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Item 1. Financial Statements

2023-12-07 compared with 2023-06-08 · 285 added, 323 removed, 706 unchanged (46% of the section changed)

3 unchanged sentences

CONDENSED CONSOLIDATED BALANCE SHEETS

Assets April 30, 2023 July 31, 2022

Assets October 31, 2023 July 31, 2023

Current assets:

3 unchanged sentences

Prepaid expenses and other current assets 20,230,000 17,521,000

Assets of disposal group held for sale 44,894,000 —

Total current assets 353,745,000 305,486,000

12 unchanged sentences

Operating lease liabilities, current 8,169,000 8,645,000

Dividends payable — 2,746,000

Contract liabilities 63,106,000 66,351,000

Interest payable 1,426,000 1,368,000

Liabilities of disposal group held for sale 10,557,000 —

Total current liabilities 390,939,000 211,970,000

9 unchanged sentences

authorized 125,000 shares;

issued 100,000 at April 30, 2023 and July 31, 2022 (includes accrued dividends of $ 595,000 and $ 566,000 , respectively)

issued 100,000 at October 31, 2023 and July 31, 2023 (includes accrued dividends of $ 614,000 and $ 604,000 , respectively)

114,034,000 112,211,000

4 unchanged sentences

authorized 100,000,000 shares;

issued 42,922,265 and 42,672,827 shares at April 30, 2023 and July 31, 2022, respectively

issued 43,268,782 and 43,096,271 shares at October 31, 2023 and July 31, 2023, respectively

4,327,000 4,310,000

2 unchanged sentences

878,655,000 880,148,000

Treasury stock, at cost ( 15,033,317 shares at April 30, 2023 and July 31, 2022)

Treasury stock, at cost ( 15,033,317 shares at October 31, 2023 and July 31, 2023)

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

5 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

2023 2022 2023 2022

Three months ended October 31,

Net sales $ 151,911,000 131,139,000

5 unchanged sentences

CEO transition costs — 9,090,000

Proxy solicitation costs — — — 11,248,000

45,796,000 56,527,000

Operating loss ( 5,276,000 ) ( 566,000 ) ( 15,781,000 ) ( 31,671,000 )

Operating income (loss) 2,086,000 ( 9,724,000 )

Other expenses (income):

1 unchanged sentence

Interest (income) and other ( 65,000 ) ( 255,000 )

Change in fair value of convertible preferred

stock purchase option liability — ( 302,000 ) — ( 1,004,000 )

Loss before benefit from income taxes ( 2,781,000 ) ( 11,704,000 )

3 unchanged sentences

Dividend on convertible preferred stock ( 1,823,000 ) ( 1,710,000 )

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 $ ( 3,260,000 ) ( 12,806,000 )

8 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

Three months ended April 30, 2023 and 2022

Series A Convertible Preferred Stock Common Stock Additional

Paid-in Capital Retained Earnings Treasury Stock Stockholders'

Shares Amount Shares Amount Shares Amount

Balance as of January 31, 2022 100,000 $ 101,867,000 41,553,244 $ 4,155,000 $ 612,780,000 $ 292,778,000 15,033,317 $ ( 441,849,000 ) $ 467,864,000

Equity-classified stock award compensation

— — — — 1,071,000 — — — 1,071,000

Issuance of employee stock purchase plan shares — — 12,131 2,000 160,000 — — — 162,000

Net settlement of stock-based awards

— — ( 5,014 ) ( 1,000 ) ( 113,000 ) — — — ( 114,000 )

Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends) 1,655,000 — — — ( 1,655,000 ) — — ( 1,655,000 )

Cash dividends declared, net ($ 0.10 per share)

— — — — — ( 2,646,000 ) — — ( 2,646,000 )

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

— — — — — ( 97,000 ) — — ( 97,000 )

Net loss — — — — — ( 25,000 ) — — ( 25,000 )

Balance as of April 30, 2022 100,000 $ 103,522,000 41,560,361 $ 4,156,000 $ 613,898,000 $ 288,355,000 15,033,317 $ ( 441,849,000 ) $ 464,560,000

Balance as of January 31, 2023 100,000 $ 108,651,000 42,900,871 $ 4,290,000 $ 630,233,000 $ 253,422,000 15,033,317 $ ( 441,849,000 ) $ 446,096,000

Equity-classified stock award compensation

— — — — 4,126,000 — — — 4,126,000

Issuance of employee stock purchase plan shares — — 12,146 1,000 126,000 — — — 127,000

Net settlement of stock-based awards

— — 9,248 1,000 ( 294,000 ) — — — ( 293,000 )

Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends) — 1,766,000 — — — ( 1,766,000 ) — — ( 1,766,000 )

Reversal of dividend equivalents ($ 0.10 per share)

— — — — — 22,000 — — 22,000

Net loss — — — — — ( 7,458,000 ) — — ( 7,458,000 )

Balance as of April 30, 2023 100,000 $ 110,417,000 42,922,265 $ 4,292,000 $ 634,191,000 $ 244,220,000 15,033,317 $ ( 441,849,000 ) $ 440,854,000

See accompanying notes to condensed consolidated financial statements.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

Nine months ended April 30, 2023 and 2022

Three months ended October 31, 2023 and 2022

Series A Convertible Preferred Stock Common Stock Additional

9 unchanged sentences

— — 112,284 11,000 ( 1,241,000 ) — — — ( 1,230,000 )

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) 1,710,000 — — — ( 1,710,000 ) — — ( 1,710,000 )

4 unchanged sentences

Net loss — — — — — ( 11,096,000 ) — — ( 11,096,000 )

Balance as of April 30, 2022 100,000 $ 103,522,000 41,560,361 $ 4,156,000 $ 613,898,000 $ 288,355,000 15,033,317 $ ( 441,849,000 ) $ 464,560,000

Balance as of October 31, 2022 100,000 $ 106,914,000 42,810,846 $ 4,281,000 $ 629,027,000 $ 262,902,000 15,033,317 $ ( 441,849,000 ) $ 454,361,000

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

1 unchanged sentence

— — — — 2,645,000 — — — 2,645,000

CEO transition costs related to equity-classified stock-based awards (See Note 1) — — — — 3,764,000 — — — 3,764,000

Issuance of employee stock purchase plan shares — — 12,799 1,000 93,000 — — — 94,000

3 unchanged sentences

Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends) — 1,823,000 — — — ( 1,823,000 ) — — ( 1,823,000 )

Cash dividends declared, net ($ 0.20 per share)

— — — — — ( 5,549,000 ) — — ( 5,549,000 )

Accrual of dividend equivalents, net of reversal ($ 0.20 per share)

Reversal of dividend equivalents ($ 0.10 per share)

— — — — — 23,000 — — 23,000

Net loss — — — — — ( 1,437,000 ) — — ( 1,437,000 )

Balance as of April 30, 2023 100,000 $ 110,417,000 42,922,265 $ 4,292,000 $ 634,191,000 $ 244,220,000 15,033,317 $ ( 441,849,000 ) $ 440,854,000

Balance as of October 31, 2023 100,000 $ 114,034,000 43,268,782 $ 4,327,000 $ 638,652,000 $ 235,676,000 15,033,317 $ ( 441,849,000 ) $ 436,806,000

See accompanying notes to condensed consolidated financial statements.

