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; our ability to successfully implement changes in our executive leadership; the possibility that the expected synergies and benefits from acquisitions and/or restructuring activities will not be fully realized, or will not be realized within the anticipated time periods; the risk that 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 and our ability to scale opportunities and deliver solutions to current and prospective customers; changes in prevailing economic and political conditions, including as a result of Russia's military incursion into Ukraine, the Israel-Hamas war and attacks in the Red Sea region; 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 New 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 being 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. 39 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 April 30, 2024, 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 April 30, 2024, net intangibles recorded on our Condensed Consolidated Balance Sheet aggregated $210.0 million (of which $60.0 million relates to our Satellite and Space Communications segment and $150.0 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. 40 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, Canada and the United Kingdom are our most significant income tax jurisdictions. 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. 41 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: Third Quarter Highlights and Business Outlook Financial highlights for the third quarter of fiscal 2024 include: • Consolidated net sales were $128.1 million, compared to $134.2 million in the second quarter of fiscal 2024 and $136.3 million in the third quarter of fiscal 2023; • Gross margin was 30.4%, compared to 32.2% in our second quarter of fiscal 2024 and 31.7% in our third quarter of fiscal 2023; • GAAP operating loss of $3.5 million, compared to GAAP operating income of $3.0 million in our second quarter of fiscal 2024 and a GAAP operating loss of $5.3 million in the third quarter of fiscal 2023; • GAAP net loss attributable to common stockholders was $1.0 million, and included $2.8 million of restructuring costs, $2.5 million of CEO transition costs, $0.9 million of strategic emerging technology costs for next-generation satellite technology and a $0.2 million reduction to the estimated gain on sale of the PST Divestiture; • GAAP EPS net loss of $0.04 and Non-GAAP EPS net income of $0.20; • Adjusted EBITDA (a Non-GAAP financial measure discussed below) of $11.9 million, or 9.3% of consolidated net sales, compared to $15.1 million, or 11.3% of consolidated net sales for the second quarter of fiscal 2024 and $12.5 million, or 9.2% of consolidated net sales for the third quarter of fiscal 2023; • New bookings (also referred to as orders) of $101.7 million, representing a quarterly book-to-bill ratio of 0.79x (a measure defined as bookings divided by net sales); • Backlog of $653.4 million as of April 30, 2024, compared to $662.2 million as of July 31, 2023 and $668.4 million as of April 30, 2023; • Revenue visibility of approximately $1.5 billion, an increase from the $1.1 billion as of July 31, 2023. We measure this revenue visibility as the sum of our $653.4 million of funded backlog, plus the total unfunded value of certain multi-year contracts that we have received and from which we expect future orders (backlog and revenue visibility as of April 30, 2024 do not yet reflect our receipt, subsequent to quarter end, of a large, multi-year award of a Next Generation 911 (“NG-911”) contract from the Commonwealth of Massachusetts, as discussed further below); • Cash flows used in operating activities were $3.8 million. Non-GAAP financial measures discussed above are reconciled to the most directly comparable GAAP financial measures in the table included in the below section “ Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of the Results of Operations for the Three Months Ended April 30, 2024 and 2023 ” and “ Comparison of the Results of Operations for the Nine Months Ended April 30, 2024 and 2023 .” 42 Index Debt Refinancing Complete On June 17, 2024, we entered into a $222.0 million credit facility with a new syndicate of lenders (the “New Credit Facility”), which replaces our Prior Credit Facility and which is expected to be funded on or around June 18, 2024. The New Credit Facility matures on July 31, 2028, consists of a committed $162.0 million term loan facility (“Term Loan”) and $60.0 million revolver loan facility (“Revolver”) and is expected to have outstanding borrowings at close of $187.0 million, reflecting $25.0 million drawn on the Revolver. As of the issuance date, our available sources of liquidity approximate $63.0 million, consisting of qualified cash and cash equivalents of approximately $28.0 million and $35.0 million of excess availability under the Revolver, both as defined in the New Credit Facility. Entering into the New Credit Facility was a key milestone for our company. We are very pleased to have successfully resolved this significant overhang over our business and expect the New Credit Facility to contribute significantly to enhancing our liquidity and business prospects. Other Recent Key Developments In the third quarter of fiscal 2024, our Satellite and Space Communications segment was awarded over $13.5 million of funded orders from the U.S. Army for VSAT equipment and related services, over $6.0 million of funding from the U.S. Army for cyber training related solutions and over $5.5 million in operational support and maintenance orders from the Japan Aerospace Exploration Agency. During the third quarter, this segment also was awarded over $5.0 million of funding from a Canadian customer to upgrade a previously deployed troposcatter system, as well as an order from an international military, who is evaluating our COMET TM troposcatter solutions. We believe that this new international customer, along with two other new international customers that placed orders in our second quarter of fiscal 2024 to evaluate our next generation Modular Transportable Transmission System ("MTTS"), could lead to larger scale troposcatter opportunities in the future. In the third quarter of fiscal 2024, our Terrestrial and Wireless Networks segment extended critical NG-911 services for a large county in a Midwestern state; such multi-year extension is valued at over $10.0 million. We also extended our short messaging service ("SMS") software engineering services to a large international mobile network operator; such extension is valued at over $7.0 million. During the third quarter, we were awarded a multi-year NG-911 call handling services contract, aggregating over $4.0 million, for PSAPs located in Canada. Additionally, subsequent to quarter end, we entered into a contract with the Commonwealth of Massachusetts for continued operation and maintenance of the state’s NG-911 system. The new contract has an initial five-year term from August 1, 2024 through July 31, 2029, and includes one option to renew for a five-year period through July 31, 2034. Including the option period, the total contract value could potentially exceed $250.0 million. We believe Comtech's position as a trusted leader in 911 and public safety applications positions us increasingly well when it comes to delivering similarly sophisticated solutions for 988 emergencies. One Comtech and People Strategy In March 2024, we announced the hiring of Jeff Robertson, a telecommunications and public safety leader, as the new President of our Terrestrial and Wireless Networks segment. Among the many leadership roles throughout his career, Mr. Robertson most recently served as the President and CEO of Intrado Life Safety, where under his leadership it saw enhancements to its operating structure, the implementation of critical digital transformation initiatives, and the migration of legacy products to next-generation cloud-based infrastructures, which culminated with the sale of the business in 2023. Mr. Robertson's deep industry expertise and leadership experience aligns well with our Terrestrial and Wireless Networks segment vision and overall continued One Comtech transformation. Also, as it relates to the Terrestrial and Wireless Networks segment, we hired Tom Guthrie as Chief Operating Officer and General Manager for our location-based technologies business and John Whitehead as General Manager for our safety and securities business. Both Mr. Guthrie and Mr. Whitehead are seasoned veterans and bring a wealth of leadership and experience within the Terrestrial and Wireless Networks end markets. Also, in April 2024, we hired Roly Rigual as our Vice President of Sales and Business Development. Mr. Rigual, who most recently served as the Vice President of Sales Engineering and Strategy at iDirect Government, brings over two decades of telecommunications industry leadership experience and a proven track record of driving sales engineering and strategic solutions. Having held leadership roles at top-tier telecommunications companies, Mr. Rigual's deep understanding of satellite and space markets, as well as terrestrial and wireless markets, aligns well with and will be instrumental to our strategic business priorities across a variety of global markets. 