COMTECH TELECOMMUNICATIONS CORP /DE/ 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS Certain information in this Quarterly Report on Form 10-Q contains, and oral statements made by our representatives from time to time may contain, forward-looking statements. Forward-looking statements can be identified by words such as: "anticipate," "believe," "continue," "could," "estimate," "expect," "future," "goal," "outlook," "intend," "likely," "may," "plan," "potential," "predict," "project," "seek," "should," "strategy," "target," "will," "would," and similar references to future periods. Examples of forward-looking statements include, among others, statements we make regarding our future performance and financial condition, plans to address our ability to continue as a going concern, plans and objectives of our management and our assumptions regarding such future performance, financial condition, and plans and objectives that involve certain significant known and unknown risks and uncertainties and other factors not under our control which may cause our actual results, future performance and financial condition, and achievement of our plans and objectives of our management to be materially different from the results, performance or other expectations implied by these forward-looking statements. These factors include, among other things: our ability to access capital and liquidity so that we are able to continue as a going concern; the possibility that the expected synergies and benefits from acquisitions will not be fully realized, or will not be realized within the anticipated time periods; the risk that the acquired businesses will not be integrated successfully; the possibility of disruption from acquisitions or dispositions, making it more difficult to maintain business and operational relationships or retain key personnel; the risk that we will be unsuccessful in implementing our "One Comtech" transformation and integration of individual businesses into two segments; the risk that we will be unsuccessful in implementing a tactical shift in our Satellite and Space Communications segment away from bidding on large commodity service contracts and toward pursuing contracts for our niche products and solutions with higher margins; the nature and timing of our receipt of, and our performance on, new or existing orders that can cause significant fluctuations in net sales and operating results; the timing and funding of government contracts; adjustments to gross profits on long-term contracts; risks associated with international sales; rapid technological change; evolving industry standards; new product announcements and enhancements; changing customer demands and or procurement strategies; changes in prevailing economic and political conditions, including as a result of Russia's military incursion into Ukraine and the Israel-Hamas war; changes in the price of oil in global markets; changes in prevailing interest rates and foreign currency exchange rates; risks associated with our legal proceedings, customer claims for indemnification, and other similar matters; risks associated with our obligations under our credit facility and our ability to refinance our credit facility; risks associated with our large contracts; risks associated with supply chain disruptions; and other factors described in this and our other filings with the Securities and Exchange Commission ("SEC"). OVERVIEW We are a leading global provider of next-generation 911 emergency systems ("NG-911") and secure wireless and satellite communications technologies. This includes the critical communications infrastructure that people, businesses, and governments rely on when durable, trusted connectivity is required, no matter where they are – on land, at sea, or in the air – and no matter what the circumstances – from armed conflict to a natural disaster. Our solutions are designed to fulfill our customers’ needs for secure wireless communications in the most demanding environments, including those where traditional communications are unavailable or cost-prohibitive, and in mission-critical and other scenarios where performance is crucial. We anticipate future growth in our business due to a trend of increasing demand for global voice, video and data usage in recent years, upgraded ground stations and related services resulting from the large quantities of satellites anticipated to be launched for new LEO and MEO constellations, digitization and virtualization of modems, the resurgence of troposcatter as a viable form of primary or backup communications, enhanced location positioning combined with data-rich geospatial intelligence, and the growth of 988 networks. We provide our solutions to both commercial and governmental customers within the converging satellite and space communications and terrestrial and wireless networking markets. 33 Index We manage our business through two reportable operating segments: • Satellite and Space Communications - is organized into three technology areas: satellite modem technologies and amplifier technologies, troposcatter and SATCOM solutions and space components and antennas. 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 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™; and procurement and supply chain management of high reliability Electrical, Electronic and Electromechanical ("EEE") parts for satellite, launch vehicle and manned space applications. • Terrestrial and Wireless Networks - is organized into three service areas: next generation 911 and call delivery, Solacom call handling solutions, and trusted location and messaging solutions. This segment offers customers SMS text to 911 services, providing alternate paths for individuals who need to request assistance (via text messaging) a method to reach Public Safety Answering Points ("PSAPs"); next generation 911 solutions, providing emergency call routing, location validation, policy-based routing rules, logging and security functionality; Emergency Services IP Network transport infrastructure for emergency services communications and support of next generation 911 services; call handling applications for PSAPs; wireless emergency alerts solutions for network operators; and software and equipment for location-based and text messaging services for various applications, including for public safety, commercial and government services. Our Quarterly Financial Information Quarterly and period-to-period sales and operating results may be significantly affected by either short-term or long-term contracts with our customers. In addition, our gross profit is affected by a variety of factors, including the mix of products, systems and services sold, production efficiencies, estimates of warranty expense, price competition and general economic conditions. Our gross profit may also be affected by the impact of any cumulative adjustments to contracts that are accounted for over time. In particular, our contracts with the U.S. government can be terminated for convenience by it at any time and orders are subject to unpredictable funding, deployment and technology decisions by the U.S. government. Some of these contracts are indefinite delivery/indefinite quantity ("IDIQ") contracts and, as such, the U.S. government is not obligated to purchase any equipment or services under these contracts. We have, in the past, experienced and we continue to expect significant fluctuations in sales and operating results from quarter-to-quarter and period-to-period due to these factors. As such, comparisons between periods and our current results may not be indicative of a trend or future performance. CRITICAL ACCOUNTING POLICIES We consider certain accounting policies to be critical due to the estimation process involved in each. Revenue Recognition. In accordance with FASB ASC 606 - Revenue from Contracts with Customers ("ASC 606"), we record revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to customers. See " Notes to Condensed Consolidated Financial Statements - Note (4) - Revenue Recognition " for further information. Impairment of Goodwill and Other Intangible Assets . As of October 31, 2023, total goodwill recorded on our Condensed Consolidated Balance Sheet aggregated $333.1 million (of which $159.0 million relates to our Satellite and Space Communications segment and $174.1 million relates to our Terrestrial and Wireless Networks segment). Additionally, as of October 31, 2023, net intangibles recorded on our Condensed Consolidated Balance Sheet aggregated $220.6 million (of which $63.4 million relates to our Satellite and Space Communications segment and $157.2 million relates to our Terrestrial and Wireless Networks segment). For purposes of reviewing impairment and the recoverability of goodwill and other intangible assets, our Satellite and Space Communications and Terrestrial and Wireless Networks segments each constitute a reporting unit and we must make various assumptions in determining their estimated fair values. See " Notes to Condensed Consolidated Financial Statements - Note (15) - Goodwill and Note (16) - Intangible Assets " for further information. 