COMTECH TELECOMMUNICATIONS CORP /DE/ 10-Q

Item 1. Financial Statements COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) Assets October 31, 2023 July 31, 2023 Current assets: Cash and cash equivalents $ 18,116,000 18,961,000 Accounts receivable, net 185,065,000 163,159,000 Inventories, net 85,440,000 105,845,000 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 Property, plant and equipment, net 50,648,000 53,029,000 Operating lease right-of-use assets, net 37,209,000 44,410,000 Goodwill 333,105,000 347,692,000 Intangibles with finite lives, net 220,618,000 225,907,000 Deferred financing costs, net 1,879,000 2,349,000 Other assets, net 15,339,000 17,364,000 Total assets $ 1,012,543,000 996,237,000 Liabilities, Convertible Preferred Stock and Stockholders’ Equity Current liabilities: Accounts payable $ 66,501,000 64,241,000 Accrued expenses and other current liabilities 57,677,000 66,990,000 Current portion of long-term debt 183,503,000 4,375,000 Operating lease liabilities, current 8,169,000 8,645,000 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 Non-current portion of long-term debt — 160,029,000 Operating lease liabilities, non-current 34,626,000 41,763,000 Income taxes payable 2,602,000 2,208,000 Deferred tax liability, net 11,359,000 9,494,000 Long-term contract liabilities 20,323,000 18,419,000 Other liabilities 1,854,000 1,844,000 Total liabilities 461,703,000 445,727,000 Commitments and contingencies (See Note 19) Convertible preferred stock, par value $ 0.10 per share; authorized 125,000 shares; issued 100,000 at October 31, 2023 and July 31, 2023 (includes accrued dividends of $ 614,000 and $ 604,000 , respectively) 114,034,000 112,211,000 Stockholders’ equity: Preferred stock, par value $ 0.10 per share; authorized and unissued 1,875,000 shares — — Common stock, par value $ 0.10 per share; authorized 100,000,000 shares; issued 43,268,782 and 43,096,271 shares at October 31, 2023 and July 31, 2023, respectively 4,327,000 4,310,000 Additional paid-in capital 638,652,000 636,925,000 Retained earnings 235,676,000 238,913,000 878,655,000 880,148,000 Less: Treasury stock, at cost ( 15,033,317 shares at October 31, 2023 and July 31, 2023) ( 441,849,000 ) ( 441,849,000 ) Total stockholders’ equity 436,806,000 438,299,000 Total liabilities, convertible preferred stock and stockholders’ equity $ 1,012,543,000 996,237,000 See accompanying notes to condensed consolidated financial statements. 2 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three months ended October 31, 2023 2022 Net sales $ 151,911,000 131,139,000 Cost of sales 104,029,000 84,336,000 Gross profit 47,882,000 46,803,000 Expenses: Selling, general and administrative 32,695,000 29,337,000 Research and development 7,812,000 12,751,000 Amortization of intangibles 5,289,000 5,349,000 CEO transition costs — 9,090,000 45,796,000 56,527,000 Operating income (loss) 2,086,000 ( 9,724,000 ) Other expenses (income): Interest expense 4,932,000 2,235,000 Interest (income) and other ( 65,000 ) ( 255,000 ) Loss before benefit from income taxes ( 2,781,000 ) ( 11,704,000 ) Benefit from income taxes ( 1,344,000 ) ( 608,000 ) Net loss $ ( 1,437,000 ) ( 11,096,000 ) Adjustments to reflect redemption value of convertible preferred stock: Dividend on convertible preferred stock ( 1,823,000 ) ( 1,710,000 ) Net loss attributable to common stockholders $ ( 3,260,000 ) ( 12,806,000 ) Net loss per common share (See Note 6): Basic $ ( 0.11 ) ( 0.46 ) Diluted $ ( 0.11 ) ( 0.46 ) Weighted average number of common shares outstanding – basic 28,745,000 27,830,000 Weighted average number of common and common equivalent shares outstanding – diluted 28,745,000 27,830,000 See accompanying notes to condensed consolidated financial statements. 3 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (Unaudited) Three months ended October 31, 2023 and 2022 Series A Convertible Preferred Stock Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Stockholders' Equity Shares Amount Shares Amount Shares Amount Balance as of July 31, 2022 100,000 $ 105,204,000 42,672,827 $ 4,267,000 $ 625,484,000 $ 278,683,000 15,033,317 $ ( 441,849,000 ) $ 466,585,000 Equity-classified stock award compensation — — — — 904,000 — — — 904,000 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 — — 15,017 2,000 117,000 — — — 119,000 Issuance of restricted stock, net of forfeiture — — 10,718 1,000 ( 1,000 ) — — — — Net settlement of stock-based awards — — 112,284 11,000 ( 1,241,000 ) — — — ( 1,230,000 ) Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends) 1,710,000 — — — ( 1,710,000 ) — — ( 1,710,000 ) Cash dividends declared, net ($ 0.10 per share) — — — — — ( 2,774,000 ) — — ( 2,774,000 ) Accrual of dividend equivalents, net of reversal ($ 0.10 per share) — — — — — ( 201,000 ) — — ( 201,000 ) Net loss — — — — — ( 11,096,000 ) — — ( 11,096,000 ) 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 Equity-classified stock award compensation — — — — 2,645,000 — — — 2,645,000 Issuance of employee stock purchase plan shares — — 12,799 1,000 93,000 — — — 94,000 Issuance of restricted stock, net of forfeiture — — 13,904 2,000 ( 2,000 ) — — — — Net settlement of stock-based awards — — 145,808 14,000 ( 1,009,000 ) — — — ( 995,000 ) Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends) — 1,823,000 — — — ( 1,823,000 ) — — ( 1,823,000 ) Reversal of dividend equivalents ($ 0.10 per share) — — — — — 23,000 — — 23,000 Net loss — — — — — ( 1,437,000 ) — — ( 1,437,000 ) 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. 4 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three months ended October 31, 2023 2022 Cash flows from operating activities: Net loss $ ( 1,437,000 ) ( 11,096,000 ) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization of property, plant and equipment 3,022,000 2,798,000 Amortization of intangible assets with finite lives 5,289,000 5,349,000 Amortization of stock-based compensation 2,645,000 904,000 Amortization of cost to fulfill assets 240,000 240,000 CEO transition costs related to equity-classified stock-based awards — 3,764,000 Amortization of deferred financing costs 594,000 203,000 Changes in other liabilities ( 1,033,000 ) ( 1,033,000 ) 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 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 ) Inventories 2,656,000 ( 4,278,000 ) Prepaid expenses and other current assets 997,000 1,581,000 Other assets 2,802,000 ( 714,000 ) Accounts payable 5,100,000 ( 1,555,000 ) Accrued expenses and other current liabilities ( 6,538,000 ) 5,256,000 Contract liabilities ( 685,000 ) ( 3,048,000 ) Other liabilities, non-current 145,000 ( 61,000 ) Interest payable 58,000 78,000 Income taxes payable ( 3,472,000 ) 790,000 Net cash used in operating activities ( 14,545,000 ) ( 6,197,000 ) Cash flows from investing activities: Purchases of property, plant and equipment ( 3,216,000 ) ( 7,221,000 ) Net cash used in investing activities ( 3,216,000 ) ( 7,221,000 ) Cash flows from financing activities: Net borrowings of long-term debt under Revolving Loan Facility 19,600,000 18,700,000 Repayment of debt under Term Loan ( 625,000 ) — Cash dividends paid on common stock ( 111,000 ) ( 3,092,000 ) Payment of deferred financing costs ( 308,000 ) — Remittance of employees’ statutory tax withholding for stock awards ( 1,682,000 ) ( 2,332,000 ) Proceeds from issuance of employee stock purchase plan shares 94,000 119,000 Payment of shelf registration costs — ( 101,000 ) Repayment of principal amounts under finance lease liabilities — ( 2,000 ) Net cash provided by financing activities 16,968,000 13,292,000 Net decrease in cash and cash equivalents, including cash classified within assets of disposal group held for sale ( 793,000 ) ( 126,000 ) Less: 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 Cash and cash equivalents at end of period $ 18,116,000 21,528,000 (Continued) See accompanying notes to condensed consolidated financial statements. 5 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (Unaudited) Three months ended October 31, 2023 2022 Supplemental cash flow disclosures: Cash paid (received) during the period for: Interest $ 4,278,000 1,947,000 Income taxes, net $ 1,019,000 ( 181,000 ) Non-cash investing and financing activities: Accrued additions to property, plant and equipment $ 1,154,000 1,818,000 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 See accompanying notes to condensed consolidated financial statements. 