UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM			10-Q

(Mark One)


☒			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended April 30, ~~2021~~2022


☐			Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 0-7928

(Exact name of registrant as specified in its charter)


Delaware						11-2139466
(State or other jurisdiction of incorporation /organization)						(I.R.S. Employer Identification Number)
68 South Service Road, Suite 230, Melville, NY						11747
(Address of principal executive offices)						(Zip Code)


(631)			962-7000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value ~~$.10~~$0.10 per share

CMTL

NASDAQ Stock Market LLC

~~Series A Junior Participating Cumulative Preferred Stock, par value $0.10 per share~~

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒☐

Accelerated filer

☐

~~Emerging growth company~~

☐☒

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐ Yes ☒ No

As of June ~~4, 2021,~~3, 2022, the number of outstanding shares of Common Stock, par value $0.10 per share, of the registrant was ~~26,068,995~~26,527,044 shares.

Index


COMTECH TELECOMMUNICATIONS CORP. INDEX
			Page
PART I. FINANCIAL INFORMATION

	Item 1.	Condensed Consolidated Financial Statements	2

		Condensed Consolidated Balance Sheets - April 30 , 3 0 ~~, 2021~~2022 and July 31, ~~2020~~2021 (Unaudited)	2

		Condensed Consolidated Statements of Operations - Three and Nine Months Ended April 3 0 30 , ~~2021~~2022 and ~~2020~~2021 (Unaudited)	3

		Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity - Three and Nine Months Ended April 30 , ~~2021~~2022 and ~~2020~~2021 (Unaudited)	4

		Condensed Consolidated Statements of Cash Flows - Nine Months Ended April 30 , ~~2021~~2022 and ~~2020~~2021 (Unaudited)	6

		Notes to Condensed Consolidated Financial Statements (Unaudited)	8

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3435

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	6165

	Item 4.	Controls and Procedures	6165

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	6266

	Item 1A.	Risk Factors	6266

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6267

	Item 4.	Mine Safety Disclosures	6267

	Item 6.	Exhibits	6268

		Signature Page	6369

Index

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)


Assets	Assets	April 30, 2021		July 31, 2020	Assets	April 30, 2022		July 31, 2021
Current assets:	Current assets:				Current assets:
Cash and cash equivalents	Cash and cash equivalents	$	39,198,000	47,878,000	Cash and cash equivalents	$	32,831,000	30,861,000
Accounts receivable, net	Accounts receivable, net	144,132,000		126,816,000	Accounts receivable, net	124,091,000		158,110,000
Inventories, net	Inventories, net	83,106,000		82,302,000	Inventories, net	95,243,000		80,358,000
Prepaid expenses and other current assets	Prepaid expenses and other current assets	25,801,000		20,101,000	Prepaid expenses and other current assets	23,300,000		18,167,000
Total current assets	Total current assets	292,237,000		277,097,000	Total current assets	275,465,000		287,496,000
Property, plant and equipment, net	Property, plant and equipment, net	29,366,000		27,037,000	Property, plant and equipment, net	45,016,000		35,286,000
Operating lease right-of-use assets, net	Operating lease right-of-use assets, net	47,296,000		30,033,000	Operating lease right-of-use assets, net	52,216,000		44,486,000

Goodwill	Goodwill	347,780,000		330,519,000	Goodwill	347,692,000		347,698,000
Intangibles with finite lives, net	Intangibles with finite lives, net	274,048,000		258,019,000	Intangibles with finite lives, net	252,652,000		268,699,000
Deferred financing costs, net	Deferred financing costs, net	1,839,000		2,391,000	Deferred financing costs, net	1,216,000		1,824,000
Other assets, net	Other assets, net	6,026,000		4,551,000	Other assets, net	9,380,000		7,622,000
Total assets	Total assets	$	998,592,000	929,647,000	Total assets	$	983,637,000	993,111,000
Liabilities and Stockholders’ Equity
Liabilities, Convertible Preferred Stock and Stockholders’ Equity					Liabilities, Convertible Preferred Stock and Stockholders’ Equity
Current liabilities:	Current liabilities:				Current liabilities:
Accounts payable	Accounts payable	$	33,277,000	23,423,000	Accounts payable	$	32,140,000	36,193,000
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	97,602,000		85,161,000	Accrued expenses and other current liabilities	84,164,000		89,601,000
Operating lease liabilities, current	Operating lease liabilities, current	8,755,000		8,247,000	Operating lease liabilities, current	9,203,000		8,841,000
Dividends payable	Dividends payable	2,600,000		2,468,000	Dividends payable	2,646,000		2,601,000
Contract liabilities	Contract liabilities	56,192,000		40,250,000	Contract liabilities	76,647,000		66,130,000
Interest payable	Interest payable	227,000		163,000	Interest payable	121,000		195,000
Total current liabilities	Total current liabilities	198,653,000		159,712,000	Total current liabilities	204,921,000		203,561,000
Non-current portion of long-term debt, net		215,000,000		149,500,000
Non-current portion of long-term debt					Non-current portion of long-term debt	127,000,000		201,000,000
Operating lease liabilities, non-current	Operating lease liabilities, non-current	41,542,000		24,109,000	Operating lease liabilities, non-current	46,540,000		39,569,000
Income taxes payable	Income taxes payable	2,588,000		1,963,000	Income taxes payable	3,003,000		2,717,000
Deferred tax liability, net	Deferred tax liability, net	24,495,000		17,637,000	Deferred tax liability, net	15,946,000		21,230,000
Long-term contract liabilities	Long-term contract liabilities	8,997,000		9,596,000	Long-term contract liabilities	10,778,000		9,808,000
Other liabilities	Other liabilities	15,695,000		17,831,000	Other liabilities	7,367,000		14,507,000
Total liabilities	Total liabilities	506,970,000		380,348,000	Total liabilities	415,555,000		492,392,000
Commitments and contingencies (See Note 18)		0		0
Commitments and contingencies (See Note 19)					Commitments and contingencies (See Note 19)	0		0
Convertible preferred stock, par value $0.10 per share; authorized 125,000 shares; issued 100,000 at April 30, 2022 (includes accrued dividends of $558,000)					Convertible preferred stock, par value $0.10 per share; authorized 125,000 shares; issued 100,000 at April 30, 2022 (includes accrued dividends of $558,000)	103,522,000		—
Stockholders’ equity:	Stockholders’ equity:				Stockholders’ equity:
Preferred stock, par value $0.10 per share; shares authorized and unissued 2,000,000		0		0
Common stock, par value $0.10 per share; authorized 100,000,000 shares; issued 41,102,215 shares and 39,924,439 shares at April 30, 2021 and July 31, 2020, respectively		4,110,000		3,992,000
Preferred stock, par value $0.10 per share; authorized and unissued 1,875,000 shares					Preferred stock, par value $0.10 per share; authorized and unissued 1,875,000 shares	—		—
Common stock, par value $0.10 per share; authorized 100,000,000 shares; issued 41,560,361 and 41,281,812 shares at April 30, 2022 and July 31, 2021, respectively					Common stock, par value $0.10 per share; authorized 100,000,000 shares; issued 41,560,361 and 41,281,812 shares at April 30, 2022 and July 31, 2021, respectively	4,156,000		4,128,000
Additional paid-in capital	Additional paid-in capital	601,029,000		569,891,000	Additional paid-in capital	613,898,000		605,439,000
Retained earnings	Retained earnings	328,332,000		417,265,000	Retained earnings	288,355,000		333,001,000
		933,471,000		991,148,000		906,409,000		942,568,000
Less:	Less:				Less:
Treasury stock, at cost (15,033,317 shares at April 30, 2021 and July 31, 2020)		(441,849,000)		(441,849,000)
Treasury stock, at cost (15,033,317 shares at April 30, 2022 and July 31, 2021)					Treasury stock, at cost (15,033,317 shares at April 30, 2022 and July 31, 2021)	(441,849,000)		(441,849,000)
Total stockholders’ equity	Total stockholders’ equity	491,622,000		549,299,000	Total stockholders’ equity	464,560,000		500,719,000
Total liabilities and stockholders’ equity		$	998,592,000	929,647,000
Total liabilities, convertible preferred stock and stockholders’ equity					Total liabilities, convertible preferred stock and stockholders’ equity	$	983,637,000	993,111,000

See accompanying notes to condensed consolidated financial statements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


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

		2021		2020	2021	2020		2022		2021	2022		2021
Net sales	Net sales	$	139,376,000	135,121,000	435,886,000	467,042,000	Net sales	$	122,116,000	139,376,000	$	359,256,000	435,886,000
Cost of sales	Cost of sales	86,360,000		82,120,000	276,982,000	289,872,000	Cost of sales	75,452,000		86,360,000	224,999,000		276,982,000
Gross profit	Gross profit	53,016,000		53,001,000	158,904,000	177,170,000	Gross profit	46,664,000		53,016,000	134,257,000		158,904,000

Expenses:	Expenses:						Expenses:
Selling, general and administrative	Selling, general and administrative	26,997,000		32,313,000	83,999,000	93,538,000	Selling, general and administrative	27,626,000		26,997,000	85,695,000		83,999,000
Research and development	Research and development	13,092,000		12,324,000	37,391,000	40,925,000	Research and development	14,255,000		13,092,000	39,384,000		37,391,000
Amortization of intangibles	Amortization of intangibles	5,310,000		5,517,000	15,671,000	15,952,000	Amortization of intangibles	5,349,000		5,310,000	16,047,000		15,671,000
Former CEO transition costs							Former CEO transition costs	—		—	13,554,000		—
Proxy solicitation costs							Proxy solicitation costs	—		—	11,248,000		—
Acquisition plan expenses	Acquisition plan expenses	5,267,000		5,983,000	99,807,000	14,397,000	Acquisition plan expenses	—		5,267,000	—		99,807,000
		50,666,000		56,137,000	236,868,000	164,812,000		47,230,000		50,666,000	165,928,000		236,868,000

Operating income (loss)		2,350,000		(3,136,000)	(77,964,000)	12,358,000
Operating (loss) income							Operating (loss) income	(566,000)		2,350,000	(31,671,000)		(77,964,000)

Other expenses (income):	Other expenses (income):						Other expenses (income):
Interest expense	Interest expense	1,518,000		1,504,000	5,233,000	4,924,000	Interest expense	981,000		1,518,000	3,576,000		5,233,000
Interest (income) and other	Interest (income) and other	(276,000)		108,000	(276,000)	37,000	Interest (income) and other	(449,000)		(276,000)	(260,000)		(276,000)
Change in fair value of convertible preferred stock purchase option liability							Change in fair value of convertible preferred stock purchase option liability	(302,000)		—	(1,004,000)		—

Income (loss) before provision for (benefit from) income taxes		1,108,000		(4,748,000)	(82,921,000)	7,397,000
Provision for (benefit from) income taxes		316,000		(759,000)	(2,078,000)	1,503,000
(Loss) income before (benefit from) provision for income taxes							(Loss) income before (benefit from) provision for income taxes	(796,000)		1,108,000	(33,983,000)		(82,921,000)
(Benefit from) provision for income taxes							(Benefit from) provision for income taxes	(771,000)		316,000	(6,100,000)		(2,078,000)

Net income (loss)		$	792,000	(3,989,000)	(80,843,000)	5,894,000

Net income (loss) per share:
Net (loss) income							Net (loss) income	$	(25,000)	792,000	$	(27,883,000)	(80,843,000)

Adjustments to reflect redemption value of convertible preferred stock:							Adjustments to reflect redemption value of convertible preferred stock:
Convertible preferred stock issuance costs							Convertible preferred stock issuance costs	—		—	(4,007,000)		—
Establishment of initial convertible preferred stock purchase option liability							Establishment of initial convertible preferred stock purchase option liability	—		—	(1,005,000)		—
Dividend on convertible preferred stock							Dividend on convertible preferred stock	(1,655,000)		—	(3,522,000)		—
Net (loss) income attributable to common stockholders							Net (loss) income attributable to common stockholders	$	(1,680,000)	792,000	$	(36,417,000)	(80,843,000)

Net (loss) income per common share (See Note 6):							Net (loss) income per common share (See Note 6):
Basic	Basic	$	0.03	(0.16)	(3.12)	0.24	Basic	$	(0.06)	0.03	$	(1.37)	(3.12)
Diluted	Diluted	$	0.03	(0.16)	(3.12)	0.24	Diluted	$	(0.06)	0.03	$	(1.37)	(3.12)

Weighted average number of common shares outstanding – basic	Weighted average number of common shares outstanding – basic	25,911,000		24,982,000	25,875,000	24,730,000	Weighted average number of common shares outstanding – basic	26,528,000		25,911,000	26,582,000		25,875,000

Weighted average number of common and common equivalent shares outstanding – diluted	Weighted average number of common and common equivalent shares outstanding – diluted	26,266,000		24,982,000	25,875,000	24,892,000	Weighted average number of common and common equivalent shares outstanding – diluted	26,528,000		26,266,000	26,582,000		25,875,000

See accompanying notes to condensed consolidated financial statements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

(Unaudited)


		Three months ended April 30, 2021 and 2020																						Three months ended April 30, 2022 and 2021
		Common Stock			Additional Paid-in Capital				Retained Earnings				Treasury Stock						Stockholders' Equity					Series A Convertible Preferred Stock			Common Stock			Additional Paid-in Capital			Retained Earnings			Treasury Stock						Stockholders' Equity
		Shares	Amount								Shares			Amount
Balance as of January 31, 2020		39,752,559	$	3,975,000			$	563,834,000			$	425,243,000		15,033,317			$	(441,849,000)			$	551,203,000
Equity-classified stock award compensation		—	—		981,000				—				—		—				981,000
Proceeds from issuance of employee stock purchase plan shares		16,158	2,000		178,000				—				—		—				180,000
Forfeiture of restricted stock		(5,539)	(1,000)		1,000				—				—		—				0
Net settlement of stock-based awards		2,079	1,000		(29,000)				—				—		—				(28,000)
Cash dividends declared, net ($0.10 per share)		—	—		—				(2,466,000)				—		—				(2,466,000)
Accrual of dividend equivalents, net of reversal ($0.10 per share)		—	—		—				(56,000)				—		—				(56,000)
Net loss		—	—		—				(3,989,000)				—		—				(3,989,000)
Balance as of April 30, 2020		39,765,257	$	3,977,000	$	564,965,000			$	418,732,000			15,033,317		$	(441,849,000)			$	545,825,000
																								Shares	Amount		Shares	Amount				Additional Paid-in Capital				Retained Earnings			Shares			Amount			Stockholders' Equity
Balance as of January 31, 2021	Balance as of January 31, 2021	40,059,977	$	4,006,000	$	570,891,000			$	330,236,000			15,033,317		$	(441,849,000)			$	463,284,000			Balance as of January 31, 2021	—	$	—	40,059,977	$	4,006,000				15,033,317				$	(441,849,000)
Equity-classified stock award compensation	Equity-classified stock award compensation	—	—		1,204,000				—				—		—				1,204,000				Equity-classified stock award compensation	—	—		—	—		1,204,000					—		—				—			1,204,000
Proceeds from issuance of employee stock purchase plan shares	Proceeds from issuance of employee stock purchase plan shares	12,113	1,000		204,000				—				—		—				205,000				Proceeds from issuance of employee stock purchase plan shares	—	—		12,113	1,000		204,000			—			—			—			205,000
Forfeiture of restricted stock	Forfeiture of restricted stock	(480)	—		—				—				—		—				—				Forfeiture of restricted stock				(480)	—		—			—			—			—			—
Net settlement of stock-based awards	Net settlement of stock-based awards	4,038	—		(59,000)				—				—		—				(59,000)				Net settlement of stock-based awards	—	—		4,038	—		(59,000)			—			—			—			(59,000)
Common stock issued for acquisition of UHP Networks Inc.	Common stock issued for acquisition of UHP Networks Inc.	1,026,567	103,000		28,789,000				—				—		—				28,892,000				Common stock issued for acquisition of UHP Networks Inc.	—	—		1,026,567	103,000		28,789,000												28,892,000
Cash dividends declared, net ($0.10 per share)	Cash dividends declared, net ($0.10 per share)	—	—		—				(2,600,000)				—		—				(2,600,000)				Cash dividends declared, net ($0.10 per share)	—	—		—	—		—			(2,600,000)			—			—			(2,600,000)
Accrual of dividend equivalents, net of reversal ($0.10 per share)	Accrual of dividend equivalents, net of reversal ($0.10 per share)	—	—		—				(96,000)				—		—				(96,000)				Accrual of dividend equivalents, net of reversal ($0.10 per share)	—	—		—	—		—			(96,000)			—			—			(96,000)
Net income	Net income	—	—		—				792,000				—		—				792,000				Net income	—	—		—	—		—			792,000			—			—			792,000
Balance as of April 30, 2021	Balance as of April 30, 2021	41,102,215	$	4,110,000	$	601,029,000			$	328,332,000			15,033,317		$	(441,849,000)			$	491,622,000			Balance as of April 30, 2021	—	$	—	41,102,215	$	4,110,000	$	601,029,000		$	328,332,000		15,033,317			$	(441,849,000)		$	491,622,000

Balance as of January 31, 2022																							Balance as of January 31, 2022	100,000	$	101,867,000	41,553,244	$	4,155,000	$	612,780,000		$	292,778,000		15,033,317			$	(441,849,000)		$	467,864,000
Equity-classified stock award compensation																							Equity-classified stock award compensation	—	—		—	—		1,071,000			—			—			—			1,071,000

Proceeds from issuance of employee stock purchase plan shares																							Proceeds from issuance of employee stock purchase plan shares	—	—		12,131	2,000		160,000			—			—			—			162,000

Net settlement of stock-based awards																							Net settlement of stock-based awards	—	—		(5,014)	(1,000)		(113,000)			—			—			—			(114,000)

Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends)																							Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends)	—	1,655,000		—	—		—			(1,655,000)			—			—			(1,655,000)
Cash dividends declared, net ($0.10 per share)																							Cash dividends declared, net ($0.10 per share)	—	—		—	—		—			(2,646,000)			—			—			(2,646,000)
Accrual of dividend equivalents, net of reversal ($0.10 per share)																							Accrual of dividend equivalents, net of reversal ($0.10 per share)	—	—		—	—		—			(97,000)			—			—			(97,000)
Net loss																							Net loss	—	—		—	—		—			(25,000)			—			—			(25,000)
Balance as of April 30, 2022																							Balance as of April 30, 2022	100,000	$	103,522,000	41,560,361	$	4,156,000	$	613,898,000		$	288,355,000		15,033,317			$	(441,849,000)		$	464,560,000

See accompanying notes to condensed consolidated financial statements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY

(Unaudited)


		Nine months ended April 30, 2021 and 2020																							Nine months ended April 30, 2022 and 2021
		Common Stock			Additional Paid-in Capital				Retained Earnings				Treasury Stock						Stockholders' Equity						Series A Convertible Preferred Stock			Common Stock				Additional Paid-in Capital			Retained Earnings		Treasury Stock			Stockholders' Equity
		Shares	Amount								Shares			Amount									Shares		Amount	Shares		Amount	Additional Paid-in Capital		Retained Earnings			Shares			Amount	Stockholders' Equity
Balance as of July 31, 2019		39,276,161	$	3,928,000			$	552,670,000			$	420,333,000		15,033,317			$	(441,849,000)			$	535,082,000
Equity-classified stock award compensation		—	—		3,098,000				—				—		—				3,098,000
Proceeds from exercises of stock options		16,700	2,000		466,000				—				—		—				468,000
Proceeds from issuance of employee stock purchase plan shares		36,168	4,000		686,000				—				—		—				690,000
Issuance of restricted stock		3,319	—		—				—				—		—				—
Net settlement of stock-based awards		109,405	11,000		(3,498,000)				—				—		—				(3,487,000)
Common stock issued for acquisition of CGC Technology Limited		323,504	32,000		11,543,000				—				—		—				11,575,000
Cash dividends declared, net ($0.30 per share)		—	—		—				(7,326,000)				—		—				(7,326,000)
Accrual of dividend equivalents, net of reversal ($0.30 per share)		—	—		—				(169,000)				—		—				(169,000)
Net income		—	—		—				5,894,000				—		—				5,894,000
Balance as of April 30, 2020		39,765,257	$	3,977,000	$	564,965,000			$	418,732,000			15,033,317		$	(441,849,000)			$	545,825,000

Balance as of July 31, 2020	Balance as of July 31, 2020	39,924,439	$	3,992,000	$	569,891,000			$	417,265,000			15,033,317		$	(441,849,000)			$	549,299,000				Balance as of July 31, 2020	—	$	—	39,924,439	$	3,992,000		$	569,891,000		$	417,265,000	15,033,317	$	(441,849,000)	$	549,299,000
Equity-classified stock award compensation	Equity-classified stock award compensation	—	—		3,190,000				—				—		—				3,190,000					Equity-classified stock award compensation	—	—		—	—			3,190,000			—		—	—		3,190,000

