemable Securities , we have classified the Convertible Preferred Stock outside of permanent equity as temporary equity since the redemption of such shares is not solely within our control and we could be required by the holder to redeem the shares for cash or other assets, at their option. Upon the Initial Issuance, we recorded the Convertible Preferred Stock, net of issuance costs of $ 4,007,000 and net of the portion of such proceeds allocated to the convertible preferred stock purchase option liability described above, which resulted in an initial carrying value of the Convertible Preferred Stock less than its initial redemption value of $ 100,000,000 . We have elected to adjust the carrying value of the Convertible Preferred Stock to its current redemption value of $ 112,211,000 , which includes $ 11,607,000 of cumulative dividends paid in kind and $ 604,000 of accumulated and unpaid dividends. As such, a total adjustment of $ 7,007,000 to increase the carrying value of the Convertible Preferred Stock was recorded against retained earnings during fiscal 2023. On October 9, 2023, we received a non-binding term sheet from the Investors proposing (i) an exchange of their outstanding Series A Convertible Preferred Stock for a new series of convertible preferred stock on amended terms and (ii) purchase an additional amount of such new series of convertible preferred stock, on terms, conditions and assumptions described therein. No assurances can be given that a transaction will be consummated and the Investors reserve the right to withdraw the proposal at any time. (16) Stockholders’ Equity Shelf Registration On July 13, 2022, we filed a $ 200,000,000 shelf registration statement with the SEC for the sale of various types of securities, including debt securities. This shelf registration statement was declared effective by the SEC as of July 25, 2022 and expires on July 25, 2025. To-date, we have not issued any securities pursuant to our $ 200,000,000 shelf registration statement. Common Stock Repurchase Program On September 29, 2020, our Board of Directors authorized a $ 100,000,000 stock repurchase program, which replaced our prior program. The $ 100,000,000 stock repurchase program has no time restrictions and repurchases may be made from time to time in open-market or privately negotiated transactions, or by other means in accordance with federal securities laws. There were no repurchases made during the fiscal years ended July 31, 2023 or 2022. Common Stock Dividends On September 29, 2022 and December 8, 2022, our Board of Directors declared a dividend of $ 0.10 per common share, which were paid on November 18, 2022 and February 17, 2023, respectively. During the third quarter of fiscal 2023, 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, our Board of Directors, 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. (17) Cost Reduction In fiscal 2023, we transformed and integrated our individual businesses into two segments to 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. In doing so, during fiscal 2023, we recorded $ 3,872,000 of severance costs in selling, general and administrative expenses in our Consolidated Statements of Operations, of which $ 1,989,000 , $ 1,220,000 and $ 663,000 related to our Satellite and Space Communications, Terrestrial and Wireless Networks and Unallocated segments, respectively. We paid $ 2,320,000 of severance costs during fiscal 2023 and our severance liability as of July 31, 2023 was $ 1,552,000 . Most of the remaining severance liability will be paid during the first quarter of fiscal 2024. F - 40 COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued (18) Subsequent Events On October 11, 2023, we entered into a stock sale agreement relating to our solid-state RF microwave high power amplifiers and control components product line, which is included in our Satellite and Space Communications segment. The completion of this divestiture is subject to customary closing conditions. The preliminary sales price for this divestiture is $ 35,000,000 in cash, plus contingent consideration up to $ 5,000,000 based on the achievement of a revenue target or the receipt of an anticipated contract award as specified in the stock sale agreement. The sales price is also subject to adjustment based on the closing date net working capital of the divested business. F - 41 Schedule II COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES Valuation and Qualifying Accounts and Reserves Fiscal Years Ended July 31, 2023, 2022 and 2021 Column A Column B Column C Additions Column D Column E Description Balance at beginning of period Charged to cost and expenses Charged to other accounts - describe Transfers (deductions) - describe Balance at end of period Allowance for doubtful accounts receivable: Year ended July 31, 2023 $ 2,337,000 261,000 (A) — ( 509,000 ) (B) $ 2,089,000 2022 1,648,000 838,000 (A) — ( 149,000 ) (B) 2,337,000 2021 1,769,000 ( 18,000 ) (A) 215,000 (C) ( 318,000 ) (B) 1,648,000 Inventory reserves: Year ended July 31, 2023 $ 23,121,000 4,871,000 (D) — ( 3,333,000 ) (E) $ 24,659,000 2022 20,229,000 4,447,000 (D) — ( 1,555,000 ) (E) 23,121,000 2021 19,076,000 4,364,000 (D) — ( 3,211,000 ) (E) 20,229,000 Valuation allowance for deferred tax assets: Year ended July 31, 2023 $ 31,227,000 4,617,000 (F) — ( 1,366,000 ) (F) $ 34,478,000 2022 28,384,000 2,947,000 (F) — ( 104,000 ) (F) 31,227,000 2021 11,471,000 17,750,000 (F) — ( 837,000 ) (F) 28,384,000 (A) Provision for doubtful accounts. (B) Write-off of uncollectible receivables. (C) Increase due to our August 1, 2020 adoption of FASB ASU No. 2016-13, on a modified-retrospective basis, which requires companies to utilize an impairment model (current expected credit loss ("CECL”)) for most financial assets measured at amortized cost and certain other financial instruments, which include, but are not limited to trade receivables and contract assets. (D) Provision for excess and obsolete inventory. (E) Write-off of inventory. (F) Change in valuation allowance. See Note (9) - "Income Taxes" for further discussion. S - 1