6 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (1) General The accompanying condensed consolidated financial statements of Comtech Telecommunications Corp. and its subsidiaries ("Comtech," "we," "us," or "our") as of and for the three 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. Our results of operations for such periods are not necessarily indicative of the results of operations to be expected for the full fiscal year. The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the condensed consolidated financial statements, and the reported amounts of net sales and expenses during the reported period. Actual results may differ from those estimates. Our condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements, filed with the Securities and Exchange Commission ("SEC"), for the fiscal year ended July 31, 2023 and the notes thereto contained in our Annual Report on Form 10-K, and all of our other filings with the SEC. 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. 7 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. 8 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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); and • 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 On August 9, 2022, our Board of Directors appointed our Chairman of the Board, Ken Peterman, as President and Chief Executive Officer ("CEO"). Transition costs related to our former President and CEO, Michael D. Porcelain, pursuant to his separation agreement with the Company, were $ 7,424,000 , of which $ 3,764,000 related to the acceleration of unamortized stock based compensation, with the remaining $ 3,660,000 related to his severance payments and benefits upon termination of employment. The cash portion of the transition costs of $ 3,660,000 was paid to Mr. Porcelain in October 2022. Also, in connection with Mr. Peterman entering into an employment agreement with the Company, effective as of August 9, 2022, we incurred a $ 1,000,000 expense related to a cash sign-on bonus, which was paid to Mr. Peterman in January 2023. CEO transition costs related to Mr. Porcelain and Mr. Peterman were expensed in our Unallocated segment during the first quarter of fiscal 2023. There were no similar costs incurred in the first quarter of fiscal 2024. 9 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (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 We are required to prepare our condensed consolidated financial statements in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") which is the source for all authoritative U.S. generally accepted accounting principles, which are commonly referred to as "GAAP." The FASB ASC is subject to updates by the FASB, which are known as Accounting Standards Updates ("ASUs"). ASUs issued, but not effective until after October 31, 2023, are not expected to have a material impact on our condensed consolidated financial statements or disclosures. 10 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (4) Revenue Recognition In accordance with FASB ASC 606 - Revenue from Contracts with Customers ("ASC 606"), we record revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to customers. Under ASC 606, we follow a five-step model to: (1) identify the contract with our customer; (2) identify our performance obligations in our contract; (3) determine the transaction price for our contract; (4) allocate the transaction price to our performance obligations; and (5) recognize revenue using one of the following two methods: • Over time - We recognize revenue using the over time method when there is a continuous transfer of control to the customer over the contractual period of performance. This generally occurs when we enter into a long-term contract relating to the design, development or manufacture of complex equipment or technology platforms to a buyer’s specification (or to provide services related to the performance of such contracts). Continuous transfer of control is typically supported by contract clauses which allow our customers to unilaterally terminate a contract for convenience, pay for costs incurred plus a reasonable profit and take control of work-in-process. Revenue recognized over time is generally based on the extent of progress toward completion of the related performance obligations. The selection of the method to measure progress requires judgment and is based on the nature of the products or services provided. In certain instances, typically for firm fixed-price contracts, we use the cost-to-cost measure because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion, including warranty costs. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Costs to fulfill generally include direct labor, materials, subcontractor costs, other direct costs and an allocation of indirect costs. When these contracts are modified, the additional goods or services are generally not distinct from those already provided. As a result, these modifications form part of an existing contract and we must update the transaction price and our measure of progress for the single performance obligation and recognize a cumulative catch-up to revenue and gross profits. For over time contracts using a cost-to-cost measure of progress, we have an estimate at completion ("EAC") process in which management reviews the progress and execution of our performance obligations. This EAC process requires management judgment relative to assessing risks, estimating contract revenue and costs, and making assumptions for schedule and technical issues. Since certain contracts extend over a long period of time, the impact of revisions in revenue and or cost estimates during the progress of work may impact current period earnings through a cumulative adjustment. Additionally, if the EAC process indicates a loss, a provision is made for the total anticipated loss in the period that it becomes evident. Contract revenue and cost estimates for significant contracts are generally reviewed and reassessed at least quarterly. The cost-to-cost method is principally used to account for contracts in our Satellite and Space Communications segment and, to a lesser extent, certain location-based and messaging infrastructure contracts in our public safety and location technologies product line within our Terrestrial and Wireless Networks segment. For service-based contracts in our Terrestrial and Wireless Networks segment, we also recognize revenue over time. These services are typically recognized as a series of services performed over the contract term using the straight-line method, or based on our customers’ actual usage of the networks and platforms which we provide. • Point in time - When a performance obligation is not satisfied over time, we must record revenue using the point in time accounting method which generally results in revenue being recognized upon shipment or delivery of a promised good or service to a customer. This generally occurs when we enter into short-term contracts or purchase orders where items are provided to customers with relatively quick turn-around times. Modifications to such contracts and or purchase orders, which typically provide for additional quantities or services, are accounted for as a new contract because the pricing for these additional quantities or services are based on standalone selling prices. 