Proceeds from issuance of employee stock purchase plan shares	Proceeds from issuance of employee stock purchase plan shares	43,235	4,000		570,000				—				—		—				574,000					Proceeds from issuance of employee stock purchase plan shares	—	—		43,235	4,000			570,000			—		—	—		574,000
Issuance of restricted stock, net of forfeiture	Issuance of restricted stock, net of forfeiture	35,495	4,000		(4,000)				—				—		—				0					Issuance of restricted stock, net of forfeiture	—	—		35,495	4,000			(4,000)			—		—	—		—
Net settlement of stock-based awards	Net settlement of stock-based awards	72,479	7,000		(1,407,000)				—				—		—				(1,400,000)					Net settlement of stock-based awards	—	—		72,479	7,000			(1,407,000)			—		—	—		(1,400,000)
Common stock issued for acquisition of UHP	Common stock issued for acquisition of UHP	1,026,567	103,000		28,789,000				—				—		—				28,892,000					Common stock issued for acquisition of UHP	—	—		1,026,567	103,000			28,789,000			—		—	—		28,892,000
Cash dividends declared, net ($0.30 per share)	Cash dividends declared, net ($0.30 per share)	—	—		—				(7,588,000)				—		—				(7,588,000)					Cash dividends declared, net ($0.30 per share)	—	—		—	—			—			(7,588,000)		—	—		(7,588,000)
Accrual of dividend equivalents, net of reversal ($0.30 per share)	Accrual of dividend equivalents, net of reversal ($0.30 per share)	—	—		—				(287,000)				—		—				(287,000)					Accrual of dividend equivalents, net of reversal ($0.30 per share)	—	—		—	—			—			(287,000)		—	—		(287,000)
Adoption of current expected credit loss standard	Adoption of current expected credit loss standard	—	—		—				(215,000)				—		—				(215,000)					Adoption of current expected credit loss standard	—	—		—	—			—			(215,000)		—	—		(215,000)
Net loss	Net loss	—	—		—				(80,843,000)				—		—				(80,843,000)					Net loss	—	—		—	—			—			(80,843,000)		—	—		(80,843,000)
Balance as of April 30, 2021	Balance as of April 30, 2021	41,102,215	$	4,110,000	$	601,029,000			$	328,332,000			15,033,317		$	(441,849,000)			$	491,622,000				Balance as of April 30, 2021	—	$	—	41,102,215	$	4,110,000		$	601,029,000		$	328,332,000	15,033,317	$	(441,849,000)	$	491,622,000

Balance as of July 31, 2021																								Balance as of July 31, 2021	—	$	—	41,281,812	$	4,128,000		$	605,439,000		$	333,001,000	15,033,317	$	(441,849,000)	$	500,719,000
Equity-classified stock award compensation																								Equity-classified stock award compensation	—	—		—	—			3,975,000			—		—	—		3,975,000
Former CEO transition costs related to equity-classified stock-based awards (See Note 1)																								Former CEO transition costs related to equity-classified stock-based awards (See Note 1)	—	—		—	—			7,388,000			—		—	—		7,388,000
Proceeds from issuance of employee stock purchase plan shares																								Proceeds from issuance of employee stock purchase plan shares	—	—		33,807	4,000			612,000			—		—	—		616,000
Issuance of restricted stock																								Issuance of restricted stock	—	—		132,854	13,000			(13,000)			—		—	—		—
Net settlement of stock-based awards																								Net settlement of stock-based awards	—	—		111,888	11,000			(3,503,000)			—		—	—		(3,492,000)

Issuance of convertible preferred stock																								Issuance of convertible preferred stock	100,000	100,000,000		—	—			—			—		—	—		—
Convertible preferred stock issuance costs																								Convertible preferred stock issuance costs	—	(4,007,000)		—	—			—			—		—	—		—
Establishment of initial convertible preferred stock purchase option liability																								Establishment of initial convertible preferred stock purchase option liability	—	(1,005,000)		—	—			—			—		—	—		—
Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends)																								Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends)	—	8,534,000		—	—			—			(8,534,000)		—	—		(8,534,000)

Cash dividends declared, net ($0.30 per share)																								Cash dividends declared, net ($0.30 per share)	—	—		—	—			—			(7,915,000)		—	—		(7,915,000)
Accrual of dividend equivalents, net of reversal ($0.30 per share)																								Accrual of dividend equivalents, net of reversal ($0.30 per share)	—	—		—	—			—			(314,000)		—	—		(314,000)

Net loss																								Net loss	—	—		—	—			—			(27,883,000)		—	—		(27,883,000)
Balance as of April 30, 2022																								Balance as of April 30, 2022	100,000	$	103,522,000	41,560,361	$	4,156,000		$	613,898,000		$	288,355,000	15,033,317	$	(441,849,000)	$	464,560,000

See accompanying notes to condensed consolidated financial statements. ~~(Continued)~~

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


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

		2021		2020		2022		2021
Cash flows from operating activities:	Cash flows from operating activities:				Cash flows from operating activities:
Net (loss) income		$	(80,843,000)	5,894,000
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Net loss					Net loss	$	(27,883,000)	(80,843,000)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:					Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization of property, plant and equipment	Depreciation and amortization of property, plant and equipment	7,283,000		8,022,000	Depreciation and amortization of property, plant and equipment	7,057,000		7,283,000
Amortization of intangible assets with finite lives	Amortization of intangible assets with finite lives	15,671,000		15,952,000	Amortization of intangible assets with finite lives	16,047,000		15,671,000
Amortization of stock-based compensation	Amortization of stock-based compensation	3,190,000		3,098,000	Amortization of stock-based compensation	3,975,000		3,190,000
Amortization of cost to fulfill assets					Amortization of cost to fulfill assets	233,000		—
Former CEO transition costs related to equity-classified stock-based awards					Former CEO transition costs related to equity-classified stock-based awards	7,388,000		—
Amortization of deferred financing costs	Amortization of deferred financing costs	552,000		553,000	Amortization of deferred financing costs	608,000		552,000
Estimated contract settlement costs		0		444,000
Change in fair value of convertible preferred stock purchase option liability					Change in fair value of convertible preferred stock purchase option liability	(1,004,000)		—

Changes in other liabilities	Changes in other liabilities	(5,067,000)		(3,100,000)	Changes in other liabilities	(3,099,000)		(5,067,000)
Loss on disposal of property, plant and equipment		29,000		3,000
Benefit from allowance for doubtful accounts		(287,000)		(364,000)
(Gain) loss on disposal of property, plant and equipment					(Gain) loss on disposal of property, plant and equipment	(120,000)		29,000
Provision for (benefit from) allowance for doubtful accounts					Provision for (benefit from) allowance for doubtful accounts	316,000		(287,000)
Provision for excess and obsolete inventory	Provision for excess and obsolete inventory	3,213,000		1,238,000	Provision for excess and obsolete inventory	3,299,000		3,213,000
Deferred income tax (benefit) expense		(28,000)		1,374,000
Deferred income tax benefit					Deferred income tax benefit	(5,253,000)		(28,000)
Other	Other	(225,000)		0	Other	—		(225,000)
Changes in assets and liabilities, net of effects of business acquisitions:	Changes in assets and liabilities, net of effects of business acquisitions:				Changes in assets and liabilities, net of effects of business acquisitions:
Accounts receivable	Accounts receivable	(17,098,000)		10,129,000	Accounts receivable	33,709,000		(17,098,000)
Inventories	Inventories	(3,935,000)		(5,689,000)	Inventories	(18,184,000)		(3,935,000)
Prepaid expenses and other current assets	Prepaid expenses and other current assets	(3,735,000)		(4,080,000)	Prepaid expenses and other current assets	(3,447,000)		(3,735,000)
Other assets	Other assets	(2,613,000)		(20,000)	Other assets	(964,000)		(2,613,000)
Accounts payable	Accounts payable	8,122,000		6,748,000	Accounts payable	(5,802,000)		8,122,000
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	1,850,000		(78,000)	Accrued expenses and other current liabilities	(3,702,000)		1,850,000
Contract liabilities	Contract liabilities	14,686,000		1,063,000	Contract liabilities	11,487,000		14,686,000
Other liabilities, non-current	Other liabilities, non-current	3,756,000		303,000	Other liabilities, non-current	(3,698,000)		3,756,000
Interest payable	Interest payable	64,000		(307,000)	Interest payable	(73,000)		64,000
Income taxes payable	Income taxes payable	(1,167,000)		(2,176,000)	Income taxes payable	(2,469,000)		(1,167,000)
Net cash (used in) provided by operating activities		(56,582,000)		39,007,000
Net cash provided by (used in) operating activities					Net cash provided by (used in) operating activities	8,421,000		(56,582,000)
Cash flows from investing activities:	Cash flows from investing activities:				Cash flows from investing activities:
Net cash acquired from acquisition of UHP	Net cash acquired from acquisition of UHP	1,381,000		0	Net cash acquired from acquisition of UHP	—		1,381,000
Payment for acquisition of CGC, net of cash acquired	Payment for acquisition of CGC, net of cash acquired	(750,000)		(11,165,000)	Payment for acquisition of CGC, net of cash acquired	—		(750,000)
Payment for acquisition of NG-911 Inc.		0		(781,000)

Purchases of property, plant and equipment	Purchases of property, plant and equipment	(8,237,000)		(4,420,000)	Purchases of property, plant and equipment	(14,420,000)		(8,237,000)
Net cash used in investing activities	Net cash used in investing activities	(7,606,000)		(16,366,000)	Net cash used in investing activities	(14,420,000)		(7,606,000)
Cash flows from financing activities:	Cash flows from financing activities:				Cash flows from financing activities:
Net borrowings (payments) of long-term debt under Credit Facility		65,500,000		(5,600,000)
Proceeds from issuance of convertible preferred stock					Proceeds from issuance of convertible preferred stock	100,000,000		—
Net (payments) borrowings of long-term debt under Credit Facility					Net (payments) borrowings of long-term debt under Credit Facility	(74,000,000)		65,500,000
Remittance of employees' statutory tax withholding for stock awards	Remittance of employees' statutory tax withholding for stock awards	(2,799,000)		(5,274,000)	Remittance of employees' statutory tax withholding for stock awards	(6,088,000)		(2,799,000)
Cash dividends paid		(7,734,000)		(7,553,000)
Cash dividends paid on common stock					Cash dividends paid on common stock	(8,398,000)		(7,734,000)
Payment of convertible preferred stock issuance costs					Payment of convertible preferred stock issuance costs	(4,007,000)		—
Payment of deferred financing costs					Payment of deferred financing costs	(140,000)		—
Repayment of principal amounts under finance lease liabilities	Repayment of principal amounts under finance lease liabilities	(33,000)		(314,000)	Repayment of principal amounts under finance lease liabilities	(14,000)		(33,000)
Proceeds from issuance of employee stock purchase plan shares	Proceeds from issuance of employee stock purchase plan shares	574,000		690,000	Proceeds from issuance of employee stock purchase plan shares	616,000		574,000
Proceeds from exercises of stock options		0		468,000

Net cash provided by (used in) financing activities	Net cash provided by (used in) financing activities	55,508,000		(17,583,000)	Net cash provided by (used in) financing activities	7,969,000		55,508,000
Net (decrease) increase in cash and cash equivalents		(8,680,000)		5,058,000
Net increase (decrease) in cash and cash equivalents					Net increase (decrease) in cash and cash equivalents	1,970,000		(8,680,000)
Cash and cash equivalents at beginning of period	Cash and cash equivalents at beginning of period	47,878,000		45,576,000	Cash and cash equivalents at beginning of period	30,861,000		47,878,000
Cash and cash equivalents at end of period	Cash and cash equivalents at end of period	$	39,198,000	50,634,000	Cash and cash equivalents at end of period	$	32,831,000	39,198,000
See accompanying notes to condensed consolidated financial statements. (Continued)

See accompanying notes to condensed consolidated financial statements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Unaudited)


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

		2021		2020		2022		2021
Supplemental cash flow disclosures:	Supplemental cash flow disclosures:				Supplemental cash flow disclosures:
Cash paid (received) during the period for:	Cash paid (received) during the period for:				Cash paid (received) during the period for:
Interest	Interest	$	4,565,000	4,546,000	Interest	$	2,906,000	4,565,000
Income taxes, net	Income taxes, net	$	(882,000)	2,330,000	Income taxes, net	$	1,631,000	(882,000)

Non-cash investing and financing activities:	Non-cash investing and financing activities:				Non-cash investing and financing activities:
Reclass of finance lease right-of-use assets to property, plant and equipment		$	0	698,000

Cash dividends declared but unpaid (including accrual of dividend equivalents)		$	2,887,000	2,635,000

Accrued additions to property, plant and equipment	Accrued additions to property, plant and equipment	$	2,068,000	1,201,000	Accrued additions to property, plant and equipment	$	2,379,000	2,068,000

Cash dividends declared on common stock but unpaid (including accrual of dividend equivalents)					Cash dividends declared on common stock but unpaid (including accrual of dividend equivalents)	$	2,960,000	2,887,000

Issuance of restricted stock	Issuance of restricted stock	$	4,000	0	Issuance of restricted stock	$	13,000	4,000

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

Adjustment to reflect redemption value of convertible preferred stock					Adjustment to reflect redemption value of convertible preferred stock	$	8,534,000	—

Common stock issued for acquisitions	Common stock issued for acquisitions	$	28,892,000	11,575,000	Common stock issued for acquisitions	$	—	28,892,000

Fair value of UHP acquisition contingent earn-out consideration	Fair value of UHP acquisition contingent earn-out consideration	$	8,500,000	0	Fair value of UHP acquisition contingent earn-out consideration	$	—	8,500,000

Accruals related to acquisitions		$	0	4,020,000

See accompanying notes to condensed consolidated financial statements.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) General

The accompanying condensed consolidated financial statements of Comtech Telecommunications Corp. and its subsidiaries ("Comtech," "we," "us," or "our") as of and for the three and nine months ended April 30, ~~2021~~2022 and ~~2020~~2021 are unaudited. In the opinion of management, the information furnished reflects all material adjustments (which include normal recurring adjustments) necessary for a fair presentation of the results for the unaudited interim periods. Our results of operations for such periods are not necessarily indicative of the results of operations to be expected for the full fiscal year.

The preparation of our condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the condensed consolidated financial statements, and the reported amounts of net sales and expenses during the reported period. Actual results may differ from those estimates.

Our condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements, filed with the Securities and Exchange Commission ("SEC"), for the fiscal year ended July 31, ~~2020~~2021 and the notes thereto contained in our Annual Report on Form 10-K, and all of our other filings with the SEC.

~~As disclosed in more detail in~~ ~~Note (14)~~ -"~~Segment Information," we manage our business in 2 reportable segments: Commercial Solutions and Government Solutions.~~

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

Impact of Coronavirus Disease 2019 Pandemic ("COVID-19") and Global Supply Chain Constraints on Our Business

Since March 2020, we have conducted most of our non-production related operations using remote working arrangements, curtailed most business travel, and ~~have~~ established social distancing safeguards. ~~Additionally,~~COVID-19, Russia's military incursion into Ukraine and the related global supply chain constraints have impacted our business, operating results and financial condition, as well as the operations and financial performance of many of the customers and suppliers in industries that we serve. We have experienced order and production delays, ~~minor supply chain~~ disruptions in component availability, increased pricing both for labor and parts, lower levels of factory utilization and higher logistics and operational costs. ~~Although the COVID-19 pandemic is by no means over~~Such business conditions are expected to continue during our fourth quarter of fiscal 2022 and additional waves of COVID-19 could again alter the business landscape, we believe that the pandemic’s worst impact on our business is largely behind us. Our long-term fundamentals remain strong and we continue to believe both of our segments are well-positioned for growth.carry into fiscal 2023.

Former CEO Transition Costs

~~Index~~

~~COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES~~On December 31, 2021, our Board of Directors appointed Michael D. Porcelain as Chief Executive Officer (“CEO”). Prior to that, Mr. Porcelain served as our President and Chief Operating Officer (“COO”). Transition costs related to our former CEO, Mr. Kornberg, were $13,554,000 and all expensed in our second quarter of fiscal 2022. Of such amount, $10,304,000 related to Mr. Kornberg's severance payments and benefits upon termination of his employment; the remainder related to Mr. Kornberg agreeing to serve as a Senior Technology Advisor for a minimum of two years. Of the total former CEO transition costs of $13,554,000, $7,388,000 relates to the amortization of equity-classified stock-based awards.

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

(2) Acquisitions

UHP Networks Inc.

On March 2, 2021, we completed our acquisition of UHP Networks Inc. ("UHP"), a leading provider of innovative and disruptive satellite ground station technology solutions, pursuant to a stock purchase agreement initially entered into in November 2019 and last amended ~~in June 2020 and~~ on March 1, ~~2021, respectively.~~2021. With end-markets for high-speed satellite-based ~~network~~networks anticipated to significantly ~~growing,~~grow, our acquisition ~~of UHP~~ allows us to enhance our Commercial Solutions segment's offerings with low cost time division multiple access ("TDMA") satellite modems.

The acquisition ~~has~~had a ~~preliminary~~final purchase price for accounting purposes of ~~$37,402,000. The initial upfront payment~~$37,470,000, which represents the sum of ~~approximately $23,902,000 was~~$23,979,000 paid ~~primarily in shares of our common stock, with $10,000 in cash. An additional $5,000,000, payable~~ at ~~our option in cash~~closing, $4,991,000 paid on August 1, 2021 and ~~or shares of our common stock, was placed in escrow and is subject~~$8,500,000 related to ~~certain conditions that we expect will be satisfied within twelve months after~~ the acquisition. The stock purchase agreement also provides for an earn-out payment of up to $9,000,000, also payable at our option in cash and or shares of our common stock, if specified sales milestones are reached during the eighteen-month period ending September 30, 2022. The preliminaryacquisition date estimated fair value of ~~such~~a $9,000,000 contingent earn-out ~~consideration at the acquisition date was $8,500,000.~~payment.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

At closing, we funded the $23,902,000 paid at closing, $5,060,000 was placed into escrow to be released once the following conditions are met pursuant to the stock purchase agreement: (i) $500,000 payable upon settlement of net working capital adjustments;$23,979,000 and ~~(ii) $4,560,000 payable ratably over three years upon settlement of potential indemnification obligations of the seller.~~

~~We issued~~$4,991,000 payments with 1,026,567 shares of our common stock, ~~at closing,~~ based on a volume weighted average stock price of approximately $28.14 per share, plus $87,000 in ~~satisfaction~~cash. As of ~~initial~~April 30, 2022, 197,855 of the 1,026,567 shares of our common stock issued at closing were held in escrow to satisfy potential indemnification obligations of the seller.

In addition, the full $9,000,000 earn-out payment was accrued, as the specified sales milestones were met. Settlement of the $9,000,000 earn-out payment is expected to occur in the fourth quarter of fiscal 2022. Comtech retains the right to use cash, common stock or a combination of both to settle such payment. Upon payment, twenty-percent, or $1,800,000, of such amount will also be placed into escrow and ~~escrow arrangements under~~is anticipated to be released to the seller equally on March 2, 2023 and 2024. The terms of the stock purchase ~~agreement.~~agreement provide an ability for us to substitute cash in lieu of the common stock that was initially placed into escrow.

The following table summarizes the final fair value of assets acquired and liabilities assumed in connection with the UHP acquisition:


	Purchase Price Allocation (1)
Initial upfront payment	$	23,979,000
Hold-back amount	4,991,000
Contingent earn-out consideration	8,500,000
Purchase price at fair value	$	37,470,000
Allocation of aggregate purchase price:
Cash and cash equivalents	$	1,391,000
Current assets	1,367,000
Property, plant and equipment	10,000
Deferred tax assets	310,000
Contract liabilities	(648,000)
Accrued warranty obligations	(750,000)
Other current liabilities	(1,175,000)
Non-current liabilities	(160,000)
Net tangible assets at preliminary fair value	$	345,000
Identifiable intangibles, deferred taxes and goodwill:			Estimated Useful Lives
Technology	$	15,300,000	15 years
Customer relationships	15,500,000		15 years
Trade name	800,000		20 years
Deferred tax liabilities	(8,374,000)
Goodwill	13,899,000		Indefinite
Allocation of aggregate purchase price	$	37,470,000

(1)As reported in the Company's Quarterly Report on Form 10-Q for the three months ended October 31, 2021.