43 Index Business Outlook As we enter the fourth quarter of fiscal 2024, business conditions continue to be challenging, and the operating environment is largely unpredictable, due to factors including but not limited to: the timing of when we entered into the New Credit Facility, rising interest rates, inflation, continuing resolutions associated with the U.S. Federal budget, repercussions of 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 resulting from such conditions have or could impact our business. In light of these business conditions and resulting challenges, while we are pleased to have successfully closed on our refinancing of the Prior Credit Facility, we anticipate variability from time to time as we move through our One Comtech transformational change and are targeting, subject to the risks highlighted in this Form 10-Q and other filings with the SEC, net sales and Adjusted EBITDA for our fourth quarter of fiscal 2024 to be similar to our third quarter of fiscal 2024. We do not provide forward-looking guidance on a GAAP basis because we are unable to predict certain items contained in the GAAP measure without unreasonable efforts. Because our consolidated Adjusted EBITDA, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each segment as well as unallocated spending, it is inherently difficult to forecast. Please refer to the discussion below under "Adjusted EBITDA" for more information. Additional information related to our Business Outlook for Fiscal 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 April 30, 2024 and 2023 ” and “ Comparison of the Results of Operations for the Nine Months Ended April 30, 2024 and 2023 .” COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2024 AND 2023 Net Sales. Consolidated net sales were $128.1 million and $136.3 million for the three months ended April 30, 2024 and 2023, respectively, representing a decrease of $8.2 million, or 6.0%. The period-over-period decrease reflects lower net sales in our Satellite and Space Communications segment offset, in part, by an increase in net sales in our Terrestrial and Wireless Networks segment, as further discussed below. Satellite and Space Communications segment net sales during our third quarter of fiscal 2024 continued to reflect challenging business conditions stemming principally from our efforts to refinance our Prior Credit Facility, which temporarily slowed down our receipt of components from suppliers and our ability to deliver finished products during the quarter. While we have made significant progress toward resolving such conditions by entering into our New Credit Facility on June 17, 2024, net sales related to certain orders in our backlog shifted to future periods. Also, net sales in our Satellite and Space Communications segment reflect the PST Divestiture on November 7, 2023. Satellite and Space Communications Net sales in our Satellite and Space Communications segment were $71.4 million for the three months ended April 30, 2024 as compared to $82.2 million for the three months ended April 30, 2023, a decrease of $10.8 million. Related segment net sales for the three months ended April 30, 2024 primarily reflect higher net sales of our troposcatter solutions to U.S. government end customers (including progress toward delivering next-generation troposcatter terminals to both the U.S. Marine Corps and U.S. Army), more than offset by lower net sales of high power solid state amplifiers related to the PST Divestiture on November 7, 2023, COMET TM troposcatter terminals to an international customer and VSAT SATCOM equipment for the U.S. Army. Our Satellite and Space Communications segment represented 55.8% of consolidated net sales for the three months ended April 30, 2024 as compared to 60.3% for the three months ended April 30, 2023. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the three months ended April 30, 2024 was 0.85x. Bookings, sales and profitability in our Satellite and Space Communications segment can fluctuate substantially from period-to-period due to many factors, including unpredictable funding, deployment and technology decisions by our U.S. and international government customers. Period-to-period fluctuations in bookings are normal for this segment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance. 44 Index Terrestrial and Wireless Networks Net sales in our Terrestrial and Wireless Networks segment were $56.6 million for the three months ended April 30, 2024, as compared to $54.1 million for the three months ended April 30, 2023, an increase of $2.5 million, or 4.6%. Related segment net sales for the three months ended April 30, 2024 primarily reflect higher net sales of our NG-911 and call handling services, offset in part by lower net sales of our location-based solutions. Our Terrestrial and Wireless Networks segment represented 44.2% of consolidated net sales for the three months ended April 30, 2024 as compared to 39.7% for the three months ended April 30, 2023. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the three months ended April 30, 2024 was 0.72x. 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 and timing of our receipt of large, multi-year NG-911 contracts. Period-to-period fluctuations in bookings are normal for this segment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance. Geography and Customer Type Sales by geography and customer type, as a percentage of related sales, for the three months ended April 30, 2024 and 2023 are as follows: Three months ended April 30, 2024 2023 2024 2023 2024 2023 Satellite and Space Communications Terrestrial and Wireless Networks Consolidated U.S. government 60.9 % 47.1 % 1.0 % 1.6 % 34.4 % 29.1 % Domestic 16.2 % 14.8 % 88.3 % 87.9 % 48.1 % 43.8 % Total U.S. 77.1 % 61.9 % 89.3 % 89.5 % 82.5 % 72.9 % International 22.9 % 38.1 % 10.7 % 10.5 % 17.5 % 27.1 % Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Sales to U.S. government customers include sales to the U.S. Department of Defense ("DoD"), intelligence and civilian agencies, as well as sales directly to or through prime contractors. Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. For the three months ended April 30, 2024 and 2023, except for the U.S. government, there were no customers that represented 10% or more of consolidated net sales. International sales for the three months ended April 30, 2024 and 2023 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $22.4 million and $37.0 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 10% or more of consolidated net sales for the three months ended April 30, 2024 and 2023. Gross Profit. Gross profit was $39.0 million and $43.1 million for the three months ended April 30, 2024 and 2023, respectively. Gross profit, as a percentage of consolidated net sales, for the three months ended April 30, 2024 was 30.4% as compared to 31.7% for the three months ended April 30, 2023. Our gross profit (both in dollars and as a percentage of consolidated net sales) reflects lower net sales and overall product mix changes (including the impact of the PST Divestiture), as discussed above. Gross profit, as a percentage of related segment net sales, is further discussed below. Our Satellite and Space Communications segment's gross profit, as a percentage of related segment net sales, for the three months ended April 30, 2024 increased in comparison to the three months ended April 30, 2023. The gross profit percentage in the more recent 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 April 30, 2024 decreased in comparison to the three months ended April 30, 2023. The gross profit percentage in the more recent period reflects changes in products and services mix, as discussed above. Included in consolidated cost of sales for the three months ended April 30, 2024 and 2023 are provisions for excess and obsolete inventory of $0.8 million and $1.5 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. 