11 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Point in time accounting is principally applied to contracts in our satellite ground station technologies product line (which includes satellite modems, solid-state and traveling wave tube amplifiers) and certain contracts for our solid-state, high-power RF amplifiers. The contracts related to these product lines do not meet the requirements for over time revenue recognition because our customers cannot utilize the equipment for its intended purpose during any phase of our manufacturing process; customers do not simultaneously receive and or consume the benefits provided by our performance; customers do not control the asset (i.e., prior to delivery, customers cannot direct the use of the asset, sell or exchange the equipment, etc.); and, although many of our contracts have termination for convenience clauses and or an enforceable right to payment for performance completed to date, our performance creates an asset with an alternative use through the point of delivery. In determining that our equipment has alternative use, we considered the underlying manufacturing process for our products. In the early phases of manufacturing, raw materials and work in process (including subassemblies) consist of common parts that are highly fungible among many different types of products and customer applications. Finished products are either configured to our standard configuration or based on our customers’ specifications. Finished products, whether built to our standard specification or to a customers’ specification, can be sold to a variety of customers and across many different end use applications with minimal rework, if needed, and without incurring a significant economic loss. When identifying a contract with our customer, we consider when it has approval and commitment from both parties, if the rights of the parties are identified, if the payment terms are identified, if it has commercial substance and if collectability is probable. When identifying performance obligations, we consider whether there are multiple promises and how to account for them. In our contracts, multiple promises are separated if they are distinct, both individually and in the context of the contract. If multiple promises in a contract are highly interrelated or comprise a series of distinct services performed over time, they are combined into a single performance obligation. In some cases, we may also provide the customer with an additional service-type warranty, which we recognize as a separate performance obligation. Service-type warranties do not represent a significant portion of our consolidated net sales. When service-type warranties represent a separate performance obligation, the revenue is deferred and recognized ratably over the extended warranty period. Our contracts, from time-to-time, may also include options for additional goods and services. To date, these options have not represented material rights to the customer as the pricing for them reflects standalone selling prices. As a result, we do not consider options we offer to be performance obligations for which we must allocate a portion of the transaction price. In many cases, we provide assurance-type warranty coverage for some of our products for a period of at least one year from the date of delivery. When identifying the transaction price, we typically utilize the contract's stated price as a starting point. The transaction price in certain arrangements may include estimated amounts of variable consideration, including award fees, incentive fees or other provisions that can either increase or decrease the transaction price. We estimate variable consideration as the amount to which we expect to be entitled, and we include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the estimation uncertainty is resolved. The estimation of this variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (e.g., historical, current and forecasted) that is reasonably available to us. When allocating the contract’s transaction price, we consider each distinct performance obligation. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. We determine standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions, including geographic or regional specific factors, competitive positioning, internal costs, profit objectives and internally approved pricing guidelines related to the performance obligations. 12 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Most of our contracts with customers are denominated in U.S. dollars and typically are either firm fixed-price or cost reimbursable type contracts (including fixed-fee, incentive-fee and time-and-material type contracts). In almost all of our contracts with customers, we are the principal in the arrangement and report revenue on a gross basis. Transaction prices for contracts with U.S. domestic and international customers are usually based on specific negotiations with each customer and in the case of the U.S. government, sometimes based on estimated or actual costs of providing the goods or services in accordance with applicable regulations. Sales by geography and customer type, as a percentage of consolidated net sales, are as follows: Three months ended October 31, 2023 2022 United States U.S. government 35.3 % 32.1 % Domestic 40.2 % 46.7 % Total United States 75.5 % 78.8 % International 24.5 % 21.2 % Total 100.0 % 100.0 % Sales to U.S. government customers include sales to the U.S. Department of Defense ("DoD"), intelligence and civilian agencies, as well as sales directly to or through prime contractors. Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. 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 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 October 31, 2023 Satellite and Space Communications Terrestrial and Wireless Networks Total Geographical region and customer type U.S. government $ 53,006,000 596,000 $ 53,602,000 Domestic 15,952,000 45,190,000 61,142,000 Total United States 68,958,000 45,786,000 114,744,000 International 33,430,000 3,737,000 37,167,000 Total $ 102,388,000 49,523,000 $ 151,911,000 Contract type Firm fixed-price $ 85,408,000 49,523,000 $ 134,931,000 Cost reimbursable 16,980,000 — 16,980,000 Total $ 102,388,000 49,523,000 $ 151,911,000 Transfer of control Point in time $ 45,741,000 647,000 $ 46,388,000 Over time 56,647,000 48,876,000 105,523,000 Total $ 102,388,000 49,523,000 $ 151,911,000 13 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Three months ended October 31, 2022 Satellite and Space Communications Terrestrial and Wireless Networks Total Geographical region and customer type U.S. government $ 41,013,000 1,038,000 $ 42,051,000 Domestic 15,244,000 46,011,000 61,255,000 Total United States 56,257,000 47,049,000 103,306,000 International 24,616,000 3,217,000 27,833,000 Total $ 80,873,000 50,266,000 $ 131,139,000 Contract type Firm fixed-price $ 69,875,000 50,266,000 $ 120,141,000 Cost reimbursable 10,998,000 — 10,998,000 Total $ 80,873,000 50,266,000 $ 131,139,000 Transfer of control Point in time $ 55,000,000 84,000 $ 55,084,000 Over time 25,873,000 50,182,000 76,055,000 Total $ 80,873,000 50,266,000 $ 131,139,000 The timing of revenue recognition, billings and collections results in receivables, unbilled receivables and contract liabilities on our Condensed Consolidated Balance Sheet. Under typical payment terms for our contracts accounted for over time, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., monthly) or upon achievement of contractual milestones. For certain contracts with provisions that are intended to protect customers in the event we do not satisfy our performance obligations, billings occur subsequent to revenue recognition, resulting in unbilled receivables. Under ASC 606, unbilled receivables constitute contract assets. There were no material impairment losses recognized on contract assets during the three 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. Under ASC 606, payments received from customers in excess of revenue recognized to-date results in a contract liability. These contract liabilities are not considered to represent a significant financing component of the contract because we believe these cash advances and deposits are generally used to meet working capital demands which can be higher in the earlier stages of a contract. Also, advanced payments and deposits provide us with some measure of assurance that the customer will perform on its obligations under the contract. Under the typical payment terms for our contracts accounted for at a point in time, costs are accumulated in inventory until the time of billing, which generally coincides with revenue recognition. Of the current contract liability balance of $ 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 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. As for commissions payable to our third-party sales representatives related to long-term contracts, we do consider these types of commissions both direct and incremental costs to obtain and fulfill such contracts. Therefore, such types of commissions are included in total estimated costs at completion for such contracts and expensed over time through cost of sales on our Condensed Consolidated Statements of Operations. 