We ~~are accounting~~accounted for the acquisition ~~of UHP~~ under the acquisition method of accounting in accordance with FASB ASC 805, "Business Combinations" ("ASC 805"). ~~The purchase price was allocated to the assets acquired and liabilities assumed, based on their preliminary fair value as of March 2, 2021 pursuant to the business combination accounting rules.~~ Acquisition plan expenses were not included as a component of consideration transferred and were expensed in the period incurred. The final purchase price was allocated to the assets acquired and liabilities assumed, based on their fair value as of March 2, 2021 pursuant to the business combination accounting rules. Our condensed consolidated statements of operations for the three and nine months ended April 30, ~~2021~~2022 include a nominal amount of revenue contribution from ~~UHP.~~the acquisition. Pro forma financial information is not disclosed, as the acquisition is not material.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed in connection with the UHP acquisition:~~


	~~March 2, 2021~~
~~Initial upfront payment~~	$	~~23,902,000~~
~~Hold-back amount~~	~~5,000,000~~
~~Contingent earn-out consideration~~	~~8,500,000~~
~~Preliminary purchase price at fair value~~	$	~~37,402,000~~
~~Preliminary allocation of aggregate purchase price:~~
~~Cash and cash equivalents~~	$	~~1,391,000~~
~~Current assets~~	~~1,235,000~~
~~Property, plant and equipment~~	~~10,000~~
~~Deferred tax assets~~	~~286,000~~
~~Contract liabilities~~	~~(657,000)~~
~~Accrued warranty obligations~~	~~(750,000)~~
~~Other current liabilities~~	~~(1,166,000)~~
~~Non-current liabilities~~	~~(160,000)~~
~~Net tangible assets at preliminary fair value~~	$	~~189,000~~
~~Identifiable intangibles, deferred taxes and goodwill:~~			~~Estimated Useful Lives~~
~~Technology~~	$	~~15,300,000~~	~~15 years~~
~~Customer relationships~~	~~15,500,000~~		~~15 years~~
~~Trade name~~	~~800,000~~		~~20 years~~
~~Deferred tax liabilities~~	~~(8,374,000)~~
~~Goodwill~~	~~13,987,000~~		~~Indefinite~~
~~Preliminary allocation of aggregate purchase price~~	$	~~37,402,000~~

The acquired identifiable intangible assets are being amortized on a straight-line basis, which we believe approximates the pattern in which the assets are utilized over their estimated useful lives. The preliminary fair value of customer relationships was primarily based on the value of the discounted cash flows that the related intangible asset could be expected to generate in the future. The preliminary fair value of technology and trade name was based on the discounted capitalization of royalty expense saved because we now own the assets. The preliminary estimated fair value of contingent earn-out consideration represents the present value of the estimated amount payable, based on a probability-weighted amount of net sales, as defined, during the earn-out period, which reflects significant management estimates and assumptions using unobservable Level 3 inputs, including: (i) possible outcomes for targeted net sales during the earn-out period; (ii) timing of each possible outcome; (iii) probability of each possible outcome; and (vi) discount rate reflecting the credit risk of the Company. Among the factors contributing to the recognition of goodwill, as a component of the preliminary purchase price allocation, were synergies in products and technologies and the addition of a skilled, assembled workforce. This goodwill has been assigned to our Commercial Solutions segment based on specific identification and is generally not deductible for income tax purposes.

The allocation of the preliminary purchase price shown in the above table was based upon a preliminary valuation and estimates and assumptions that are subject to change within the purchase price allocation period, generally one year from the acquisition date. The primary areas of the purchase price allocation not yet finalized include the purchase price (due to customary adjustments for final net working capital, potential indemnification obligations of the seller under the stock purchase agreement and contingent earn-out consideration), a final assessment of assets acquired and liabilities assumed, accrued warranty obligations, income taxes and residual goodwill.

~~Index~~

~~COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Acquisition Plan Expenses

During the three and nine months ended April 30, 2021, ~~and 2020,~~ we incurred acquisition plan expenses of $5,267,000 and ~~$5,983,000 and~~ $99,807,000, ~~and $14,397,000,~~ respectively. Of the amount recorded infor the nine months ended April 30, 2021, $88,343,000 related to the previously announced litigation and merger termination with Gilat Satellite Networks, Ltd. ("Gilat"), including $70,000,000 paid in cash to Gilat. The remaining costs primarily related to the April 2021 settlement of litigation associated with the 2019 acquisition of GD NG-911, as well as our acquisition of UHP, which closed in March 2021. ~~We do not expect any significant acquisition plan expense~~Additionally, during the ~~fourth quarter~~nine months ended April 30, 2021, we recorded $1,178,000 of ~~fiscal 2021.~~incremental interest expense related to a now terminated financing commitment letter.

(3) Adoption of Accounting Standards and Updates

We are required to prepare our condensed consolidated financial statements in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") which is the source for all authoritative U.S. generally accepted accounting principles, which are commonly referred to as "GAAP." The FASB ASC is subject to updates by the FASB, which are known as Accounting Standards Updates ("ASUs"). During the nine months ended April 30, ~~2021,~~2022, we adopted:

•FASB ASU No. ~~2016-13,~~2019-12, which ~~requires companies~~simplifies various aspects related to ~~utilize an impairment model (current expected credit loss ("CECL”))~~accounting for ~~most financial assets measured at amortized cost and~~income taxes. ASU 2019-12 removes certain ~~other financial instruments, which include, but are not limited~~exceptions to ~~trade receivables and contract assets.This accounting standard replaced~~ the ~~incurred loss model with a model that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate those losses.On August 1, 2020, we adopted this ASU on a modified-retrospective basis and recorded a $215,000 decrease to opening retained earnings.~~

•~~FASB ASU No. 2018-13, which modifies the disclosure requirements for fair value measurements~~general principles in Topic ~~820. On August 1, 2020, we adopted this ASU.~~740 and also clarifies and amends existing guidance to improve consistent application. Our adoption of this ASU on August 1, 2021 did not have ~~any~~a material impact on our condensed consolidated financial statements or disclosures.

•FASB ASU No. ~~2018-15,~~2020-01, which ~~aligns~~clarifies the ~~requirements for capitalizing implementation costs incurred in a hosting arrangement~~interactions between Topics 321, 323 and 815. This ASU clarifies that ~~is a service contract with~~an entity should consider observable transactions that require it to either apply or discontinue the ~~requirements for capitalizing implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal use software license). The~~equity method of accounting for the ~~service element~~purposes of ~~a hosting arrangement that is a service contract is not affected by~~applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. In addition, the amendments clarify the accounting for certain forward contracts and purchased options accounted for under Topic 815. Our adoption of this ASU on August 1, 2021 did not impact our condensed consolidated financial statements or disclosures.

•FASB ASU No. 2020-06, which simplifies the accounting for convertible instruments by removing certain separation models (including the cash conversion model and the beneficial conversion feature model) for convertible instruments. As a result, for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815 or that do not result in ~~this ASU.~~substantial premiums accounted for as paid-in capital, the embedded conversion features are no longer separated from the host contract. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, and convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost as long as no other features require bifurcation and recognition as derivatives. On August 1, ~~2020,~~2021, we early adopted this ASU. Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.

•FASB ASU No. ~~2018-17,~~2021-08, which requires ~~entities~~that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, as if it had originated the contracts. Prior to ~~consider indirect interests held through related parties under common control~~this ASU, an acquirer generally recognized contract assets and contract liabilities assumed that arose from contracts with customers at fair value on ~~a proportional basis, rather than as~~ the ~~equivalent of a direct interest in its entirety, when determining whether a decision-making fee is a variable interest.~~acquisition date. On August 1, ~~2020,~~2021, we early adopted this ASU.Our early adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.

•FASB ASU No. 2018-18, which clarifies when certain transactions between collaborative arrangement participants should be accounted for under ASC 606 and incorporates unit-of-account guidance consistent with ASC 606 to aid in this determination. The ASU also precludes entities from presenting consideration from transactions with a collaborator that is not a customer together with revenue recognized from contracts with customers. On August 1, 2020, we adopted this ASU.~~Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.~~

•FASB ASU No. 2019-08, which requires that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. The amount recorded as a reduction of the transaction price is required to be measured based on the grant-date fair value of the share-based payment award. On August 1, 2020, we adopted this ASU.~~Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.~~

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(4) Revenue Recognition

In accordance with FASB ASC 606 - Revenue from Contracts with Customers ("ASC 606"), we record revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to customers. Under ASC 606, we follow a five-step model to: (1) identify the contract with our customer; (2) identify our performance obligations in our contract; (3) determine the transaction price for our contract; (4) allocate the transaction price to our performance obligations; and (5) recognize revenue using one of the following two methods:

•Over time - We recognize revenue using the over time method when there is a continuous transfer of control to the customer over the contractual period of performance. This generally occurs when we enter into a long-term contract relating to the design, development or manufacture of complex equipment or technology platforms to a buyer’s specification (or to provide services related to the performance of such contracts). Continuous transfer of control is typically supported by contract clauses which allow our customers to unilaterally terminate a contract for convenience, pay for costs incurred plus a reasonable profit and take control of work-in-process. Revenue recognized over time is generally based on the extent of progress toward completion of the related performance obligations. The selection of the method to measure progress requires judgment and is based on the nature of the products or services provided. In certain instances, typically for firm fixed-price contracts, we use the cost-to-cost measure because it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion, including warranty costs. Revenues, including estimated fees or profits, are recorded proportionally as costs are incurred. Costs to fulfill generally include direct labor, materials, subcontractor costs, other direct costs and an allocation of indirect costs. When these contracts are modified, the additional goods or services are generally not distinct from those already provided. As a result, these modifications form part of an existing contract and we must update the transaction price and our measure of progress for the single performance obligation and recognize a cumulative catch-up to revenue and gross profits.

For over time contracts using a cost-to-cost measure of progress, we have an estimate at completion ("EAC") process in which management reviews the progress and execution of our performance obligations. This EAC process requires management judgment relative to assessing risks, estimating contract revenue and costs, and making assumptions for schedule and technical issues. Since certain contracts extend over a long period of time, the impact of revisions in revenue and or cost estimates during the progress of work may impact current period earnings through a cumulative adjustment. Additionally, if the EAC process indicates a loss, a provision is made for the total anticipated loss in the period that it becomes evident. Contract revenue and cost estimates for significant contracts are generally reviewed and reassessed at least quarterly.

The cost-to-cost method is principally used to account for contracts in our Government Solutions segment and, to a lesser extent, certain location-based and messaging infrastructure contracts in our public safety and location technologies product line within our Commercial Solutions segment. For service-based contracts in our public safety and location technologies product line, we also recognize revenue over time. These services are typically recognized as a series of services performed over the contract term using the straight-line method, or based on our customers’ actual usage of the networks and platforms which we provide.

•Point in time - When a performance obligation is not satisfied over time, we must record revenue using the point in time accounting method which generally results in revenue being recognized upon shipment or delivery of a promised good or service to a customer. This generally occurs when we enter into short term contracts or purchase orders where items are provided to customers with relatively quick turn-around times. Modifications to such contracts and or purchase orders, which typically provide for additional quantities or services, are accounted for as a new contract because the pricing for these additional quantities or services are based on standalone selling prices.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Point in time accounting is principally applied to contracts in our satellite ground station technologies product line ~~in our Commercial Solutions segment~~ (which includes satellite modems, solid-state and traveling wave tube amplifiers) and certain contracts for our solid-state, high-power RF ~~amplifiers in our Government Solutions segment.~~amplifiers. The contracts related to these product lines do not meet the requirements for over time revenue recognition because our customers cannot utilize the equipment for its intended purpose during any phase of our manufacturing process; customers do not simultaneously receive and or consume the benefits provided by our performance; customers do not control the asset (i.e., prior to delivery, customers cannot direct the use of the asset, sell or exchange the equipment, etc.); and, although many of our contracts have termination for convenience clauses and or an enforceable right to payment for performance completed to date, our performance creates an asset with an alternative use through the point of delivery.

In determining that our equipment has alternative use, we considered the underlying manufacturing process for our products. In the early phases of manufacturing, raw materials and work in process (including subassemblies) consist of common parts that are highly fungible among many different types of products and customer applications. Finished products are either configured to our standard configuration or based on our customers’ specifications. Finished products, whether built to our standard specification or to a customers’ specification, can be sold to a variety of customers and across many different end use applications with minimal rework, if needed, and without incurring a significant economic loss.

When identifying a contract with our customer, we consider when it has approval and commitment from both parties, if the rights of the parties are identified, if the payment terms are identified, if it has commercial substance and if collectability is probable.

When identifying performance obligations, we consider whether there are multiple promises and how to account for them. In our contracts, multiple promises are separated if they are distinct, both individually and in the context of the contract. If multiple promises in a contract are highly interrelated or comprise a series of distinct services performed over time, they are combined into a single performance obligation. In some cases, we may also provide the customer with an additional service-type warranty, which we recognize as a separate performance obligation. Service-type warranties do not represent a significant portion of our consolidated net sales. When service-type warranties represent a separate performance obligation, the revenue is deferred and recognized ratably over the extended warranty period. Our contracts, from time-to-time, may also include options for additional goods and services. To date, these options have not represented material rights to the customer as the pricing for them reflects standalone selling prices. As a result, we do not consider options we offer to be performance obligations for which we must allocate a portion of the transaction price. In many cases, we provide assurance-type warranty coverage for some of our products for a period of at least one year from the date of delivery.

When identifying the transaction price, we typically utilize the contract's stated price as a starting point. The transaction price in certain arrangements may include estimated amounts of variable consideration, including award fees, incentive fees or other provisions that can either increase or decrease the transaction price. We estimate variable consideration as the amount to which we expect to be entitled, and we include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the estimation uncertainty is resolved. The estimation of this variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information (e.g., historical, current and forecasted) that is reasonably available to us.

When allocating the contract’s transaction price, we consider each distinct performance obligation. For contracts with multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. We determine standalone selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, we estimate the standalone selling price taking into account available information such as market conditions, including geographic or regional specific factors, competitive positioning, internal costs, profit objectives and internally approved pricing guidelines related to the performance obligations.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

~~Substantially all~~Most of our contracts with customers are denominated in U.S. dollars and typically are either firm fixed-price or cost reimbursable type contracts (including fixed-fee, incentive-fee and time-and-material type contracts). In almost all of our contracts with customers, we are the principal in the arrangement and report revenue on a gross basis. Transaction prices for contracts with U.S. domestic and international customers are usually based on specific negotiations with each customer and in the case of the U.S. government, sometimes based on estimated or actual costs of providing the goods or services in accordance with applicable regulations. Sales by geography and customer type, as a percentage of consolidated net sales, are as follows:


		Three months ended April 30,				Nine months ended April 30,				Three months ended April 30,				Nine months ended April 30,
		2021		2020		2021		2020				2022		2021		2022		2021
United States	United States										United States
U.S. government	U.S. government	33.2	%	30.7	%	37.1	%	38.1	%		U.S. government	23.3	%	33.2	%	26.8	%	37.1	%
Domestic	Domestic	46.6	%	45.0	%	40.4	%	38.8	%		Domestic	48.6	%	46.6	%	48.2	%	40.4	%
Total United States	Total United States	79.8	%	75.7	%	77.5	%	76.9	%		Total United States	71.9	%	79.8	%	75.0	%	77.5	%

International	International	20.2	%	24.3	%	22.5	%	23.1	%		International	28.1	%	20.2	%	25.0	%	22.5	%
Total	Total	100.0	%	100.0	%	100.0	%	100.0	%		Total	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. Included in domestic sales are sales to Verizon Communications Inc. ("Verizon"), which accounted for 10.6% and 11.1% of consolidated net sales for the three and nine months ended April 30, 2022, respectively, and 11.4% and 11.2% of consolidated net sales for the three and nine months ended April 30, 2021, respectively. ~~Except for the U.S. government, there were no customers that represented more than 10.0% of consolidated net sales during the three and nine months ended April 30, 2020.~~ Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented more than 10.0% of consolidated net sales for the three and nine months ended April 30, ~~2021~~2022 and ~~2020.~~2021.

The following tables summarize our disaggregation of revenue consistent with information reviewed by our ~~chief operating decision-maker~~Chief Operating Decision Maker ("CODM") for the three and nine months ended April 30, ~~2021~~2022 and ~~2020.~~2021. We believe these categories best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors which impact our business:


		Three months ended April 30, 2021					Nine months ended April 30, 2021						Three months ended April 30, 2022					Nine months ended April 30, 2022
		Commercial Solutions		Government Solutions	Total		Commercial Solutions		Government Solutions	Total			Commercial Solutions		Government Solutions	Total		Commercial Solutions		Government Solutions	Total
Geographical region and customer type	Geographical region and customer type											Geographical region and customer type
U.S. government	U.S. government	$	15,079,000	31,227,000	$	46,306,000	$	41,383,000	120,157,000	$	161,540,000	U.S. government	$	8,154,000	20,281,000	$	28,435,000	$	31,442,000	64,713,000	$	96,155,000
Domestic	Domestic	55,869,000		9,036,000	64,905,000		153,128,000		23,134,000	176,262,000		Domestic	54,406,000		4,926,000	59,332,000		156,189,000		17,018,000	173,207,000
Total United States	Total United States	70,948,000		40,263,000	111,211,000		194,511,000		143,291,000	337,802,000		Total United States	62,560,000		25,207,000	87,767,000		187,631,000		81,731,000	269,362,000

International	International	20,416,000		7,749,000	28,165,000		66,480,000		31,604,000	98,084,000		International	25,571,000		8,778,000	34,349,000		60,711,000		29,183,000	89,894,000
Total	Total	$	91,364,000	48,012,000	$	139,376,000	$	260,991,000	174,895,000	$	435,886,000	Total	$	88,131,000	33,985,000	$	122,116,000	$	248,342,000	110,914,000	$	359,256,000
Contract type	Contract type											Contract type
Firm fixed-price	Firm fixed-price	$	90,727,000	31,726,000	$	122,453,000	$	258,859,000	102,456,000	$	361,315,000	Firm fixed-price	$	87,654,000	26,363,000	$	114,017,000	$	247,529,000	88,957,000	$	336,486,000
Cost reimbursable	Cost reimbursable	637,000		16,286,000	16,923,000		2,132,000		72,439,000	74,571,000		Cost reimbursable	477,000		7,622,000	8,099,000		813,000		21,957,000	22,770,000
Total	Total	$	91,364,000	48,012,000	$	139,376,000	$	260,991,000	174,895,000	$	435,886,000	Total	$	88,131,000	33,985,000	$	122,116,000	$	248,342,000	110,914,000	$	359,256,000
Transfer of control	Transfer of control											Transfer of control
Point in time	Point in time	$	32,305,000	22,108,000	$	54,413,000	$	99,111,000	71,674,000	$	170,785,000	Point in time	$	33,034,000	14,311,000	$	47,345,000	$	85,831,000	50,076,000	$	135,907,000
Over time	Over time	59,059,000		25,904,000	84,963,000		161,880,000		103,221,000	265,101,000		Over time	55,097,000		19,674,000	74,771,000		162,511,000		60,838,000	223,349,000
Total	Total	$	91,364,000	48,012,000	$	139,376,000	$	260,991,000	174,895,000	$	435,886,000	Total	$	88,131,000	33,985,000	$	122,116,000	$	248,342,000	110,914,000	$	359,256,000

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


		Three months ended April 30, 2020					Nine months ended April 30, 2020						Three months ended April 30, 2021					Nine months ended April 30, 2021
		Commercial Solutions		Government Solutions	Total		Commercial Solutions		Government Solutions	Total			Commercial Solutions		Government Solutions	Total		Commercial Solutions		Government Solutions	Total
Geographical region and customer type	Geographical region and customer type											Geographical region and customer type
U.S. government	U.S. government	$	7,230,000	34,268,000	$	41,498,000	$	41,167,000	136,941,000	$	178,108,000	U.S. government	$	15,079,000	31,227,000	$	46,306,000	$	41,383,000	120,157,000	$	161,540,000
Domestic	Domestic	51,499,000		9,314,000	60,813,000		158,856,000		22,588,000	181,444,000		Domestic	55,869,000		9,036,000	64,905,000		153,128,000		23,134,000	176,262,000
Total United States	Total United States	58,729,000		43,582,000	102,311,000		200,023,000		159,529,000	359,552,000		Total United States	70,948,000		40,263,000	111,211,000		194,511,000		143,291,000	337,802,000

International	International	19,582,000		13,228,000	32,810,000		68,724,000		38,766,000	107,490,000		International	20,416,000		7,749,000	28,165,000		66,480,000		31,604,000	98,084,000
Total	Total	$	78,311,000	56,810,000	$	135,121,000	$	268,747,000	198,295,000	$	467,042,000	Total	$	91,364,000	48,012,000	$	139,376,000	$	260,991,000	174,895,000	$	435,886,000
Contract type	Contract type											Contract type
Firm fixed-price	Firm fixed-price	$	77,553,000	39,079,000	$	116,632,000	$	265,318,000	128,677,000	$	393,995,000	Firm fixed-price	$	90,727,000	31,726,000	$	122,453,000	$	258,859,000	102,456,000	$	361,315,000
Cost reimbursable	Cost reimbursable	758,000		17,731,000	18,489,000		3,429,000		69,618,000	73,047,000		Cost reimbursable	637,000		16,286,000	16,923,000		2,132,000		72,439,000	74,571,000
Total	Total	$	78,311,000	56,810,000	$	135,121,000	$	268,747,000	198,295,000	$	467,042,000	Total	$	91,364,000	48,012,000	$	139,376,000	$	260,991,000	174,895,000	$	435,886,000
Transfer of control	Transfer of control											Transfer of control
Point in time	Point in time	$	25,730,000	32,193,000	$	57,923,000	$	106,464,000	98,653,000	$	205,117,000	Point in time	$	32,305,000	22,108,000	$	54,413,000	$	99,111,000	71,674,000	$	170,785,000
Over time	Over time	52,581,000		24,617,000	77,198,000		162,283,000		99,642,000	261,925,000		Over time	59,059,000		25,904,000	84,963,000		161,880,000		103,221,000	265,101,000
Total	Total	$	78,311,000	56,810,000	$	135,121,000	$	268,747,000	198,295,000	$	467,042,000	Total	$	91,364,000	48,012,000	$	139,376,000	$	260,991,000	174,895,000	$	435,886,000

The timing of revenue recognition, billings and collections results in receivables, unbilled receivables and contract liabilities on our Condensed Consolidated Balance Sheet. Under typical payment terms for our contracts accounted for over time, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., monthly) or upon achievement of contractual milestones. For certain contracts with provisions that are intended to protect customers in the event we do not satisfy our performance obligations, billings occur subsequent to revenue recognition, resulting in unbilled receivables. Under ASC 606, unbilled receivables constitute contract assets. There were no material impairment losses recognized on contract assets during the nine months ended April 30, ~~2021~~2022 and ~~2020,~~2021, respectively. On large long-term contracts, and for contracts with international customers that do not do business with us regularly, payment terms typically require advanced payments and deposits. Under ASC 606, payments received from customers in excess of revenue recognized to-date results in a contract liability. These contract liabilities are not considered to represent a significant financing component of the contract because we believe these cash advances and deposits are generally used to meet working capital demands which can be higher in the earlier stages of a contract. Also, advanced payments and deposits provide us with some measure of assurance that the customer will perform on its obligations under the contract. Under the typical payment terms for our contracts accounted for at a point in time, costs are accumulated in inventory until the time of billing, which generally coincides with revenue recognition. Of the contract liability balance at July 31, ~~2020~~2021 and July 31, ~~2019,~~2020, $46,031,000 and $30,011,000 ~~and $31,000,000~~ was recognized as revenue during the nine months ended April 30, 2022 and 2021, ~~and 2020,~~ respectively. ~~Contract liabilities increased $657,000 as a result of our acquisition of UHP discussed in~~ ~~Note~~ (2~~) - “Acquisitions - UHP Networks Inc.~~”

We recognize the incremental costs to obtain or fulfill a contract as an expense when incurred if the amortization period of the asset is one year or ~~less. Incremental~~less; otherwise, such costs are capitalized and amortized over the estimated life of the contract. During the three and nine months ended April 30, 2022, incremental costs to obtain or fulfill contracts with an amortization period greater than one year were not material.