45 Index 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 $28.7 million and $31.4 million for the three months ended April 30, 2024 and 2023, respectively. As a percentage of consolidated net sales, selling, general and administrative expenses were 22.4% and 23.0% for the three months ended April 30, 2024 and 2023, respectively. During the three months ended April 30, 2024 and 2023, we incurred $2.8 million and $4.1 million, respectively, of restructuring costs primarily to streamline our operations and improve efficiency (including severance and costs related to the relocation of certain of our satellite ground station production facilities to our 146,000 square foot facility in Chandler, Arizona). Excluding restructuring costs, selling, general and administrative expenses for the three months ended April 30, 2024 and 2023 would have decreased from $27.3 million to $25.9 million, respectively. As a percentage of consolidated net sales, selling, general and administrative expenses would have approximated 20.0% in both periods. The decrease, in dollars, reflects lower amortization of stock-based compensation, as discussed below. Amortization of stock-based compensation expense recorded as selling, general and administrative expenses was $0.3 million in the three months ended April 30, 2024 as compared to $3.9 million in the three months ended April 30, 2023. The more recent period reflects forfeitures of stock-based awards related to our former CEO. Amortization of stock-based compensation is not allocated to our two reportable operating segments. Research and Development Expenses. Research and development expenses were $5.7 million and $11.7 million for the three months ended April 30, 2024 and 2023, respectively. As a percentage of consolidated net sales, research and development expenses were 4.5% and 8.6% for the three months ended April 30, 2024 and 2023, respectively. For the three months ended April 30, 2024 and 2023, research and development expenses of $3.0 million and $5.3 million, respectively, related to our Satellite and Space Communications segment, and $2.7 million and $6.3 million, respectively, related to our Terrestrial and Wireless Networks segment. The remaining research and development expenses in each period related to the amortization of stock-based compensation expense and were nominal. Lower research and development expenses reflect our One Comtech initiative and prioritization of resources across various programs. During the three months ended April 30, 2024 and 2023, we incurred $0.9 million and $1.0 million, respectively, of strategic emerging technology costs in our Satellite and Space Communications segment for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations. We are evaluating this new market in relation to our long-term business strategies, and we may incur additional costs in the future. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the three months ended April 30, 2024 and 2023, customers reimbursed us $5.7 million and $4.5 million, respectively, which is not reflected in the reported research and development expenses but is included in net sales with the related costs included in cost of sales. Amortization of Intangibles. Amortization relating to intangible assets with finite lives for both the three months ended April 30, 2024 and 2023 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). Gain on Business Divestiture, Net. On November 7, 2023, we completed the PST Divestiture and recorded an estimated gain of $2.2 million in our Unallocated segment. Such estimated gain included a $1.0 million receivable for an amount held in escrow relating to the closing date net working capital. During our third quarter of fiscal 2024, the closing date net working capital was finalized, and we received $0.8 million of the $1.0 million held in escrow. As a result, we recognized a $0.2 million reduction to the estimated gain, resulting in a revised estimated gain on business divestiture, net of $2.0 million for the nine months ended April 30, 2024. There was no similar activity in the corresponding period of the prior year. 46 Index CEO Transition Costs . CEO transition costs were $2.5 million for the three months ended April 30, 2024 and principally consisted of Unallocated legal expenses related to the termination of our former CEO, Mr. Peterman, for cause, due to conduct unrelated to our business strategy, financial results or previously filed financial statements. There were no similar costs incurred in the three months ended April 30, 2023. Operating Income (Loss). Operating loss for the three months ended April 30, 2024 and 2023 was $3.5 million and $5.3 million, respectively. Operating income (loss) by reportable segment is shown in the table below: Three months ended April 30, 2024 2023 2024 2023 2024 2023 2024 2023 ($ in millions) Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Consolidated Operating income (loss) $ 2.8 0.1 5.7 3.1 (12.0) (8.5) $ (3.5) (5.3) Percentage of related net sales 3.9 % 0.1 % 10.1 % 5.8 % NA NA NA NA Our GAAP operating loss of $3.5 million for the three months ended April 30, 2024 reflects: (i) $5.3 million of amortization of intangibles; (ii) $2.8 million of restructuring costs (of which $0.6 million and $2.2 million related to our Satellite and Space Communications and Unallocated segments, respectively); (iii) $2.5 million of CEO transition costs; (iv) $0.4 million of amortization of stock-based compensation; (v) $0.9 million of strategic emerging technology costs; (vi) $0.2 million of amortization of cost to fulfill assets; and (vii) a $0.2 million reduction to the estimated gain related to the PST Divestiture, as discussed above. Excluding such items, our consolidated operating income for the three months ended April 30, 2024 would have been $8.8 million. Our GAAP operating loss of $5.3 million for the three months ended April 30, 2023 reflects: (i) $5.3 million of amortization of intangibles; (ii) $4.1 million of restructuring costs (of which $2.2 million, $0.5 million and $1.4 million related to our Satellite and Space Communications, Terrestrial and Wireless Networks and Unallocated segments, respectively); (iii) $4.1 million of amortization of stock-based compensation; (iv) $1.0 million of strategic emerging technology costs; and (v) $0.2 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating income for the three months ended April 30, 2023 would have been $9.6 million. The decrease in operating income, excluding the above items, from $9.6 million to $8.8 million for the most recent period primarily reflects lower research and development expenses in both of our reportable operating segments, more than offset by lower consolidated net sales and lower consolidated gross profit (both in dollars and as a percentage of consolidated net sales) and higher Unallocated selling, general and administrative expenses due to our One Comtech and People Strategy initiatives, 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 April 30, 2024 reflects lower research and development and selling, general and administrative expenses, offset in part by lower related segment net sales and gross profit, 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 April 30, 2024 reflects lower research and development and selling, general and administrative expenses, offset in part by a lower gross profit percentage on related segment net sales, as discussed above. Excluding the impact of CEO transition costs, its respective portion of restructuring charges in each period and the reduction to the estimated gain related to the PST Divestiture, Unallocated expenses for both the three months ended April 30, 2024 and 2023 would have been $7.1 million. Interest Expense and Other. Interest expense was $5.1 million and $4.4 million for the three months ended April 30, 2024 and 2023, respectively. The increase is primarily due to a general rise in interest rates as compared to the prior year period, partially offset by a lower average debt balance outstanding under our Prior Credit Facility during the more recent period. Our effective interest rate (including amortization of deferred financing costs) in the three months ended April 30, 2024 was approximately 12.3%, as compared to 10.1% in the prior year period. Our cash borrowing rate (which excludes the amortization of deferred financing costs) under our Prior Credit Facility approximated 9.4%, as compared to 8.9% in the prior year period. Interest (Income) and Other. Interest (income) and other for both the three months ended April 30, 2024 and 2023 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. 