14 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Remaining performance obligations represent the transaction price of firm orders for which work has not been performed as of the end of a fiscal period. Remaining performance obligations, which we refer to as backlog, exclude unexercised contract options and potential orders under indefinite delivery / indefinite quantity ("IDIQ") contracts. As of 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, 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 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 Our basic earnings per share ("EPS") is computed based on the weighted average number of common shares (including vested but unissued stock units, share units, performance shares and restricted stock units ("RSUs")) outstanding during each respective period. Our diluted EPS reflects the dilution from potential common stock issuable pursuant to the exercise of equity-classified stock-based awards, settlement of escrow arrangements related to our acquisition of UHP Networks Inc. ("UHP") and the assumed conversion of Convertible Preferred Stock, if dilutive, outstanding during each respective period. Pursuant to FASB ASC 260 " Earnings Per Share, " shares whose issuance is contingent upon the satisfaction of certain conditions are included in diluted EPS based on the number of shares, if any, that would be issuable if the end of the reporting period were the end of the contingency period. When calculating our diluted earnings per share, we consider the amount an employee must pay upon assumed exercise of stock-based awards and the amount of stock-based compensation cost attributed to future services and not yet recognized. There were no repurchases of our common stock during the three 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 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 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. 15 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 October 31, 2023 2022 Numerator: Net loss $ ( 1,437,000 ) ( 11,096,000 ) Dividend on convertible preferred stock ( 1,823,000 ) ( 1,710,000 ) Net loss attributable to common stockholders $ ( 3,260,000 ) ( 12,806,000 ) Denominator: Denominator for basic and diluted calculation 28,745,000 27,830,000 As discussed further in Note (17) - " Convertible Preferred Stock ," the Convertible Preferred Stock issued in October 2021 represents a "participating security" as defined in ASC 260. As a result, our EPS calculations for the three months ended October 31, 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: October 31, 2023 July 31, 2023 Receivables from commercial and international customers $ 53,001,000 52,438,000 Unbilled receivables from commercial and international customers 68,474,000 54,469,000 Receivables from the U.S. government and its agencies 19,269,000 31,149,000 Unbilled receivables from the U.S. government and its agencies 46,239,000 27,192,000 Total accounts receivable 186,983,000 165,248,000 Less allowance for doubtful accounts 1,918,000 2,089,000 Accounts receivable, net $ 185,065,000 163,159,000 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 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. 16 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (8) Inventories Inventories consist of the following at: October 31, 2023 July 31, 2023 Raw materials and components $ 75,591,000 87,139,000 Work-in-process and finished goods 26,749,000 43,365,000 Total inventories 102,340,000 130,504,000 Less reserve for excess and obsolete inventories 16,900,000 24,659,000 Inventories, net $ 85,440,000 105,845,000 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: October 31, 2023 July 31, 2023 Accrued wages and benefits $ 18,804,000 21,994,000 Accrued contract costs 11,182,000 19,041,000 Accrued warranty obligations 9,250,000 8,285,000 Accrued commissions and royalties 4,539,000 4,659,000 Accrued legal costs 794,000 688,000 Other 13,108,000 12,323,000 Accrued expenses and other current liabilities $ 57,677,000 66,990,000 Accrued contract costs represent direct and indirect costs on contracts as well as estimates of amounts owed for invoices not yet received from vendors or reflected in accounts payable. Accrued warranty obligations as of 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. We record a liability for estimated warranty expense based on historical claims, product failure rates, consideration of contractual obligations, future costs to resolve software issues and other factors. Some of our product warranties are provided under long-term contracts, the costs of which are incorporated into our estimates of total contract costs. Changes in our accrued warranty obligations during the three months ended October 31, 2023 and 2022 were as follows: Three months ended October 31, 2023 2022 Balance at beginning of period $ 8,285,000 9,420,000 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 (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. 17 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (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. On November 30, 2022, we refinanced the amount outstanding under the Credit Facility by entering into a Second Amended and Restated Credit Agreement (also referred to herein as the “Credit Facility”) with the existing lenders. The Credit Facility provides a senior secured loan facility of up to $ 300,000,000 consisting of: (i) a revolving loan facility (“Revolving Loan Facility”) with a borrowing limit of $ 150,000,000 , including a $ 20,000,000 letter of credit sublimit and a swingline loan credit sublimit of $ 15,000,000 ; (ii) a $ 50,000,000 term loan A (“Term Loan”); and (iii) an accordion feature allowing us to make a request to borrow up to an additional $ 100,000,000 subject to the satisfaction of specified conditions, including approval by our lenders. The Credit Facility has a maturity date of October 31, 2024 (“Maturity Date”). In connection with entering the Credit Facility, we capitalized $ 3,809,000 of financing costs, and accounted for the amendment to the Credit Facility as a debt modification. As of 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 Less unamortized deferred financing costs related to Term Loan 497,000 621,000 Term Loan, net 47,003,000 47,504,000 Revolving Loan Facility 136,500,000 116,900,000 Amount outstanding under Credit Facility, net $ 183,503,000 $ 164,404,000 Less current portion of long-term debt 183,503,000 4,375,000 Non-current portion of long-term debt $ — $ 160,029,000 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. 18 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The Credit Facility contains customary representations, warranties and affirmative covenants. 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. In addition, under certain circumstances, we may be required to enter into amendments to the Credit Facility in connection with any further syndication of the Credit Facility. The Credit Facility provides for, among other things: (i) scheduled payments of principal under the Term Loan totaling $ 2,500,000 in the first year after closing (of which $ 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 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 . The obligations under the Credit Facility are guaranteed by certain of our domestic and foreign subsidiaries (the “Guarantors”). As collateral security under the Credit Facility and the guarantees thereof, we and the Guarantors have granted to the administrative agent, for the benefit of the lenders, a lien on, and first priority security interest in, substantially all of our tangible and intangible assets. Capitalized terms used but not defined herein have the meanings set forth for such terms in the Credit Facility, which has been documented and filed with the SEC. The Credit Facility 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. 