2 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Nine months ended April 30,

Three months ended October 31,

Cash flows from operating activities:

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Amortization of deferred financing costs 594,000 203,000

Change in fair value of convertible preferred stock purchase option liability — ( 1,004,000 )

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

Loss (gain) on disposal of property, plant and equipment 48,000 ( 120,000 )

Loss on disposal of property, plant and equipment 6,000 71,000

Provision for allowance for doubtful accounts 143,000 242,000

Provision for excess and obsolete inventory 78,000 847,000

Deferred income tax benefit ( 4,926,000 ) ( 5,253,000 )

Changes in assets and liabilities, net of effects of business acquisitions:

Deferred income tax expense (benefit) 1,114,000 ( 1,217,000 )

Changes in assets and liabilities, net of effects of acquisitions and divestitures:

Accounts receivable ( 26,269,000 ) ( 5,318,000 )

8 unchanged sentences

Income taxes payable ( 3,472,000 ) 790,000

Net cash (used in) provided by operating activities ( 177,000 ) 8,421,000

Net cash used in operating activities ( 14,545,000 ) ( 6,197,000 )

Cash flows from investing activities:

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Cash flows from financing activities:

Net borrowings (payments) of long-term debt under Revolving Loan Facility 31,000,000 ( 74,000,000 )

Net borrowings of long-term debt under Revolving Loan Facility 19,600,000 18,700,000

Repayment of debt under Term Loan ( 625,000 ) —

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Repayment of principal amounts under finance lease liabilities — ( 2,000 )

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 16,968,000 13,292,000

Net (decrease) increase in cash and cash equivalents ( 250,000 ) 1,970,000

Net decrease in cash and cash equivalents, including cash classified within assets of disposal group

held for sale ( 793,000 ) ( 126,000 )

net increase in cash classified within assets of disposal group held for sale ( 52,000 ) —

Net decrease in cash and cash equivalents ( 845,000 ) ( 126,000 )

Cash and cash equivalents at beginning of period 18,961,000 21,654,000

4 unchanged sentences

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

Nine months ended April 30,

Three months ended October 31,

Supplemental cash flow disclosures:

4 unchanged sentences

Accrued additions to property, plant and equipment $ 1,154,000 1,818,000

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

dividend equivalents) $ 342,000 2,960,000

Adjustment to reflect redemption value of convertible preferred stock $ 1,823,000 1,710,000

Accrued deferred financing costs $ 444,000 —

Accrued remittance of employees' statutory tax withholdings $ 526,000 —

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

dividend equivalents) $ ( 23,000 ) 2,975,000

Reclassification of finance lease right-of-use assets to property, plant and equipment $ — 12,000

Issuance of restricted stock $ 9,000 13,000

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

See accompanying notes to condensed consolidated financial statements.

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The accompanying condensed consolidated financial statements of Comtech Telecommunications Corp.

and its subsidiaries ("Comtech," "we," "us," or "our") as of and for the three and nine months ended April 30, 2023 and 2022 are unaudited.

and its subsidiaries ("Comtech," "we," "us," or "our") as of and for the three months ended October 31, 2023 and 2022 are unaudited.

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

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Our condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements, filed with the Securities and Exchange Commission ("SEC"), for the fiscal year ended July 31, 2023 and the notes thereto contained in our Annual Report on Form 10-K, and all of our other filings with the SEC.

Reclassifications

Certain reclassifications have been made to previously reported condensed consolidated financial statements to conform to the fiscal 2023 presentation.

See Note (13) - "Segment Information" for additional information.

Liquidity and Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared assuming we will continue as a going concern.

The going concern basis of presentation assumes that we will continue in operation one year after the date these unaudited condensed consolidated financial statements are issued and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business.

Pursuant to the requirements of ASC Topic 205-40, " Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern ," we are required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern.

This evaluation does not take into consideration the potential mitigating effect of our plans that have not been fully implemented or are not within our control as of the date the unaudited condensed consolidated financial statements are issued.

When substantial doubt exists, we evaluate whether the mitigating effect of our plans sufficiently alleviates substantial doubt about our ability to continue as a going concern.

The mitigating effect of our plans, however, is only considered if both (i) it is probable that the plans will be effectively implemented within one year after the date that the unaudited condensed consolidated financial statements are issued, and (ii) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about our ability to continue as a going concern within one year after the date that the unaudited condensed consolidated financial statements are issued.

As of the date these financial statements were issued (the "issuance date"), we evaluated whether the following adverse conditions or events, considered in the aggregate, raise substantial doubt about the Company's ability to continue as a going concern over the next twelve months beyond the issuance date.

Over the past three fiscal years, we incurred operating losses of $ 14,660,000 , $ 33,752,000 , and $ 68,298,000 in fiscal 2023, 2022 and 2021, respectively.

More recently, we recognized operating income of $ 2,086,000 in the three months ended October 31, 2023.

In addition, over the past three fiscal years, net cash used in operating activities was $ 4,433,000 and $ 40,638,000 in fiscal 2023 and 2021, respectively, and net cash provided by operating activities was $ 1,997,000 in fiscal 2022.

More recently, net cash used in operating activities was $ 14,545,000 in the three months ended October 31, 2023.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of October 31, 2023, we were in compliance with all of the restrictive and financial covenants under our Credit Facility (See Note (10) – “ Credit Facility ” for defined terms).

As of October 31, 2023, our Secured Leverage Ratio was 3.53 x trailing twelve months ("TTM") Adjusted EBITDA compared to the maximum allowable Secured Leverage Ratio of 3.75 x TTM Adjusted EBITDA.

Our Interest Expense Coverage Ratio as of October 31, 2023 was 3.37 x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25 x TTM Adjusted EBITDA.

Our Minimum Liquidity was $ 29,240,000 compared to the Minimum Liquidity requirement of $ 25,000,000 .

However, over the next twelve months beyond the issuance date, we anticipate we may be unable to remain in compliance with one or more of these financial covenants.

As disclosed in Note (10) – “ Credit Facility, ” on November 7, 2023, we entered into the Third Amended and Restated Credit Agreement which, effective January 31, 2024, among other things, lowers our borrowing limit under the Revolving Loan Facility from $ 150,000,000 to $ 140,000,000 and increases the quarterly Term Loan amortization payment from $ 1,250,000 to $ 1,875,000 .

As of the issuance date, our available sources of liquidity included cash and cash equivalents of approximately $ 18,000,000 .

In addition, as of the issuance date, borrowings under our Credit Facility, which has a maturity date of October 31, 2024, aggregated $ 180,500,000 , of which $ 149,300,000 and $ 31,200,000 related to the Revolving Loan Facility and Term Loan, respectively.

Accordingly, as of the issuance date, there was no additional borrowing capacity under the Revolving Loan Facility.

Our ability to meet our current obligations as they come due may be impacted by our ability to remain compliant with the financial covenants under the Credit Facility or to obtain waivers or amendments that impact the related financial covenants.

If we are unable to satisfy certain covenants and not able to obtain waivers or amendments, such event would constitute an Event of Default and could cause an immediate acceleration and repayment of all outstanding principal, interest and fees due under the Credit Facility.

If there is an Event of Default, there can be no assurances that we will be able to continue as a going concern, which could force us to delay, reduce or discontinue certain aspects of our business strategy.

Additionally, our ability to meet future anticipated liquidity needs will largely depend on our ability to generate positive cash inflows from operations, as well as refinance our Credit Facility, and/or secure other sources of outside capital.

Based on our current business plans, including projected capital expenditures, we do not believe our current level of cash and cash equivalents, or liquidity expected to be generated from future cash flows will be sufficient to fund our operations over the next twelve months beyond the issuance date and repay the outstanding borrowings scheduled to mature under the Credit Facility on or before October 31, 2024.

In anticipation of this maturity, we engaged with third party financial advisors to assist us in our discussions and negotiations with our existing lenders and holders of Convertible Preferred Stock to extend or refinance the Credit Facility and/or amend or restructure our Convertible Preferred Stock, as well as seeking other sources of credit or outside capital.

If we are unable to obtain sufficient, timely financial resources or outside capital, our business, financial condition and results of operations could be materially and adversely affected.

Our ability to generate cash in the future or have sufficient access to credit from financial institutions and/or financing from public and/or private debt and equity markets on acceptable terms, or at all, (i) is subject to (a) general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control and (b) a majority vote consent right of the Holders of the Convertible Preferred Stock (as discussed further in Note (17) – " Convertible Preferred Stock "), and (ii) could (x) dilute the ownership interest of our stockholders, (y) include terms that adversely affect the rights of our common stockholders, or (z) restrict our ability to take specific actions such as incurring additional debt, making acquisitions or capital expenditures or declaring dividends.

Also, our transition to sustained profitability is dependent upon the successful completion of our ongoing One Comtech transformation and integration of individual businesses into two segments and related restructuring activities to optimize our cost structure.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

In addition to our plan to refinance the Credit Facility and/or secure new sources of credit or outside capital, our plans also include, among other things:

• implementing certain cost savings and restructuring activities to reduce cash used in operations, as discussed further in Note (20) – “ Cost Reduction;

• pursuing initiatives to reduce investments in working capital, namely accounts receivable and inventory;

• improving process disciplines to attain and maintain profitable operations by entering into more favorable sales or service contracts;

• reevaluating our business plans to identify opportunities to further reduce capital expenditures;

• seeking opportunities to improve liquidity through any combination of debt and or equity financing (including possibly restructuring our existing Convertible Preferred Stock);

• seeking other strategic transactions and or measures including, but not limited to, the potential sale or divestiture of assets.