47 Index Change in Fair Value of Warrants. During the three months ended April 30, 2024, we recorded a $6.4 million non-cash benefit from the remeasurement of warrants. See "Notes to Condensed Consolidated Financial Statements - Note (17) - Convertible Preferred Stock" for more information. Benefit from Income Taxes. For the three months ended April 30, 2024 and 2023, we recorded a tax benefit of $5.4 million and $2.9 million, respectively. Our effective tax rate (excluding discrete tax items) for the three months ended April 30, 2024 and 2023 was 2.0% and 14.25%, respectively. The change in rate from 14.25% to 2.0% is primarily due to changes in expected product and geographic mix. For purposes of determining our 2.0% estimated annual effective tax rate for fiscal 2024, the estimated gain, net on the PST Divestiture, CEO transition costs and change in fair value of warrants are considered significant, unusual or infrequently occurring discrete tax items and are excluded from the computation of our effective tax rate. For purposes of determining our 14.25% estimated annual effective tax rate for fiscal 2023, CEO transition costs are considered significant, unusual or infrequently occurring discrete tax items and are excluded from the computation of our effective tax rate. During the three months ended April 30, 2024, we recorded a net discrete tax benefit of $0.8 million primarily related to the reversal of tax contingencies no longer required due to the expiration of applicable statute of limitations and the deductible portion of CEO transition costs. During the three months ended April 30, 2023, we recorded a net discrete tax benefit of $1.2 million, primarily related to the reversal of tax contingencies no longer required due to the expiration of applicable statute of limitations, offset in part by the finalization of certain tax accounts in connection with our fiscal 2022 federal income tax return. Our U.S. federal income tax returns for fiscal 2021 through 2023 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 April 30, 2024 and 2023, consolidated net loss attributable to common stockholders was $1.0 million and $9.2 million, respectively. The more recent period included a $6.4 million benefit from the change in fair value of warrants related to convertible preferred shares, as discussed above. There was no similar benefit in the three months ended April 30, 2023. Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both the three months ended April 30, 2024 and 2023 are shown in the table below with a reconciliation to net income (loss) (numbers in the table may not foot due to rounding): Three months ended April 30, 2024 2023 2024 2023 2024 2023 2024 2023 ($ in millions) Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Consolidated Net income (loss) $ 1.8 0.7 5.3 2.9 (4.3) (11.0) $ 2.8 (7.5) (Benefit from) provision for income taxes — (1.2) 0.3 0.1 (5.7) (1.8) (5.4) (2.9) Interest (income) and other 0.1 0.6 0.2 0.2 0.1 — 0.4 0.7 Interest expense 0.9 — — — 4.3 4.4 5.1 4.4 Change in fair value of warrants — — — — (6.4) — (6.4) — Amortization of stock-based compensation — — — — 0.4 4.1 0.4 4.1 Amortization of intangibles 1.7 1.8 3.6 3.5 — — 5.3 5.3 Depreciation 1.0 1.0 2.0 1.9 0.1 — 3.1 3.0 Amortization of cost to fulfill assets 0.2 0.2 — — — — 0.2 0.2 Restructuring costs 0.6 2.2 — 0.5 2.2 1.4 2.8 4.1 Strategic emerging technology costs 0.9 1.0 — — — — 0.9 1.0 CEO transition costs — — — — 2.5 — 2.5 — Loss on business divestiture, net — — — — 0.2 — 0.2 — Adjusted EBITDA $ 7.2 6.4 11.3 9.2 (6.6) (3.0) $ 11.9 12.5 Percentage of related net sales 10.1 % 7.7 % 20.0 % 16.9 % NA NA 9.3 % 9.2 % 48 Index The decrease in consolidated Adjusted EBITDA, in dollars, for the three months ended April 30, 2024 as compared to the three months ended April 30, 2023 primarily reflects lower research and development expenses in both of our reportable operating segments, more than offset by lower consolidated net sales and lower consolidated gross profit (both in dollars and as a percentage of consolidated net sales) and higher Unallocated selling, general and administrative expenses due to our One Comtech and People Strategy initiatives, 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 lower research and development and selling, general and administrative expenses, offset in part by lower related segment net sales and gross profit, 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 lower research and development and selling, general and administrative expenses, offset in part by a lower gross profit percentage on related segment net sales, as discussed above. 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 interest, income taxes, depreciation expense, amortization of intangibles, amortization of stock-based compensation, amortization of cost to fulfill assets, restructuring costs, strategic emerging technology costs (for next-generation satellite technology), change in fair value of convertible preferred stock purchase option liability, change in fair value of warrants, write-off of deferred financing costs, acquisition plan expenses, COVID-19 related costs, facility exit costs, CEO transition costs, proxy solicitation costs and strategic alternatives analysis expenses and other. Although closely aligned, our definition of Adjusted EBITDA is different than the Consolidated EBITDA (as such term was defined in our Prior Credit Facility and New 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. 49 Index These Non-GAAP financial measures have limitations as an analytical tool as they exclude the financial impact of transactions necessary to conduct our business, such as the granting of equity compensation awards, and are not intended to be an alternative to financial measures prepared in accordance with GAAP. These measures are adjusted as described in the reconciliation of GAAP to Non-GAAP measures in the tables presented herein, but these adjustments should not be construed as an inference that all of these adjustments or costs are unusual, infrequent or non-recurring. Non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, financial measures determined in accordance with GAAP. Investors are advised to carefully review the GAAP financial results that are disclosed in our SEC filings. We have not quantitatively reconciled our fourth quarter fiscal 2024 Adjusted EBITDA outlook 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. Reconciliations of our GAAP consolidated operating loss, net loss attributable to common stockholders and net loss per diluted common share for the three months ended April 30, 2024 and 2023 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 income attributable to common stockholders and non-GAAP net 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 income per diluted common share for the three months ended April 30, 2024 and 2023 was computed using weighted average diluted shares outstanding of 28,936,000 and 28,498,000, respectively, during the period. Three months ended April 30, 2024 ($ 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 $ (3.5) $ (1.0) $ (0.04) Adjustments to reflect redemption value of convertible preferred stock — 3.8 0.13 Change in fair value of warrants — (6.4) (0.22) Amortization of intangibles 5.3 4.1 0.14 Restructuring costs 2.8 2.1 0.07 CEO transition costs 2.5 1.9 0.07 Amortization of stock-based compensation 0.4 0.3 0.01 Strategic emerging technology costs 0.9 0.7 0.02 Amortization of costs to fulfill assets 0.2 0.2 0.01 Loss on business divestiture, net 0.2 0.2 0.01 Net discrete tax benefit — (0.2) (0.01) Non-GAAP measures $ 8.8 $ 5.7 $ 0.20 50 Index Three months