34 Index Provision for Warranty Obligations. We provide warranty coverage for most of our products, including products under long-term contracts, for a period of at least one year from the date of shipment. We record a liability for estimated warranty expense based on historical claims, product failure rates and other factors. Costs associated with some of our warranties that are provided under long-term contracts are incorporated into our estimates of total contract costs. There exist inherent risks and uncertainties in estimating warranty expenses, particularly on larger or longer-term contracts. If we do not accurately estimate our warranty costs, any changes to our original estimates could be material to our results of operations and financial condition. Accounting for Income Taxes. Our deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities and applying enacted tax rates expected to be in effect for the year in which we expect the differences to reverse. Our provision for income taxes is based on domestic (including federal, state and local) and international statutory income tax rates in the tax jurisdictions where we operate, permanent differences between financial reporting and tax reporting and available credits and incentives. The U.S. federal government is our most significant income tax jurisdiction. Significant judgment is required in determining income tax provisions and tax positions. We may be challenged upon review by the applicable taxing authority and positions taken by us may not be sustained. We recognize all or a portion of the benefit of income tax positions only when we have made a determination that it is more likely than not that the tax position will be sustained upon examination, based upon the technical merits of the position and other factors. For tax positions that are determined as "more likely than not" to be sustained upon examination, the tax benefit recognized is the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. We recognize potential interest and penalties related to uncertain tax positions in income tax expense. On a quarterly basis, we assess the realizability of deferred tax assets, based on all available evidence, including historical taxable income and estimates about future taxable income, and valuation allowances are established, when necessary, to reduce net deferred tax assets to the amount "more likely than not" expected to be realized. If actual outcomes differ materially from these subjective critical estimates, we will adjust these estimates in future periods, which could have a material impact on our results of operations and financial condition. Research and Development Costs. We generally expense all research and development costs. Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other personnel-related expenses associated with product development. Research and development expenses also include third-party development and programming costs. Costs incurred internally in researching and developing software to be sold are charged to expense until technological feasibility has been established for the software. Judgment is required in determining when technological feasibility of a product is established. Technological feasibility for our advanced communication software solutions is generally reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to customers and when we are able to validate the marketability of such product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. To date, capitalized internally developed software costs were not material. Provisions for Excess and Obsolete Inventory. We record a provision for excess and obsolete inventory based on historical and projected usage trends. Other factors may also influence our provision, including decisions to exit a product line, technological change and new product development. These factors could result in a change in the amount of excess and obsolete inventory on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory was overvalued, we would be required to recognize such costs in our financial statements at the time of such determination. Any such charge could be material to our results of operations and financial condition. Allowance for Doubtful Accounts. We perform credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness, as determined by our review of our customers’ current credit information. Generally, we will require cash in advance or payment secured by irrevocable letters of credit before an order is accepted from an international customer that we do not do business with regularly. In addition, we seek to obtain insurance for certain domestic and international customers. We monitor collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. In light of ongoing tight credit market conditions and high interest rates, we continue to see requests from our customers for higher credit limits and longer payment terms. We have, on a limited basis, approved certain customer requests. We continue to monitor our accounts receivable credit portfolio. To-date, there has been no material changes in our credit portfolio as a result of the challenging business conditions. 35 Index Although our overall credit losses have historically been within the allowances we established, we may not be able to accurately predict our future credit loss experience, given the current poor business environment. Measurement of credit losses requires consideration of historical loss experience, including the need to adjust for changing business conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and the financial health of specific customers. Future changes to the estimated allowance for doubtful accounts could be material to our results of operations and financial condition. Fiscal 2024: First Quarter Highlights and Business Outlook Financial highlights for the first quarter of fiscal 2024 include: • Consolidated net sales were $151.9 million, up 2.1% sequentially from the fourth quarter of fiscal 2023 and up 15.9% from the first quarter of fiscal 2023; • Gross margin was 31.5%, compared to 32.7% in our fourth quarter of fiscal 2023 and 35.7% in our first quarter of fiscal 2023; • GAAP operating income of $2.1 million, compared to $1.1 million in our fourth quarter of fiscal 2023 and a GAAP operating loss of $9.7 million in the first quarter of fiscal 2023; • GAAP net loss attributable to common stockholders was $3.3 million, and included $3.7 million of restructuring costs and $1.4 million of strategic emerging technology costs for next-generation satellite technology; • GAAP EPS loss of $0.11 and Non-GAAP EPS income of $0.24; • Adjusted EBITDA (a Non-GAAP financial measure discussed below) of $18.4 million, or 12.1% of consolidated net sales, comparable to the $18.9 million, or 12.7% of consolidated net sales for the fourth quarter of fiscal 2023, and an increase from the $10.7 million, or 8.2% of consolidated net sales for the first quarter of fiscal 2023; • New bookings (also referred to as orders) of $185.6 million, representing a quarterly book-to-bill ratio of 1.22x (a measure defined as bookings divided by net sales) and the highest