While we believe the implementation of some or all of the elements of our plans over the next twelve months beyond the issuance date will be successful, these plans are not all solely within management’s control and, as such, we can provide no assurance our plans are probable of being effectively implemented as of the issuance date.

Therefore, these adverse conditions and events described above raise substantial doubt about the Company’s ability to continue as a going concern as of the issuance date.

We prepared these unaudited condensed consolidated financial statements on a going concern basis, assuming our financial resources will be sufficient to meet our capital needs over the next twelve months and did not include any adjustments relating to the recoverability and realization of assets and classification of liabilities that might be necessary should we be unable to continue in operation for the next twelve months.

CEO Transition Costs & Related

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Peterman were expensed in our Unallocated segment during the first quarter of fiscal 2023.

During fiscal 2022, we expensed $ 13,554,000 of transition costs related to another former CEO, Fred Kornberg.

Since being appointed President and CEO, Mr.

Peterman, along with his senior leadership team, has been driving transformational changes at Comtech to, among other things, integrate our individual businesses into two segments and improve operational performance.

This transformation, which we refer to as “One Comtech,” has provided insight into opportunities to manage costs, streamline operations, improve efficiency, and accelerate decision making by eliminating management layers and other redundancies – resulting in a reduction in our workforce and the implementation of other lean initiatives during the third and fourth quarters of fiscal 2023.

Severance costs relating to these actions are not anticipated to be material to our results of operations.

There were no similar costs incurred in the first quarter of fiscal 2024.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(2) Business Divestiture

On November 7, 2023, we completed the divestiture of our solid-state RF microwave high power amplifiers and control components ("Power Systems Technology") product line, which was included in our Satellite and Space Communications segment, pursuant to a stock sale agreement entered into on October 11, 2023 (the "PST Sale").

The preliminary sales price for this divestiture was $ 35,700,000 in cash (including adjustments for estimated closing date net working capital and cash on hand), plus contingent consideration of 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 subject to adjustment based on the final closing date net working capital of the divested business.

We received cash proceeds of $ 32,500,000 at closing, net of $ 2,200,000 of transaction costs and $ 1,000,000 held in escrow until finalization of closing date net working capital.

During the three months ended October 31, 2023, we determined the criteria to be classified as held for sale were met with respect to the Power Systems Technology product line ("PST disposal group") and classified the assets and liabilities of the PST disposal group as held for sale as of October 31, 2023.

The carrying amount of the major classes of assets and liabilities classified as held for sale as of October 31, 2023 are as follows:

October 31, 2023

Cash and cash equivalents $ 52,000

Accounts receivable, net 4,220,000

Inventories, net 17,671,000

Prepaid expenses and other current assets 161,000

Property, plant and equipment, net 2,789,000

Operating lease right-of-use assets, net 5,379,000

Goodwill 14,587,000

Other assets, net 35,000

Total assets of disposal group held for sale $ 44,894,000

Accounts payable $ 3,160,000

Accrued expenses and other current liabilities 1,753,000

Operating lease liabilities, current 545,000

Contract liabilities 656,000

Operating lease liabilities, non-current 4,894,000

Deferred tax liability, net ( 451,000 )

Total liabilities of disposal group held for sale $ 10,557,000

(3) Adoption of Accounting Standards and Updates

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

ASUs issued, but not effective until after April 30, 2023, are not expected to have a material impact on our condensed consolidated financial statements or disclosures.

ASUs issued, but not effective until after October 31, 2023, are not expected to have a material impact on our condensed consolidated financial statements or disclosures.

COMTECH TELECOMMUNICATIONS CORP.

72 unchanged sentences

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

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

2023 2022 2023 2022

Three months ended October 31,

United States

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state and local governments.

Except for the U.S.

government, there were no customers that represented more than 10.0% of consolidated net sales for the three months ended April 30, 2023.

Included in domestic sales are sales to Verizon Communications Inc.

("Verizon"), which accounted for 11.2 % of consolidated net sales for the nine months ended April 30, 2023 and 10.6 % and 11.1 % of consolidated net sales for the three and nine months ended April 30, 2022, respectively.

For the three months ended October 31, 2023, except for the U.S.

government, there were no customers that represented more than 10.0% of consolidated net sales.

For the three months ended October 31, 2022, i ncluded in domestic sales are sales to Verizon Communications Inc.

("Verizon"), which accounted for 12.5 % of consolidated net sales.

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

domestic companies for inclusion in products that are sold to a foreign country) represented more than 10.0% of consolidated net sales for the three and nine months ended April 30, 2023 and 2022.

The following tables summarize our disaggregation of revenue consistent with information reviewed by our Chief Operating Decision Maker ("CODM") for the three and nine months ended April 30, 2023 and 2022.

domestic companies for inclusion in products that are sold to a foreign country) represented more than 10.0% of consolidated net sales for the three months ended October 31, 2023 and 2022.

The following tables summarize our disaggregation of revenue consistent with information reviewed by our Chief Operating Decision Maker ("CODM") for the three months ended October 31, 2023 and 2022.

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

Three months ended April 30, 2023 Nine months ended April 30, 2023

Satellite and Space Communications Terrestrial and Wireless Networks Total Satellite and Space Communications Terrestrial and Wireless Networks Total

Three months ended October 31, 2023

Satellite and Space Communications Terrestrial and Wireless Networks Total

Geographical region and customer type

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three months ended April 30, 2022 Nine months ended April 30, 2022

Satellite and Space Communications Terrestrial and Wireless Networks Total Satellite and Space Communications Terrestrial and Wireless Networks Total

Three months ended October 31, 2022

Satellite and Space Communications Terrestrial and Wireless Networks Total

Geographical region and customer type

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Under ASC 606, unbilled receivables constitute contract assets.

There were no material impairment losses recognized on contract assets during the three and nine months ended April 30, 2023 and 2022, respectively.

There were no material impairment losses recognized on contract assets during the three months ended October 31, 2023 and 2022, respectively.

On large long-term contracts, and for contracts with international customers that do not do business with us regularly, payment terms typically require advanced payments and deposits.

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Under the typical payment terms for our contracts accounted for at a point in time, costs are accumulated in inventory until the time of billing, which generally coincides with revenue recognition.

Of the current contract liability balance of $ 64,601,000 at July 31, 2022 and $ 66,130,000 at July 31, 2021, $ 43,125,000 and $ 46,031,000 was recognized as revenue during the nine months ended April 30, 2023 and 2022, respectively.

Of the current contract liability balance of $ 66,351,000 at July 31, 2023 and $ 64,601,000 at July 31, 2022, $ 20,737,000 and $ 21,628,000 was recognized as revenue during the three months ended October 31, 2023 and 2022, respectively.

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

otherwise, such costs are capitalized and amortized over the estimated life of the contract.

During the nine months ended April 30, 2023 and 2022, incremental costs to obtain or fulfill contracts with an amortization period greater than one year were not material.

During the three months ended October 31, 2023 and 2022, incremental costs to obtain or fulfill contracts with an amortization period greater than one year were not material.

As commissions payable to our internal sales and marketing employees or contractors are contingent upon multiple factors, such commissions are not considered direct costs to obtain or fulfill a contract with a customer and are expensed as incurred in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations.

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

As of April 30, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 668,405,000 (which represents the amount of our consolidated funded backlog).

We estimate that a substantial portion of our remaining performance obligations at April 30, 2023 will be completed and recognized as revenue during the next twenty-four month period, with the rest thereafter.

During the nine months ended April 30, 2023, revenue recognized from performance obligations satisfied, or partially satisfied, in previous periods (for example due to changes in the transaction price) was not material.

As of October 31, 2023, the aggregate amount of the transaction price allocated to remaining performance obligations was $ 695,867,000 (which represents the amount of our consolidated funded backlog).

We estimate that a substantial portion of our remaining performance obligations at October 31, 2023 will be completed and recognized as revenue during the next twenty-four month period, with the rest thereafter.

During the three months ended October 31, 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.

(5) 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.

We believe that the carrying amounts of our other current financial assets (such as accounts receivable) and other current liabilities (including accounts payable, accrued expenses and the current portion of long-term debt) approximate their fair values due to their short-term maturities.