ended April 30, 2023 ($ in millions, except for per share amount) Operating (Loss) Income Net (Loss) Income Attributable to Common Stockholders Net (Loss) Income per Diluted Common Share Reconciliation of GAAP to Non-GAAP Earnings: GAAP measures, as reported $ (5.3) $ (9.2) $ (0.33) Adjustments to reflect redemption value of convertible preferred stock — 1.8 0.06 Amortization of intangibles 5.3 4.1 0.15 Restructuring costs 4.1 3.2 0.11 Amortization of stock-based compensation 4.1 3.2 0.11 Strategic emerging technology costs 1.0 0.9 0.03 Amortization of costs to fulfill assets 0.2 0.2 0.01 Net discrete tax benefit — (1.2) (0.04) Non-GAAP measures $ 9.6 $ 3.0 $ 0.11 COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 2024 AND 2023 Net Sales. Consolidated net sales were $414.2 million and $401.2 million for the nine months ended April 30, 2024 and 2023, respectively, representing an increase of $13.0 million, or 3.2%. The period-over-period increase reflects higher net sales in both our Satellite and Space Communications segment and Terrestrial and Wireless Networks segment, as further discussed below. Although higher than last year, net sales during the nine months ended April 30, 2024, primarily in our Satellite and Space Communications segment, reflect delays in the timing of our receipt of and performance on orders, principally a result of the challenging business conditions giving rise to our going concern disclosures in early December 2023, which we believe temporarily slowed down our receipt of orders from customers, as well as components from suppliers. While we have made significant progress toward resolving such conditions by entering into our New Credit Facility on June 17, 2024, net sales related to certain orders in our backlog shifted to future periods. Also, net sales in our Satellite and Space Communications segment reflect the PST Divestiture on November 7, 2023. Satellite and Space Communications Net sales in our Satellite and Space Communications segment were $252.4 million for the nine months ended April 30, 2024 as compared to $243.5 million for the nine months ended April 30, 2023, an increase of $8.9 million or 3.7%. Related segment net sales for the nine months ended April 30, 2024 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 U.S. Army), offset by lower net sales of satellite ground station solutions (including X/Y steerable antennas), high power solid state amplifiers related to the PST Divestiture on November 7, 2023 and COMET TM troposcatter terminals to an international customer. Our Satellite and Space Communications segment represented 60.9% of consolidated net sales for the nine months ended April 30, 2024 as compared to 60.7% for the nine months ended April 30, 2023. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the nine months ended April 30, 2024 was 1.05x. Bookings, sales and profitability in our Satellite and Space Communications segment can fluctuate substantially from period-to-period due to many factors, including unpredictable funding, deployment and technology decisions by our U.S. and international government customers. Period-to-period fluctuations in bookings are normal for this segment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance. Terrestrial and Wireless Networks Net sales in our Terrestrial and Wireless Networks segment were $161.8 million for the nine months ended April 30, 2024, as compared to $157.7 million for the nine months ended April 30, 2023, an increase of $4.1 million, or 2.6%. Related segment net sales for the nine months ended April 30, 2024 primarily reflect higher net sales of our NG-911 and call handling services, offset in part by lower net sales of our location based solutions. Our Terrestrial and Wireless Networks segment represented 39.1% of consolidated net sales for the nine months ended April 30, 2024 as compared to 39.3% for the nine months ended April 30, 2023. Our book-to-bill ratio in this segment for the nine months ended April 30, 2024 was 1.01x. 51 Index 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 and timing of our receipt of large, multi-year NG-911 contracts. Period-to-period fluctuations in bookings are normal for this segment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance. Geography and Customer Type Sales by geography and customer type, as a percentage of related sales, for the nine months ended April 30, 2024 and 2023 are as follows: Nine months ended April 30, 2024 2023 2024 2023 2024 2023 Satellite and Space Communications Terrestrial and Wireless Networks Consolidated U.S. government 54.8 % 48.7 % 1.1 % 1.8 % 33.8 % 30.3 % Domestic 14.4 % 17.2 % 89.0 % 89.8 % 43.5 % 45.7 % Total U.S. 69.2 % 65.9 % 90.1 % 91.6 % 77.3 % 76.0 % International 30.8 % 34.1 % 9.9 % 8.4 % 22.7 % 24.0 % Total 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Sales to U.S. government customers include sales to the DoD, intelligence and civilian agencies, as well as sales directly to or through prime contractors. Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. For the nine months ended April 30, 2024, except for the U.S. government, there were no customers that represented 10% or more of consolidated net sales. For the nine months ended April 30, 2023, included in domestic sales are sales to Verizon Communications Inc. ("Verizon"), which accounted for 11.2% of consolidated net sales. International sales for the nine months ended April 30, 2024 and 2023 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $93.9 million and $96.2 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 10% or more of consolidated net sales for the nine months ended April 30, 2024 and 2023. Gross Profit. Gross profit was $130.0 million and $135.9 million for the nine months ended April 30, 2024 and 2023, respectively, a decrease of $5.9 million. Gross profit, as a percentage of consolidated net sales, for the nine months ended April 30, 2024 was 31.4% as compared to 33.9% for the nine months ended April 30, 2023. Our gross profit (both in dollars and as a percentage of consolidated net sales) reflects overall product mix changes (including the impact of the PST Divestiture), as discussed above. Gross profit, as a percentage of related segment net sales, is further discussed below. Our Satellite and Space Communications segment's gross profit, both in dollars and as a percentage of related segment net sales, for the nine months ended April 30, 2024 decreased in comparison to the nine months ended April 30, 2023. The gross profit percentage in the more recent period reflects changes in products and services mix, as discussed above. Our Terrestrial and Wireless Networks segment's gross profit, both in dollars and as a percentage of related segment net sales, for the nine months ended April 30, 2024 decreased in comparison to the nine months ended April 30, 2023. The gross profit percentage in the more recent period reflects changes in products and services mix, as discussed above. Included in consolidated cost of sales for the nine months ended April 30, 2024 and 2023 are provisions for excess and obsolete inventory of $2.2 million and $2.8 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 $91.7 million and $89.6 million for the nine months ended April 30, 2024 and 2023, respectively. As a percentage of consolidated net sales, selling, general and administrative expenses were 22.1% and 22.3% for the nine months ended April 30, 2024 and 2023, respectively. 