As commissions payable to our internal sales and marketing employees or contractors are contingent upon multiple factors, such commissions are not considered direct costs to obtain or fulfill a contract with a customer and are expensed as incurred in selling, general and administrative expenses on our Condensed Consolidated Statements of Operations. As for commissions payable to our third-party sales representatives related to long-term contracts, we do consider these types of commissions both direct and incremental costs to obtain and fulfill such contracts. Therefore, such types of commissions are included in total estimated costs at completion for such contracts and expensed over time through cost of sales on our Condensed Consolidated Statements of Operations.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Remaining performance obligations represent the transaction price of firm orders for which work has not been performed as of the end of a fiscal period. Remaining performance obligations, which we refer to as backlog, exclude unexercised contract options and potential orders under indefinite delivery / indefinite quantity ("IDIQ") contracts. As of April 30, ~~2021,~~2022, the aggregate amount of the transaction price allocated to remaining performance obligations was ~~$636,460,000~~$602,333,000 (which represents the amount of our consolidated funded backlog). We estimate that a substantial portion of our remaining performance obligations at April 30, ~~2021~~2022 will be completed and recognized as revenue during the next twenty-four month period, with the rest thereafter. During the three and nine months ended April 30, ~~2021,~~2022, revenue recognized from performance obligations satisfied, or partially satisfied, in previous periods (for example due to changes in the transaction price) was not material.

(5) Fair Value Measurements and Financial Instruments

Using the fair value hierarchy described in FASB ASC 820 "Fair Value Measurements and Disclosures," we valued our cash and cash equivalents using Level 1 inputs that were based on quoted market prices.

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

The fair value of our Credit Facility that we entered into on October 31, 2018 approximates its carrying amount due to its variable interest rate and pricing grid that is dependent upon our leverage ratio as of the end of each fiscal quarter.

The stock purchase agreement for the acquisition of UHP provided for a contingent earn-out payment of up to $9,000,000, if specified sales milestones were reached during a defined period ending September 30, 2022. The earn-out was accounted for as a contingent consideration liability to be recorded at its fair value. See Note (2) - "Acquisitions" for more information.

As of April 30, ~~2021~~2022 and July 31, ~~2020,~~2021, other than the financial instruments discussed above, we had no other significant assets or liabilities included in our Condensed Consolidated Balance Sheets recorded at fair value, as such term is defined by FASB ASC 820.

(6) Earnings Per Share

Our basic earnings per share ("EPS") is computed based on the weighted average number of common shares (including vested but unissued stock units, share units, performance shares and restricted stock units ("RSUs")), outstanding during each respective period. Our diluted EPS reflects the dilution from potential common stock issuable pursuant to the exercise of equity-classified stock-based awards, settlement of escrow and earn-out arrangements related to our acquisition of UHP and the assumed conversion of Convertible Preferred Stock, if dilutive, outstanding during each respective period. Pursuant to FASB ASC 260 "Earnings Per Share," ~~equity-classified stock-based awards that are subject to performance~~shares whose issuance is contingent upon the satisfaction of certain conditions are ~~not considered~~included in ~~our~~ diluted EPS ~~calculations until~~based on the ~~respective performance conditions have been satisfied.~~number of shares, if any, that would be issuable if the end of the reporting period were the end of the contingency period. When calculating our diluted earnings per share, we consider the amount an employee must pay upon assumed exercise of stock-based awards and the amount of stock-based compensation cost attributed to future services and not yet recognized.

There were 0no repurchases of our common stock during the three ~~and~~or nine months ended April 30, ~~2021 and 2020.~~2022 or 2021. See Note ~~(17)~~(18) - "Stockholders’ Equity" for more information.

Weighted average stock options, RSUs and restricted stock outstanding of ~~912,000~~1,369,000 and ~~1,440,000~~912,000 for the three months ended April 30, 2022 and 2021, respectively, and ~~2020~~1,463,000 and 1,499,000 ~~and 642,000~~ for the nine months ended April 30, ~~2021~~2022 and ~~2020,~~2021, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive.

Our EPS calculations exclude ~~236,000~~339,000 and ~~203,000~~236,000 weighted average performance shares outstanding for the three months ended April 30, ~~2021~~2022 and ~~2020,~~2021, respectively, and ~~235,000~~287,000 and ~~201,000~~235,000 for the nine months ended April 30, ~~2021~~2022 and ~~2020,~~2021, respectively, as the performance conditions have not yet been satisfied. However, ~~net income (loss) (the numerator)~~the numerator for EPS calculations for each respective period is reduced by the compensation expense related to these awards.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Weighted average common shares of 4,225,000 and 2,969,000 underlying the assumed conversion of Convertible Preferred Stock, on an if-converted basis, were not included in our diluted EPS calculation for the three and nine months ended April 30, 2022, respectively, because their effect would have been anti-dilutive. As a result, the numerator for our basic and diluted EPS calculation for the three and nine months ended April 30, 2022 is the respective net loss attributable to common stockholders.

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


	Three months ended April 30,			Nine months ended April 30,
	2022		2021	2022		2021
Numerator:
Net (loss) income	$	(25,000)	792,000	$	(27,883,000)	(80,843,000)
Convertible preferred stock issuance costs	—		—	(4,007,000)		—
Establishment of initial convertible preferred stock purchase option liability	—		—	(1,005,000)		—
Dividend on convertible preferred stock	(1,655,000)		—	(3,522,000)		—
Net loss attributable to common stockholders	$	(1,680,000)	792,000	$	(36,417,000)	(80,843,000)

Denominator:
Denominator for basic calculation	26,528,000		25,911,000	26,582,000		25,875,000
Effect of dilutive securities:
Stock-based awards	—		355,000	—		—
Denominator for diluted calculation	26,528,000		26,266,000	26,582,000		25,875,000

As discussed further in Note (17) - "Convertible Preferred Stock," the Convertible Preferred Stock issued in October 2021 represents a "participating security" as defined in ASC 260. As a result, our EPS calculations for the three and nine months ended April 30, 2022 were based on the two-class method. Given the net loss attributable to common stockholders for the three and nine months ended April 30, 2022, there was no impact of applying the two-class method to our reported basic or diluted earnings per common share.

(7) Accounts Receivable

Accounts receivable consist of the following at:


	April 30, 2022		July 31, 2021
Receivables from commercial and international customers	$	62,691,000	86,890,000
Unbilled receivables from commercial and international customers	40,202,000		36,131,000
Receivables from the U.S. government and its agencies	21,767,000		33,381,000
Unbilled receivables from the U.S. government and its agencies	1,330,000		3,356,000
Total accounts receivable	125,990,000		159,758,000
Less allowance for doubtful accounts	1,899,000		1,648,000
Accounts receivable, net	$	124,091,000	158,110,000

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

Three months ended April 30, Nine months ended April 30,
2021 2020 2021 2020
Numerator:
Net income (loss) for basic calculation $ 792,000 (3,989,000) $ (80,843,000) 5,894,000
Numerator for diluted calculation $ 792,000 (3,989,000) $ (80,843,000) 5,894,000
Denominator:
Denominator for basic calculation 25,911,000 24,982,000 25,875,000 24,730,000
Effect of dilutive securities:
Stock-based awards 355,000 0 0 162,000
Denominator for diluted calculation 26,266,000 24,982,000 25,875,000 24,892,000

~~(7)~~ ~~Accounts Receivable~~

~~Accounts receivable consist of the following at:~~

April 30, 2021 July 31, 2020
Receivables from commercial and international customers $ 71,383,000 67,109,000
Unbilled receivables from commercial and international customers 29,271,000 21,588,000
Receivables from the U.S. government and its agencies 37,596,000 32,870,000
Unbilled receivables from the U.S. government and its agencies 7,269,000 7,018,000
Total accounts receivable 145,519,000 128,585,000
Less allowance for doubtful accounts 1,387,000 1,769,000
Accounts receivable, net $ 144,132,000 126,816,000

Unbilled receivables as of April 30, ~~2021~~2022 relate to contracts-in-progress for which revenue has been recognized, but for which we have not yet earned the right to bill the customer for work performed to-date. Under ASC 606, unbilled receivables constitute contract assets. Management estimates that a substantial portion of the amounts not yet billed at April 30, ~~2021~~2022 will be billed and collected within one year.

~~Allowance for doubtful accounts as of April 30, 2021 includes $215,000 recorded at August 1, 2020 as a result of our adoption of FASB ASU No. 2016-13, which is discussed in more detail in~~ ~~Note (3)~~ ~~- "Adoption of Accounting Standards and Updates~~."

As of April 30, ~~2021,~~2022, except for the U.S. government (and its agencies) and Verizon, which represented ~~30.8%~~18.3% and ~~14.6%, respectively,~~16.9% of total accounts ~~receivable. As of July 31, 2020, except for the U.S. government (and its agencies), which represented 31.0% of total accounts~~ receivable, respectively, there were no other customers which accounted for greater than ~~10.0%~~10% of total accounts receivable.

As of July 31, 2021, 23.0%, 12.7% and 12.1% of total accounts receivable related to the U.S. government (and its agencies), AT&T, Inc. and Verizon, respectively.

~~Index~~

~~COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

(8) Inventories

Inventories consist of the following at:


		April 30, 2021		July 31, 2020		April 30, 2022		July 31, 2021
Raw materials and components	Raw materials and components	$	63,288,000	59,175,000	Raw materials and components	$	72,005,000	62,249,000
Work-in-process and finished goods	Work-in-process and finished goods	39,755,000		42,203,000	Work-in-process and finished goods	46,059,000		38,338,000
Total inventories	Total inventories	103,043,000		101,378,000	Total inventories	118,064,000		100,587,000
Less reserve for excess and obsolete inventories	Less reserve for excess and obsolete inventories	19,937,000		19,076,000	Less reserve for excess and obsolete inventories	22,821,000		20,229,000
Inventories, net	Inventories, net	$	83,106,000	82,302,000	Inventories, net	$	95,243,000	80,358,000

As of April 30, ~~2021~~2022 and July 31, ~~2020,~~2021, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was ~~$6,442,000~~$7,993,000 and ~~$7,215,000,~~$7,028,000, respectively, and the amount of inventory related to contracts from third-party commercial customers who outsource their manufacturing to us was ~~$1,531,000~~$1,724,000 and ~~$1,387,000,~~$1,509,000, respectively.

(9) Accrued Expenses and Other Current Liabilities

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


		April 30, 2021		July 31, 2020		April 30, 2022		July 31, 2021
Accrued wages and benefits	Accrued wages and benefits	$	28,167,000	20,857,000	Accrued wages and benefits	$	26,758,000	26,367,000
Accrued warranty obligations					Accrued warranty obligations	10,832,000		17,600,000
Accrued contract costs	Accrued contract costs	17,136,000		15,306,000	Accrued contract costs	16,045,000		12,750,000
Accrued warranty obligations		16,747,000		15,200,000
Accrued acquisition-related costs					Accrued acquisition-related costs	9,000,000		9,222,000
Accrued commissions and royalties					Accrued commissions and royalties	5,208,000		5,342,000
Accrued legal costs	Accrued legal costs	2,783,000		2,539,000	Accrued legal costs	2,258,000		2,854,000
Accrued commissions and royalties		4,728,000		4,621,000
Accrued acquisition-related costs		12,175,000		7,014,000
Other	Other	15,866,000		19,624,000	Other	14,063,000		15,466,000
Accrued expenses and other current liabilities	Accrued expenses and other current liabilities	$	97,602,000	85,161,000	Accrued expenses and other current liabilities	$	84,164,000	89,601,000

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

Accrued acquisition-related costs as of April 30, 2022 and July 31, 2021 include ~~$8,581,000~~$9,000,000 and $8,705,000, respectively, of contingent earn-out consideration related to our acquisition of UHP. See Note (2) (2) - “Acquisitions - UHP Networks Inc.” for further discussion.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Accrued warranty obligations as of April 30, ~~2021~~2022 relate to estimated liabilities for assurance type warranty coverage that we provide to our customers. We generally provide warranty coverage for some of our products for a period of at least one year from the date of delivery. We record a liability for estimated warranty expense based on historical claims, product failure rates, consideration of contractual obligations, future costs to resolve software issues and other factors. Some of our product warranties are provided under long-term contracts, the costs of which are incorporated into our estimates of total contract costs.

~~Index~~

~~COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Changes in our accrued warranty obligations during the nine months ended April 30, ~~2021~~2022 and ~~2020~~2021 were as follows:


		Nine months ended April 30,				Nine months ended April 30,
		2021		2020		2022		2021
Balance at beginning of period	Balance at beginning of period	$	15,200,000	15,968,000	Balance at beginning of period	$	17,600,000	15,200,000
Provision for warranty obligations		2,852,000		1,628,000
(Benefit from) provision for warranty obligations					(Benefit from) provision for warranty obligations	(613,000)		2,852,000
Adjustments for changes in estimates					Adjustments for changes in estimates	(2,500,000)		—
Charges incurred					Charges incurred	(3,655,000)		(2,055,000)
Additions (in connection with acquisitions)	Additions (in connection with acquisitions)	750,000		1,000,000	Additions (in connection with acquisitions)	—		750,000
Charges incurred		(2,055,000)		(3,394,000)
Reclassification from non-current liabilities		0		302,000

Balance at end of period	Balance at end of period	$	16,747,000	15,504,000	Balance at end of period	$	10,832,000	16,747,000

During the nine months ended April 30, 2022, we recorded a $2,500,000 benefit to cost of sales in our Commercial Solutions segment due to lower than expected warranty claims associated with previously acquired NG-911 technologies.

(10) Credit Facility

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

The Credit Facility provides a senior secured loan facility of up to $550,000,000 consisting of: (i) a revolving loan facility ("Revolving Loan Facility") with a borrowing limit of $300,000,000; (ii) an accordion feature allowing us to make a request to borrow up to an additional ~~$250,000,000;~~$250,000,000 subject to the satisfaction of specified conditions, including approval by our lenders; (iii) a $35,000,000 letter of credit sublimit; and (iv) a swingline loan credit sublimit of $25,000,000.

The Credit Facility matures on October 31, 2023 (the "Revolving Maturity Date"). If we issue new unsecured debt in excess of $5,000,000 with a maturity date that is less than 91 days from October 31, 2023, the Revolving Maturity Date would automatically accelerate so that it would be 91 days earlier than the maturity date of the new unsecured debt.

As of April 30, ~~2021,~~2022, the amount outstanding under our Credit Facility was ~~$215,000,000~~$127,000,000, which is reflected in the non-current portion of long-term debt on our Condensed Consolidated Balance Sheet. At April 30, ~~2021,~~2022, we had ~~$2,022,000~~$925,000 of standby letters of credit outstanding under our Credit Facility related to guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit. During the nine months ended April 30, ~~2021,~~2022, we had outstanding balances under the Credit Facility ranging from ~~$125,000,000~~$100,000,000 to ~~$217,000,000.~~$212,000,000.

As of April 30, ~~2021,~~2022, total net deferred financing costs related to the Credit Facility were ~~$1,839,000~~$1,216,000 and are being amortized over the term of our Credit Facility through October 31, 2023.

Interest expense related to our Credit Facility, including amortization of deferred financing costs, recorded during the three months ended April 30, 2022 and 2021 was $1,004,000 and ~~2020 was~~ $1,515,000, ~~and $1,470,000,~~ respectively. Interest expense related to our Credit Facility, including amortization of deferred financing costs, recorded during the nine months ended April 30, 2022 and 2021 was $3,478,000 and ~~2020 was~~ $4,040,000, ~~and $4,795,000,~~ respectively. Our blended interest rate approximated ~~2.97%~~3.30% and ~~3.73%~~2.97%, respectively, for the three months ended April 30, 2022 and 2021 and ~~2020. Our blended interest rate~~ approximated ~~2.80%~~3.20% and ~~4.24%~~2.80%, respectively, for the nine months ended April 30, ~~2021~~2022 and ~~2020.~~2021.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Borrowings under the Credit Facility shall be either: (i) Alternate Base Rate borrowings, which bear interest from the applicable borrowing date at a rate per annum equal to (x) the greatest of (a) the Prime Rate (as defined) in effect on such day, (b) the Federal Funds Effective Rate (as defined) in effect on such day plus 1/2 of 1.00% per annum and (c) the Adjusted LIBO Rate (as defined) on such day (or, if such day is not a business day, the immediately preceding business day) plus 1.00% per annum, plus (y) the Applicable Rate (as defined), or (ii) Eurodollar borrowings, which bear interest from the applicable borrowing date at a rate per annum equal to (x) the Adjusted LIBO Rate for such interest period plus (y) the Applicable Rate. Determination of the Applicable Rate is based on a pricing grid that is dependent upon our Secured Leverage Ratio (as defined) as of the end of each fiscal quarter for which consolidated financial statements have been most recently delivered.

~~Index~~

~~COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

The Credit Facility contains customary representations, warranties and affirmative covenants. The Credit Facility also contains customary negative covenants, subject to negotiated exceptions, including but not limited to: (i) liens, (ii) investments, (iii) indebtedness, (iv) significant corporate changes, including mergers and acquisitions, (v) dispositions, (vi) restricted payments, including stockholder dividends, and (vii) certain other restrictive agreements. The Credit Facility also contains certain financial covenants and customary events of default (subject to grace periods, as appropriate), such as payment defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency, the occurrence of a defined change in control and the failure to observe the negative covenants and other covenants related to the operation of our business. In addition, under certain circumstances, we may be required to enter into amendments to the Credit Facility in connection with any further syndication of the Credit Facility.

The Credit Facility provides for, among other things: (i) no scheduled payments of principal until maturity; (ii) a maximum Secured Leverage Ratio of 3.75x trailing twelve months ("TTM") Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA") and a Maximum Total Leverage Ratio of 4.50x TTM Adjusted EBITDA, each with no step downs; and (iii) a Minimum Interest Expense Coverage Ratio of 3.25x TTM Adjusted EBITDA.