The fair value of the non-current portion of our credit facility approximates its carrying amount due to its variable interest rate and pricing grid that is dependent upon our leverage ratio as of the end of each fiscal quarter.

See Note (10) - "Credit Facility" for more information.

As of April 30, 2023 and July 31, 2022, other than the cash and cash equivalents discussed above, we had no other significant assets or liabilities included in our Condensed Consolidated Balance Sheets recorded at fair value, as such term is defined by FASB ASC 820.

As of October 31, 2023 and July 31, 2023, other than the cash and cash equivalents discussed above, we had no other significant assets or liabilities included in our Condensed Consolidated Balance Sheets recorded at fair value, as such term is defined by FASB ASC 820.

(6) Earnings Per Share

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

There were no repurchases of our common stock during the three or nine months ended April 30, 2023 or 2022.

There were no repurchases of our common stock during the three months ended October 31, 2023 and 2022.

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

Weighted average stock options, RSUs and restricted stock outstanding of 956,000 and 1,369,000 for the three months ended April 30, 2023 and 2022, respectively, and 1,001,000 and 1,463,000 shares for the nine months ended April 30, 2023 and 2022, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive.

Our EPS calculations exclude 429,000 and 339,000 weighted average performance shares outstanding for the three months ended April 30, 2023 and 2022, respectively, and 384,000 and 287,000 for the nine months ended April 30, 2023 and 2022, respectively, as the performance conditions have not yet been satisfied.

Weighted average stock options, RSUs and restricted stock outstanding of 1,168,000 and 1,169,000 shares for the three months ended October 31, 2023 and 2022, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive.

Our EPS calculations exclude 680,000 and 383,000 weighted average performance shares outstanding for the three months ended October 31, 2023 and 2022, respectively, as the performance conditions have not yet been satisfied.

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

Weighted average common shares of 228,000 and 553,000 for the three months ended April 30, 2023 and 2022, respectively, and 293,000 and 455,000 for the nine months ended April 30, 2023 and 2022, respectively, related to our acquisition of UHP in March 2021 were not included in our diluted EPS calculation because their effect would have been anti-dilutive.

Weighted average common shares of 162,000 and 324,000 related to our acquisition of UHP in March 2021 were not included in our diluted EPS calculation for the three months ended October 31, 2023 and 2022, respectively, because their effect would have been anti-dilutive.

COMTECH TELECOMMUNICATIONS CORP.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Weighted average common shares underlying the assumed conversion of Convertible Preferred Stock, on an if-converted basis, of 4,606,000 and 4,225,000 for the three months ended April 30, 2023 and 2022, respectively, and 4,533,000 and 2,969,000 for the nine months ended April 30, 2023 and 2022, respectively, were not included in our diluted EPS calculation for the respective periods because their effect would have been anti-dilutive.

As a result, the numerator for our basic and diluted EPS calculation for the three and nine months ended April 30, 2023 and 2022 is the respective net loss attributable to common stockholders.

Weighted average common shares of 4,757,000 and 4,460,000 underlying the assumed conversion of Convertible Preferred Stock, on an if-converted basis, were not included in our diluted EPS calculation for the three months ended October 31, 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 the three months ended October 31, 2023 and 2022 is the respective net loss attributable to common stockholders.

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

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

2023 2022 2023 2022

Three months ended October 31,

Net loss $ ( 1,437,000 ) ( 11,096,000 )

Dividend on convertible preferred stock ( 1,823,000 ) ( 1,710,000 )

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 $ ( 3,260,000 ) ( 12,806,000 )

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

As a result, our EPS calculations for the three and nine months ended April 30, 2023 and 2022 were based on the two-class method.

Given the net loss attributable to common stockholders for the three and nine months ended April 30, 2023 and 2022, there was no impact of applying the two-class method to our reported basic or diluted earnings per common share.

As a result, our EPS calculations for the three months ended October 31, 2023 and 2022 were based on the two-class method.

Given the net loss attributable to common stockholders for the three months ended October 31, 2023 and 2022, there was no impact of applying the two-class method to our reported basic or diluted earnings per common share.

(7) Accounts Receivable

Accounts receivable consist of the following at:

April 30, 2023 July 31, 2022

October 31, 2023 July 31, 2023

Receivables from commercial and international customers $ 53,001,000 52,438,000

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Accounts receivable, net $ 185,065,000 163,159,000

Unbilled receivables as of April 30, 2023 relate to contracts-in-progress for which revenue has been recognized, but for which we have not yet earned the right to bill the customer for work performed to-date.

Unbilled receivables as of October 31, 2023 relate to contracts-in-progress for which revenue has been recognized, but for which we have not yet earned the right to bill the customer for work performed to-date.

Under ASC 606, unbilled receivables constitute contract assets.

Management estimates that a substantial portion of the amounts not yet billed at April 30, 2023 will be billed and collected within one year.

Accounts receivable in the table above excludes $ 2,873,000 of long-term unbilled receivables presented within "Other assets, net" in the condensed consolidated balance sheet as of April 30, 2023.

As of April 30, 2023, except for the U.S.

Management estimates that a substantial portion of the amounts not yet billed at October 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 October 31, 2023, except for the U.S.

government (and its agencies), which represented 35.0 % of total accounts receivable, there were no other customers which accounted for greater than 10% of total accounts receivable.

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% of total accounts receivable.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of July 31, 2022, except for the U.S.

government (and its agencies) and Verizon, which represented 20.9 % and 13.4 % of total accounts receivable, respectively, there were no other customers which accounted for greater than 10% of total accounts receivable.

(8) Inventories

Inventories consist of the following at:

April 30, 2023 July 31, 2022

October 31, 2023 July 31, 2023

Raw materials and components $ 75,591,000 87,139,000

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Inventories, net $ 85,440,000 105,845,000

As of April 30, 2023 and July 31, 2022, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $ 6,006,000 and $ 4,100,000 , respectively, and the amount of inventory related to contracts from third-party commercial customers who outsource their manufacturing to us was $ 3,533,000 and $ 1,866,000 , respectively.

As of October 31, 2023 and July 31, 2023, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $ 4,575,000 and $ 5,911,000 , respectively, and the amount of inventory related to contracts from third-party commercial customers who outsource their manufacturing to us was $ 2,707,000 and $ 3,277,000 , respectively.

(9) Accrued Expenses and Other Current Liabilities

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

April 30, 2023 July 31, 2022

October 31, 2023 July 31, 2023

Accrued wages and benefits $ 18,804,000 21,994,000

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Accrued contract costs represent direct and indirect costs on contracts as well as estimates of amounts owed for invoices not yet received from vendors or reflected in accounts payable.

Accrued warranty obligations as of April 30, 2023 relate to estimated liabilities for assurance type warranty coverage that we provide to our customers.

Accrued warranty obligations as of October 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.

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Some of our product warranties are provided under long-term contracts, the costs of which are incorporated into our estimates of total contract costs.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Changes in our accrued warranty obligations during the nine months ended April 30, 2023 and 2022 were as follows:

Nine months ended April 30,

Changes in our accrued warranty obligations during the three months ended October 31, 2023 and 2022 were as follows:

Three months ended October 31,

Balance at beginning of period $ 8,285,000 9,420,000

Provision (benefit) for warranty obligations 1,756,000 ( 613,000 )

Adjustments for changes in estimates ( 1,500,000 ) ( 2,500,000 )

Provision for (benefit from) warranty obligations 1,694,000 409,000

Charges incurred ( 311,000 ) ( 435,000 )

Reclassification to liabilities of disposal group held for sale (1)

( 418,000 ) —

Balance at end of period $ 9,250,000 9,394,000

During the nine months ended April 30, 2023 and 2022, we recorded benefits of $ 1,500,000 and $ 2,500,000 , respectively, to cost of sales in our Terrestrial and Wireless Networks segment due to lower than expected warranty claims associated with previously acquired NG-911 technologies.

(1) Represents the reclassification of accrued warranty to liabilities held for sale due to an agreement to sell the PST disposal group.

See Note (2) - "Business Divestiture" for additional information.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(10) Credit Facility

On October 31, 2018, we entered into a First Amended and Restated Credit Agreement (the "Credit Facility") with a syndicate of lenders.