19 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. (11) Leases Our leases historically relate to the leasing of facilities and equipment. In accordance with FASB ASC 842 - " Leases " ("ASC 842"), we determine at inception whether an arrangement is, or contains, a lease and whether the lease should be classified as an operating or a financing lease. At lease commencement, we recognize a right-of-use ("ROU") asset and lease liability based on the present value of the future lease payments over the estimated lease term. We have elected to not recognize a ROU asset or lease liability for any leases with terms of twelve months or less. Instead, for such short-term leases, we recognize lease expense on a straight-line basis over the lease term. Certain of our leases include options to extend the term of the lease or to terminate the lease early. When it is reasonably certain that we will exercise a renewal option or will not exercise a termination option, we include the impact of exercising or not exercising such option, respectively, in the estimate of the lease term. As our lease agreements do not explicitly state the discount rate implicit in the lease, we use our incremental borrowing rate ("IBR") on the commencement date to calculate the present value of future lease payments. Such IBR represents our estimated rate of interest to borrow on a collateralized basis over a term commensurate with the expected lease term. Some of our leases include payments that are based on the Consumer Price Index ("CPI") or other similar indices. These variable lease payments are included in the calculation of the ROU asset and lease liability using the index as of the lease commencement date. Other variable lease payments, such as common area maintenance, property taxes, and usage-based amounts, are required by ASC 842 to be excluded from the ROU asset and lease liability and expensed as incurred. In addition to the present value of the future lease payments, the calculation of the ROU asset would also consider, to the extent applicable, any deferred rent upon adoption, lease pre-payments or initial direct costs of obtaining the lease (e.g., such as commissions). For all classes of leased assets, we elected the practical expedient to not separate lease components (i.e., the actual item being leased, such as the facility or piece of equipment) from non-lease components (i.e., the distinct elements of a contract not related to securing the use of the leased asset, such as common area maintenance and consumable supplies). Certain of our facility lease agreements (which are classified as operating leases) contain rent holidays or rent escalation clauses. For rent holidays and rent escalation clauses during the lease term, we record rental expense on a straight-line basis over the term of the lease. As of 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 October 31, 2023 2022 Finance lease expense: Amortization of ROU assets $ — 3,000 Operating lease expense 2,258,000 2,837,000 Short-term lease expense 108,000 101,000 Variable lease expense 1,029,000 1,087,000 Sublease income ( 17,000 ) ( 17,000 ) Total lease expense $ 3,378,000 4,011,000 20 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Additional information related to leases is as follows: Three months ended October 31, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating leases - Operating cash outflows $ 2,319,000 $ 2,906,000 Finance leases - Financing cash outflows — 3,000 ROU assets obtained in the exchange for lease liabilities (non-cash): 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 October 31, 2023: Remainder of fiscal 2024 $ 6,571,000 Fiscal 2025 8,089,000 Fiscal 2026 6,652,000 Fiscal 2027 4,546,000 Fiscal 2028 3,812,000 Thereafter 18,793,000 Total future undiscounted cash flows 48,463,000 Less: Present value discount 5,668,000 Lease liabilities $ 42,795,000 Weighted-average remaining lease terms (in years) 8.08 Weighted-average discount rate 3.49 % We lease our Melville, New York production facility from a partnership controlled by our former CEO. 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. The annual rent of the facility for calendar year 2024 is $ 733,000 and is subject to customary adjustments. We have a right of first refusal in the event of a sale of the facility. As of 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 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. 21 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Our U.S. federal income tax returns for fiscal 2020 through 2022 are subject to potential future Internal Revenue Service ("IRS") audit. None of our state income tax returns prior to fiscal 2019 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition. (13) Stock-Based Compensation Overview We issue stock-based awards to certain of our employees and our Board of Directors pursuant to our 2000 Stock Incentive Plan, as amended and/or restated from time to time (the "Plan") and our 2001 Employee Stock Purchase Plan, as amended and/or restated from time to time (the "ESPP"), and recognize related stock-based compensation in our condensed consolidated financial statements. The Plan provides for the granting to employees and consultants of Comtech (including prospective employees and consultants): (i) incentive and non-qualified stock options, (ii) restricted stock units ("RSUs"), (iii) RSUs with performance measures (which we refer to as "performance shares"), (iv) restricted stock, (v) stock units (reserved for issuance to non-employee directors) and share units (reserved for issuance to employees) (collectively, "share units") and (vi) stock appreciation rights ("SARs"), among other types of awards. Our non-employee directors are eligible to receive non-discretionary grants of stock-based awards, subject to certain limitations. As of 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 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, share units and other stock-based awards 1,624,324 Total 2,686,386 Our ESPP provides for the issuance of up to 1,300,000 shares of our common stock. Our ESPP is intended to provide our eligible employees the opportunity to acquire our common stock at 85 % of fair market value on the first or last day of each calendar quarter, whichever is lower. Through October 31, 2023, we have cumulatively issued 1,011,305 shares of our common stock to participating employees in connection with our ESPP. 22 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Stock-based compensation for awards issued is reflected in the following line items in our Condensed Consolidated Statements of Operations: Three months ended October 31, 2023 2022 Cost of sales $ 282,000 158,000 Selling, general and administrative expenses 2,176,000 648,000 Research and development expenses 187,000 98,000 Stock-based compensation expense before CEO transition costs 2,645,000 904,000 CEO transition costs related to equity-classified stock-based awards — 3,764,000 Total stock-based compensation expense before income tax benefit 2,645,000 4,668,000 Estimated income tax benefit ( 584,000 ) ( 493,000 ) Net stock-based compensation expense $ 2,061,000 4,175,000 Stock-based compensation for equity-classified awards is measured at the date of grant, based on an estimate of the fair value of the award and is generally expensed over the vesting period of the award. At 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 October 31, 2023 2022 Stock options $ 19,000 25,000 Performance shares 357,000 74,000 RSUs, restricted stock and share units 2,244,000 774,000 ESPP 25,000 31,000 Stock-based compensation expense before CEO transition costs 2,645,000 904,000 CEO transition costs related to equity-classified stock-based awards — 3,764,000 Total stock-based compensation expense before income tax benefit 2,645,000 4,668,000 Estimated income tax benefit ( 584,000 ) ( 493,000 ) Net stock-based compensation expense $ 2,061,000 4,175,000 ESPP stock-based compensation expense primarily relates to the 15 % discount offered to participants in the ESPP. The estimated income tax benefit as shown in the above table was computed using income tax rates expected to apply when the awards are settled. Such deferred tax asset was recorded net as part of our non-current deferred tax liability on our 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. 