level of quarterly bookings looking back over the past five fiscal quarters; • Backlog of $695.9 million as of October 31, 2023, compared to $662.2 million as of July 31, 2023 and $668.2 million as of October 31, 2022; • Revenue visibility of approximately $1.7 billion, an increase from the $1.1 billion as of July 31, 2023. The $1.7 billion includes the $544.0 million U.S. Army Global Field Service Representative (“GFSR”) contract and $48.6 million U.S. Army Enterprise Digital Intermediate Frequency Multi-Carrier (“EDIM”) modem contract awarded to us in September 2023. We measure this revenue visibility as the sum of our $695.9 million of funded backlog, plus the total unfunded value of certain multi-year contracts that we have received and from which we expect future orders; and • Cash flows used in operating activities of $14.5 million. Non-GAAP financial measures discussed above are reconciled to the most directly comparable GAAP financial measures in the table included in the below section “ Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of the Results of Operations for the Three Months Ended October 31, 2023 and 2022 .” Fiscal 2023 marked a year of tremendous change and accomplishments for our organization. Led by a new management team and refreshed Board of Directors, as we entered fiscal 2024, we continued to implement many important lean initiatives and process improvement activities anticipated to drive sustainable, profitable growth in our business. Several of these actions have already contributed to our improved financial performance, affording us the opportunity to report our second fiscal quarter of positive GAAP operating income since fiscal 2021. We are greatly encouraged by the progress we have made through our One Comtech transformation, which gives us the confidence to expect, subject to the risks highlighted in this Form 10-Q and our other filings with the SEC, that our Business Outlook for Fiscal 2024 will be even better than fiscal 2023. We base our enthusiasm about our future, in part, on our people as well as our recent large strategic contract wins, that serve to validate and reinforce our technology leadership positions in multiple growing end markets. Taken together, we believe these significant, strategic contracts demonstrate our ability to outperform in every facet of our business. For example: 36 Index In September 2023, we were awarded a large, multi-year GFSR contract by the U.S. Army. This contract has a total potential value of $544.0 million and is expected to contribute significantly to our net sales in the second half of our fiscal 2024. Through this program, our Satellite and Space Communications segment will provide ongoing communications and IT infrastructure support for the U.S. Army, Air Force, Navy, Marine Corps and NATO, enabling U.S. and coalition forces to maintain robust, resilient and secure connectivity for global all-domain operations. Foundational to this success: Comtech’s professional engineering services and extensive portfolio of resilient, blended, smart-enabled technologies. Also, in September 2023, our Satellite and Space Communications segment was honored to win a highly competitive $48.6 million contract to deliver next-generation EDIM modems for the U.S. Army's satellite communications ("SATCOM") digitization and modernization programs. The advanced, software defined EDIM modem is intended to: support multiple satellite providers; become one of the primary modems used for U.S. military SATCOM, eventually replacing the Enhanced Bandwidth Efficient Modem ("EBEM"); and provide the U.S. Army, Navy and Air Force with a digitized, hybrid satellite network architecture. The EDIM modem would allow SATCOM users to easily roam across orbital regimes, blend capabilities from traditionally disparate networks and maintain assured, resilient connectivity in the most demanding of environments. In October 2023, our Satellite and Space Communications segment was also awarded an order in excess of $20.0 million from our UK-based partners, Spectra Group. The order will allow Spectra Group, the appointed regional distributor of our Compact Over-the-Horizon Transportable Terminal ("COMET"), to service multiple orders already received, and several expected follow-on orders from undisclosed customers in the NATO and European regions. The COMET is designed to be easily integrated with other Department of Defense ("DoD") and coalition tactical, mobile, and fixed communications systems to provide resilient, secure beyond-line-of-sight ("BLOS") capabilities in some of the world’s most challenging environments. Each COMET is an end-to-end, rapidly deployable BLOS system that utilizes a single fully integrated Troposcatter hub, which includes the company’s CS67PLUS Troposcatter radio. The CS67PLUS is also embedded across each of Comtech’s next generation Family of Systems ("FoS"). Finally, in October 2023, our Terrestrial and Wireless Networks segment extended enhanced 911 call routing services, valued in excess of $30.0 million, for one of the largest wireless carriers in the United States. We believe Comtech's position as a trusted leader in 911 and public safety positions us increasingly well when it comes to delivering similarly sophisticated solutions for 988 emergencies. In addition to optimizing our cost structure, securing key contract wins and expanding our pipeline of opportunities, we have also been busy addressing strategic questions about the composition of our business and the strength of our balance sheet. Following a careful review of our current business and product lines, considering the kind of software and solutions-based enterprise our customers need us to be in the future, we saw an opportunity to divest our solid-state RF microwave high power amplifiers and control components ("Power Systems Technology") product line. We completed this divestiture on November 7, 2023. We are also simultaneously addressing the need to refinance our Credit Facility, which expires in October 2024. In connection with these ongoing initiatives, we are in discussions with various potential sources of capital, including our existing preferred shareholders, regarding alternative investment structures. As we enter the second quarter of fiscal 2024, business conditions continue to be challenging, and the operating environment is largely unpredictable, including factors such as inflation, rising interest rates, the repercussions of the military conflicts in Russia and Ukraine and the Middle East, and a potential global recession. Order and production delays, disruptions in component availability, increased pricing both for labor and parts, lower levels of factory utilization and higher logistics and operational costs have or could impact our business. Nevertheless, despite these business conditions and resulting challenges and although we anticipate some variability from time to time as we move through our One Comtech transformational change, for our second quarter of fiscal 2024, subject to the risks highlighted in this Form 10-Q and other filings with the SEC, we are targeting consolidated net sales to increase approximately 1.0% to 3.0% and for our consolidated Adjusted EBITDA margin to range between 11.0% and 13.0%. We do not provide forward-looking guidance on a GAAP basis because we are unable to predict certain items contained in the GAAP measure without unreasonable efforts. Because our consolidated Adjusted EBITDA, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each segment as well as unallocated spending, it is inherently difficult to forecast. Please refer to the discussion below under "Adjusted EBITDA" for more information. 37 Index As discussed in " Notes to Condensed Consolidated Financial Statements – Note (1) – General," and below under the heading “ Liquidity and Capital Resources ,” we have evaluated whether there are any conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern over the next twelve months. 