52 Index During the nine months ended April 30, 2024 and 2023, we incurred $9.2 million and $7.0 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 146,000 square foot facility in Chandler, Arizona), as well as to complete the PST Divestiture. Excluding restructuring costs, selling, general and administrative expenses for the nine months ended April 30, 2024 and 2023 would have been comparable at $82.5 million or 19.9% and $82.6 million or 20.6%, respectively, of consolidated net sales. Amortization of stock-based compensation expense recorded as selling, general and administrative expenses was $4.5 million in the nine months ended April 30, 2024 as compared to $5.6 million in the nine months ended April 30, 2023. The more recent period reflects forfeitures of stock-based awards related to our former CEO. Amortization of stock-based compensation is not allocated to our two reportable operating segments. Research and Development Expenses. Research and development expenses were $20.4 million and $36.9 million for the nine months ended April 30, 2024 and 2023, respectively, representing a decrease of $16.5 million or 44.7%. As a percentage of consolidated net sales, research and development expenses were 4.9% and 9.2% for the nine months ended April 30, 2024 and 2023, respectively. For the nine months ended April 30, 2024 and 2023, research and development expenses of $12.0 million and $17.3 million, respectively, related to our Satellite and Space Communications segment and $8.1 million and $19.3 million, respectively, related to our Terrestrial and Wireless Networks segment. The remaining research and development expenses of $0.3 million in the nine months ended April 30, 2024 and 2023, respectively, related to the amortization of stock-based compensation expense. Lower research and development expenses reflect our One Comtech initiative and prioritization of resources across various programs. During the nine months ended April 30, 2024 and 2023, we incurred $3.2 million and $2.5 million, respectively, of strategic emerging technology costs in our Satellite and Space Communications segment for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations. We are evaluating this new market in relation to our long-term business strategies, and we may incur additional costs in the future. Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the nine months ended April 30, 2024 and 2023, customers reimbursed us $12.2 million and $10.1 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 the nine months ended April 30, 2024 and 2023 was $15.9 million (of which $5.0 million was for the Satellite and Space Communications segment and $10.9 million was for the Terrestrial and Wireless Networks segment) and $16.0 million (of which $5.5 million was for the Satellite and Space Communications segment and $10.5 million was for the Terrestrial and Wireless Networks segment), respectively. Gain on Business Divestiture, Net. On November 7, 2023, we completed the PST Divestiture and recorded an estimated gain of $2.2 million in our Unallocated segment. Such estimated gain included a $1.0 million receivable for an amount held in escrow relating to the closing date net working capital. During our third quarter of fiscal 2024, the closing date net working capital was finalized, and we received $0.8 million of the $1.0 million held in escrow. As a result, we recognized a $0.2 million reduction to the estimated gain, resulting in a revised estimated gain on business divestiture, net of $2.0 million for the nine months ended April 30, 2024. There was no similar activity in the corresponding period of the prior year. CEO Transition Costs . CEO transition costs were $2.5 million for the nine months ended April 30, 2024 and principally consisted of Unallocated legal expenses related to the termination of our former CEO, Mr. Peterman, for cause, due to conduct unrelated to our business strategy, financial results or previously filed financial statements. CEO transition costs were $9.1 million for the nine months ended April 30, 2023 and principally consisted of Unallocated compensation related expenses pertaining to our former CEO, Mr. Porcelain, pursuant to his separation agreement with the Company. 53 Index Operating Income (Loss). Operating income (loss) for the nine months ended April 30, 2024 and 2023 was $1.6 million and $(15.8) million, respectively. Operating income (loss) by reportable segment is shown in the table below: Nine months ended April 30, 2024 2023 2024 2023 2024 2023 2024 2023 ($ in millions) Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Consolidated Operating income (loss) $ 14.8 8.4 17.9 7.2 (31.1) (31.4) $ 1.6 (15.8) Percentage of related net sales 5.8 % 3.4 % 11.1 % 4.6 % NA NA 0.4 % NA Our GAAP operating income of $1.6 million for the nine months ended April 30, 2024 reflects: (i) $15.9 million of amortization of intangibles; (ii) $9.2 million of restructuring costs (of which $2.8 million and $6.4 million related to our Satellite and Space Communications and Unallocated segments, respectively); (iii) $5.2 million of amortization of stock-based compensation; (iv) $3.2 million of strategic emerging technology costs; (v) a $2.0 million estimated gain, net on the PST Divestiture reported in our Unallocated segment; (vi) $2.5 million of CEO transition costs; and (vii) $0.7 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating income for the nine months ended April 30, 2024 would have been $36.3 million, or 8.8% of consolidated net sales. Our GAAP operating loss of $15.8 million for the nine months ended April 30, 2023 reflects: (i) $16.0 million of amortization of intangibles; (ii) $9.1 million of CEO transition costs; (iii) $7.0 million of restructuring costs (of which $4.4 million, $0.5 million and $2.1 million related to our Satellite and Space Communications, Terrestrial and Wireless Networks and Unallocated segments, respectively); (iv) $6.3 million of amortization of stock-based compensation; (v) $2.5 million of strategic emerging technology costs; and (vi) $0.7 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating income for the nine months ended April 30, 2023 would have been $25.9 million, or 6.4% of consolidated net sales. The increase in operating income, excluding the above items, from $25.9 million to $36.3 million for the more recent period primarily reflects lower research and development expenses in both of our reportable operating segments, offset in part by lower consolidated gross profit (both in dollars and as a percentage of consolidated net sales), as discussed above. Operating income (loss) by reportable segment is further discussed below. The increase in our Satellite and Space Communications segment operating income, both in dollars and as a percentage of the related segment net sales, for the nine months ended April 30, 2024 reflects lower research and development expenses, 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 nine months ended April 30, 2024 reflects lower research and development expenses, as discussed above. Excluding the estimated gain on the PST Divestiture, the impact of CEO transition costs and its respective portion of restructuring charges in each period, Unallocated expenses for the nine months ended April 30, 2024 would have been $24.2 million, as compared to $20.2 million for the nine months ended April 30, 2023. The increase in Unallocated expenses, excluding such items, was primarily due to higher compensation and legal expenses related to our One Comtech and People Strategy initiatives. Interest Expense and Other. Interest expense was $15.3 million and $10.4 million for the nine months ended April 30, 2024 and 2023, respectively. The increase is due to a general rise in interest rates as compared to the prior year period and a higher average debt balance outstanding under our Prior Credit Facility during the more recent period. Our effective interest rate (including amortization of deferred financing costs) in the nine months ended April 30, 2024 was approximately 11.4%, as compared to 8.3% in the prior year period. Our cash borrowing rate (which excludes the amortization of deferred financing costs) under our Prior Credit Facility approximated 9.4%, as compared to 8.9% in the prior year period. Interest (Income) and Other. Interest (income) and other for both the nine months ended April 30, 2024 and 2023 was nominal. All of our available cash and cash equivalents are currently invested in bank deposits and money market deposit accounts which, at this time, are currently yielding an immaterial interest rate. Change in Fair Value of Warrants. During the nine months ended April 30, 2024, we recorded a $6.4 million non-cash benefit from the remeasurement of warrants. See "Notes to Condensed Consolidated Financial Statements - Note (17) - Convertible Preferred Stock" for more information. 