As of July 31, 2022, the amount outstanding under our Credit Facility was $ 130,000,000 , which is reflected in the non-current portion of long-term debt on our condensed consolidated balance sheet.

On November 30, 2022, we refinanced the amount outstanding under the Credit Facility by entering into a Second Amended and Restated Credit Agreement (also referred to herein as the “Credit Facility”) with the existing lenders.

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In connection with entering the Credit Facility, we capitalized $ 3,809,000 of financing costs, and accounted for the amendment to the Credit Facility as a debt modification.

As of April 30, 2023, the amount outstanding under our Credit Facility was as follows:

April 30, 2023

As of October 31, 2023, the amount outstanding under our Credit Facility was as follows:

October 31, 2023 July 31, 2023

Term Loan $ 47,500,000 $ 48,125,000

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Non-current portion of long-term debt $ — $ 160,029,000

At April 30, 2023, we had $ 1,049,000 of standby letters of credit outstanding under our Credit Facility related to guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit.

During the nine months ended April 30, 2023, we had outstanding balances under the Credit Facility ranging from $ 130,000,000 to $ 182,375,000 .

As of April 30, 2023, total net deferred financing costs related to the Credit Facility were $ 3,565,000 and are being amortized over the term of our Credit Facility through the Maturity Date.

At October 31, 2023, we had $ 604,000 of standby letters of credit outstanding under our Credit Facility related to guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit.

During the three months ended October 31, 2023, we had outstanding balances under the Credit Facility ranging from $ 165,025,000 to $ 184,625,000 .

As of October 31, 2023, total net deferred financing costs related to the Credit Facility were $ 2,376,000 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 three months ended October 31, 2023 and 2022 was $ 4,910,000 and $ 2,240,000 , respectively.

Our blended interest rate approximated 10.54 % and 5.85 %, respectively, for the three months ended October 31, 2023 and 2022.

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.

COMTECH TELECOMMUNICATIONS CORP.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Interest expense related to our Credit Facility, including amortization of deferred financing costs, recorded during the three months ended April 30, 2023 and 2022 was $ 4,400,000 and $ 1,004,000 , respectively.

Interest expense related to our Credit Facility, including amortization of deferred financing costs, recorded during the nine months ended April 30, 2023 and 2022 was $ 10,401,000 and $ 3,478,000 , respectively.

Our blended interest rate approximated 10.10 % and 3.30 %, respectively, for the three months ended April 30, 2023 and 2022 and approximated 8.34 % and 3.20 %, respectively, for the nine months ended April 30, 2023 and 2022.

Under the Credit Facility, borrowings under the Revolving Loan Facility and Term Loan are either:

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 customary conditions to drawing the Revolving Loan Facility and 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, including the disposition of assets by any Loan Party to any Subsidiary that is not a Subsidiary Loan Party, (vi) restricted payments, including stockholder dividends, (vii) distributions, including the repayment of subordinated intercompany and third party indebtedness, and (viii) 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.

1 unchanged sentence

The Credit Facility provides for, among other things:

(i) scheduled payments of principal under the Term Loan totaling $ 2,500,000 in the first year after closing (of which $ 1,250,000 was paid through April 30, 2023), and $ 5,000,000 in the second year after closing, with the remaining balance of the Term Loan due upon maturity;

(ii) a maximum Leverage Ratio of 4.00 x trailing twelve months ("TTM") Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") at the fiscal quarter ended April 30, 2023, stepping down to 3.75 x at the fiscal quarter ending July 31, 2023, and 3.50 x at the fiscal quarter ending January 31, 2024 and thereafter;

(i) scheduled payments of principal under the Term Loan totaling $ 2,500,000 in the first year after closing (of which $ 2,500,000 was paid through October 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 TTM Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") at the fiscal quarter ended October 31, 2023, stepping down to 3.50 x at the fiscal quarter ending January 31, 2024 and thereafter;

(iii) a Minimum Interest Coverage Ratio of 3.25 x TTM Adjusted EBITDA;

and (iv) Minimum Liquidity of $ 25,000,000 .

As of April 30, 2023, our Secured Leverage Ratio was 3.73 x TTM Adjusted EBITDA compared to the maximum allowable Secured Leverage Ratio of 4.00 x TTM Adjusted EBITDA.

Our Interest Expense Coverage Ratio as of April 30, 2023 was 4.11 x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25 x TTM Adjusted EBITDA.

As of October 31, 2023, our Secured Leverage Ratio was 3.53 x TTM Adjusted EBITDA compared to the maximum allowable Secured Leverage Ratio of 3.75 x TTM Adjusted EBITDA.

Our Interest Expense Coverage Ratio as of October 31, 2023 was 3.37 x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25 x TTM Adjusted EBITDA.

Our Minimum Liquidity was $ 29,240,000 compared to the Minimum Liquidity requirement of $ 25,000,000 .

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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 Maturity Date is one year out from the balance sheet date and, because as of such date we have not entered into an agreement to extend the Maturity Date or refinance our existing Credit Facility, the outstanding amount is classified as a current liability on the balance sheet as of October 31, 2023.

In anticipation of the upcoming Maturity Date, we engaged third-party financial advisors to assist us with the refinancing of our existing Credit Facility and/or amending or restructuring our Convertible Preferred Stock, seeking other sources of credit or outside capital and evaluating other capital structure-related alternatives.

Subsequent Event

On November 7, 2023, we entered into a Third Amended and Restated Credit Agreement (also referred to herein as the “Amended Credit Facility”) with our existing lenders.

The amendment was entered into in connection with the PST Sale.

The Amended Credit Facility provides a senior secured loan facility of up to $ 200,000,000 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;

(ii) a $ 50,000,000 term loan A (“Term Loan”) which had an outstanding balance of $ 47,500,000 at October 31, 2023.

The Amended Credit Facility provided a modification of prepayment terms to allow 50 % of the net proceeds from the PST Sale to prepay the Term Loan.

COMTECH TELECOMMUNICATIONS CORP.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Amended Credit Facility provides the following additional updates effective January 31, 2024, among others:

(i) our borrowing limit under the Revolving Loan Facility reduces to $ 140,000,000 from $ 150,000,000 and reduces by an additional $ 5,000,000 each quarter, thereafter;

(ii) the Term Loan amortization increases from $ 1,250,000 to $ 1,875,000 ;

(iii) the accordion feature is eliminated;

(iv) the swingline loan is reduced to $0;

and (v) the Applicable Rate increases 0.25 %.

There are no changes to the financial covenants discussed above.

Our leases historically relate to the leasing of facilities and equipment.

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

As of April 30, 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.

As of October 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:

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

2023 2022 2023 2022

Three months ended October 31,

Finance lease expense:

Amortization of ROU assets $ — 3,000

Interest on lease liabilities — 1,000 — 1,000

Operating lease expense 2,258,000 2,837,000

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Additional information related to leases is as follows:

Nine months ended April 30,

Three months ended October 31,

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

Operating leases - Operating cash outflows $ 2,319,000 $ 2,906,000

Finance leases - Operating cash outflows — 1,000

Finance leases - Financing cash outflows — 3,000

1 unchanged sentence

Operating leases $ 20,000 $ 2,573,000

The following table is a reconciliation of future cash flows relating to operating lease liabilities presented on our Condensed Consolidated Balance Sheet as of April 30, 2023:

The following table is a reconciliation of future cash flows relating to operating lease liabilities presented on our Condensed Consolidated Balance Sheet as of October 31, 2023:

Remainder of fiscal 2024 $ 6,571,000

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

Lease payments made during the nine months ended April 30, 2023 and 2022 were $ 516,000 and $ 504,000 , respectively.

Lease payments made during the three months ended October 31, 2023 and 2022 were $ 180,000 and $ 171,000 , respectively.

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

1 unchanged sentence

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

As of April 30, 2023, we do not have any material rental commitments that have not already commenced.

As of October 31, 2023, we do not have any material rental commitments that have not already commenced.

(12) Income Taxes

Our effective tax rate for the three months ended April 30, 2023 was 28.2 %, which includes a net discrete tax benefit of $ 1,203,000 primarily related to the reversal of tax contingencies no longer required due to the expiration of applicable statute of limitations, offset in part by the finalization of certain tax accounts in connection with our fiscal 2022 federal income tax return.