As of April 30, ~~2021,~~2022, our Secured Leverage Ratio was ~~2.78x~~2.40x TTM Adjusted EBITDA compared to the maximum allowable Secured Leverage Ratio of 3.75x TTM Adjusted EBITDA. Our Interest Expense Coverage Ratio as of April 30, ~~2021~~2022 was ~~13.78x~~12.12x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25x TTM Adjusted EBITDA. ~~Given~~Although we do expect our Secured Leverage Ratio to increase during the fourth quarter of fiscal 2022 as we make payments to various vendors associated with the build-out of our high-volume technology manufacturing facilities and working capital needs for our existing contracts, given our overall expected ~~future~~ business performance, we anticipate maintaining compliance with the terms and financial covenants in our Credit Facility for the foreseeable future.

The obligations under the Credit Facility are guaranteed by certain of our domestic and foreign subsidiaries (the "Guarantors"). As collateral security under the Credit Facility and the guarantees thereof, we and the Guarantors have granted to the administrative agent, for the benefit of the lenders, a lien on, and first priority security interest in, substantially all of our tangible and intangible assets.

On December 6, 2018, we entered into an amendment to the Credit Facility to provide for a mechanism to replace the LIBO Rate for Eurodollar borrowings with an alternative benchmark interest rate, should the LIBO Rate generally become unavailable in the future on an other-than-temporary basis. On January 14, 2021, we entered into a further amendment of the Credit Facility to update the LIBO Rate replacement mechanism language and other definitional items. On July 30, 2021, we entered into an amendment to incorporate certain foreign subsidiaries as loan parties and guarantors into the Credit Facility and added certain definitional items.

Capitalized terms used but not defined herein have the meanings set forth for such terms in the Credit Facility, which has been documented and filed with the SEC.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(11) Leases

Our leases historically relate to the leasing of facilities and equipment. In accordance with FASB ASC 842 - "Leases" ("ASC 842"), we determine at inception whether an arrangement is, or contains, a lease and whether the lease should be classified as an operating or a financing lease. At lease commencement, we recognize a right-of-use ("ROU") asset and lease liability based on the present value of the future lease payments over the estimated lease term. We have elected to not recognize a ROU asset or lease liability for any leases with terms of twelve months or less. Instead, for such short-term leases, we recognize lease expense on a straight-line basis over the lease term. Certain of our leases include options to extend the term of the lease or to terminate the lease early. When it is reasonably certain that we will exercise a renewal option or will not exercise a termination option, we include the impact of exercising or not exercising such option, respectively, in the estimate of the lease term. As our lease agreements do not explicitly state the discount rate implicit in the lease, we use our incremental borrowing rate ("IBR") on the commencement date to calculate the present value of future lease payments. Such IBR represents our estimated rate of interest to borrow on a collateralized basis over a term commensurate with the expected lease term.

~~Index~~

~~COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Some of our leases include payments that are based on the Consumer Price Index ("CPI") or other similar indices. These variable lease payments are included in the calculation of the ROU asset and lease liability using the index as of the lease commencement date. Other variable lease payments, such as common area maintenance, property taxes, and usage-based amounts, are required by ASC 842 to be excluded from the ROU asset and lease liability and expensed as incurred. In addition to the present value of the future lease payments, the calculation of the ROU asset would also consider, to the extent applicable, any deferred rent upon adoption, lease pre-payments or initial direct costs of obtaining the lease (e.g., such as commissions).

For all classes of leased assets, we elected the practical expedient to not separate lease components (i.e., the actual item being leased, such as the facility or piece of equipment) from non-lease components (i.e., the distinct elements of a contract not related to securing the use of the leased asset, such as common area maintenance and consumable supplies).

Certain of our facility lease agreements (which are classified as operating leases) contain rent holidays or rent escalation clauses. For rent holidays and rent escalation clauses during the lease term, we record rental expense on a straight-line basis over the term of the lease. As of April 30, ~~2021,~~2022, none of our leases contained a residual value guarantee and covenants included in our lease agreements are customary for the types of facilities and equipment being leased.

~~The components of lease expense are as follows:~~

Three months ended April 30, Nine months ended April 30,
2021 2020 2021 2020
Finance lease expense:
Amortization of ROU assets $ 5,000 0 $ 33,000 152,000
Interest on lease liabilities 0 0 2,000 3,000
Operating lease expense 3,024,000 2,733,000 8,373,000 8,069,000
Short-term lease expense 236,000 798,000 738,000 2,539,000
Variable lease expense 1,202,000 1,004,000 3,356,000 3,013,000
Sublease income (17,000) (5,000) (50,000) (5,000)
Total lease expense $ 4,450,000 4,530,000 $ 12,452,000 13,771,000

~~Additional information related to leases is as follows:~~

Nine months ended April 30,
2021 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating leases - Operating cash outflows $ 8,064,000 $ 8,681,000
Finance leases - Operating cash outflows 2,000 3,000
Finance leases - Financing cash outflows 33,000 300,000
ROU assets obtained in the exchange for lease liabilities (non-cash):
Operating leases $ 24,504,000 $ 3,096,000

In fiscal 2021, we commenced a 15-year operating lease for a facility in Chandler, Arizona and a 10-year operating lease for a facility in the United Kingdom. Accordingly, amounts related to both leases are reflected as an operating lease right-of-use asset or related operating lease liability in our Condensed Consolidated Balance Sheet as of April 30, 2021.

2120

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The components of lease expense are as follows:


	Three months ended April 30,			Nine months ended April 30,
	2022		2021	2022		2021
Finance lease expense:
Amortization of ROU assets	$	3,000	5,000	$	10,000	33,000
Interest on lease liabilities	1,000		—	1,000		2,000
Operating lease expense	2,933,000		3,024,000	8,797,000		8,373,000
Short-term lease expense	92,000		236,000	303,000		738,000
Variable lease expense	1,128,000		1,202,000	3,446,000		3,356,000
Sublease income	(17,000)		(17,000)	(50,000)		(50,000)
Total lease expense	$	4,140,000	4,450,000	$	12,507,000	12,452,000

Additional information related to leases is as follows:


	Nine months ended April 30,
	2022		2021

Cash paid for amounts included in the measurement of lease liabilities:
Operating leases - Operating cash outflows	$	8,910,000	$	8,064,000
Finance leases - Operating cash outflows	1,000		2,000
Finance leases - Financing cash outflows	14,000		33,000
ROU assets obtained in the exchange for lease liabilities (non-cash):
Operating leases	$	15,212,000	$	24,504,000

The following table is a reconciliation of future cash flows relating to operating and financing lease liabilities presented on our Condensed Consolidated Balance Sheet as of April 30, ~~2021:~~2022:


		Operating		Finance	Total			Operating		Finance	Total
Remainder of fiscal 2021		$	2,587,000	9,000	$	2,596,000
Fiscal 2022		10,072,000		16,000	10,088,000
Remainder of fiscal 2022							Remainder of fiscal 2022	$	2,945,000	2,000	$	2,947,000
Fiscal 2023	Fiscal 2023	8,050,000		5,000	8,055,000		Fiscal 2023	10,192,000		4,000	10,196,000
Fiscal 2024	Fiscal 2024	6,673,000		0	6,673,000		Fiscal 2024	8,949,000		—	8,949,000
Fiscal 2025	Fiscal 2025	6,140,000		0	6,140,000		Fiscal 2025	8,247,000		—	8,247,000
Fiscal 2026							Fiscal 2026	6,771,000		—	6,771,000
Thereafter	Thereafter	25,571,000		0	25,571,000		Thereafter	29,006,000		—	29,006,000
Total future undiscounted cash flows	Total future undiscounted cash flows	59,093,000		30,000	59,123,000		Total future undiscounted cash flows	66,110,000		6,000	66,116,000
Less: Present value discount	Less: Present value discount	8,796,000		6,000	8,802,000		Less: Present value discount	10,367,000		1,000	10,368,000
Lease liabilities	Lease liabilities	$	50,297,000	24,000	$	50,321,000	Lease liabilities	$	55,743,000	5,000	$	55,748,000

Weighted-average remaining lease terms (in years)	Weighted-average remaining lease terms (in years)	8.95		1.48			Weighted-average remaining lease terms (in years)	8.84		0.81
Weighted-average discount rate	Weighted-average discount rate	3.54%		7.02%			Weighted-average discount rate	3.43%		6.68%

We lease our Melville, New York production facility from a partnership controlled by the non-executive Chairman of our ~~CEO and Chairman.~~Board of Directors. Lease payments made during the nine months ended April 30, 2022 and 2021 were $504,000 and ~~2020 were~~ $494,000, ~~and $486,000,~~ respectively. The current lease provides for our use of the premises as they exist through December 2031. The annual rent of the facility for calendar year ~~2021~~2022 is ~~$665,000~~$685,000 and is subject to customary adjustments. We have a right of first refusal in the event of a sale of the facility.

~~There are no other~~As of April 30, 2022, we do not have any material rental commitments that have not ~~commenced as of April 30, 2021.~~commenced.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(12) Income Taxes

At April 30, ~~2021~~2022 and July 31, ~~2020,~~2021, total unrecognized tax benefits were ~~$9,170,000~~$9,845,000 and ~~$8,345,000,~~$9,172,000, respectively, including interest of ~~$150,000~~$289,000 and ~~$75,000,~~$163,000, respectively. At April 30, ~~2021~~2022 and July 31, ~~2020, $2,588,000~~2021, $3,003,000 and ~~1,963,000,~~$2,717,000, respectively, of our unrecognized tax benefits were recorded as non-current income taxes payable on our Condensed Consolidated Balance Sheets. The remaining unrecognized tax benefits of ~~$6,582,000~~$6,842,000 and ~~$6,382,000~~$6,455,000 at April 30, ~~2021~~2022 and July 31, ~~2020,~~2021, respectively, were presented as an offset to the associated non-current deferred tax assets on our Condensed Consolidated Balance Sheets. Of the total unrecognized tax benefits, ~~$8,406,000~~$8,921,000 and ~~$7,700,000~~$8,408,000 at April 30, ~~2021~~2022 and July 31, ~~2020,~~2021, respectively, net of the reversal of the federal benefit recognized as a deferred tax asset relating to state reserves, would favorably impact our effective tax rate, if recognized. Unrecognized tax benefits result from income tax positions taken or expected to be taken on our income tax returns for which a tax benefit has not been recorded in our condensed consolidated financial statements. We do not expect that there will be any significant changes to our total unrecognized tax benefits within the next twelve months.

Our U.S. federal income tax returns for fiscal ~~2017~~2019 through ~~2020~~2021 are subject to potential future Internal Revenue Service ("IRS") audit. None of our state income tax returns prior to fiscal ~~2016~~2017 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.

~~Index~~

~~COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

(13) Stock-Based Compensation

Overview

We issue stock-based awards to certain of our employees and our Board of Directors pursuant to our 2000 Stock Incentive Plan, as amended and/or restated from time to time (the "Plan") and our 2001 Employee Stock Purchase Plan, as amended and/or restated from time to time (the "ESPP"), and recognize related stock-based compensation in our condensed consolidated financial statements. The Plan provides for the granting to employees and consultants of Comtech (including prospective employees and consultants): (i) incentive and non-qualified stock options, (ii) restricted stock units ("RSUs"), (iii) RSUs with performance measures (which we refer to as "performance shares"), (iv) restricted stock, (v) stock units (reserved for issuance to non-employee directors) and share units (reserved for issuance to employees) (collectively, "share units") and (vi) stock appreciation rights ("SARs"), among other types of awards. Our non-employee directors, excluding our non-executive Chairman, are eligible to receive non-discretionary grants of stock-based awards, subject to certain limitations.

As of April 30, ~~2021,~~2022, the aggregate number of shares of common stock which may be issued, pursuant to the Plan, may not exceed 10,962,500. Stock options granted may not have a term exceeding ten years or, in the case of an incentive stock award granted to a stockholder who owns stock representing more than 10.0% of the voting power, no more than five years. We expect to settle all outstanding awards under the Plan and employee purchases under the ESPP with the issuance of new shares of our common stock.

As of April 30, ~~2021,~~2022, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or acquire an aggregate of ~~9,361,233~~9,246,184 shares (net of ~~4,446,870~~5,321,105 expired and canceled awards), of which an aggregate of ~~6,936,724~~7,605,758 have been exercised or settled.

As of April 30, ~~2021,~~2022, the following stock-based awards, by award type, were outstanding:


			April 30, ~~2021~~2022
Stock options			~~1,312,785~~541,985
Performance shares			~~252,349~~347,018
RSUs, ~~and~~ restricted stock and share units			~~577,330~~751,423
~~Share units~~			~~282,045~~

Total			~~2,424,509~~1,640,426

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Our ESPP provides for the issuance of up to 1,050,000 shares of our common stock. Our ESPP is intended to provide our eligible employees the opportunity to acquire our common stock at 85% of fair market value on the first or last day of each calendar quarter, whichever is lower. Through April 30, ~~2021,~~2022, we have cumulatively issued ~~883,244~~928,578 shares of our common stock to participating employees in connection with our ESPP.

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


		Three months ended April 30,			Nine months ended April 30,				Three months ended April 30,			Nine months ended April 30,
		2021		2020	2021		2020		2022		2021	2022		2021
Cost of sales	Cost of sales	$	42,000	45,000	$	174,000	164,000	Cost of sales	$	80,000	42,000	$	229,000	174,000
Selling, general and administrative expenses	Selling, general and administrative expenses	1,089,000		878,000	2,789,000		2,715,000	Selling, general and administrative expenses	886,000		1,089,000	3,494,000		2,789,000
Research and development expenses	Research and development expenses	73,000		58,000	227,000		219,000	Research and development expenses	105,000		73,000	252,000		227,000
Stock-based compensation expense before income tax benefit		1,204,000		981,000	3,190,000		3,098,000
Stock-based compensation expense								Stock-based compensation expense	1,071,000		1,204,000	3,975,000		3,190,000
Former CEO transition costs related to equity-classified stock-based awards								Former CEO transition costs related to equity-classified stock-based awards	—		—	7,388,000		—
Total stock-based compensation expense before income tax benefit								Total stock-based compensation expense before income tax benefit	1,071,000		1,204,000	11,363,000		3,190,000
Estimated income tax benefit	Estimated income tax benefit	(260,000)		(204,000)	(684,000)		(664,000)	Estimated income tax benefit	(226,000)		(260,000)	(1,449,000)		(684,000)
Net stock-based compensation expense	Net stock-based compensation expense	$	944,000	777,000	$	2,506,000	2,434,000	Net stock-based compensation expense	$	845,000	944,000	$	9,914,000	2,506,000

~~Index~~

~~COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Stock-based compensation for equity-classified awards is measured at the date of grant, based on an estimate of the fair value of the award and is generally expensed over the vesting period of the award. At April 30, ~~2021,~~2022, unrecognized stock-based compensation of ~~$11,162,000,~~$10,078,000, net of estimated forfeitures of ~~$1,124,000,~~$797,000, is expected to be recognized over a weighted average period of ~~3.2~~3.1 years. Total stock-based compensation capitalized and included in ending inventory at both April 30, ~~2021~~2022 and July 31, ~~2020~~2021 was $48,000. There are 0no liability-classified stock-based awards outstanding as of April 30, ~~2021~~2022 or July 31, ~~2020.~~2021.

Selling, general and administrative expenses included in the table above, for the nine months ended April 30, 2022, includes $827,000 of amortization of stock-based compensation related to 3, long-standing members of our Board of Directors who retired in December 2021.

Stock-based compensation expense, ~~(benefit),~~ by award type, is summarized as follows:


		Three months ended April 30,			Nine months ended April 30,				Three months ended April 30,			Nine months ended April 30,
		2021		2020	2021		2020		2022		2021	2022		2021
Stock options	Stock options	$	72,000	39,000	$	289,000	203,000	Stock options	$	40,000	72,000	$	482,000	289,000
Performance shares	Performance shares	431,000		412,000	1,096,000		1,185,000	Performance shares	300,000		431,000	1,013,000		1,096,000
RSUs and restricted stock		649,000		477,000	2,270,000		1,850,000
RSUs, restricted stock and share units								RSUs, restricted stock and share units	675,000		649,000	2,314,000		1,654,000
ESPP	ESPP	52,000		53,000	151,000		170,000	ESPP	56,000		52,000	166,000		151,000
Share units		0		0	(616,000)		(310,000)
Stock-based compensation expense before income tax benefit		1,204,000		981,000	3,190,000		3,098,000

Stock-based compensation expense								Stock-based compensation expense	1,071,000		1,204,000	3,975,000		3,190,000
Former CEO transition costs related to equity-classified stock-based awards								Former CEO transition costs related to equity-classified stock-based awards	—		—	7,388,000		—
Total stock-based compensation expense before income tax benefit								Total stock-based compensation expense before income tax benefit	1,071,000		1,204,000	11,363,000		3,190,000
Estimated income tax benefit	Estimated income tax benefit	(260,000)		(204,000)	(684,000)		(664,000)	Estimated income tax benefit	(226,000)		(260,000)	(1,449,000)		(684,000)
Net stock-based compensation expense	Net stock-based compensation expense	$	944,000	777,000	$	2,506,000	2,434,000	Net stock-based compensation expense	$	845,000	944,000	$	9,914,000	2,506,000

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

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The estimated income tax benefit as shown in the above table was computed using income tax rates expected to apply when the awards are settled. Such deferred tax asset was recorded net as part of our non-current deferred tax liability on our Condensed Consolidated Balance Sheet as of April 30, ~~2021~~2022 and July 31, ~~2020.~~2021. The actual income tax benefit recognized for tax reporting is based on the fair market value of our common stock at the time of settlement and can significantly differ from the estimated income tax benefit recorded for financial reporting.

Stock Options

The following table summarizes the ~~Plan's~~Plan’s activity:

Awards
(in Shares) Weighted Average
Exercise Price Weighted Average
Remaining Contractual
Term (Years) Aggregate
Intrinsic Value
Outstanding at July 31, 2020 1,422,025 $ 26.17
Expired/canceled (77,390) 29.90
Outstanding at October 31, 2020 1,344,635 25.95
Expired/canceled (12,800) 25.86
Outstanding at January 31, 2021 1,331,835 25.96
Expired/canceled (19,050) 20.89
Outstanding at April 30, 2021 1,312,785 $ 26.03 3.88 $ 1,941,000
Exercisable at April 30, 2021 1,001,485 $ 28.56 2.27 $ 48,000
Vested and expected to vest at April 30, 2021 1,300,153 $ 26.11 3.83 $ 1,864,000


	Awards (in Shares)	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding at July 31, 2021	1,073,435	$	25.76

Expired/canceled	(56,250)	27.59
Exercised	(1,220)	17.88
Outstanding at October 31, 2021	1,015,965	25.66
Expired/canceled	(10,030)	27.14

Outstanding at January 31, 2022	1,005,935	25.65

Expired/canceled	(463,950)	26.44

Outstanding at April 30, 2022	541,985	$	24.97	4.17	$	—

Exercisable at April 30, 2022	424,625	$	26.93	3.09	$	—

Vested and expected to vest at April 30, 2022	536,090	$	25.05	4.13	$	—

Stock options outstanding as of April 30, ~~2021~~2022 have exercise prices ranging from $17.88 - $33.94, representing the fair market value of our common stock on the date of grant, a contractual term of ~~five~~ or ten years and a vesting period of ~~three~~ or five years. The total intrinsic value relating to stock options exercised during the nine months ended April 30, 2022 was $7,000. There were no stock options exercised during the nine months ended April 30, 2021.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Performance Shares, RSUs, Restricted Stock and Share Unit Awards

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


		Awards (in Shares)	Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value			Awards (in Shares)	Weighted Average Grant Date Fair Value		Aggregate Intrinsic Value
Outstanding at July 31, 2020		999,574	$	21.15
Outstanding at July 31, 2021							Outstanding at July 31, 2021	1,068,370	$	21.93
Granted	Granted	383,337	16.67				Granted	228,161	26.81
Settled	Settled	(176,051)	20.47				Settled	(190,310)	23.97
Canceled/Forfeited	Canceled/Forfeited	(65,215)	16.16				Canceled/Forfeited	(40,880)	23.15
Outstanding at October 31, 2020		1,141,645	20.03

Settled		(526)	11.40
Canceled/Forfeited		(7,229)	20.15
Outstanding at January 31, 2021		1,133,890	20.04
Outstanding at October 31, 2021							Outstanding at October 31, 2021	1,065,341	22.56
Granted	Granted	1,693	28.97				Granted	187,658	23.35
Settled	Settled	(6,820)	15.59				Settled	(191,238)	22.47
Canceled/Forfeited	Canceled/Forfeited	(17,039)	21.62				Canceled/Forfeited	(15,156)	21.88
Outstanding at April 30, 2021		1,111,724	$	20.05	$	26,652,000
Outstanding at January 31, 2022							Outstanding at January 31, 2022	1,046,605	22.73
Granted							Granted	84,125	16.39
Settled							Settled	(14,099)	24.00
Canceled/Forfeited							Canceled/Forfeited	(18,190)	22.46
Outstanding at April 30, 2022							Outstanding at April 30, 2022	1,098,441	$	22.23	$	14,939,000

Vested at April 30, 2021		391,134	$	16.64	$	9,372,000
Vested at April 30, 2022							Vested at April 30, 2022	444,847	$	22.12	$	6,050,000

Vested and expected to vest at April 30, 2021		1,063,198	$	19.98	$	25,488,000
Vested and expected to vest at April 30, 2022							Vested and expected to vest at April 30, 2022	1,064,636	$	22.22	$	14,479,000

The total intrinsic value relating to fully-vested awards settled during the three and nine months ended April 30, 2022 was $262,000 and $9,726,000, respectively. The total intrinsic value relating to fully-vested awards settled during the three and nine months ended April 30, 2021 was $178,000 and $3,083,000, respectively. ~~The total intrinsic value relating to fully-vested awards settled during the three and nine months ended April 30, 2020 was $70,000 and $5,895,000.~~

The performance shares granted to employees principally vest over a three-year performance period, if pre-established performance goals are attained, or as specified pursuant to the Plan and related agreements. As of April 30, ~~2021,~~2022, the number of outstanding performance shares included in the above table, and the related compensation expense prior to consideration of estimated pre-vesting forfeitures, assume achievement of the pre-established goals at a target level.