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 and repay current obligations under the Credit Facility, raising substantial doubt about the Company's ability to continue as a going concern as of the date of this Quarterly Report on Form 10-Q. We are actively pursuing strategies to mitigate these conditions and events and alleviate such substantial doubt about our ability to continue as a going concern. For more information, please see " Notes to Condensed Consolidated Financial Statements – Note (1) – General.” Additional information related to our Business Outlook for fiscal 2024 and a definition and explanation of Adjusted EBITDA is included in the below section " Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of the Results of Operations for the Three Months Ended October 31, 2023 and 2022." COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2023 AND 2022 Net Sales. Consolidated net sales were $151.9 million and $131.1 million for the three months ended October 31, 2023 and 2022, respectively, representing an increase of $20.8 million, or 15.9%. The period-over-period increase in consolidated net sales primarily reflects significantly higher net sales in our Satellite and Space Communications segment, as further discussed below. Satellite and Space Communications Net sales in our Satellite and Space Communications segment were $102.4 million for the three months ended October 31, 2023 as compared to $80.9 million for the three months ended October 31, 2022, an increase of $21.5 million or 26.6%. Related segment net sales for the three months ended October 31, 2023 primarily reflect significantly higher net sales of our troposcatter and SATCOM solutions to U.S. government customers (including progress toward delivering next-generation troposcatter terminals to the U.S. Marine Corps and VSAT equipment for the U.S. Army), and sales of high power amplifiers and switches, X/Y antennas and satellite ground station technologies. Net sales in the comparable period of the prior year included sales related to an FMS contract awarded to us for beyond line-of-sight communications terminals and upgrades to the Ukrainian government’s existing systems. Our Satellite and Space Communications segment represented 67.4% of consolidated net sales for the three months ended October 31, 2023 as compared to 61.7% for the three months ended October 31, 2022. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the three months ended October 31, 2023 was 1.34x. Bookings, sales and profitability in our Satellite and Space Communications segment can fluctuate substantially from period-to-period due to many factors, including unpredictable funding, deployment and technology decisions by our U.S. and international government customers. Also, net sales in future periods will no longer include our Power Systems Technology product line due to the divestiture of this product line on November 7, 2023. Period-to-period fluctuations in bookings are normal for this segment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance. Terrestrial and Wireless Networks Net sales in our Terrestrial and Wireless Networks segment were $49.5 million for the three months ended October 31, 2023, as compared to $50.3 million for the three months ended October 31, 2022, a decrease of $0.8 million, or 1.6%. Related segment net sales for the three months ended October 31, 2023 primarily reflect lower net sales in our location platforms and call routing product lines partially offset by higher net sales in our NG-911 solutions and services business. The lower net sales in the more recent period reflects the timing of rollout of 5G technologies and services by our major wireless carrier customers as well as longer testing and acceptance cycles resulting from the introduction of new technologies into carrier environments. In addition, net sales in the more recent period also reflect a transition in some of our call handling solutions customers to our hosted models. Our Terrestrial and Wireless Networks segment represented 32.6% of consolidated net sales for the three months ended October 31, 2023 as compared to 38.3% for the three months ended October 31, 2022. Our book-to-bill ratio in this segment for the three months ended October 31, 2023 was 0.98x. Bookings, sales and profitability in our Terrestrial and Wireless Networks segment can fluctuate from period-to-period due to many factors, including changes in the general business environment. Period-to-period fluctuations in bookings are normal for this segment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance. 38 Index Geography and Customer Type Sales by geography and customer type, as a percentage of related sales, for the three months ended October 31, 2023 and 2022 are as follows: Three months ended October 31, 2023 2022 2023 2022 2023 2022 Satellite and Space Communications Terrestrial and Wireless Networks Consolidated U.S. government 51.8 % 50.7 % 1.2 % 2.1 % 35.3 % 32.1 % Domestic 15.5 % 18.9 % 91.3 % 91.5 % 40.2 % 46.7 % Total U.S. 67.3 % 69.6 % 92.5 % 93.6 % 75.5 % 78.8 % International 32.7 % 30.4 % 7.5 % 6.4 % 24.5 % 21.2 % Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Sales to U.S. government customers include sales to the DoD, intelligence and civilian agencies, as well as sales directly to or through prime contractors. Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. For the three months ended October 31, 2023, except for the U.S. government, there were no customers that represented more than 10% of consolidated net sales. For the three months ended October 31, 2022, included in domestic sales are sales to Verizon Communications Inc. ("Verizon"), which accounted for 12.5% of consolidated net sales. International sales for the three months ended October 31, 2023 and 2022 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $37.2 million and $27.8 million, respectively. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented more than 10% of consolidated net sales for the three months ended October 31, 2023 and 2022. Gross Profit. Gross profit was $47.9 million and $46.8 million for the three months ended October 31, 2023 and 2022, respectively, an increase of $1.1 million. Gross profit, as a percentage of consolidated net sales, for the three months ended October 31, 2023 was 31.5% as compared to 35.7% for the three months ended October 31, 2022. Our gross profit (both in dollars and as a percentage of consolidated net sales) reflects an increase in net sales and overall product mix changes, including significantly higher net sales of our troposcatter and SATCOM solutions to U.S. government customers, as discussed above. Gross profit in the comparable period of the prior year also reflects the benefit of higher net sales of our beyond line-of-sight communications terminals and upgrades to the Ukrainian government’s existing systems as part of an FMS contract awarded to us during that quarter. Gross profit, as a percentage of related segment net sales, is further discussed below. Our Satellite and Space Communications segment's gross profit, as a percentage of related segment net sales, for the three months ended October 31, 2023 decreased in comparison to the three months ended October 31, 2022. The gross profit percentage in the most recent three-month period reflects changes in products and services mix, as discussed above. Our Terrestrial and Wireless Networks segment's gross profit, as a percentage of related segment net sales, for the three months ended October 31, 2023 decreased in comparison to the three months ended October 31, 2022. The gross profit percentage in the most recent three-month period reflects changes in products and services mix, as discussed above. Included in consolidated cost of sales for the three months ended October 31, 2023 and 2022 are provisions for excess and obsolete inventory of $0.1 million and $0.8 million, respectively. As discussed in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Provisions for Excess and Obsolete Inventory," we regularly review our inventory and record a provision for excess and obsolete inventory based on historical and projected usage trends. Our consolidated gross profit, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each segment, and therefore is inherently difficult to forecast. Selling, General and Administrative Expenses . Selling, general and administrative expenses were $32.7 million and $29.3 million for the three months ended October 31, 2023 and 2022, respectively. As a percentage of consolidated net sales, selling, general and administrative expenses were 21.5% and 22.3% for the three months ended October 31, 2023 and 2022, respectively. 