23 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Stock Options The following table summarizes the Plan’s activity: Awards (in Shares) Weighted Average Exercise Price Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value Outstanding at July 31, 2023 240,510 $ 23.96 Expired/canceled ( 6,250 ) 24.31 Outstanding at October 31, 2023 234,260 $ 23.95 3.82 $ — 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: Awards (in Shares) Weighted Average Grant Date Fair Value Aggregate Intrinsic Value Outstanding at July 31, 2023 1,876,230 $ 13.21 Granted 913,908 9.93 Settled ( 296,198 ) 16.03 Canceled/Forfeited ( 41,814 ) 15.80 Outstanding at October 31, 2023 2,452,126 $ 11.60 $ 29,916,000 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 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. 24 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 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 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 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 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 Reportable operating segments are determined based on Comtech’s management approach. The management approach, as defined by FASB ASC 280 "Segment Reporting" is based on the way that the CODM organizes the segments within an enterprise for making decisions about resources to be allocated and assessing their performance. Our CODM, for purposes of FASB ASC 280, is our Chief Executive Officer. Satellite and Space Communications is organized into four technology areas: satellite modem technologies and amplifier technologies, troposcatter and SATCOM solutions, space components and antennas, and high-power amplifiers and switches technologies. This segment offers customers: satellite ground station technologies, services and system integration that facilitate the transmission of voice, video and data over GEO, MEO and LEO satellite constellations, including solid-state and traveling wave tube power amplifiers, modems, VSAT platforms and frequency converters; satellite communications and tracking antenna systems, including high precision full motion fixed and mobile X/Y tracking antennas, RF feeds, reflectors and radomes; over-the-horizon microwave equipment that can transmit digitized voice, video, and data over distances up to 200 miles using the troposphere and diffraction, including the Comtech COMET™; solid-state, RF microwave high-power amplifiers and control components designed for radar, electronic warfare, data link, medical and aviation applications; and procurement and supply chain management of high reliability Electrical, Electronic and Electromechanical ("EEE") parts for satellite, launch vehicle and manned space applications. 25 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Terrestrial and Wireless Networks is organized into three service areas: next generation 911 and call delivery, Solacom call handling solutions, and trusted location and messaging solutions. This segment offers customers: SMS text to 911 services, providing alternate paths for individuals who need to request assistance (via text messaging) a method to reach Public Safety Answering Points ("PSAPs"); next generation 911 solutions, providing emergency call routing, location validation, policy-based routing rules, logging and security functionality; Emergency Services IP Network transport infrastructure for emergency services communications and support of next generation 911 services; call handling applications for PSAPs; wireless emergency alerts solutions for network operators; and software and equipment for location-based and text messaging services for various applications, including for public safety, commercial and government services. Our CODM primarily uses a metric that we refer to as Adjusted EBITDA to measure an operating segment’s performance and to make decisions about resources to be allocated. Our Adjusted EBITDA metric for the Satellite and Space Communications and Terrestrial and Wireless Networks segments do not consider any allocation of indirect expense, or any of the following: income taxes, interest, change in fair value of the convertible preferred stock purchase option liability, write-off of deferred financing costs, amortization of stock-based compensation, amortization of intangibles, depreciation expense, amortization of cost to fulfill assets, acquisition plan expenses, restructuring costs, COVID-19 related costs, strategic emerging technology costs (for next-generation satellite technology), facility exit costs, CEO transition costs, proxy solicitation costs, strategic alternatives expenses and other. These items, while periodically affecting our results, may vary significantly from period to period and may have a disproportionate effect in a given period, thereby affecting the comparability of results. Any amounts shown in the Adjusted EBITDA calculation for our Satellite and Space Communications and Terrestrial and Wireless Networks segments are directly attributable to those segments. Our Adjusted EBITDA is also used by our management in assessing the Company's operating results. Although closely aligned, the Company's definition of Adjusted EBITDA is different than the Consolidated EBITDA (as such term is defined in our Credit Facility) utilized for financial covenant calculations and also may differ from the definition of EBITDA or Adjusted EBITDA used by other companies and, therefore, may not be comparable to similarly titled measures used by other companies. Operating segment information, along with a reconciliation of segment net income (loss) and consolidated net income (loss) to Adjusted EBITDA is presented in the tables below: Three months ended October 31, 2023 Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Total Net sales $ 102,388,000 49,523,000 — $ 151,911,000 Operating income (loss) $ 10,105,000 4,040,000 ( 12,059,000 ) $ 2,086,000 Net income (loss) $ 9,303,000 4,145,000 ( 14,885,000 ) $ ( 1,437,000 ) Provision for (benefit from) income taxes 227,000 ( 300,000 ) ( 1,271,000 ) ( 1,344,000 ) Interest expense 872,000 — 4,060,000 4,932,000 Interest (income) and other ( 297,000 ) 195,000 37,000 ( 65,000 ) Amortization of stock-based compensation — — 2,645,000 2,645,000 Amortization of intangibles 1,672,000 3,617,000 — 5,289,000 Depreciation 954,000 1,973,000 95,000 3,022,000 Amortization of cost to fulfill assets 240,000 — — 240,000 Restructuring costs 790,000 7,000 2,919,000 3,716,000 Strategic emerging technology costs 1,370,000 — — 1,370,000 Adjusted EBITDA $ 15,131,000 9,637,000 ( 6,400,000 ) $ 18,368,000 Purchases of property, plant and equipment $ 903,000 1,736,000 577,000 $ 3,216,000 Total assets at October 31, 2023 $ 527,343,000 460,088,000 25,112,000 $ 1,012,543,000 26 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Three months ended October 31, 2022 Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Total Net sales $ 80,873,000 50,266,000 — $ 131,139,000 Operating income (loss) $ 5,016,000 744,000 ( 15,484,000 ) $ ( 9,724,000 ) Net income (loss) $ 5,815,000 605,000 ( 17,516,000 ) $ ( 11,096,000 ) Benefit from income taxes ( 222,000 ) ( 165,000 ) ( 221,000 ) ( 608,000 ) Interest expense ( 2,000 ) — 2,237,000 2,235,000 Interest (income) and other ( 575,000 ) 304,000 16,000 ( 255,000 ) Amortization of stock-based compensation — — 904,000 904,000 Amortization of intangibles 1,828,000 3,521,000 — 5,349,000 Depreciation 1,020,000 1,737,000 41,000 2,798,000 Amortization of cost to fulfill assets 240,000 — — 240,000 Restructuring costs 1,056,000 — 269,000 1,325,000 Strategic emerging technology costs 746,000 — — 746,000 CEO transition costs — — 9,090,000 9,090,000 Adjusted EBITDA $ 9,906,000 6,002,000 ( 5,180,000 ) $ 10,728,000 Purchases of property, plant and equipment $ 4,435,000 2,542,000 244,000 $ 7,221,000 Total assets at October 31, 2022 $ 486,636,000 467,594,000 23,595,000 $ 977,825,000 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 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 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 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. 