54 Index Provision for (Benefit from) Income Taxes. For the nine months ended April 30, 2024, we recorded a tax expense of $0.6 million, as compared to a tax benefit of $3.8 million recorded in the nine months ended April 30, 2023. Our effective tax rate (excluding discrete tax items) for the nine months ended April 30, 2024 and 2023 was 2.0% and 14.25%, respectively. The change in rate from 14.25% to 2.0% is primarily due to changes in expected product and geographic mix. For purposes of determining our 2.0% estimated annual effective tax rate for fiscal 2024, the estimated gain, net on the PST Divestiture, CEO transition costs and change in fair value of warrants are considered significant, unusual or infrequently occurring discrete tax items and are excluded from the computation of our effective tax rate. For purposes of determining our 14.25% estimated annual effective tax rate for fiscal 2023, CEO transition costs are considered significant, unusual or infrequently occurring discrete tax items and are excluded from the computation of our effective tax rate. During the nine months ended April 30, 2024, we recorded a net discrete tax expense of $1.0 million primarily related to the anticipated timing of the settlement of contingent consideration related to the PST Divestiture. Upon settlement of the contingent consideration, if any, we would expect an offsetting net discrete tax benefit due to the utilization of capital losses that had been previously subject to a full valuation allowance. During the nine months ended April 30, 2023, we recorded a net discrete tax benefit of $1.2 million primarily related to the reversal of tax contingencies no longer required due to the expiration of applicable statute of limitations and the deductible portion of CEO transition costs, offset in part by the settlement of stock-based awards and the finalization of certain tax accounts in connection with our fiscal 2022 federal income tax return. Our U.S. federal income tax returns for fiscal 2021 through 2023 are subject to potential future 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 nine months ended April 30, 2024 and 2023, consolidated net loss attributable to common stockholders was $34.8 million and $28.6 million, respectively. The more recent period includes $18.0 million of expense specifically related to the exchange of our Series A-1 Convertible Preferred Stock for Series B Convertible Preferred Stock on January 22, 2024, offset in part by a $6.4 million benefit from the change in fair value of warrants related to convertible preferred shares and a $2.0 million estimated gain, net on the PST Divestiture, as discussed above. Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both the nine months ended April 30, 2024 and 2023 are shown in the table below (numbers in the table may not foot due to rounding): Nine months ended April 30, 2024 2023 2024 2023 2024 2023 2024 2023 ($ in millions) Satellite and Space Communications Terrestrial and Wireless Networks Unallocated Consolidated Net income (loss) $ 10.7 9.6 17.0 7.1 (36.9) (40.0) $ (9.2) (23.4) Provision for (benefit from) income taxes 0.5 (1.8) 0.7 (0.2) (0.6) (1.7) 0.6 (3.8) Interest (income) and other 0.9 0.6 0.2 0.3 0.2 — 1.2 0.9 Interest expense 2.7 — — — 12.7 10.4 15.3 10.4 Change in fair value of warrants — — — — (6.4) — (6.4) — Amortization of stock-based compensation — — — — 5.2 6.3 5.2 6.3 Amortization of intangibles 5.0 5.5 10.9 10.6 — — 15.9 16.0 Depreciation 2.9 3.1 5.9 5.6 0.3 0.1 9.1 8.7 Amortization of cost to fulfill assets 0.7 0.7 — — — — 0.7 0.7 Restructuring costs 2.8 4.4 — 0.5 6.4 2.1 9.2 7.0 Strategic emerging technology costs 3.2 2.5 — — — — 3.2 2.5 CEO transition costs — — — — 2.5 9.1 2.5 9.1 Gain on business divestiture, net — — — — (2.0) — (2.0) — Adjusted EBITDA $ 29.4 24.5 34.7 23.9 (18.7) (13.8) $ 45.4 34.6 Percentage of related net sales 11.6 % 10.1 % 21.4 % 15.2 % NA NA 11.0 % 8.6 % 55 Index The increase in consolidated Adjusted EBITDA, both in dollars and as a percentage of consolidated net sales, for the nine months ended April 30, 2024 as compared to the nine months ended April 30, 2023 reflects lower research and development expenses in both of our reportable operating segments, offset in part by lower consolidated gross profit (both in dollars and as a percentage of consolidated net sales), 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, reflects lower research and development expenses, 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, reflects lower research and development expenses, as discussed above. 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 interest, income taxes, depreciation expense, amortization of intangibles, amortization of stock-based compensation, amortization of cost to fulfill assets, restructuring costs, strategic emerging technology costs (for next-generation satellite technology), change in fair value of convertible preferred stock purchase option liability, change in fair value of warrants, write-off of deferred financing costs, acquisition plan expenses, COVID-19 related costs, facility exit costs, CEO transition costs, proxy solicitation costs and strategic alternatives analysis expenses and other. Although closely aligned, our definition of Adjusted EBITDA is different than the Consolidated EBITDA (as such term was defined in our Prior Credit Facility and New 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 fourth quarter fiscal 2024 Adjusted EBITDA outlook 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. 56 Index Reconciliations of our GAAP consolidated operating income (loss), net loss attributable to common stockholders and net loss per diluted common share for the nine months ended April 30, 2024 and 2023 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 income attributable to common stockholders and non-GAAP net 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 income per diluted common share for the nine months ended April 30, 2024 and 2023 was computed using weighted average diluted shares outstanding of 28,948,000 and 28,353,000, respectively, during the period. Nine months ended April 30, 2024 ($ in millions, except for per share amount) Operating 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 $ 1.6 $ (34.8) $ (1.21) Loss on extinguishment of convertible preferred stock — 13.6 0.47 Adjustments to reflect redemption value of convertible preferred stock — 12.0 0.41 Change in fair value of warrants — (6.4) (0.22) CEO transition costs 2.5 1.9 0.07 Amortization of intangibles 15.9 12.3 0.42 Restructuring costs 9.2 7.1 0.24 Amortization of stock-based compensation 5.2 4.1 0.14 Strategic emerging technology costs 3.2 2.5 0.09 Amortization of cost to fulfill assets 0.7 0.7 0.02 Gain on business divestiture, net (2.0) (1.2) (0.04) Net discrete tax expense — 0.8 0.03 Non-GAAP measures $ 36.3 $ 12.5 $ 0.43 Nine months ended April 30, 2023 ($ in millions, except for per share amount) Operating (Loss) Income Net (Loss) Income Attributable to Common Stockholders Net (Loss) Income per Diluted Common Share Reconciliation of GAAP to Non-GAAP Earnings: GAAP measures, as reported $ (15.8) $ (28.6) $ (1.02) Adjustment to reflect redemption value of convertible preferred stock — 5.2 0.19 Amortization of intangibles 16.0 12.4 0.44 CEO transition costs 9.1 8.6 0.31 Restructuring costs 7.0 5.4 0.19 Amortization of stock-based compensation 6.3 4.9 0.18 Strategic emerging technology costs 2.5 2.2 0.08 Amortization of cost to fulfill assets 0.7 0.7 0.03 Net discrete tax benefit — (0.7) (0.03) Non-GAAP measures $ 25.9 $ 10.2 $ 0.36 57 Index LIQUIDITY AND CAPITAL RESOURCES Our cash and cash equivalents were $27.2 million and $19.0 million at April 30, 2024 and July 31, 2023, respectively. For the nine months ended April 30, 2024, our cash flows reflect the following: • Net cash used in operating activities was $45.0 million for the nine months ended April 30, 2024 as compared to net cash used in operating activities of $0.2 million for the nine months ended April 30, 2023. 