RSUs and restricted stock granted to non-employee directors prior to July 31, 2019 ~~have~~had a vesting period of three years and are convertible into shares of our common stock generally at the time of termination, on a 1-for-one basis for no cash consideration, or earlier under certain circumstances. ~~RSUs and restricted stock granted to non-employee directors after~~After July 31, 2019, such awards have a vesting period of five years. Also, restricted stock granted to our non-executive Chairman of the Board of Directors, pursuant to his Senior Technology Advisor consulting agreement, vests 1/12 on the date of grant and in eleven equal monthly installments thereafter.

RSUs granted to employees have a vesting period of five years and are convertible into shares of our common stock generally at the time of vesting, on a 1-for-one basis for no cash consideration. Also, certain RSUs granted to our newly appointed CEO, pursuant to his employment agreement, vest over three years.

Share units granted prior to July 31, 2017 were vested when issued and are convertible into shares of our common stock, generally at the time of termination, on a 1-for-one basis for no cash consideration, or earlier under certain circumstances. Share units granted on or after July 31, 2017 were granted to certain employees in lieu of non-equity incentive compensation and are convertible into shares of our common stock on the one-year anniversary of the respective grant date. ~~Cumulatively, through April 30, 2021, 677,562 share units granted have been settled.~~

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The fair value of performance shares, RSUs, restricted stock and share units is determined using the closing market price of our common stock on the date of grant, less the present value of any estimated future dividend equivalents such awards are not entitled to receive and an applicable estimated discount for any post-vesting transfer restrictions. RSUs, performance shares and restricted stock granted since fiscal 2013 are entitled to dividend equivalents unless forfeited before vesting occurs. Share units granted since fiscal 2014 are entitled to dividend equivalents while the underlying shares are unissued.

Dividend equivalents are subject to forfeiture, similar to the terms of the underlying stock-based awards, and are payable in cash generally at the time of settlement of the underlying award. During the three and nine months ended April 30, ~~2021,~~2022, we accrued ~~$96,000~~$97,000 and ~~$286,000,~~$314,000, respectively, of dividend equivalents (net of forfeitures) and paid out ~~$3,000~~$2,000 and ~~$278,000,~~$527,000, respectively. Accrued dividend equivalents were recorded as a reduction to retained earnings. As of April 30, ~~2021~~2022 and July 31, ~~2020,~~2021, accrued dividend equivalents were ~~$791,000~~$671,000 and ~~$783,000,~~$884,000, respectively.

With respect to the actual settlement of stock-based awards for income tax reporting, during the three and nine months ended April 30, 2022, we recorded an income tax expense of $483,000 and $344,000, respectively, and during the three and nine months ended April 30, 2021, we recorded an income tax benefit of $18,000 and an income tax expense of $189,000, ~~respectively, and during the three and nine months ended April 30, 2020, we recorded an income tax expense of $122,000 and an income tax benefit of $349,000,~~ respectively.

(14) Segment Information

Reportable operating segments are determined based on Comtech’s management approach. The management approach, as defined by FASB ASC 280 - ~~"Segment~~"Segment Reporting" is based on the way that the CODM organizes the segments within an enterprise for making decisions about resources to be allocated and assessing their performance. Our CODM, for purposes of FASB ASC 280, is our Chief Executive Officer. In connection with his recent appointment on December 31, 2021, our new CEO is currently evaluating his management approach to the business. At the moment, we are currently managing our business through the following reportable operating segments:

Our Commercial Solutions segment offers satellite ground station technologies (such as modems and amplifiers) and public safety and location technologies (such as 911 call routing, 911 call handling and mapping solutions) to commercial customers and smaller government customers, such as state and local governments. This segment also serves certain large government customers (including the U.S. government) that have requirements for off-the-shelf commercial equipment.

Our Government Solutions segment provides tactical satellite-based networks and ongoing support for complicated communications networks and troposcatter systems and solid-state, high-power amplifiers to large government end-users (including those of foreign countries), large international customers and domestic prime contractors.

Our CODM primarily uses a metric that we refer to as Adjusted EBITDA to measure an operating segment’s performance and to make decisions about resources to be allocated. Our Adjusted EBITDA metric for the Commercial Solutions and Government Solutions segments do not consider any allocation of indirect expense, or any of the following: income taxes, interest (income) and other, change in fair value of the convertible preferred stock purchase option liability, write-off of deferred financing costs, interest expense, amortization of stock-based compensation, amortization of ~~intangible assets,~~intangibles, depreciation expense, amortization of cost to fulfill assets, estimated contract settlement costs, settlement of intellectual property litigation, acquisition plan expenses, restructuring costs, COVID-19 related costs, strategic emerging technology costs (for next-generation satellite technology), facility exit costs, former CEO transition costs, proxy solicitation costs, strategic alternatives analysis expenses and other. These items, while periodically affecting our results, may vary significantly from period to period and may have a disproportionate effect in a given period, thereby affecting the comparability of results. Any amounts shown in the Adjusted EBITDA calculation for our Commercial Solutions and Government Solutions segments are directly attributable to those segments. Our Adjusted EBITDA is also used by our management in assessing the Company's operating results. Although closely aligned, the Company's definition of Adjusted EBITDA is different than the Consolidated EBITDA (as such term is defined in our Credit Facility) utilized for financial covenant calculations and also may differ from the definition of EBITDA or Adjusted EBITDA used by other companies and, therefore, may not be comparable to similarly titled measures used by other companies.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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



	Three months ended April 30, 2022
	Commercial Solutions		Government Solutions	Unallocated	Total
Net sales	$	88,131,000	33,985,000	—	$	122,116,000
Operating income (loss)	$	7,424,000	(2,928,000)	(5,062,000)	$	(566,000)

Net income (loss)	$	6,631,000	(1,832,000)	(4,824,000)	$	(25,000)
Provision for (benefit from) income taxes	823,000		(666,000)	(928,000)	(771,000)
Interest (income) and other	(30,000)		(408,000)	(11,000)	(449,000)
Change in fair value of convertible preferred stock purchase option liability	—		—	(302,000)	(302,000)
Interest expense	—		(22,000)	1,003,000	981,000
Amortization of stock-based compensation	—		—	1,071,000	1,071,000
Amortization of intangibles	4,260,000		1,089,000	—	5,349,000
Depreciation	1,991,000		443,000	48,000	2,482,000
Amortization of cost to fulfill assets	—		233,000	—	233,000



Restructuring costs	1,310,000		290,000	—	1,600,000
COVID-19 related costs	—		115,000	—	115,000
Strategic emerging technology costs	268,000		644,000	—	912,000
Adjusted EBITDA	$	15,253,000	(114,000)	(3,943,000)	$	11,196,000

Purchases of property, plant and equipment	$	4,849,000	759,000	—	$	5,608,000

Total assets at April 30, 2022	$	732,436,000	222,259,000	28,942,000	$	983,637,000

~~Index~~

~~COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

Three months ended April 30, 2021
Commercial Solutions Government Solutions Unallocated Total
Net sales $ 91,364,000 48,012,000 0 $ 139,376,000
Operating income (loss) $ 9,318,000 768,000 (7,736,000) $ 2,350,000
Net income (loss) $ 9,020,000 752,000 (8,980,000) $ 792,000
     Provision for (benefit from) income taxes 302,000 (85,000) 99,000 316,000
     Interest (income) and other (7,000) 101,000 (370,000) (276,000)
     Interest expense 3,000 0 1,515,000 1,518,000
     Amortization of stock-based compensation 0 0 1,204,000 1,204,000
     Amortization of intangibles 4,221,000 1,089,000 0 5,310,000
     Depreciation 1,779,000 439,000 56,000 2,274,000
     Acquisition plan expenses 0 0 5,267,000 5,267,000
     Restructuring costs 594,000 0 0 594,000
     COVID-19 related costs 0 416,000 0 416,000
     Strategic emerging technology costs 0 315,000 0 315,000
Adjusted EBITDA $ 15,912,000 3,027,000 (1,209,000) $ 17,730,000
Purchases of property, plant and equipment $ 3,159,000 1,389,000 3,000 $ 4,551,000
Long-lived assets acquired in connection with acquisitions $ 45,597,000 0 0 $ 45,597,000
Total assets at April 30, 2021 $ 721,857,000 237,798,000 38,937,000 $ 998,592,000


		Three months ended April 30, 2020							Three months ended April 30, 2021
		Commercial Solutions		Government Solutions	Unallocated	Total			Commercial Solutions		Government Solutions	Unallocated	Total
Net sales	Net sales	$	78,311,000	56,810,000	0	$	135,121,000	Net sales	$	91,364,000	48,012,000	—	$	139,376,000
Operating income (loss)	Operating income (loss)	$	4,041,000	4,194,000	(11,371,000)	$	(3,136,000)	Operating income (loss)	$	9,318,000	768,000	(7,736,000)	$	2,350,000

Net income (loss)	Net income (loss)	$	3,462,000	4,253,000	(11,704,000)	$	(3,989,000)	Net income (loss)	$	9,020,000	752,000	(8,980,000)	$	792,000
Provision for (benefit from) income taxes	Provision for (benefit from) income taxes	481,000		(65,000)	(1,175,000)	(759,000)		Provision for (benefit from) income taxes	302,000		(85,000)	99,000	316,000
Interest (income) and other	Interest (income) and other	89,000		0	19,000	108,000		Interest (income) and other	(7,000)		101,000	(370,000)	(276,000)
Interest expense	Interest expense	9,000		6,000	1,489,000	1,504,000		Interest expense	3,000		—	1,515,000	1,518,000
Amortization of stock-based compensation	Amortization of stock-based compensation	0		0	981,000	981,000		Amortization of stock-based compensation	—		—	1,204,000	1,204,000
Amortization of intangibles	Amortization of intangibles	4,313,000		1,204,000	0	5,517,000		Amortization of intangibles	4,221,000		1,089,000	—	5,310,000
Depreciation	Depreciation	1,993,000		447,000	210,000	2,650,000		Depreciation	1,779,000		439,000	56,000	2,274,000
Estimated contract settlement costs		476,000		0	0	476,000

Acquisition plan expenses	Acquisition plan expenses	701,000		0	5,282,000	5,983,000		Acquisition plan expenses	—		—	5,267,000	5,267,000
Restructuring costs								Restructuring costs	594,000		—	—	594,000
COVID-19 related costs								COVID-19 related costs	—		416,000	—	416,000
Strategic emerging technology costs								Strategic emerging technology costs	—		315,000	—	315,000
Adjusted EBITDA	Adjusted EBITDA	$	11,524,000	5,845,000	(4,898,000)	$	12,471,000	Adjusted EBITDA	$	15,912,000	3,027,000	(1,209,000)	$	17,730,000

Purchases of property, plant and equipment	Purchases of property, plant and equipment	$	1,263,000	531,000	118,000	$	1,912,000	Purchases of property, plant and equipment	$	3,159,000	1,389,000	3,000	$	4,551,000
Long-lived assets acquired in connection with acquisitions	Long-lived assets acquired in connection with acquisitions	$	4,023,000	4,402,000	0	$	8,425,000	Long-lived assets acquired in connection with acquisitions	$	45,597,000	—	—	$	45,597,000
Total assets at April 30, 2020		$	663,455,000	235,739,000	52,538,000	$	951,732,000
Total assets at April 30, 2021								Total assets at April 30, 2021	$	721,857,000	237,798,000	38,937,000	$	998,592,000

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


		Nine months ended April 30, 2021							Nine months ended April 30, 2022
		Commercial Solutions		Government Solutions	Unallocated	Total			Commercial Solutions		Government Solutions	Unallocated	Total
Net sales	Net sales	$	260,991,000	174,895,000	0	$	435,886,000	Net sales	$	248,342,000	110,914,000	—	$	359,256,000
Operating income (loss)	Operating income (loss)	$	27,439,000	8,813,000	(114,216,000)	$	(77,964,000)	Operating income (loss)	$	14,179,000	(4,538,000)	(41,312,000)	$	(31,671,000)

Net income (loss)	Net income (loss)	$	26,618,000	9,138,000	(116,599,000)	$	(80,843,000)	Net income (loss)	$	13,251,000	(3,091,000)	(38,043,000)	$	(27,883,000)
Provision for (benefit from) income taxes	Provision for (benefit from) income taxes	858,000		(497,000)	(2,439,000)	(2,078,000)		Provision for (benefit from) income taxes	869,000		(1,297,000)	(5,672,000)	(6,100,000)
Interest (income) and other	Interest (income) and other	(40,000)		108,000	(344,000)	(276,000)		Interest (income) and other	53,000		(242,000)	(71,000)	(260,000)
Change in fair value of convertible preferred stock purchase option liability								Change in fair value of convertible preferred stock purchase option liability	—		—	(1,004,000)	(1,004,000)
Interest expense	Interest expense	3,000		64,000	5,166,000	5,233,000		Interest expense	6,000		92,000	3,478,000	3,576,000
Amortization of stock-based compensation	Amortization of stock-based compensation	0		0	3,190,000	3,190,000		Amortization of stock-based compensation	—		—	3,975,000	3,975,000
Amortization of intangibles	Amortization of intangibles	12,794,000		2,877,000	0	15,671,000		Amortization of intangibles	12,780,000		3,267,000	—	16,047,000
Depreciation	Depreciation	5,709,000		1,285,000	289,000	7,283,000		Depreciation	5,743,000		1,163,000	151,000	7,057,000
Acquisition plan expenses		(1,052,000)		0	100,859,000	99,807,000
Amortization of cost to fulfill assets								Amortization of cost to fulfill assets	—		233,000	—	233,000
Former CEO transition costs								Former CEO transition costs	—		—	13,554,000	13,554,000
Proxy solicitation costs								Proxy solicitation costs	—		—	11,248,000	11,248,000

Restructuring costs	Restructuring costs	1,195,000		0	0	1,195,000		Restructuring costs	3,819,000		219,000	—	4,038,000
COVID-19 related costs	COVID-19 related costs	0		576,000	0	576,000		COVID-19 related costs	—		1,144,000	—	1,144,000
Strategic emerging technology costs	Strategic emerging technology costs	0		315,000	0	315,000		Strategic emerging technology costs	268,000		644,000	—	912,000
Adjusted EBITDA	Adjusted EBITDA	$	46,085,000	13,866,000	(9,878,000)	$	50,073,000	Adjusted EBITDA	$	36,789,000	2,132,000	(12,384,000)	$	26,537,000

Purchases of property, plant and equipment	Purchases of property, plant and equipment	$	5,123,000	3,031,000	83,000	$	8,237,000	Purchases of property, plant and equipment	$	11,617,000	2,803,000	—	$	14,420,000
Long-lived assets acquired in connection with acquisitions		$	45,597,000	2,443,000	0	$	48,040,000
Total assets at April 30, 2021		$	721,857,000	237,798,000	38,937,000	$	998,592,000

Total assets at April 30, 2022								Total assets at April 30, 2022	$	732,436,000	222,259,000	28,942,000	$	983,637,000


		Nine months ended April 30, 2020							Nine months ended April 30, 2021
		Commercial Solutions		Government Solutions	Unallocated	Total			Commercial Solutions		Government Solutions	Unallocated	Total
Net sales	Net sales	$	268,747,000	198,295,000	0	$	467,042,000	Net sales	$	260,991,000	174,895,000	—	$	435,886,000
Operating income (loss)	Operating income (loss)	$	26,501,000	16,280,000	(30,423,000)	$	12,358,000	Operating income (loss)	$	27,439,000	8,813,000	(114,216,000)	$	(77,964,000)

Net income (loss)	Net income (loss)	$	26,031,000	16,364,000	(36,501,000)	$	5,894,000	Net income (loss)	$	26,618,000	9,138,000	(116,599,000)	$	(80,843,000)
Provision for (benefit from) income taxes	Provision for (benefit from) income taxes	382,000		(65,000)	1,186,000	1,503,000		Provision for (benefit from) income taxes	858,000		(497,000)	(2,439,000)	(2,078,000)
Interest (income) and other	Interest (income) and other	62,000		(26,000)	1,000	37,000		Interest (income) and other	(40,000)		108,000	(344,000)	(276,000)

Interest expense	Interest expense	26,000		7,000	4,891,000	4,924,000		Interest expense	3,000		64,000	5,166,000	5,233,000
Amortization of stock-based compensation	Amortization of stock-based compensation	0		0	3,098,000	3,098,000		Amortization of stock-based compensation	—		—	3,190,000	3,190,000
Amortization of intangibles	Amortization of intangibles	13,037,000		2,915,000	0	15,952,000		Amortization of intangibles	12,794,000		2,877,000	—	15,671,000
Depreciation	Depreciation	6,372,000		1,072,000	578,000	8,022,000		Depreciation	5,709,000		1,285,000	289,000	7,283,000
Estimated contract settlement costs		444,000		0	0	444,000

Acquisition plan expenses	Acquisition plan expenses	701,000		0	13,696,000	14,397,000		Acquisition plan expenses	(1,052,000)		—	100,859,000	99,807,000

Restructuring costs								Restructuring costs	1,195,000		—	—	1,195,000
COVID-19 related costs								COVID-19 related costs	—		576,000	—	576,000
Strategic emerging technology costs								Strategic emerging technology costs	—		315,000	—	315,000
Adjusted EBITDA	Adjusted EBITDA	$	47,055,000	20,267,000	(13,051,000)	$	54,271,000	Adjusted EBITDA	$	46,085,000	13,866,000	(9,878,000)	$	50,073,000

Purchases of property, plant and equipment	Purchases of property, plant and equipment	$	3,178,000	956,000	286,000	$	4,420,000	Purchases of property, plant and equipment	$	5,123,000	3,031,000	83,000	$	8,237,000
Long-lived assets acquired in connection with acquisitions	Long-lived assets acquired in connection with acquisitions	$	6,060,000	34,609,000	0	$	40,669,000	Long-lived assets acquired in connection with acquisitions	$	45,597,000	2,443,000	—	$	48,040,000
Total assets at April 30, 2020		$	663,455,000	235,739,000	52,538,000	$	951,732,000
Total assets at April 30, 2021								Total assets at April 30, 2021	$	721,857,000	237,798,000	38,937,000	$	998,592,000

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Unallocated expenses result from corporate expenses such as executive compensation, accounting, legal and other regulatory compliance related costs and also includes all of our amortization of stock-based compensation. During the three ~~months ended April 30, 2021~~ and ~~2020, we recorded $5,267,000 and $5,983,000 of acquisition plan expenses, respectively, and during the~~ nine months ended April 30, 2021, ~~and 2020,~~ we recorded $5,267,000 and $99,807,000, ~~and $14,397,000~~respectively of acquisition plan expenses, ~~respectively,~~ most of which were recorded in our unallocated expenses. See Note (2) - "Acquisitions" for further information. There were no such charges recorded in the three and nine months ended April 30, 2022. During the nine months ended April 30, 2022, we incurred $11,248,000 of proxy solicitation costs (including legal and advisory fees and costs associated with a related lawsuit) as a result of a now settled proxy contest initiated by a shareholder during the first quarter of fiscal 2022. Also, during the nine months ended April 30, 2022, we expensed $13,554,000 of transition costs related to our former CEO. See Note (1) - "~~Acquisitions~~General - Former CEO Transition Costs" for a further ~~information.~~discussion.

During the three and nine months ended April 30, ~~2021,~~2022, our Commercial Solutions segment recorded ~~$594,000~~$1,310,000 and ~~$1,195,000,~~$3,819,000, respectively, of restructuring costs ~~incurred~~ to ~~shift production~~streamline our operations, including costs related to the ongoing relocation of certain of our ~~key~~ satellite earth station ~~products~~production facilities to a new 146,000 square foot facility in Chandler, Arizona. Similar restructuring costs of $594,000 and $1,195,000, respectively, were incurred during three and nine months ended April 30, 2021. In addition, during the three and nine months ended April 30, ~~2021,~~2022, our Government Solutions segment recorded ~~$416,000~~$115,000 and ~~$576,000,~~$1,144,000, respectively, of incremental operating costs ~~incurred for~~related to our antenna facility located in the United Kingdom due to the impact of the COVID-19 ~~pandemic, which resulted in a temporary but complete shut-down~~pandemic. Similar incremental operating costs of ~~this facility. There~~$416,000 and $576,000, respectively, were ~~no such charges recorded in the~~incurred during three and nine months ended April 30, ~~2020.~~2021.