27 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (15) Goodwill 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 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. If we fail the quantitative assessment of goodwill impairment ("quantitative assessment"), we would be required to recognize an impairment loss equal to the amount that a reporting unit's carrying value exceeded its fair value; however, any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. On August 1, 2023 (the first day of fiscal 2024), we performed our annual quantitative assessment using market participant assumptions to determine if the fair value of each of our reporting units with goodwill exceeded its carrying value. In making this assessment, we considered, among other things, expectations of projected net sales and cash flows, assumptions impacting the weighted average cost of capital, trends in trading multiples of comparable companies, changes in our stock price and changes in the carrying values of our reporting units with goodwill. We also considered overall business conditions. In performing the quantitative assessment, we estimated the fair value of each of our reporting units using a combination of the income and market approaches. The income approach, also known as the discounted cash flow ("DCF") method, utilizes the present value of cash flows to estimate fair value. The future cash flows for our reporting units were projected based on our estimates, at that time, of future revenues, operating income and other factors (such as working capital and capital expenditures). For purposes of conducting our impairment analysis, we assumed revenue growth rates and cash flow projections that are below our actual long-term expectations. The discount rates used in our DCF method were based on a weighted-average cost of capital ("WACC") determined from relevant market comparisons, adjusted upward for specific reporting unit risks (primarily the uncertainty of achieving projected operating cash flows). A terminal value growth rate was applied to the final year of the projected period, which reflects our estimate of stable, perpetual growth. We then calculated a present value of the respective cash flows for each reporting unit to arrive at an estimate of fair value under the income approach. Under the market approach, we estimated a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization and factored in a control premium. Finally, we compared our estimates of fair values to our total public market capitalization and assessed implied control premiums based on our common stock price of $ 10.09 as of the date of testing. Ultimately, based on our quantitative 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. 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. 28 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. and internationally) could deteriorate from the current state, our current or prospective customers could materially postpone, reduce or even forgo purchases of our products and services to a greater extent than we currently anticipate, or our common stock price could fluctuate. A significant decline in our customers' spending that is greater than we anticipate or a shift in funding priorities may also have a negative effect on future orders, sales, income and cash flows and we might be required to perform a quantitative assessment during fiscal 2024 or beyond. If assumed net sales and cash flow projections are not achieved in future periods or our common stock price significantly declines from current levels, our Satellite and Space Communications and Terrestrial and Wireless Networks reporting units could be at risk of failing the quantitative assessment and goodwill assigned to the respective reporting units could be impaired. In any event, we are required to perform our next annual goodwill impairment analysis on August 1, 2024 (the start of our fiscal 2025). If our assumptions and related estimates change in the future, or if we change our reporting unit structure or other events and circumstances change (e.g., a sustained decrease in the price of our common stock (considered on both absolute terms and relative to peers)), we may be required to record impairment charges when we perform these tests, or in other future periods. Any impairment charges that we may record in the future could be material to our results of operations and financial condition. (16) Intangible Assets Intangible assets with finite lives are as follows: October 31, 2023 Weighted Average Amortization Period Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships 20.2 $ 302,058,000 125,454,000 $ 176,604,000 Technologies 14.8 114,949,000 81,734,000 33,215,000 Trademarks and other 16.7 32,926,000 22,127,000 10,799,000 Total $ 449,933,000 229,315,000 $ 220,618,000 July 31, 2023 Weighted Average Amortization Period Gross Carrying Amount Accumulated Amortization Net Carrying Amount Customer relationships 20.2 $ 302,058,000 121,786,000 $ 180,272,000 Technologies 14.8 114,949,000 80,672,000 34,277,000 Trademarks and other 16.7 32,926,000 21,568,000 11,358,000 Total $ 449,933,000 224,026,000 $ 225,907,000 The weighted average amortization period in the above table excludes fully amortized intangible assets. Amortization expense for the three months ended October 31, 2023 and 2022 was $ 5,289,000 and $ 5,349,000 , respectively. 29 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The estimated amortization expense consists of the following for the fiscal years ending July 31: 2024 $ 21,154,000 2025 21,039,000 2026 19,888,000 2027 18,534,000 2028 18,534,000 We review net intangible assets with finite lives for impairment when an event occurs indicating the potential for impairment. Based on our last assessment, we believe that the carrying values of our net intangible assets were recoverable as of 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. Any impairment charges that we may record in the future could be material to our results of operations and financial condition. (17) Convertible Preferred Stock On October 18, 2021, we entered into a Subscription Agreement (the “Subscription Agreement”) with certain affiliates and related funds of White Hat Capital Partners LP and Magnetar Capital LLC (collectively, the “Investors”), relating to the issuance and sale of up to 125,000 shares of a new series of the Company's Series A Convertible Preferred Stock, par value $ 0.10 per share (the “Convertible Preferred Stock”), for an aggregate purchase price of up to $ 125,000,000 , or $ 1,000 per share. On October 19, 2021 (the “Initial Closing Date”), pursuant to the terms of the Subscription Agreement, the Investors purchased an aggregate of 100,000 shares of Convertible Preferred Stock (the “Initial Issuance”) for an aggregate purchase price of $ 100,000,000 . The Investors had a one-time option exercisable at any time on or prior to March 31, 2023 to purchase additional shares of Convertible Preferred Stock for an aggregate purchase price of $ 25,000,000 . This purchase option, commonly referred to as a “Green Shoe” expired unexercised and together with the Initial Issuance, is collectively referred to as the “Issuance.” The adjusted conversion price for the shares issued in the Initial Issuance is $ 23.97 , subject to certain adjustments set forth in the Certificate of Designations filed with the Secretary of State of the State of Delaware. The Convertible Preferred Stock ranks senior to the shares of our common stock, with respect to the payment of dividends and the distribution of assets upon a liquidation, dissolution or winding up of the Company. The Convertible Preferred Stock initially had a liquidation preference of $ 1,000 per share with each share entitled to a cumulative dividend (the “Dividend”) at the rate of 6.5 % per annum, compounding quarterly, paid-in-kind or paid in cash, at our election. For any quarter in which we