39 Index During the three months ended October 31, 2023 and 2022, we incurred $3.7 million and $1.3 million of restructuring costs, respectively, primarily to streamline our operations and improve efficiency, including severance and costs related to the relocation of certain of our satellite ground station production facilities to our new 146,000 square foot facility in Chandler, Arizona, as well as legal and other expenses related to the divestiture of our Power Systems Technology product line, which closed on November 7, 2023. Excluding restructuring costs, selling, general and administrative expenses for the three months ended October 31, 2023 and 2022 would have been $29.0 million or 19.1% and $28.0 million or 21.4%, respectively, of consolidated net sales. The decrease in our selling, general and administrative expenses, as a percentage of consolidated net sales, is primarily due to higher consolidated net sales, as discussed above. Our selling, general and administrative expenses in the most recent period also reflect lower labor costs associated with our One Comtech initiative offset by higher legal and other professional fees as compared to the three months ended October 31, 2022. Amortization of stock-based compensation expense recorded as selling, general and administrative expenses was $2.2 million in the three months ended October 31, 2023 as compared to $0.6 million in the three months ended October 31, 2022. Amortization of stock-based compensation is not allocated to our two reportable operating segments. Research and Development Expenses. Research and development expenses were $7.8 million and $12.8 million for the three months ended October 31, 2023 and 2022, respectively, representing a decrease of $5.0 million or 38.7%. As a percentage of consolidated net sales, research and development expenses were 5.1% and 9.8% for the three months ended October 31, 2023 and 2022, respectively. For the three months ended October 31, 2023 and 2022, research and development expenses of $4.7 million and $6.4 million, respectively, related to our Satellite and Space Communications segment and $2.9 million and $6.3 million, respectively, related to our Terrestrial and Wireless Networks segment. The remaining research and development expenses of $0.2 million and $0.1 million in the three months ended October 31, 2023 and 2022, respectively, related to the amortization of stock-based compensation expense. Lower research and development expenses were driven by our One Comtech initiative and prioritization of resources across various programs. During the three months ended October 31, 2023 and 2022, we incurred $1.4 million and $0.7 million, respectively, of strategic emerging technology costs in our Satellite and Space Communications segment for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations. We are evaluating this new market in relation to our long-term business strategies, and we may incur additional costs in the future. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the three months ended October 31, 2023 and 2022, customers reimbursed us $4.0 million and $2.2 million, respectively, which is not reflected in the reported research and development expenses but is included in net sales with the related costs included in cost of sales. Amortization of Intangibles . Amortization relating to intangible assets with finite lives for both the three months ended October 31, 2023 and 2022 was $5.3 million (of which $1.7 million was for the Satellite and Space Communications segment and $3.6 million was for the Terrestrial and Wireless Networks segment). CEO Transition Costs . On August 9, 2022, our Board of Directors appointed our Chairman of the Board, Mr. Peterman, as President and CEO. Transition costs related to our former President and CEO, Mr. Porcelain, pursuant to his separation agreement with the Company, were $7.4 million, of which $3.8 million related to the acceleration of unamortized stock-based compensation, with the remaining $3.6 million related to his severance payments and benefits upon termination of employment. The cash portion of the transition costs of $3.6 million was paid to Mr. Porcelain in October 2022. Also, in connection with Mr. Peterman entering into an employment agreement with the Company, effective as of August 9, 2022, we incurred a $1.0 million expense related to a cash sign-on bonus, which was paid in January 2023. CEO transition costs related to Mr. Porcelain and Mr. Peterman were expensed in our Unallocated segment during the first quarter of fiscal 2023. 40 Index Operating Income (Loss). Operating income (loss) for the three months ended October 31, 2023 and 2022 was $2.1 million and $(9.7) million, respectively. Operating income (loss) by reportable segment is shown in the table below: Three months ended October 31, 2023 2022 2023 2022 2023 2022 2023 2022 ($ in millions) Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Consolidated Operating income (loss) $ 10.1 5.0 4.0 0.7 (12.1) (15.5) $ 2.1 (9.7) Percentage of related net sales 9.9 % 6.2 % 8.2 % 1.5 % NA NA 1.4 % NA Our GAAP operating income of $2.1 million for the three months ended October 31, 2023 reflects: (i) $5.3 million of amortization of intangibles; (ii) $3.7 million of restructuring costs (of which $0.8 million and $2.9 million related to our Satellite and Space Communications and Unallocated segments, respectively); (iii) $2.6 million of amortization of stock-based compensation; (iv) $1.4 million of strategic emerging technology costs; and (v) $0.2 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating income for the three months ended October 31, 2023 would have been $15.3 million, or 10.1% of consolidated net sales. Our GAAP operating loss of $9.7 million for the three months ended October 31, 2022 reflects: (i) $9.1 million of CEO transition costs; (ii) $5.3 million of amortization of intangibles; (iii) $1.3 million of restructuring costs (of which $1.1 million and $0.2 million related to our Satellite and Space Communications and Unallocated segments, respectively); (iv) $0.9 million of amortization of stock-based compensation; (v) $0.7 million of strategic emerging technology costs; and (vi) $0.2 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating income for the three months ended October 31, 2022 would have been $7.9 million, or 6.0% of consolidated net sales. The increase in operating income, excluding the above items, from $7.9 million to $15.3 million for the most recent period reflects the benefit of our One Comtech lean initiatives implemented through October 31, 2023 and, to a lesser extent, higher consolidated net sales, as discussed above. Operating income (loss) by reportable segment is further discussed below. The increase in our Satellite and Space Communications segment operating income, both in dollars and as a percentage of the related segment net sales, for the three months ended October 31, 2023 was driven primarily by an increase in related segment net sales and our One Comtech lean initiatives, as discussed above. The increase in our Terrestrial and Wireless Networks segment operating income, both in dollars and as a percentage of the related segment net sales, for the three months ended October 31, 2023 was driven primarily by our One Comtech lean initiatives, offset in part by changes in products and services mix, as discussed above. Excluding the impact of CEO transition costs and its respective portion of restructuring charges, Unallocated expenses for the three months ended October 31, 2023 would have been $9.2 million, as compared to $6.1 million for the three months ended October 31, 2022. The increase in Unallocated expenses excluding such items was primarily due to higher labor costs associated with our One