Interest expense in the tables above primarily relates to our Credit Facility, and includes the amortization of deferred financing costs. See Note (10) - "Credit Facility" for further discussion. ~~In addition, interest~~Interest expense for the nine months ended April 30, 2021 includes $1,178,000 of incremental interest expense related to a now terminated financing commitment letter, as discussed in more detail in Note (2) - "Acquisitions."

Intersegment sales for the three months ended April 30, ~~2021~~2022 and ~~2020~~2021 by the Commercial Solutions segment to the Government Solutions segment were ~~$827,000~~$920,000 and ~~$3,115,000,~~$827,000, respectively. Intersegment sales for the nine months ended April 30, ~~2021~~2022 and ~~2020~~2021 by the Commercial Solutions segment to the Government Solutions segment were ~~$2,622,000~~$2,986,000 and ~~$6,876,000,~~$2,622,000, respectively. There were nominal sales by the Government Solutions segment to the Commercial Solutions segment for these periods. All intersegment sales are eliminated in consolidation and are excluded from the tables above.

Unallocated assets at April 30, ~~2021~~2022 consist principally of cash and cash equivalents, income taxes receivable, corporate property, plant and equipment and deferred financing costs. The large majority of our long-lived assets are located in the U.S.

(15) Goodwill

The following table represents goodwill by reportable operating segment, including the changes in the net carrying value of goodwill during the nine months ended April 30, ~~2021:~~2022:

Commercial Solutions Government Solutions Total
Balance as of July 31, 2020 $ 255,432,000 75,087,000 $ 330,519,000
Change related to CGC acquisition 0 2,222,000 2,222,000
Change related to Solacom Technologies Inc. ("Solacom") 1,052,000 0 1,052,000
UHP acquisition 13,987,000 0 13,987,000
Balance as of April 30, 2021 $ 270,471,000 77,309,000 $ 347,780,000

~~During the nine months ended April 30, 2021, we recorded an adjustment to Solacom's goodwill to correct an immaterial item.~~


	Commercial Solutions		Government Solutions	Total
Balance as of July 31, 2021	$	270,389,000	77,309,000	$	347,698,000
UHP acquisition	(6,000)		—	(6,000)
Balance as of April 30, 2022	$	270,383,000	77,309,000	$	347,692,000

In accordance with FASB ASC 350, we perform a goodwill impairment analysis at least annually (in the first quarter of each fiscal year), unless indicators of impairment exist in interim periods. If we fail the quantitative assessment of goodwill impairment ("quantitative assessment"), we would be required to recognize an impairment loss equal to the amount that a reporting unit's carrying value exceeded its fair value; however, any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On August 1, ~~2020~~2021 (the first day of our fiscal ~~2021)~~2022), we performed our annual quantitative assessment using market participant assumptions to determine if the fair value of each of our reporting units with goodwill exceeded its carrying value. In making this assessment, we considered, among other things, expectations of projected net sales and cash flows, assumptions impacting the weighted average cost of capital, trends in trading multiples of comparable companies, changes in our stock price and changes in the carrying values of our reporting units with goodwill. We also considered overall business conditions. ~~We also considered overall business conditions, including both the potential short-term and long-term effects of the COVID-19 pandemic.~~

In performing the quantitative assessment, we estimated the fair value of each of our reporting units using a combination of the income and market approaches. The income approach, also known as the discounted cash flow ("DCF") method, utilizes the present value of cash flows to estimate fair value. The future cash flows for our reporting units were projected based on our estimates, at that time, of future revenues, operating income and other factors (such as working capital and capital expenditures). For purposes of conducting our impairment analysis, we assumed revenue growth rates and cash flow projections that are below our actual long-term expectations. The discount rates used in our DCF method were based on a weighted-average cost of capital ("WACC") determined from relevant market comparisons, adjusted upward for specific reporting unit risks (primarily the uncertainty of achieving projected operating cash flows). A terminal value growth rate was applied to the final year of the projected period, which reflects our estimate of stable, perpetual growth. We then calculated a present value of the respective cash flows for each reporting unit to arrive at an estimate of fair value under the income approach. Under the market approach, we estimated a fair value based on comparable companies' market multiples of revenues and earnings before interest, taxes, depreciation and amortization and factored in a control premium. Finally, we compared our estimates of fair values to our August 1, ~~2020~~2021 total public market capitalization and assessed implied control premiums based on our common stock price of ~~$16.42~~$24.97 as of August 1, ~~2020.~~2021.

Based on our quantitative evaluation performed on August 1, 2021, we determined that our Commercial Solutions and Government Solutions reporting units had estimated fair values in excess of their carrying values of at least ~~8.4%~~22.7% and ~~78.0%~~94.1%, respectively, and concluded that our goodwill was not impaired and that neither of our 2 reporting units was at risk of failing the quantitative assessment.

It is possible that, during the remainder of fiscal ~~2021~~2022 or beyond, business conditions (both in the U.S. and internationally) could deteriorate from the current state, our current or prospective customers could materially postpone, reduce or even forgo purchases of our products and services to a greater extent than we currently anticipate, or our common stock price could fluctuate. Such fluctuation could be caused by uncertainty about the severity and length of the COVID-19 pandemic, and its impact on global activity.

A significant decline in our customers' spending that is greater than we anticipate or a shift in funding priorities may also have a negative effect on future orders, sales, income and cash flows and we might be required to perform a quantitative assessment during fiscal ~~2021~~2022 or beyond. If assumed net sales and cash flow projections are not achieved in future periods or our common stock price significantly declines from current levels, our Commercial Solutions and Government Solutions reporting units could be at risk of failing the quantitative assessment and goodwill assigned to the respective reporting units could be impaired.

In ~~any event,~~the past several months, COVID-19, Russia's military incursion into Ukraine and the related global supply chain constraints have impacted our business, operating results and financial condition, as well as the operations and financial performance of many of the customers and suppliers in industries that we serve. We have experienced 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. Such business conditions are ~~required~~expected to ~~perform the~~continue during our fourth quarter of fiscal 2022 and carry into fiscal 2023. In addition, as of April 30, 2022, our stock price has declined to $13.60.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We have started our next annual goodwill impairment analysis, which is required to be performed on August 1, ~~2021~~2022 (the start of our fiscal ~~2022)~~2023). Such analysis will consider the challenging business environment we are operating in. Also, as disclosed in Note (14) - "Segment Information," our new CEO is currently evaluating his management approach to the business. If our assumptions and related estimates change in the future, or if we change our reporting unit structure or other events and circumstances change (e.g., a sustained decrease in the price of our common stock (considered on both absolute terms and relative to peers)), we may be required to record impairment charges when we perform these tests, or in other future periods. Any impairment charges that we may record in the future could be material to our results of operations and financial condition.

~~Index~~

~~COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~(Unaudited)~~

(16) Intangible Assets

Intangible assets with finite lives are as follows:


		April 30, 2021							April 30, 2022
		Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization	Net Carrying Amount			Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization	Net Carrying Amount
Customer relationships	Customer relationships	20.2	$	302,058,000	89,644,000	$	212,414,000	Customer relationships	20.2	$	302,058,000	103,928,000	$	198,130,000
Technologies	Technologies	14.8	114,949,000		69,705,000	45,244,000		Technologies	14.8	114,949,000		74,580,000	40,369,000
Trademarks and other	Trademarks and other	16.7	32,926,000		16,536,000	16,390,000		Trademarks and other	16.7	32,926,000		18,773,000	14,153,000
Total	Total		$	449,933,000	175,885,000	$	274,048,000	Total		$	449,933,000	197,281,000	$	252,652,000


		July 31, 2020							July 31, 2021
		Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization	Net Carrying Amount			Weighted Average Amortization Period	Gross Carrying Amount		Accumulated Amortization	Net Carrying Amount
Customer relationships	Customer relationships	20.4	$	286,058,000	79,534,000	$	206,524,000	Customer relationships	20.2	$	302,058,000	93,215,000	$	208,843,000
Technologies	Technologies	14.0	99,349,000		65,398,000	33,951,000		Technologies	14.8	114,949,000		70,924,000	44,025,000
Trademarks and other	Trademarks and other	16.6	32,826,000		15,282,000	17,544,000		Trademarks and other	16.7	32,926,000		17,095,000	15,831,000
Total	Total		$	418,233,000	160,214,000	$	258,019,000	Total		$	449,933,000	181,234,000	$	268,699,000

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

Amortization expense for the three months ended April 30, 2022 and 2021 was $5,349,000 and ~~2020 was~~ $5,310,000, ~~and $5,517,000,~~ respectively. Amortization expense for the nine months ended April 30, 2022 and 2021 was $16,047,000 and ~~2020 was~~ $15,671,000, ~~and $15,952,000,~~ respectively.

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


2021		$	21,117,000
2022	2022	21,781,000		2022	$	21,396,000
2023	2023	21,781,000		2023	21,781,000
2024	2024	21,154,000		2024	21,154,000
2025	2025	21,041,000		2025	21,041,000
2026				2026	19,888,000

We review net intangible assets with finite lives for impairment when an event occurs indicating the potential for impairment. Based on our last assessment, we believe that the carrying values of our net intangible assets were recoverable as of April 30, ~~2021.~~2022. However, if business conditions deteriorate, we may be required to record impairment losses, and or increase the amortization of intangibles in the future. Any impairment charges that we may record in the future could be material to our results of operations and financial condition.

Index

COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(17) Convertible Preferred Stock

On October 18, 2021, we entered into a Subscription Agreement (the “Subscription Agreement”) with certain affiliates and related funds of White Hat Capital Partners LP and Magnetar Capital LLC (collectively, the “Investors”), relating to the issuance and sale of up to 125,000 shares of a new series of the Company's Series A Convertible Preferred Stock, par value $0.10 per share (the “Convertible Preferred Stock”), for an aggregate purchase price of up to $125,000,000, or $1,000 per share. On October 19, 2021 (the “Initial Closing Date”), pursuant to the terms of the Subscription Agreement, the Investors purchased an aggregate of 100,000 shares of Convertible Preferred Stock (the “Initial Issuance”) for an aggregate purchase price of $100,000,000. The Investors have a one-time option exercisable at any time on or prior to March 31, 2023 to purchase additional shares of Convertible Preferred Stock for an aggregate purchase price of $25,000,000. This purchase option is commonly referred to as a “Green Shoe” and together with the Initial Issuance, is collectively referred to as the “Issuance.”

The initial conversion price for the shares issued in the Initial Issuance is $24.50, subject to an increase in the conversion price to $26.00 upon the achievement of $76.0 million of Adjusted EBITDA (as defined in the Subscription Agreement) for our fiscal 2022 year, and the initial conversion price for the Green Shoe is $32.00.

The Convertible Preferred Stock ranks senior to the shares of our common stock, with respect to the payment of dividends and the distribution of assets upon a liquidation, dissolution or winding up of the Company. The Convertible Preferred Stock initially had a liquidation preference of $1,000 per share with each share entitled to a cumulative dividend (the “Dividend”) at the rate of 6.5% per annum, compounding quarterly, paid-in-kind or paid in cash, at our election. For any quarter in which we elect not to pay the Dividend in cash with respect to a share of Convertible Preferred Stock, such Dividend becomes part of the liquidation preference of such share. In addition, no dividend or other distribution on our common stock in excess of our $0.10 per share per quarter will be declared or paid on the common stock unless, at the time of such declaration and payment, an equivalent dividend or distribution is declared and paid on the Convertible Preferred Stock (the “Participating Dividend”), provided that in the case of any such dividend in the form of cash, in lieu of a cash payment, such Participating Dividend will become part of the liquidation preference of the shares of the Convertible Preferred Stock. Such Participating Dividend results in the Convertible Preferred Stock meeting the definition of a "participating security" for purposes of our earnings per share calculations.

The Convertible Preferred Stock is convertible into shares of common stock at the option of the holders thereof at or following the earlier to occur of (a) the filing of our Annual Report on Form 10-K for the fiscal year ending July 31, 2022 but no later than October 19, 2022, or (b) immediately prior to (and conditioned upon) the consummation of a Change of Control. At any time after October 19, 2024, we have the right to mandate the conversion of the Convertible Preferred Stock, subject to certain restrictions, based on the price of the common stock in the preceding thirty trading days.

Holders of the Convertible Preferred Stock are entitled to vote with the holders of the common stock on an as-converted basis, as well as are entitled to a separate class vote with respect to, among other things, amendments to our organizational documents that have an adverse effect on the Convertible Preferred Stock, authorizations or issuances of securities of the Company, the payment of dividends other than dividends on common stock in the ordinary course consistent with past practice on a quarterly basis in an amount not to exceed our current dividend rate of $0.10 per share per quarter, related party transactions, repurchases or redemptions of securities of the Company (other than the repurchase of up to $25,000,000 of shares of common stock), dispositions of businesses or assets, the incurrence of certain indebtedness and certain amendments or extensions of our existing Credit Facility.

Holders will have the right to require the Company to repurchase such holder's Convertible Preferred Stock on a date occurring either (a) on or after October 19, 2026 (the “Optional Repurchase Trigger Date”) at a price equal to the liquidation preference or (b) in connection with a conversion of Convertible Preferred Stock, pursuant to which the number of shares of common stock issuable upon such conversion would exceed 19.99% of the issued and outstanding shares of common stock as of October 18, 2021 (such excess shares, "Excess Conversion Shares"), at any time after the date that is 91 days after the maturity date of the Company's existing Credit Facility, at a price per share equal to the number of Excess Conversion Shares multiplied by the Last Reported Sales Price (as defined) of common stock on the applicable conversion date. In addition, each holder will have the right to cause the Company to repurchase its shares of Convertible Preferred Stock in connection with a Change of Control, at a price equal to the liquidation preference.

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COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We determined that our obligation to issue the Green Shoe at any time on or prior to March 31, 2023 meets the definition of a freestanding financial instrument that should be accounted for as a liability. As such, we established an initial convertible preferred stock purchase option liability of $1,005,000 and reduced the proceeds from the Initial Issuance by such amount. The liability will be remeasured to its estimated fair value each reporting period until such instrument is exercised or expires. Changes in its estimated fair value are recognized as a non-cash charge or benefit and presented on the condensed consolidated statement of operations. The estimated fair value of the convertible preferred stock purchase option liability was nominal as of April 30, 2022. During the three and nine months ended April 30, 2022, we recorded benefits of $302,000 and $1,004,000, respectively for the remeasurement of the convertible preferred stock purchase option liability.

In accordance with ASC 480, "Distinguishing Liabilities from Equity," specifically ASC 480-10-S99-3A(2), SEC Staff Announcement: Classification and Measurement of Redeemable Securities, we have classified the Convertible Preferred Stock outside of permanent equity as temporary equity since the redemption of such shares is not solely within our control and we could be required by the holder to redeem the shares for cash or other assets, at their option. Upon the Initial Issuance, we recorded the Convertible Preferred Stock, net of issuance costs of $4,007,000 and net of the portion of such proceeds allocated to the convertible preferred stock purchase option liability described above, which resulted in an initial carrying value of the Convertible Preferred Stock less than its initial redemption value of $100,000,000. We have elected to adjust the carrying value of the Convertible Preferred Stock to its current redemption value of $103,522,000, which includes $2,964,000 of dividends paid in kind and $558,000 of accumulated and unpaid dividends. As such, an adjustment of $8,534,000 to increase the carrying value of the Convertible Preferred Stock was recorded against retained earnings during the nine months ended April 30, 2022.

(18) Stockholders’ Equity

Sale of Common Stock

In December 2018, we filed a $400,000,000 shelf registration statement with the SEC for the sale of various types of securities, including debt. The shelf registration was declared effective by the SEC as of December 14, 2018. To-date, we have not issued any securities pursuant to our $400,000,000 shelf registration statement.

On March 3, 2021, in connection with our acquisition of UHP, we filed a shelf registration statement with the SEC for the sale ~~by the selling stockholder of UHP~~ of up to 1,381,567 shares of our common ~~stock.~~stock by the selling stockholder of UHP. See Note (2) - "Acquisitions - UHP Networks Inc." for further information.

Common Stock Repurchase Program

On September 29, 2020, our Board of Directors authorized a new $100,000,000 stock repurchase program, which replaced our prior program. The new $100,000,000 stock repurchase program has no time restrictions and repurchases may be made from time to time in open-market or privately negotiated transactions, or by other means in accordance with federal securities laws. There were 0no repurchases ~~made~~of our common stock during the nine months ended April 30, ~~2021~~2022 or ~~2020.~~2021.

Common Stock Dividends

Since September 2010, we have paid quarterly dividends pursuant to an annual targeted dividend amount that was established by our Board of Directors. On ~~September 29, 2020,~~October 4, 2021, December 9, ~~2020~~2021 and March ~~11, 2021,~~10, 2022, our Board of Directors declared a dividend of $0.10 per common share, which were paid on ~~October 27, 2020,~~November 12, 2021, February ~~19, 2021~~18, 2022 and May ~~21, 2021,~~20, 2022, respectively. On June ~~8, 2021,~~9, 2022, our Board of Directors declared a dividend of $0.10 per common share, payable on August ~~20, 2021~~19, 2022 to stockholders of record at the close of business on July ~~21, 2021.~~20, 2022. Future dividends remain subject to compliance with financial covenants under our Credit Facility, as well as Board ~~approval.~~approval and certain voting rights of holders of our Series A Convertible Preferred Stock.

~~(18)~~ ~~Legal Proceedings and Other Matters~~

~~April 2021 Settlement of Litigation Related to the 2019 Acquisition of GD NG-911~~

~~In April 2021, we fully and finally settled two related lawsuits with a former employee~~and Motorola Solutions, Inc. ("Motorola"), and the cases were dismissed with the Court's approval. The resolution of this litigation, which related to our 2019 acquisition of GD NG-911, did not have a material negative impact on our consolidated results of operations, cash flows, or financial position.

~~Other Matters~~

In March 2021, Comtech Xicom Technology, Inc. (“Xicom”) reached an agreement with the U.S. Department of Commerce’s Bureau of Industry and Security (“BIS”) resolving a previously disclosed matter pending since 2017, which we made a voluntarily disclosure to the U.S. Department of Commerce Office of Export Enforcement (“OEE”). Based on our own audit of approximately 7,800 transactions, it was determined that for 3 (3) separate transactions between December 2015 and March 2017, Xicom engaged in conduct prohibited by the Export Administration Regulations (the “Regulations”) when it exported items subject to the Regulations from the United States to Russia, the United Arab Emirates, and Brazil without obtaining the necessary BIS authorizations required for exports to each of these countries. The exports were valued at $154,000. Upon discovery of this issue, we implemented additional controls and procedures and increased awareness of these specific export requirements throughout Comtech to help avoid similar occurrences in the future. Pursuant to the agreement with BIS, Xicom made a payment to BIS of $122,000 in April 2021. No other actions are to be taken by BIS or required of Xicom or Comtech in connection with this matter and we now considered the matter closed.

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COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(19) Legal Proceedings and Other Matters

Settled Litigation Related to the Convertible Preferred Stock Issuance

In October 2021, Anthony Franchi (the “Plaintiff”) brought a putative class action in the Court of Chancery of the State of Delaware against the Company's current directors, the Company, White Hat Capital Partners LP (“White Hat”) and Magnetar Capital LLC (“Magnetar”), which was fully resolved by the parties and the case dismissed by court order on May 3, 2022. The ultimate resolution of this matters did not result in a material adverse effect on our consolidated results of operations and financial condition.

Other Matters

In the ordinary course of business, we include indemnification provisions in certain of our customer contracts to indemnify, hold harmless and reimburse such customers for certain losses, including but not limited to losses related to third-party claims of intellectual property infringement arising from the customer’s use of our products or services. We may also, from time to time, receive indemnification requests from customers related to third-party claims that 911 calls were improperly routed during an emergency. We evaluate such claims as and when they arise. We do not always agree with customers that they are entitled to indemnification and in such cases reject their claims. Despite maintaining that we have properly carried out our duties, we may seek coverage under our various insurance policies; however, we cannot be sure that we will be able to maintain or obtain insurance coverage at acceptable costs or in sufficient amounts or that our insurer will not disclaim coverage as to such claims. Accordingly, pending or future claims asserted against us by a party that we agree to indemnify could result in legal costs and damages that could have a material adverse effect on our consolidated results of operations and financial condition.

There are certain other pending and threatened legal actions which arise in the normal course of business. Although the ultimate outcome of litigation is difficult to accurately predict, we believe that the outcome of these other pending and threatened actions will not have a material adverse effect on our consolidated financial condition or results of operations.