Our effective tax rate for the nine months ended April 30, 2023 was 13.9 %, which includes a net discrete tax benefit of $ 1,193,000 primarily related to the reversal of tax contingencies no longer required due to the expiration of applicable statute of limitations and the deductible portion of CEO transition costs, offset in part by the settlement of stock-based awards and the finalization of certain tax accounts in connection with our fiscal 2022 federal income tax return.

Our effective tax rate for the three months ended April 30, 2022 was 96.8 %, which includes a net discrete tax expense of $ 166,000 primarily related to the expiration of equity-based awards, offset in part by the finalization of certain tax accounts in connection with our fiscal 2021 federal income tax return.

Our effective tax rate for the nine months ended April 30, 2022 was 18.0 %, which includes a net discrete tax benefit of $ 3,506,000 primarily related to proxy solicitation costs, the deductible portion of CEO transition costs and the finalization of certain tax accounts in connection with our fiscal 2021 federal income tax return.

Our effective tax rate for the three months ended October 31, 2023 was 48.3 %, which includes a net discrete tax expense of $ 2,049,000 primarily related to our decision to sell our Power Systems Technology product line in a taxable transaction and settlement of stock-based awards.

Our effective tax rate for the three months ended October 31, 2022 was 5.2 %, which includes a net discrete tax benefit of $ 111,000 primarily related to the deductible portion of CEO transition costs, partially offset by the settlement of stock-based awards.

Excluding discrete items, our effective tax rate for the three months ended October 31, 2023 and 2022 was 122.0 % and 19.0 %, respectively.

The increase in our effective tax rate, excluding discretionary items, is primarily due to changes in expected product and geographic mix.

At October 31, 2023 and July 31, 2023, total unrecognized tax benefits were $ 9,258,000 and $ 9,166,000 , respectively, including interest of $ 245,000 and $ 210,000 , respectively.

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

We believe it is reasonably possible that the gross unrecognized tax benefits could decrease by as much as $ 610,000 in the next twelve months due to the expiration of a statute of limitations related to federal, state and foreign tax positions.

COMTECH TELECOMMUNICATIONS CORP.

1 unchanged sentence

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Excluding discrete items, our effective tax rate for the three and nine months ended April 30, 2023 and 2022 was 14.25 % and 28.25 %, respectively.

For purposes of determining our estimated annual effective tax rate for fiscal 2023, CEO transition costs are considered significant, unusual or infrequently occurring discrete tax items and are excluded from the computation of our effective tax rate.

The 14.25 % reflects the recognition of a valuation allowance in a foreign jurisdiction, offset in part by the recognition of research and experimentation tax credits.

The 28.25 % reflects the recognition of research and experimentation tax credits, offset in part by nondeductible executive compensation.

At April 30, 2023 and July 31, 2022, total unrecognized tax benefits were $ 8,922,000 and $ 10,008,000 , respectively, including interest of $ 179,000 and $ 330,000 , respectively.

We believe it is reasonably possible that the gross unrecognized tax benefits could decrease by as much as $ 600,000 in the next twelve months due to the expiration of a statute of limitations related to federal, state and foreign tax positions.

federal income tax returns for fiscal 2020 through 2022 are subject to potential future Internal Revenue Service ("IRS") audit.

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

As of April 30, 2023, the aggregate number of shares of common stock which may be issued, pursuant to the Plan, may not exceed 11,962,500 .

As of October 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 April 30, 2023, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of 10,107,719 shares (net of 5,704,778 expired and canceled awards), of which an aggregate of 8,172,915 have been exercised or settled.

As of April 30, 2023, the following stock-based awards, by award type, were outstanding:

April 30, 2023

As of October 31, 2023, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of 11,466,709 shares (net of 5,863,266 expired and canceled awards), of which an aggregate of 8,780,323 have been exercised or settled.

As of October 31, 2023, the following stock-based awards, by award type, were outstanding:

October 31, 2023

Stock options 234,260

Performance shares 827,802

RSUs, restricted stock and share units 967,008

RSUs, restricted stock, share units and other stock-based awards 1,624,324

Total 2,686,386

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

Through April 30, 2023, we have cumulatively issued 985,515 shares of our common stock to participating employees in connection with our ESPP.

Through October 31, 2023, we have cumulatively issued 1,011,305 shares of our common stock to participating employees in connection with our ESPP.

COMTECH TELECOMMUNICATIONS CORP.

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

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

2023 2022 2023 2022

Three months ended October 31,

Cost of sales $ 282,000 158,000

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

At April 30, 2023, unrecognized stock-based compensation of $ 9,640,000 , net of estimated forfeitures of $ 681,000 , is expected to be recognized over a weighted average period of 2.5 years.

Total stock-based compensation capitalized and included in ending inventory at both April 30, 2023 and July 31, 2022 was $ 48,000 .

There are no liability-classified stock-based awards outstanding as of April 30, 2023 or July 31, 2022.

At October 31, 2023, unrecognized stock-based compensation of $ 13,988,000 , net of estimated forfeitures of $ 803,000 , 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 both October 31, 2023 and July 31, 2023 was $ 198,000 .

There are no liability-classified stock-based awards outstanding as of October 31, 2023 or July 31, 2023.

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

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

2023 2022 2023 2022

Three months ended October 31,

Stock options $ 19,000 25,000

8 unchanged sentences

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

Stock-based compensation expense in the three months and nine months ended April 30, 2023 reflects our assumption that fully vested, unrestricted share units will be granted to certain employees in lieu of fiscal 2023 non-equity incentive compensation.

In fiscal 2022 and prior years, fully vested share units granted to certain employees in lieu of non-equity incentive compensation would not be settled until the one-year anniversary of the grant date.

The estimated income tax benefit as shown in the above table was computed using income tax rates expected to apply when the awards are settled.

Such deferred tax asset was recorded net as part of our non-current deferred tax liability on our Condensed Consolidated Balance Sheet as of April 30, 2023 and July 31, 2022.

Such deferred tax asset was recorded net as part of our non-current deferred tax liability on our Condensed Consolidated Balance Sheet as of October 31, 2023 and July 31, 2023.

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.

12 unchanged sentences

Outstanding at October 31, 2023 234,260 $ 23.95 3.82 $ —

Expired/canceled ( 182,400 ) 24.75

Outstanding at January 31, 2023 291,620 24.15

Expired/canceled ( 1,300 ) 25.51

Outstanding at April 30, 2023 290,320 $ 24.15 3.74 $ —

Exercisable at April 30, 2023 245,740 $ 25.28 3.18 $ —

Vested and expected to vest at April 30, 2023 288,205 $ 24.19 3.72 $ —

Stock options outstanding as of April 30, 2023 have exercise prices ranging from $ 17.88 - $ 33.94 , representing the fair market value of our common stock on the date of grant, a contractual term of ten years and a vesting period of five years .

The total intrinsic value relating to stock options exercised during the nine months ended April 30, 2022 was $ 7,000 .

There were no stock options exercised during the nine months ended April 30, 2023.

Performance Shares, RSUs, Restricted Stock and Share Unit Awards

The following table summarizes the Plan’s activity relating to performance shares, RSUs, restricted stock and share units:

Exercisable at October 31, 2023 206,880 $ 24.75 3.46 $ —

Vested and expected to vest at October 31, 2023 233,021 $ 23.98 3.81 $ —

Stock options outstanding as of October 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 .

Performance Shares, RSUs, Restricted Stock Share Units 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:

(in Shares) Weighted Average

6 unchanged sentences

Outstanding at October 31, 2023 2,452,126 $ 11.60 $ 29,916,000

Granted 105,887 12.40

Settled ( 16,374 ) 19.01

Canceled/Forfeited ( 23,236 ) 17.98

Outstanding at January 31, 2023 1,668,245 14.13

Granted 56,402 11.38

Settled ( 48,614 ) 14.45

Canceled/Forfeited ( 31,549 ) 17.11

Outstanding at April 30, 2023 1,644,484 $ 13.97 $ 17,020,000

Vested at April 30, 2023 534,171 $ 15.70 $ 5,529,000

Vested and expected to vest at April 30, 2023 1,597,645 $ 13.96 $ 16,536,000

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The total intrinsic value relating to fully-vested awards settled during the three and nine months ended April 30, 2023 was $ 669,000 and $ 3,633,000 , respectively.

The total intrinsic value relating to fully-vested awards settled during the three and nine months ended April 30, 2022 was $ 262,000 and $ 9,726,000 , respectively.