Comtech transformation, as well as other investments we are making to achieve our long-term business goals. Interest Expense and Other. Interest expense was $4.9 million and $2.2 million for the three months ended October 31, 2023 and 2022, respectively. The increase is due to a higher average debt balance outstanding during the most recent period, a general rise in interest rates as compared to the prior year period, as well as higher interest rates under our Credit Facility that we entered into in November 2022. Our effective interest rate (including amortization of deferred financing costs) in the three months ended October 31, 2023 was approximately 10.5%, as compared to 5.9% in the prior year period. Our current cash borrowing rate (which excludes the amortization of deferred financing costs) under our existing Credit Facility approximates 9.2%, as compared to 7.9% in the prior year period. Interest (Income) and Other. Interest (income) and other for both the three months ended October 31, 2023 and 2022 was nominal. All of our available cash and cash equivalents are currently invested in bank deposits and money market deposit accounts which, at this time, are currently yielding an immaterial interest rate. Benefit from Income Taxes. For the three months ended October 31, 2023 and 2022, we recorded a tax benefit of $1.3 million and $0.6 million, respectively. Our effective tax rate (excluding discrete tax items) for the three months ended October 31, 2023 and 2022 was 122.0% and 19.0%, respectively. The increase in the rate is primarily due to changes in expected product and geographic mix. 41 Index During the three months ended October 31, 2023, we recorded a net discrete tax expense of $2.0 million primarily related to our decision to sell our Power Systems Technology product line in a taxable transaction and settlement of stock-based awards. Due to the timing of the closing of the divestiture on November 7, 2023 and the expected timing of the settlement of contingent consideration being subsequent to October 31, 2023, we expect there will be offsetting net discrete tax benefits recorded in subsequent periods. During the three months ended October 31, 2022, we recorded a net discrete tax benefit of $0.1 million primarily related to the deductible portion of CEO transition costs, partially offset by the settlement of stock-based awards. 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. Net Loss Attributable to Common Stockholders. During the three months ended October 31, 2023 and 2022, consolidated net loss attributable to common stockholders was $3.3 million and $12.8 million, respectively. Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both the three months ended October 31, 2023 and 2022 are shown in the table below (numbers in the table may not foot due to rounding): Three months ended October 31, 2023 2022 2023 2022 2023 2022 2023 2022 ($ in millions) Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Consolidated Net income (loss) $ 9.3 5.8 4.1 0.6 (14.9) (17.5) $ (1.4) (11.1) Provision for (benefit from) income taxes 0.2 (0.2) (0.3) (0.2) (1.3) (0.2) (1.3) (0.6) Interest (income) and other (0.3) (0.6) 0.2 0.3 — — (0.1) (0.3) Interest expense 0.9 — — — 4.1 2.2 4.9 2.2 Amortization of stock-based compensation — — — — 2.6 0.9 2.6 0.9 Amortization of intangibles 1.7 1.8 3.6 3.5 — — 5.3 5.3 Depreciation 1.0 1.0 2.0 1.7 0.1 — 3.0 2.8 Amortization of cost to fulfill assets 0.2 0.2 — — — — 0.2 0.2 CEO transition costs — — — — — 9.1 — 9.1 Restructuring costs 0.8 1.1 — — 2.9 0.3 3.7 1.3 Strategic emerging technology costs 1.4 0.7 — — — — 1.4 0.7 Adjusted EBITDA $ 15.1 9.9 9.6 6.0 (6.4) (5.2) $ 18.4 10.7 Percentage of related net sales 14.8 % 12.2 % 19.5 % 11.9 % NA NA 12.1 % 8.2 % The increase in consolidated Adjusted EBITDA, both in dollars and as a percentage of consolidated net sales, for the three months ended October 31, 2023 as compared to the three months ended October 31, 2022 reflects higher gross profit from higher net sales in our Satellite and Space Communications segment and the benefit of our One Comtech lean initiatives implemented through October 31, 2023, as discussed above. The increase in our Satellite and Space Communications segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is primarily due to an increase in related segment net sales and One Comtech lean initiatives, as discussed above. The increase in our Terrestrial and Wireless Networks segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is primarily due to One Comtech lean initiatives, offset in part by changes in products and services mix, as discussed above. 42 Index A reconciliation of our fiscal 2023 GAAP Net Loss to Adjusted EBITDA is shown in the table below (numbers in the table may not foot due to rounding): ($ in millions) Fiscal Year 2023 Reconciliation of GAAP Net Loss to Adjusted EBITDA: Net loss $ (26.9) Benefit from income taxes (3.9) Interest expense 15.0 Interest (income) and other 1.2 Amortization of stock-based compensation 10.1 Amortization of intangibles 21.4 Depreciation 11.9 Amortization of cost to fulfill assets 1.0 Restructuring costs 10.9 Strategic emerging technology costs 3.8 CEO transition costs 9.1 Adjusted EBITDA $ 53.5 Our Adjusted EBITDA is a Non-GAAP measure that represents earnings (loss) before income taxes, interest, change in fair value of the convertible preferred stock purchase option liability, write-off of deferred financing costs, amortization of stock-based compensation, amortization of intangibles, depreciation expense, amortization of cost to fulfill assets, acquisition plan expenses, restructuring costs, COVID-19 related costs, strategic emerging technology costs (for next-generation satellite technology), facility exit costs, CEO transition costs, proxy solicitation costs, strategic alternatives analysis expenses and other. Although closely aligned, our 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. Adjusted EBITDA is also a measure frequently requested by our investors and analysts. We believe that investors and analysts may use Adjusted EBITDA, along with other information contained in our SEC filings, including GAAP measures, in assessing our performance and comparability of our results with other companies. Our Non-GAAP measures reflect the GAAP measures as reported, adjusted for certain items as described herein and also excludes the effects of our outstanding convertible preferred stock. These Non-GAAP financial measures have limitations as an analytical tool as they exclude the financial impact of transactions necessary to conduct our business, such as the granting of equity compensation awards, and are not intended to be an alternative to financial measures prepared in accordance with GAAP. These measures are adjusted as described in the reconciliation of GAAP to Non-GAAP measures in the tables presented herein, but these adjustments should not be construed as an inference that all of these adjustments or costs are unusual, infrequent or non-recurring. Non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, financial measures determined in accordance with GAAP. Investors are advised to carefully review the GAAP financial results that are disclosed in our SEC filings. We have not quantitatively reconciled our second quarter fiscal 2024 Adjusted EBITDA target to the most directly comparable GAAP measure because items such as stock-based compensation, adjustments to the provision for income taxes, amortization of intangibles and interest expense, which are specific items that impact these measures, have not yet occurred, are out of our control, or cannot be predicted. For example, quantification of stock-based compensation expense requires inputs such as the number of shares granted and market price that are not currently ascertainable. Accordingly, reconciliations to the Non-GAAP forward looking metrics are not available without unreasonable effort and such unavailable reconciling items could significantly impact our financial results. 