elect not to pay the Dividend in cash with respect to a share of Convertible Preferred Stock, such Dividend becomes part of the liquidation preference of such share. In addition, no dividend or other distribution on our common stock in excess of $ 0.10 per share per quarter will be declared or paid on the common stock unless, at the time of such declaration and payment, an equivalent dividend or distribution is declared and paid on the Convertible Preferred Stock (the “Participating Dividend”), provided that in the case of any such dividend in the form of cash, in lieu of a cash payment, such Participating Dividend will become part of the liquidation preference of the shares of the Convertible Preferred Stock. Such Participating Dividend results in the Convertible Preferred Stock meeting the definition of a "participating security" for purposes of our earnings per share calculations. Effective September 29, 2022, the Convertible Preferred Stock is convertible into shares of common stock at the option of the holders. At any time after October 19, 2024, we have the right to mandate the conversion of the Convertible Preferred Stock, subject to certain restrictions, based on the price of the common stock in the preceding thirty trading days. 30 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Holders of the Convertible Preferred Stock are entitled to vote with the holders of the common stock on an as-converted basis, as well as are entitled to a separate class vote with respect to, among other things, amendments to our organizational documents that have an adverse effect on the Convertible Preferred Stock, authorizations or issuances of securities of the Company, the payment of dividends other than dividends on common stock in the ordinary course consistent with past practice on a quarterly basis in an amount not to exceed our current dividend rate of $ 0.10 per share per quarter, related party transactions, repurchases or redemptions of securities of the Company (other than the repurchase of up to $ 25,000,000 of shares of common stock), dispositions of businesses or assets, the incurrence of certain indebtedness and certain amendments or extensions of our existing Credit Facility. Holders will have the right to require the Company to repurchase such holder's Convertible Preferred Stock on a date occurring either (a) on or after October 19, 2026 (the “Optional Repurchase Trigger Date”) at a price equal to the liquidation preference or (b) in connection with a conversion of Convertible Preferred Stock, pursuant to which the number of shares of common stock issuable upon such conversion would exceed 19.99 % of the issued and outstanding shares of common stock as of October 18, 2021 (such excess shares, "Excess Conversion Shares"), at any time after the date that is 91 days after the maturity date of the Company's existing Credit Facility, at a price per share equal to the number of Excess Conversion Shares multiplied by the Last Reported Sales Price (as defined) of common stock on the applicable conversion date. In addition, each holder will have the right to cause the Company to repurchase its shares of Convertible Preferred Stock in connection with a Change of Control, at a price equal to the liquidation preference. We determined that our obligation to issue the Green Shoe at any time on or prior to March 31, 2023 met the definition of a freestanding financial instrument that should be accounted for as a liability. As such, we established an initial convertible preferred stock purchase option liability of $ 1,005,000 and reduced the proceeds from the Initial Issuance by such amount. The liability was remeasured to its estimated fair value each reporting period until such instrument expired. Changes in its estimated fair value were recognized as a non-cash charge or benefit and presented on the condensed consolidated statement of operations. In accordance with ASC 480, " Distinguishing Liabilities from Equity ," specifically ASC 480-10-S99-3A(2), SEC Staff Announcement: Classification and Measurement of Redeemable Securities , we have classified the Convertible Preferred Stock outside of permanent equity as temporary equity since the redemption of such shares is not solely within our control and we could be required by the holder to redeem the shares for cash or other assets, at their option. Upon the Initial Issuance, we recorded the Convertible Preferred Stock, net of issuance costs of $ 4,007,000 and net of the portion of such proceeds allocated to the convertible preferred stock purchase option liability described above, which resulted in an initial carrying value of the Convertible Preferred Stock less than its initial redemption value of $ 100,000,000 . We have elected to adjust the carrying value of the Convertible Preferred Stock to its current redemption value of $ 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 $ 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 Shelf Registration On July 13, 2022, we filed a $ 200,000,000 shelf registration statement with the SEC for the sale of various types of securities, including debt securities. This shelf registration statement was declared effective by the SEC as of July 25, 2022 and expires on July 25, 2025. 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 On September 29, 2020, our Board of Directors authorized a new $ 100,000,000 stock repurchase program, which replaced our prior program. The new $ 100,000,000 stock repurchase program has no time restrictions and repurchases may be made from time to time in open-market or privately negotiated transactions, or by other means in accordance with federal securities laws. There were no repurchases of our common stock during the three months ended October 31, 2023 or 2022. 31 Index COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (19) Legal Proceedings and Other Matters Other Matters In the ordinary course of business, we include indemnification provisions in certain of our customer contracts to indemnify, hold harmless and reimburse such customers for certain losses, including but not limited to losses related to third-party claims of intellectual property infringement arising from the customer’s use of our products or services. We may also, from time to time, receive indemnification requests from customers related to third-party claims that 911 calls were improperly routed during an emergency. We evaluate such claims as and when they arise. We do not always agree with customers that they are entitled to indemnification and in such cases reject their claims. Despite maintaining that we have properly carried out our duties, we may seek coverage under our various insurance policies; however, we cannot be sure that we will be able to maintain or obtain insurance coverage at acceptable costs or in sufficient amounts or that our insurer will not disclaim coverage as to such claims. Accordingly, pending or future claims asserted against us by a party that we are obligated to indemnify could result in legal costs and damages that could have a material adverse effect on our consolidated results of operations and financial condition. There are certain other pending and threatened legal actions which arise in the normal course of business. Although the ultimate outcome of litigation is difficult to accurately predict, we believe that the outcome of these other pending and threatened actions will not have a material adverse effect on our consolidated financial condition or results of operations. Employment Change of Control and Indemnification Agreements On August 9, 2022, our Board of Directors appointed our Chairman of the Board, Ken Peterman, as President and CEO, and the Company entered an employment agreement with Mr. Peterman generally providing for an annual salary, bonus award, sign-on bonus, equity incentive awards and, under certain terminations of employment, severance payment. We have also entered into legacy change of control agreements prior to 2022 with certain of our executive officers and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of the Company or termination of the employee. (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. 32 Index