Vested at October 31, 2023 774,430 $ 12.98 $ 9,448,000

Vested and expected to vest at October 31, 2023 2,380,255 $ 11.62 $ 29,039,000

The total intrinsic value relating to fully-vested awards settled during the three months ended October 31, 2023 and 2022 was $ 2,656,000 and $ 2,769,000 , respectively.

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

As of April 30, 2023, the number of outstanding performance shares included in the above table, and the related compensation expense prior to consideration of estimated pre-vesting forfeitures, assume achievement of the pre-established goals at a target level.

As of October 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 1/12th on the date of grant and in eleven equal monthly installments thereafter.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

RSUs granted to employees prior to August 2022 have a vesting period of five years and are convertible into shares of our common stock generally at the time of vesting, on a one -for-one basis for no cash consideration.

Commencing in August 2022, such RSUs have a vesting period of three years .

Share units granted to certain employees in fiscal 2022 in lieu of non-equity incentive compensation are convertible into shares of our common stock on the one-year anniversary of the respective grant date.

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.

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

RSUs, performance shares and restricted stock are entitled to dividend equivalents, as applicable, unless forfeited before vesting occurs.

Share units would be entitled to dividend equivalents while the underlying shares are unissued.

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 the three months ended April 30, 2023, we reversed $ 22,000 of previously accrued dividend equivalents due to forfeitures and paid out $ 13,000 .

During the nine months ended April 30, 2023, we accrued $ 342,000 of dividend equivalents (net of forfeitures) and paid out $ 363,000 .

During the three months ended October 31, 2023, we reversed $ 23,000 of previously accrued dividend equivalents due to forfeitures and paid out $ 114,000 .

During the three months ended October 31, 2022, we accrued $ 201,000 of dividend equivalents (net of forfeitures) and paid out $ 346,000 .

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

As of April 30, 2023 and July 31, 2022, accrued dividend equivalents were $ 721,000 and $ 742,000 , respectively.

With respect to the actual settlement of stock-based awards for income tax reporting, during the three and nine months ended April 30, 2023, we recorded an income tax expense of $ 15,000 and $ 560,000 , respectively, and during the three and nine months ended April 30, 2022, we recorded an income tax expense of $ 483,000 and $ 344,000 , respectively.

As of October 31, 2023 and July 31, 2023, accrued dividend equivalents were $ 554,000 and $ 691,000 , respectively.

With respect to the actual settlement of stock-based awards for income tax reporting, during the three months ended October 31, 2023 and 2022, we recorded an income tax expense of $ 444,000 and $ 363,000 , respectively.

Subsequent Event

At our Fiscal 2023 Annual Meeting of Stockholders, scheduled to be held on December 14, 2023, our stockholders will be asked to approve the 2023 Equity and Incentive Plan (the “2023 Plan”), which, if approved, will replace the Plan and provide 1,600,000 shares of common stock issuable under the 2023 Plan.

(14) Segment Information

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

In the fourth quarter of fiscal 2022, we revised our business segments to better align them with end-markets for our products and services and our CODM began managing our business in two new reportable segments:

“Satellite and Space Communications” and “Terrestrial and Wireless Networks.” As a result, the segment information for the prior fiscal year has been recast to conform to the current year presentation.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Satellite and Space Communications is organized into four technology areas:

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and procurement and supply chain management of high reliability Electrical, Electronic and Electromechanical ("EEE") parts for satellite, launch vehicle and manned space applications.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Terrestrial and Wireless Networks is organized into three service areas:

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

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

Three months ended April 30, 2023

Three months ended October 31, 2023

Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Total

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Net income (loss) $ 9,303,000 4,145,000 ( 14,885,000 ) $ ( 1,437,000 )

(Benefit from) provision for income taxes ( 1,188,000 ) 84,000 ( 1,828,000 ) ( 2,932,000 )

Interest expense ( 25,000 ) — 4,411,000 4,386,000

Interest (income) and other 600,000 174,000 ( 46,000 ) 728,000

Amortization of stock-based compensation — — 4,126,000 4,126,000

Amortization of intangibles 1,828,000 3,521,000 — 5,349,000

Depreciation 1,027,000 1,921,000 33,000 2,981,000

Amortization of cost to fulfill assets 240,000 — — 240,000

Restructuring costs 2,191,000 548,000 1,357,000 4,096,000

Strategic emerging technology costs 1,029,000 — — 1,029,000

Adjusted EBITDA $ 6,352,000 9,150,000 ( 2,957,000 ) $ 12,545,000

Purchases of property, plant and equipment $ 1,106,000 3,549,000 300,000 $ 4,955,000

Total assets at April 30, 2023

$ 488,814,000 475,380,000 25,665,000 $ 989,859,000

Three months ended April 30, 2022

Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Total

Net sales $ 69,150,000 52,966,000 — $ 122,116,000

Operating (loss) income $ ( 120,000 ) 4,616,000 ( 5,062,000 ) $ ( 566,000 )

Net income (loss) $ 297,000 4,502,000 ( 4,824,000 ) $ ( 25,000 )

Provision for (benefit from) income taxes 227,000 ( 300,000 ) ( 1,271,000 ) ( 1,344,000 )

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Interest (income) and other ( 297,000 ) 195,000 37,000 ( 65,000 )

Change in fair value of convertible preferred stock purchase option liability

— — ( 302,000 ) ( 302,000 )

Amortization of stock-based compensation — — 2,645,000 2,645,000

3 unchanged sentences

Restructuring costs 790,000 7,000 2,919,000 3,716,000

COVID-19 related costs 115,000 — — 115,000

Strategic emerging technology costs 1,370,000 — — 1,370,000

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Purchases of property, plant and equipment $ 903,000 1,736,000 577,000 $ 3,216,000

Total assets at April 30, 2022

Total assets at October 31, 2023

$ 527,343,000 460,088,000 25,112,000 $ 1,012,543,000

2 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Nine months ended April 30, 2023

Three months ended October 31, 2022

Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Total

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Purchases of property, plant and equipment $ 4,435,000 2,542,000 244,000 $ 7,221,000

Total assets at April 30, 2023

$ 488,814,000 475,380,000 25,665,000 $ 989,859,000

Nine months ended April 30, 2022

Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Total

Net sales $ 202,890,000 156,366,000 — $ 359,256,000

Operating (loss) income $ ( 7,933,000 ) 17,574,000 ( 41,312,000 ) $ ( 31,671,000 )

Net (loss) income $ ( 7,285,000 ) 17,445,000 ( 38,043,000 ) $ ( 27,883,000 )

(Benefit from) provision for income taxes ( 458,000 ) 30,000 ( 5,672,000 ) ( 6,100,000 )

Interest expense 98,000 — 3,478,000 3,576,000

Interest (income) and other ( 287,000 ) 98,000 ( 71,000 ) ( 260,000 )

Change in fair value of convertible preferred stock purchase

option liability — — ( 1,004,000 ) ( 1,004,000 )

Amortization of stock-based compensation — — 3,975,000 3,975,000

Amortization of intangibles 5,484,000 10,563,000 — 16,047,000

Depreciation 2,444,000 4,462,000 151,000 7,057,000

Amortization of cost to fulfill assets 233,000 — — 233,000

Restructuring costs 4,038,000 — — 4,038,000

COVID-19 related costs 1,144,000 — — 1,144,000

Strategic emerging technology costs 912,000 — — 912,000

CEO transition costs — — 13,554,000 13,554,000

Proxy solicitation costs — — 11,248,000 11,248,000

Adjusted EBITDA $ 6,323,000 32,598,000 ( 12,384,000 ) $ 26,537,000

Purchases of property, plant and equipment $ 6,522,000 7,898,000 — $ 14,420,000

Total assets at April 30, 2022

Total assets at October 31, 2022

$ 486,636,000 467,594,000 23,595,000 $ 977,825,000

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

See Note (1) - " General - CEO Transition Costs & Related " for information related to such costs.

During the three and nine months ended April 30, 2023, our Unallocated segment incurred $ 1,357,000 and $ 2,080,000 , respectively, of restructuring costs focused on streamlining our operations.

There were no similar costs incurred in fiscal 2022.

Also, during the nine months ended April 30, 2022, we incurred $ 11,248,000 of proxy solicitation costs (including legal and advisory fees and costs associated with a related lawsuit) as a result of a now-settled proxy contest.