43 Index Reconciliations of our GAAP consolidated operating income (loss), net (loss) income attributable to common stockholders and net (loss) income per diluted common share for the three months ended October 31, 2023 and 2022 to the corresponding Non-GAAP measures are shown in the tables below (numbers and per share amounts in the tables may not foot due to rounding). Non-GAAP net (loss) income attributable to common stockholders and non-GAAP net (loss) income per diluted common share reflect Non-GAAP provisions for income taxes based on year-to-date results, as adjusted for the Non-GAAP reconciling items included in the tables below. We evaluate our Non-GAAP effective income tax rate on an ongoing basis, and it can change from time to time. Our Non-GAAP effective income tax rate can differ materially from our GAAP effective income tax rate. In addition, due to the GAAP net loss for the period, Non-GAAP net (loss) income per diluted common share for the three months ended October 31, 2023 and 2022 was computed using weighted average diluted shares outstanding of 28,982,000 and 28,271,000, respectively, during the period. Three months ended October 31, 2023 ($ in millions, except for per share amount) Operating (Loss) Income Net (Loss) Income Attributable to Common Stockholders Net (Loss) Income per Diluted Common Share Reconciliation of GAAP to Non-GAAP Earnings: GAAP measures, as reported $ 2.1 $ (3.3) $ (0.11) Adjustments to reflect redemption value of convertible preferred stock — 1.8 0.06 Amortization of intangibles 5.3 4.1 0.14 Restructuring costs 3.7 2.9 0.10 Amortization of stock-based compensation 2.6 2.1 0.07 Strategic emerging technology costs 1.4 1.1 0.04 Amortization of cost to fulfill assets 0.2 0.2 0.01 Net discrete tax benefit — (2.0) (0.07) Non-GAAP measures $ 15.3 $ 6.8 $ 0.24 Three months ended October 31, 2022 ($ in millions, except for per share amount) Operating (Loss) Income Net (Loss) Income Attributable to Common Stockholders Net (Loss) Income per Diluted Common Share Reconciliation of GAAP to Non-GAAP Earnings: GAAP measures, as reported $ (9.7) $ (12.8) $ (0.46) Adjustment to reflect redemption value of convertible preferred stock — 1.7 0.06 CEO transition costs 9.1 8.6 0.31 Amortization of intangibles 5.3 4.1 0.15 Restructuring costs 1.3 1.0 0.04 Amortization of stock-based compensation 0.9 0.7 0.03 Strategic emerging technology costs 0.7 0.6 0.02 Amortization of cost to fulfill assets 0.2 0.2 0.01 Net discrete tax expense — 0.4 0.01 Non-GAAP measures $ 7.9 $ 4.6 $ 0.16 44 Index LIQUIDITY AND CAPITAL RESOURCES Our cash and cash equivalents were $18.1 million and $19.0 million at October 31, 2023 and July 31, 2023, respectively. For the three months ended October 31, 2023, our cash flows reflect the following: • Net cash used in operating activities was $14.5 million for the three months ended October 31, 2023 as compared to net cash used in operating activities of $6.2 million for the three months ended October 31, 2022. The period-over-period decrease in cash flow from operating activities reflects overall changes in net working capital requirements, principally the timing of shipments and progress toward completion on contracts accounted for over time, and related billings and payments. • Net cash used in investing activities for the three months ended October 31, 2023 and 2022 was $3.2 million and $7.2 million, respectively. Net cash used in investing activities for the three months ended October 31, 2023 primarily reflects capital expenditures to build-out cloud-based computer networks to support our previously announced NG-911 contract wins and capital investments and building improvements in connection with the opening of our new high-volume technology manufacturing centers. Net cash used in both periods also relates to expenditures for property, plant and equipment upgrades and enhancements. • Net cash provided by financing activities was $17.0 million and $13.3 million for the three months ended October 31, 2023 and 2022, respectively. During the three months ended October 31, 2023 and 2022, we had net borrowings under our Credit Facility of $19.6 million and $18.7 million, respectively. During the three months ended October 31, 2022, we paid $3.1 million in cash dividends to our common stockholders. We also made $1.7 million and $2.3 million of payments to remit employees' statutory tax withholding requirements related to the net settlement of stock-based awards during the three months ended October 31, 2023 and 2022, respectively. The Credit Facility is discussed below and in " Notes to Condensed Consolidated Financial Statements – Note (10) – Credit Facility." The Convertible Preferred Stock is discussed below and in " Notes to Condensed Consolidated Financial Statements – Note (17) – Convertible Preferred Stock." Our material cash requirements are for working capital, debt service (including interest), capital expenditures, income tax payments, facilities lease payments and dividends related to our Convertible Preferred Stock, which are payable in kind or in cash at our election. Our material cash requirements could increase beyond our current expectations due to factors such as general economic conditions, a change in government spending priorities, larger than usual customer orders or a future redemption by the holders of our Series A Convertible Preferred Stock. Also, in light of our CEO's initiatives to grow the Company, we continue to review and evaluate our capital allocation plans. Furthermore, we may choose to raise additional funds through equity and debt financing transactions to provide additional flexibility or to pursue acquisitions. Although it is difficult in the current economic and credit environment to predict the terms and conditions of financing that may be available in the future, we believe that we would have sufficient access to credit from financial institutions and/or financing from public and private debt and equity markets. We have historically met our cash requirements with funds provided by a combination of cash and cash equivalent balances, cash generated from operating activities and cash generated from equity and debt financing transactions. As discussed in " Notes to Condensed Consolidated Financial Statements – Note (1) – General," 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 our 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 $14.7 million, $33.8 million, and $68.3 million in fiscal 2023, 2022 and 2021, respectively. More recently, we recognized operating income of $2.1 million in the three months ended October 31, 2023. In addition, over the past three fiscal years, net cash used in operating activities was $4.4 million and $40.6 million in fiscal 2023 and 2021, respectively, and net cash provided by operating activities was $2.0 million in fiscal 2022. More recently, net cash used in operating activities was $14.5 million in the three months ended October 31, 2023. 45 Index As of the issuance date, our available sources of liquidity included cash and cash equivalents of approximately $18.0 million. In addition, as of the issuance date, borrowings under our Credit Facility, which has a maturity date of October 31, 2024, aggregated $180.5 million, of which $149.3 million and $31.2 million 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, seeking other sources of credit or outside capital and evaluating other capital structure-related alternatives. 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 " Notes to Condensed Consolidated Financial Statements – 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. 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 " Notes to Condensed Consolidated Financial Statements – 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 our ability to continue as a going concern as of the issuance date. We prepared our unaudited condensed consolidated financial statements as of October 31, 2023 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. 