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 provided by investing activities for the nine months ended April 30, 2024 was $24.3 million, compared to net cash used by investing activities of $14.9 million for the nine months ended April 30, 2023. The more recent period includes $33.3 million of net cash proceeds from the PST Divestiture, offset in part by 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 our manufacturing facilities. • Net cash provided by financing activities was $28.9 million and $14.8 million for the nine months ended April 30, 2024 and 2023, respectively. During the nine months ended April 30, 2024, we had net payments under our Prior Credit Facility of $3.1 million, as compared to net borrowings under our Prior Credit Facility of $29.8 million during the nine months ended April 30, 2023, respectively. Financing cash flow activities for the more recent period reflect the receipt of net cash proceeds from the issuance of Series B Convertible Preferred Stock and use of a substantial portion of the net cash proceeds from the PST Divestiture to repay a portion of the Term Loan outstanding under the Prior Credit Facility. During the nine months ended April 30, 2023, we paid $8.7 million in cash dividends to our common stockholders. Payment of cash dividends in the more recent period represents the settlement of previously issued dividend equivalents related to stock based awards. We also made $3.8 million and $2.8 million of payments to remit employees' statutory tax withholding requirements related to the net settlement of stock-based awards during the nine months ended April 30, 2024 and 2023, respectively. The Prior Credit Facility and New Credit Facility are 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 and or contracting decisions, larger than usual customer orders or a future redemption by the holders of our Convertible Preferred Stock. Also, in light of our 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 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. 58 Index 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 an operating loss of $3.5 million in the three months ended April 30, 2024 and operating income of $1.6 million in the nine months ended April 30, 2024. 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 $45.0 million in the nine months ended April 30, 2024. As discussed in Note (10) – “Credit Facility,” on June 17, 2024, we entered into a $222.0 million credit facility with a new syndicate of lenders (the “New Credit Facility”), which replaces our Prior Credit Facility and which is expected to fund on or around June 18, 2024. The New Credit Facility matures on July 31, 2028, consists of a committed $162.0 million term loan (“Term Loan”) and $60.0 million revolver loan facility (“Revolver”) and is expected to have outstanding borrowings at close of $187.0 million, reflecting $25.0 million drawn on the Revolver. The New Credit Facility, among other things, requires compliance with new restrictive and financial covenants. Considering the New Credit Facility entered into subsequent to quarter end and our forecasted results over the next twelve months beyond the issuance date, we anticipate in the future that we will be in compliance with all restrictive and financial covenants under our New Credit Facility. As of the issuance date and closing of the New Credit Facility, our available sources of liquidity will approximate $63.0 million, consisting of qualified cash and cash equivalents of approximately $28.0 million and $35.0 million of excess availability under the Revolver, both as defined in the New Credit 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 our New 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 our New 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 and/or secure other sources of outside capital. As it relates to sources of outside capital, we can raise up to $50.0 million through the issuance of common shares without the consent of the holders of Convertible Preferred Stock. Based on our current business plans, including projected capital expenditures, we believe our current level of cash and cash equivalents, excess availability under our Revolver and 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. However, such a determination is dependent on several factors including, but not limited to, general business conditions and our ability to reduce investments in working capital (such as unbilled receivables). If we are unable to maintain our current level of cash and cash equivalents, excess availability under our Revolver or generate sufficient liquidity from future cash flows, 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) under certain circumstances, 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 and reduce investments in working capital and/or capital expenditures. As a result of the foregoing, although we have successfully refinanced our Prior Credit Facility and significantly enhanced our liquidity position as of the issuance date, we continue to believe that substantial doubt exists regarding our ability to continue as a going concern. This determination considers: (i) the proximity of the refinancing to the issuance date not allowing us adequate time to evaluate our financial performance subsequent to such refinancing, and (ii) those conditions and events as of the issuance date described above that could negatively impact our forecasted results and liquidity, which in turn could result in our inability to comply with the financial covenants contained in our New Credit Facility. 59 Index Now having completed the refinancing of our Prior Credit Facility as of the issuance date, our other plans to address our ability to continue as a going concern 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, those potential 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 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. 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 into fiscal 2025. 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 $100.0 million stock repurchase program has no time restrictions and repurchases may be made from time to time in open-market or privately negotiated transactions, or by other means in accordance with federal securities laws. There were no repurchases of our common stock during the nine months ended April 30, 2024 and 2023. During the third quarter of fiscal 2023, the Board, together with management, adjusted the Company’s capital allocation plans and determined to forgo a common stock dividend, thereby increasing our financial flexibility. Future common stock dividends, if any, remain subject to compliance with financial covenants under our New Credit Facility, as well as Board approval and certain voting rights of holders of our Series B Convertible Preferred Stock. Convertible Preferred Stock See " Notes to Condensed Consolidated Financial Statements – Note (17) – Convertible Preferred Stock " for detailed information related to our Convertible Preferred Stock. 60 Index Commitments In the normal course of business, other than as discussed below, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment. We do not expect that these commitments, as of April 30, 2024, will materially adversely affect our liquidity. At April 30, 2024, cash payments due under contractual obligations (including estimated interest expense on our Prior Credit Facility), excluding purchase orders that we entered into in our normal course of business, are as follows: ($ in thousands) Total Due Within 1 Year Prior Credit Facility - principal payments $ 161,966 161,966 Prior Credit Facility - interest payments 7,479 7,479 Operating lease obligations 44,270 8,394 Contractual cash obligations $ 213,715 177,839 On June 17, 2024, we entered into a New Credit Facility that repaid in full the Prior Credit Facility. See " Notes to Condensed Consolidated Financial Statements - Note (10) - Credit Facility " for further discussion of the commitments under our New Credit Facility. 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 2028. 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 certain pending and threatened legal actions and 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 and or resolving such matters. As a result, pending or future claims asserted against us by a party 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 employment and/or change of control agreements with certain of our executive officers and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of the Company or termination of the employee. Our Condensed Consolidated Balance Sheet at April 30, 2024 includes total liabilities of $8.4 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"). During the nine months ended April 30, 2024, FASB ASU No. 2023-07, Improvements to Reportable Segment Disclosures and FASB ASU 2023-09, Improvements to Income Tax Disclosures , were issued and incorporated into the FASB ASC and have not yet been adopted by us as of April 30, 2024. See " Notes to Condensed Consolidated Financial Statements – Note (3) – Adoption of Accounting Standards and Updates, " for further information. 61 Index