There were no similar costs incurred in fiscal 2023.

During the three and nine months ended April 30, 2023, our Satellite and Space Communications segment recorded $ 2,191,000 and $ 4,336,000 , respectively, of restructuring costs primarily incurred to streamline our operations and improve efficiency, including costs related to the relocation of certain of our satellite ground station production facilities to our new 146,000 square foot facility in Chandler, Arizona.

Similar restructuring costs of $ 1,600,000 and $ 4,038,000 were incurred during the three and nine months ended April 30, 2022, respectively.

In addition, during the three and nine months ended April 30, 2023, we incurred $ 1,029,000 and $ 2,513,000 of strategic emerging technology costs for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations.

Similar strategic emerging technology costs of $ 912,000 were incurred during both the three and nine months ended April 30, 2022.

During the three and nine months ended April 30, 2022, our Satellite and Space Communications segment recorded $ 115,000 and $ 1,144,000 , respectively, of incremental operating costs related to our antenna facility located in the United Kingdom due to the impact of the COVID-19 pandemic.

There were no similar incremental operating costs during the corresponding periods in fiscal 2023.

During both the three and nine months ended April 30, 2023, our Terrestrial and Wireless Networks segment recorded $ 548,000 of restructuring costs primarily incurred to streamline our operations and improve efficiency.

There were no similar costs incurred in fiscal 2022.

During the three months ended October 31, 2023, our Unallocated segment incurred $ 2,919,000 of restructuring costs focused on streamlining our operations and legal and other divestiture related expenses for the PST Sale.

During the three months ended October 31, 2022, our Unallocated segment incurred $ 269,000 of restructuring costs focused on streamlining our operations.

During the three months ended October 31, 2023 and 2022, our Satellite and Space Communications segment recorded $ 790,000 and $ 1,056,000 , 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 the three months ended October 31, 2023 and 2022, we incurred $ 1,370,000 and $ 746,000 of strategic emerging technology costs for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations.

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

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

Intersegment sales for both the three and nine months ended April 30, 2023 and 2022 between the Satellite and Space Communications segment and the Terrestrial and Wireless Networks segment were nominal.

Intersegment sales for both the three months ended October 31, 2023 and 2022 between the Satellite and Space Communications segment and the Terrestrial and Wireless Networks segment were nominal.

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

Unallocated assets at April 30, 2023 consist principally of cash and cash equivalents, income taxes receivable, corporate property, plant and equipment and deferred financing costs.

Unallocated assets at October 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.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(15) Goodwill

The following table represents goodwill by reportable operating segment as of April 30, 2023 and July 31, 2022.

The following table represents goodwill by reportable operating segment as of October 31, 2023 and July 31, 2023.

Satellite and Space Communications Terrestrial and Wireless Networks Total

Goodwill $ 173,602,000 174,090,000 $ 347,692,000

Balance as of July 31, 2023

$ 173,602,000 174,090,000 $ 347,692,000

Reclassification to assets of disposal group held for sale (2)

( 14,587,000 ) — ( 14,587,000 )

Balance as of October 31, 2023

$ 159,015,000 174,090,000 $ 333,105,000

(2) Represents the reclassification of goodwill to assets held for sale due to an agreement to sell the PST disposal group.

See Note (2) - "Business Divestiture" for additional information.

In accordance with FASB ASC 350, we perform a goodwill impairment analysis at least annually (in the first quarter of each fiscal year), unless indicators of impairment exist in interim periods.

1 unchanged sentence

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

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As discussed in Note (13) - "Segment Information, " as a result of our segment restructuring in the fourth quarter of fiscal 2022 from the Commercial Solutions and Government Solutions segments to the Satellite and Space Communications and Terrestrial and Wireless Networks segments, we performed an interim quantitative assessment as of July 29, 2022 and estimated the fair value of each of our reporting units, both before and after the change, using a combination of the income and market approaches.

We performed our quantitative assessment using market participant assumptions to determine if the fair value of each of our reporting units with goodwill exceeded its carrying value.

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.

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.

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Ultimately, based on our quantitative evaluations, we determined that our Satellite and Space Communications and Terrestrial and Wireless Networks reporting units had estimated fair values in excess of their carrying values of at least 18.3 % 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.

Also, given its proximity to our next regularly scheduled annual goodwill impairment testing date, we utilized our July 29, 2022 interim quantitative assessment to conclude that our goodwill was not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment as of August 1, 2022.

Additionally, the carrying value of goodwill was reallocated to our new reporting units based on their respective estimated relative fair value.

During the three months ended October 31, 2023, we determined the criteria to be classified as held for sale were met with respect to the PST disposal group.

Because the divestiture of the PST disposal group represented the disposal of a portion of the Satellite and Space Communications reporting unit, we assigned $ 14,587,000 goodwill to the PST disposal group on a relative fair value basis.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For purposes of allocating goodwill to the PST disposal group, we determined the fair value of the PST disposal group based on the consideration received from the sale transaction, and the fair value of the retained businesses of the Satellite and Space Communications reporting unit based on a combination of the income and market approaches.

In conjunction with the relative fair value allocation, we tested goodwill assigned to the PST disposal group and goodwill assigned to the retained businesses of the Satellite and Space Communications reporting unit for impairment and concluded that no goodwill impairment existed at the time the held for sale criteria were met.

It is possible that, during the remainder of fiscal 2024 or beyond, business conditions (both in the U.S.

5 unchanged sentences

Any impairment charges that we may record in the future could be material to our results of operations and financial condition.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(16) Intangible Assets

Intangible assets with finite lives are as follows:

April 30, 2023

October 31, 2023

Weighted Average

16 unchanged sentences

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

Amortization expense for both the three months ended April 30, 2023 and 2022 was $ 5,349,000 and for both the nine months ended April 30, 2023 and 2022 was $ 16,047,000 .

Amortization expense for the three months ended October 31, 2023 and 2022 was $ 5,289,000 and $ 5,349,000 , respectively.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

5 unchanged sentences

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

Based on our last assessment, we believe that the carrying values of our net intangible assets were recoverable as of April 30, 2023.

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

5 unchanged sentences

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.”

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

6 unchanged sentences

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.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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.

5 unchanged sentences

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

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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We have elected to adjust the carrying value of the Convertible Preferred Stock to its current redemption value of $ 114,034,000 , which includes $ 13,420,000 of cumulative dividends paid in kind and $ 614,000 of accumulated and unpaid dividends.

As such, a total adjustment of $ 5,213,000 to increase the carrying value of the Convertible Preferred Stock was recorded against retained earnings during the nine months ended April 30, 2023.

As such, a total adjustment of $ 1,823,000 to increase the carrying value of the Convertible Preferred Stock was recorded against retained earnings during the three months ended October 31, 2023.

(18) Stockholders’ Equity

2 unchanged sentences

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.

As of the date of this Quarterly Report on Form 10-Q, we have not issued any securities pursuant to our $ 200,000,000 shelf registration statement.

Common Stock Repurchase Program

1 unchanged sentence

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

There were no repurchases of our common stock during the nine months ended April 30, 2023 or 2022.

Common Stock Dividends

On September 29, 2022 and December 8, 2022, our Board of Directors declared a dividend of $ 0.10 per common share, which was paid on November 18, 2022 and February 17, 2023, respectively.

In connection with our CEO transition and One Comtech transformation, discussed further in Note (1) – “General – CEO Transition Costs & Related ,” the Board, together with management, adjusted the Company’s capital allocation plans during the third quarter of fiscal 2023 and determined to forgo a common stock dividend, thereby increasing our financial flexibility.

Future common stock dividends, if any, remain subject to compliance with financial covenants under our Credit Facility, as well as Board approval and certain voting rights of holders of our Series A Convertible Preferred Stock.

There were no repurchases of our common stock during the three months ended October 31, 2023 or 2022.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(19) Legal Proceedings and Other Matters

9 unchanged sentences

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.

COMTECH TELECOMMUNICATIONS CORP.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Employment Change of Control and Indemnification Agreements

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All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of the Company or termination of the employee.

(20) 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 .

In the first quarter of fiscal 2024 the severance liability was further reduced by net payments of $ 952,000 resulting in a severance liability of $ 600,000 as of October 31, 2023.

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

What changed 10-Q

Item 1. Financial Statements