46 Index In addition to making capital investments for our new high-volume manufacturing centers, we have been making significant capital expenditures and building out cloud-based computer networks to support our previously announced NG-911 contract wins for the states of Pennsylvania, South Carolina and Arizona. We expect capital investments for these and other initiatives to continue in fiscal 2024. Our investment policy relating to our cash and cash equivalents is intended to minimize principal loss while at the same time maximize the income we receive without significantly increasing risk. To minimize risk, we generally invest our cash and cash equivalents in money market mutual funds (both government and commercial), certificates of deposit, bank deposits and U.S. Treasury securities. Many of our money market mutual funds invest in direct obligations of the U.S. government, bank securities guaranteed by the Federal Deposit Insurance Corporation, certificates of deposit and commercial paper and other securities issued by other companies. While we cannot predict future market conditions or market liquidity, we believe our investment policies are appropriate in the current environment. Ultimately, the availability of our cash and cash equivalents is dependent on a well-functioning liquid market. On July 13, 2022, we filed a $200.0 million shelf registration statement with the SEC for the sale of various types of securities, including debt securities. This shelf registration statement was declared effective by the SEC as of July 25, 2022 and expires on July 25, 2025. On September 29, 2020, our Board of Directors authorized a $100.0 million stock repurchase program, which replaced our prior program. The $100.0 million stock repurchase program has no time restrictions and repurchases may be made from time to time in open-market or privately negotiated transactions, or by other means in accordance with federal securities laws. There were no repurchases of our common stock during the three months ended October 31, 2023 and 2022. During the third quarter of fiscal 2023, the Board, together with management, adjusted the Company’s capital allocation plans and determined to forgo a common stock dividend, thereby increasing our financial flexibility. Future common stock dividends, if any, remain subject to compliance with financial covenants under our Credit Facility, as well as Board approval and certain voting rights of holders of our Series A Convertible Preferred Stock. 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. 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 in connection with the sale of our Power Systems Technology product line to Stellant Systems, Inc. See " Notes to Condensed Consolidated Financial Statements – Note (10) – Credit Facility " for further information. Capitalized terms used but not defined herein have the meanings set forth for such terms in the Credit Facility, which have been documented and filed with the SEC. As of October 31, 2023, the amount outstanding under our Credit Facility was $184.0 million, comprised of $136.5 million under the Revolving Loan Facility and $47.5 million under the Term Loan. At October 31, 2023, we had $0.6 million of standby letters of credit outstanding under our Credit Facility related to our guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit. During the three months ended October 31, 2023, we had outstanding balances under the Credit Facility ranging from $165.0 million to $184.6 million. As of October 31, 2023, our Secured Leverage Ratio was 3.53x trailing twelve months ("TTM") Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") compared to the maximum allowable Secured Leverage Ratio of 3.75x TTM Adjusted EBITDA. Our Interest Expense Coverage Ratio as of October 31, 2023 was 3.37x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25x TTM Adjusted EBITDA. Our Minimum Liquidity was $29.2 million compared to the Minimum Liquidity requirement of $25.0 million. 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. 47 Index 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 and repay current obligations under the Credit Facility. Although we are actively pursuing strategies to mitigate these conditions and events and alleviate such substantial doubt about our ability to continue as a going concern, there can be no assurance that our plans will be successful. Convertible Preferred Stock As discussed further in " Notes to Condensed Consolidated Financial Statements - Note (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 $125.0 million, or $1,000 per share. On October 19, 2021 (the “Initial Closing Date”), pursuant to the terms of the Subscription Agreement, the Investors purchased an aggregate of 100,000 shares of Convertible Preferred Stock (the “Initial Issuance”) for an aggregate purchase price of $100.0 million. Commitments In the normal course of business, other than as discussed below, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment. We do not expect that these commitments, as of October 31, 2023, will materially adversely affect our liquidity. At October 31, 2023, cash payments due under contractual obligations (including estimated interest expense on our Credit Facility), excluding purchase orders that we entered into in our normal course of business, are as follows: Total Due Within 1 Year Credit Facility - principal payments $ 184,000 184,000 Credit Facility - interest payments 17,061 17,061 Operating lease obligations 48,463 8,669 Contractual cash obligations $ 249,524 209,730 The commitments under our Credit Facility are described in detail above. As discussed in " Notes to Condensed Consolidated Financial Statements - Note (17) - Convertible Preferred Stock ," the holders of the Convertible Preferred Stock have the option to redeem such shares for cash commencing in October 2026. As the Convertible Preferred Stock are not mandatorily redeemable for cash, the redemption value of such shares are not presented in the table above. In the ordinary course of business, we include indemnification provisions in certain of our customer contracts. Pursuant to these agreements, we have agreed to indemnify, hold harmless and reimburse the indemnified party for certain losses suffered or incurred by the indemnified party, including but not limited to losses related to third-party intellectual property claims. It is not possible to determine the maximum potential amount under these agreements due to a history of nominal claims and the unique facts and circumstances involved in each particular agreement. As discussed further in " Notes to Condensed Consolidated Financial Statements - Note (19) - Legal Proceedings and Other Matters ," we are subject to a number of indemnification demands and we are incurring ongoing legal expenses in connection with these matters. Our insurance policies may not cover the cost of defending indemnification claims or providing indemnification. As a result, pending or future claims asserted against us by a party that we may agree or have agreed to indemnify could result in legal costs and damages that could have a material adverse effect on our consolidated results of operations and financial condition. We entered into legacy change of control agreements prior to 2022 with certain of our executive officers and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of the Company or termination of the employee. 48 Index Our Condensed Consolidated Balance Sheet at October 31, 2023 includes total liabilities of $9.3 million for uncertain tax positions, including interest, any or all of which may result in a cash payment. The future payments related to uncertain tax positions have not been presented in the table above due to the uncertainty of the amounts and timing of any potential cash settlement with the taxing authorities. RECENT ACCOUNTING PRONOUNCEMENTS We are required to prepare our condensed consolidated financial statements in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") which is the source for all authoritative U.S. generally accepted accounting principles, which is commonly referred to as "GAAP." The FASB ASC is subject to updates by the FASB, which are known as Accounting Standards Updates ("ASUs"). As further discussed in " Notes to Condensed Consolidated Financial Statements – Note (3) - Adoption of Accounting Standards and Updates, " 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.