Employment Change of Control and Indemnification Agreements

We have an employment agreement and change of control agreement with Mr. Porcelain, our President and CEO, and member of our Board of Directors. We have also entered into change of control agreements with certain of our executive officers and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of our Company or a termination of the employee.

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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 forward-looking statements. Forward-looking statements ~~including but not limited~~can be identified by words such as: "anticipate," "intend," "plan," "goal," "seek," "believe," "project, "estimate," "expect," "strategy," "future," "likely," "may," "should," "will," and similar references to ~~information relating to~~future periods. Examples of forward-looking statements include, among others, statements we make regarding our future performance and financial condition, 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 to be materially different from the results, performance or other expectations implied by these forward-looking statements. These factors include, among other things: the possibility that the expected synergies and benefits from recent acquisitions will not be fully realized, or will not be realized within the anticipated time periods; the risk that the acquired businesses will not be integrated with Comtech successfully; the possibility of disruption from recent acquisitions, making it more difficult to maintain business and operational relationships or retain key personnel; the risk that Comtech will be unsuccessful in implementing a tactical shift in its Government Solutions segment away from bidding on large commodity service contracts and toward pursuing contracts for its niche products 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, including the risks associated with expanding sales of Comtech's Heights~~TM ~~Network Platform ("HEIGHTS");~~enhancements; changing customer demands and or procurement strategies; changes in prevailing economic and political ~~conditions;~~conditions, including as a result of Russia's military incursion into Ukraine; changes in the price of oil in global markets; changes in foreign currency exchange rates; risks associated with Comtech's legal proceedings, customer claims for indemnification, and other similar matters; risks associated with our obligations under our Credit Facility; risks associated with our large contracts; risks associated with the COVID-19 ~~pandemic;~~pandemic and related 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 ~~advanced~~next generation 911 emergency systems and secure wireless communications ~~solutions for both~~technologies to commercial and government customers ~~worldwide.~~around the world. Our solutions fulfill our customers' needs for secure wireless communications in some of 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 manage our business through two reportable operating segments:

•Commercial Solutions - offers satellite ground station technologies (such as modems and amplifiers), and public safety and location technologies (such as 911 call routing, 911 call handling and mapping solutions) to commercial customers and smaller government customers, such as state and local governments. This segment also serves certain large government customers (including the U.S. government) that have requirements for off-the-shelf commercial equipment.

•Government Solutions - provides tactical satellite-based networks and ongoing support for complicated ~~communication~~communications networks, ~~and~~ troposcatter systems and solid-state, high-power amplifiers to large government end-users (including those of foreign countries), large international customers and domestic prime contractors.

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.

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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. 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. Under ASC 606, we follow a five-step model to: (1) identify the contract with our customer; (2) identify our performance obligations in our contract; (3) determine the transaction price for our contract; (4) allocate the transaction price to our performance obligations; and (5) recognize revenue using one of the following two methods:

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Point in time accounting is principally applied to contracts in our satellite ground station technologies product line in our Commercial Solutions segment (which includes satellite modems, solid-state and traveling wave tube amplifiers) and certain contracts for our solid-state, high-power RF amplifiers in our Government Solutions segment

~~Index~~

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The timing of revenue recognition, billings and collections results in receivables, unbilled receivables and contract liabilities on our Condensed Consolidated Balance Sheet. Under typical payment terms for our contracts accounted for over time, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals (e.g., monthly) or upon achievement of contractual milestones. For certain contracts with provisions that are intended to protect customers in the event we do not satisfy our performance obligations, billings occur subsequent to revenue recognition, resulting in unbilled receivables. Under ASC 606, unbilled receivables constitute contract assets. On large long term contracts, and for contracts with international customers that do not do business with us regularly, payment terms typically require advanced payments and deposits. Under ASC 606, payments received from customers in excess of revenue recognized to date results in a contract liability. These contract liabilities are not considered to represent a significant financing component of the contract because we believe these cash advances and deposits are generally used to meet working capital demands which can be higher in the earlier stages of a contract. Also, advanced payments and deposits provide us with some measure of assurance that the customer will perform on its obligations under the contract. Under the typical payment terms for our contracts accounted for at a point in time, costs are accumulated in inventory until the time of billing, which generally coincides with revenue recognition.

Impairment of Goodwill and Other Intangible Assets. As of April 30, ~~2021,~~2022, total goodwill recorded on our Condensed Consolidated Balance Sheet aggregated ~~$347.8~~$347.7 million (of which ~~$270.5~~$270.4 million relates to our Commercial Solutions segment and $77.3 million relates to our Government Solutions segment). Additionally, as of April 30, ~~2021,~~2022, net intangibles recorded on our Condensed Consolidated Balance Sheet aggregated ~~$274.0~~$252.7 million (of which ~~$226.9~~$209.9 million relates to our Commercial Solutions segment and ~~$47.1~~$42.8 million relates to our Government Solutions segment). Each of our two operating segments constitutes a reporting unit and we must make various assumptions in determining their estimated fair values.

On August 1, ~~2020~~2021 (the first day of our fiscal ~~2021)~~2022), we performed our annual quantitative assessment using market participant assumptions to determine if the fair value of each of our reporting units with goodwill exceeded its carrying value. In making this assessment, we considered, among other things, expectations of projected net sales and cash flows, assumptions impacting the weighted average cost of capital, trends in trading multiples of comparable companies, changes in our stock price and changes in the carrying values of our reporting units with goodwill. We also considered overall business ~~conditions, including both the potential short-term and long-term effects of the COVID-19 pandemic.~~conditions.

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Based on our quantitative evaluation performed on August 1, 2021, we determined that our Commercial Solutions and Government Solutions reporting units had estimated fair values in excess of their carrying values of at least ~~8.4%~~22.7% and ~~78.0%~~94.1%, respectively, and concluded that our goodwill was not impaired and that neither of our two reporting units was at risk of failing the quantitative assessment.

A significant decline in our customers' spending that is greater than we anticipate or a shift in funding priorities may also have a negative effect on future orders, sales, income and cash flows and we might be required to perform a quantitative assessment during fiscal ~~2021~~2022 or beyond. If assumed net sales and cash flow projections are not achieved in future periods or our common stock price significantly declines from current levels, our Commercial Solutions and Government Solutions reporting units could be at risk of failing the quantitative assessment and goodwill and intangibles assigned to the respective reporting units could be impaired.

We have started our next annual goodwill impairment analysis, which is required to be performed on August 1, ~~2021~~2022 (the start of our fiscal ~~2022)~~2023). Such analysis will consider the challenging business environment we are operating in. If our assumptions and related estimates change in the future, or if we change our reporting unit structure or other events and circumstances change (e.g., a sustained decrease in the price of our common stock (considered on both absolute terms and relative to peers)), we may be required to record impairment charges when we perform these tests, or in other future periods. In addition to our impairment analysis of goodwill, we also review net intangible assets with finite lives when an event occurs indicating the potential for impairment. We believe that the carrying values of our net intangible assets were recoverable as of April 30, ~~2021.~~2022. Any impairment charges that we may record in the future could be material to our results of operations and financial condition.

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.

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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 and state) 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. We recognize potential interest and penalties related to uncertain tax positions in income tax expense. The U.S. federal government is our most significant income tax jurisdiction.

~~Index~~

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. The development of valuation allowances for deferred tax assets and reserves for income tax positions requires consideration of timing and judgments about future taxable income, tax issues and potential outcomes, and are subjective critical estimates. A portion of our deferred tax assets consist of federal research and experimentation tax credit carryforwards, some of which was acquired in connection with ~~our acquisition of TCS.~~prior acquisitions. No valuation allowance has been established on these deferred tax assets based on our evaluation that our ability to realize such assets has met the criteria of "more likely than not." We continuously evaluate additional facts representing positive and negative evidence in determining our ability to realize these deferred tax assets. In certain circumstances, the ultimate outcome of exposures and risks involves significant uncertainties. If actual outcomes differ materially from these estimates, they 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, we continue to see requests from our customers for higher credit limits and longer payment terms. Because of our strong cash position and the nominal amount of interest we are earning on our cash and cash equivalents, 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 COVID-19 pandemic on worldwide business activities.

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Although our overall credit losses have historically been within the allowances we established, we cannot 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.

~~Index~~

~~Impact of COVID-19 and~~ Business Outlook for Fiscal ~~2021~~2022

~~During the~~Comtech delivered financial results for our third quarter ended April 30, 2022 that were ahead of ~~fiscal 2021, we achieved solid operating performance and generated consolidated:~~our expectations. Our financial highlights for the quarter include:

•~~Net~~Consolidated net sales ~~of $139.4 million;~~were $122.1 million, up 1.4% sequentially from the second quarter;

•Gross margins improved sequentially ten basis points to 38.2%;

•GAAP ~~operating income of $2.4~~net loss attributable to common stockholders was $1.7 million, and ~~GAAP net income~~included $0.9 million of ~~$0.8 million;~~strategic emerging technology costs for next-generation satellite technology, as discussed below;

•GAAP EPS loss of $0.06 and Non-GAAP ~~operating~~EPS income of ~~$8.9 million and Non-GAAP net income of $6.8 million. These~~$0.06;

•Adjusted EBITDA (a Non-GAAP financial measure discussed below) of $11.2 million, a 14.3% sequential increase;

•New bookings (also referred to as orders) of $113.4 million, a 10.2% sequential increase and resulting in a quarterly book-to-bill ratio of 0.93x (a measure defined as bookings divided by net sales);

•Backlog of $602.3 million as of April 30, 2022, compared to $611.1 million as of January 31, 2022;

•Revenue visibility of approximately $1.2 billion. We measure this revenue visibility as the sum of our $602.3 million backlog, plus the total unfunded value of certain multi-year contracts that we have received and from which we expect future orders; and

•Cash flows used in operating activities of $1.1 million. Excluding $10.6 million in aggregate payments for our former CEO transition and settled proxy contest, cash inflow from operating activities would have been $9.5 million.

Non-GAAP financial measures discussed above are reconciled to the most directly comparable GAAP financial measures in the table included in the below section "Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of the Results of Operations for the Three Months Ended April 30, ~~2021~~2022 and ~~2020~~2021" and "Comparison of the Results of Operations for the Nine Months Ended April 30, 2022 and 2021.";

•~~GAAP net cash provided by operating activities~~This continues to be a transformative time for Comtech. During the most recent quarter, we progressed on our initiative to enhance our leadership team, welcoming Maria Hedden as our new Chief Operating Officer and Robert Samuels as our new Vice President of ~~$6.8 million;~~Investor Relations and Corporate Communications. Both Ms. Hedden and Mr. Samuels will strengthen the Comtech team and make an immediate impact on our day-to-day operations in their respective areas of expertise. We also just announced that Tim Jenkins was appointed President of our Safety and Security Technologies product group, effective June 1. Mr. Jenkins has been with Comtech for three years, most recently serving as Group Vice President and General Manager within the Safety and Security Technologies organization.

•~~Adjusted EBITDA (a Non-GAAP financial measure discussed below)~~Further, we strengthened the leadership team of ~~$17.7 million.~~our U.S. based satellite business line with the appointment of Jon Opalski as new divisional Chief Operating Officer and Bob Pescatore as General Manager of Digital Products. Mr. Opalski will be responsible for driving operational excellence at both Comtech’s existing Santa Clara site and our new Arizona high-volume manufacturing and technology facility. Mr. Pescatore will lead the Satellite Network Technologies Digital Products Team, continuing development of industry-leading satellite modems, network products, and cybersecurity support.

~~As of April 30, 2021,~~Finally, we recently welcomed Ken Peterman as a new independent director to our ~~cash and cash equivalents were $39.2 million and our total debt outstanding was $215.0 million.~~

~~We achieved a consolidated book-to-bill ratio (a measure defined as bookings divided by net sales) of 0.83 and finished~~board. With over forty years in the ~~third quarter with consolidated backlog of $636.5 million. Our backlog (sometimes referred to herein as orders or bookings) is more fully defined~~defense sector, Mr. Peterman’s significant experience in our most recent Annual Report on Form 10-K filed with the SEC and the total value of multi-year contracts that we have received is substantially higher than our reported backlog. When adding our backlog and the total unfunded value of multi-year contracts that we have received and for which we expect future orders, our revenue visibility approximates $1.1 billion. Based on our strong pipeline and year-to-date business momentum, we anticipate achieving a final book-to-bill ratio in excess of 1.0 for the current year.

~~During the third quarter of fiscal 2021, we incurred $0.3 million of strategic emerging technology costs for next-generation~~ satellite technology and decades of experience with U.S. government contracting will help 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 over the next twelve months.

~~At the start of our fourth quarter of fiscal 2021, we entered~~lead Comtech into a ~~multi-year agreement enabling a customer to potentially order hundreds~~new era of millions of dollars of our next-generation satellite earth station technology. Shortly after we signed this agreement, we received our first order valued at more than $13.0 million to make certain customizations on behalf of this customer. Work on these efforts has commenced immediately.

We incurred an aggregate of $5.3 million of acquisition plan expenses due to the April 2021 settlement of litigation related to our 2019 acquisition of GD NG-911, as well as the March 2021 closing of our acquisition of UHP Networks Inc. (“UHP”), a leading provider of innovativecommercial success and disruptive satellite ground station technology solutions. We believe that UHP's revolutionary technology is transforming the growing Very Small Aperture Terminal (“VSAT”) market and its unique time divisional multiple access (“TDMA”) technology has software defined network functionality that offers best-in-class support for very large networks. UHP's technology platform furthers our strategy of offering our global customers the most robust and advanced wireless communications solutions to meet the growing need for high-speed satellite-based networks serving the mobile backhaul, maritime, enterprise and defense/government markets. The integration of UHP into our satellite ground station product line in our Commercial Solutions segment is well underway and we do not expect to incur any significant acquisition plan expenses for the remainder of fiscal 2021.

Looking forward, we expect a strong finish to fiscal 2021 and estimate that fiscal 2021 consolidated net sales will be within a range of $580.0 million to $590.0 million. This updated target primarily reflects a change in anticipated revenues in our Government Solutions segment due to the U.S. government’s April 2021 announcement to fully withdraw troops from Afghanistan as well as other program changes. We continue our efforts on streamlining our operations including the consolidation of certain administrative and operating functions in our Government Solutions segment and the shifting of production of many of our key satellite earth station products from our existing Tempe, Arizona locations to a new 146,000 square foot facility in Chandler, Arizona as well as the combination of certain related functions. We believe these streamlining efforts are paying off and we continue to target Adjusted EBITDA in a range of $74.0 million to $76.0 million for fiscal 2021.shareholder value.

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~~We continue~~During the third quarter, we also continued to ~~operate~~execute on our ~~business under difficult conditions. Spikes in COVID-19 infection rates are suppressing orders and purchases from many~~plans to deploy the proceeds of our ~~international end-customers. We also continue~~$100.0 million strategic growth investment and continued to ~~experience residual impacts from the forced closure of~~solidify our antenna design and manufacturing center in the United Kingdom in December 2020 due to COVID-19. Most of our global non-production related operations continue to use remote working arrangements, have not yet resumed international business travel, and are maintaining social distancing safeguardsposition as a leading solutions provider in our ~~workplaces. These precautions~~two key end-markets: Next Generation 911 Public Safety and ~~business practices~~Satellite and Space Communications. Both are at the beginning of a long-term investment and upgrade cycle, and the demand environment for our products, despite the headwinds discussed below, remains strong.

Considering this outlook, we pressed forward during the most recent quarter on our investments in capital equipment and building improvements in connection with the opening of a new 146,000 square-foot facility in Chandler, Arizona, and the establishment of a 56,000 square-foot facility in Basingstoke, United Kingdom. Although COVID-19 and supply chain issues have extended our original build-out schedules, both manufacturing centers are expected to support production of next-generation broadband satellite technology and should be fully operational by early fiscal 2023.

Our business continues to face near-term challenges and continued uncertainties, as the repercussions of the military conflict between Russia and Ukraine remain significant. For Comtech, the current conflict is directly impacting near-term elements of our sales pipelines. Certain customers have paused procurement and deployment of satellite and troposcatter communication systems, and instead are purchasing war-fighting equipment, such as anti-tank missiles and other “lethal equipment.” As a consequence, the U.S. defense budget, and defense budgets worldwide, are being adjusted in ~~effect so long~~real-time to reflect the priorities of war and changing European geopolitics. Anticipated funding for other expected orders, including for our satellite and space communication products, has been shifted to other programs and/or temporarily delayed as a result of changes in defense spending priorities.

For context, in May 2022, the U.S. authorized an unprecedented $40.0 billion military and humanitarian aid package for Ukraine. While there are portions of this spending package that we could expect to benefit from in the future, such as financial support for Ukraine’s military and expanded U.S. military operations in Europe, we would not expect such spending for our communications related products and services to be immediate, as such military requirements are still being defined. Nonetheless, at the request of the Ukrainian government, ~~advisories recommend.~~ during the most recent quarter, we donated multiple COMET™ troposcatter systems to support Ukraine’s urgent need for secure, reliable communications.

In ~~addition~~late May 2022, at the request of the U.S. Army, we conducted in-field demonstrations of our troposcatter solutions (including the COMET™) for both U.S. and NATO allied government customers. These demonstrations consisted of end-to-end data communications links, showcasing small, medium and large troposcatter terminals. While it is always difficult to predict the timing and amount of future orders, we feel confident that Comtech is well-positioned to participate in the uptick in demand, as conflict and uncertainties present new opportunities for the types of communications solutions we provide. However, given the priority for weapons systems spending as opposed to communications systems spending right now, we continue to expect no meaningful bookings or related sales for the rest of fiscal 2022.

As we enter the fourth quarter of fiscal 2022, like experienced by most companies around the world, business conditions have become more challenging, and the operating environment is largely unpredictable. There continues to be order ~~delays, we have experienced~~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. ~~Supply chain issues are becoming more prevalent~~As such, we shifted several opportunities from our prior fiscal 2022 business outlook, as ~~lead times for certain parts has significantly increased. If~~ we ~~are unable~~now expect them to ~~timely secure parts or receive certain anticipated orders from customers,~~occur in our fiscal ~~2021 financial targets will likely~~2023. For instance, we no longer expect our signed contract to deploy a state-wide NG-911 system for the state of Ohio to be ~~impacted.~~funded during the quarter because the legislative vote to do so is now expected to occur in the fall of 2022. Additionally, we no longer expect funding to be finalized in the quarter for a smaller NG-911 infrastructure project in the southwest. We also are removing a previously expected multi-million-dollar award for a government customer located in Asia due to significant price increases from our vendor which we do not believe we can pass on.

~~Although the COVID-19 pandemic is by no means over and additional waves of COVID-19 could again alter the business landscape,~~Also, as it relates to our ~~long-term fundamentals remain strong as we continue to believe~~operations in Russia, like other companies, we are ~~well-positioned for growth as business conditions meaningfully improve. Because~~continuing to shift certain commercial software development and related support activities conducted in our Russian office to locations outside of the ~~pandemic's continuing impact~~country. Our updated guidance reflects additional expenses of roughly $1.5 million (or $6.0 million on global business conditions, we are not providing guidance on GAAP operating income, GAAP net income or GAAP EPS or a reconciliation of our projected Adjusted EBITDA to the most comparable GAAP measure, as such a reconciliation cannot be prepared without unreasonable effort. For the same reasons, we are unable to address the probable significance of the unavailable information, which could be material to future results.an annual basis) associated with shifting these development resources.

In light of business conditions and resulting challenges, we have lowered our financial targets for fiscal 2022. For the fourth quarter of fiscal 2022, we are now targeting consolidated net sales and Adjusted EBITDA of approximately $123.0 million and $11.5 million, respectively, and for fiscal 2022, we are targeting consolidated net sales and Adjusted EBITDA of approximately $482.0 million and $38.0 million, respectively. This compares to our prior annual financial targets for fiscal 2022 which consisted of consolidated net sales of $520.0 million and Adjusted EBITDA of $50.0 million. Our effective tax rate for fiscal 2022 is now expected to approximate 28.25% as compared to our prior estimate of 19.75% due to changes in expected product and geographical mix changes reflected in our updated Business Outlook for Fiscal ~~2021 does not consider the financial impact of other expenses related to future actions we may take in order to achieve our strategic objectives.~~2022.

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We expect such challenging business conditions to carry into fiscal 2023. Nevertheless, despite these headwinds, we are confident in the importance and value of the markets we serve, and the way we are serving them. Reflecting this confidence in our business, on June ~~8, 2021,~~9, 2022, our Board of Directors declared a dividend of $0.10 per common share, payable on August ~~20, 2021~~19, 2022 to stockholders of record at the close of business on July ~~21, 2021.~~20, 2022. Future ~~Common Stock~~common stock dividends remain subject to compliance with financial covenants under our Credit Facility, as well as Board ~~approval.~~approval and certain voting rights of holders of our Series A Convertible Preferred Stock.

Additional information related to our Business Outlook for Fiscal ~~2021~~2022 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, ~~2021~~2022 and ~~2020~~2021" and "Comparison of the Results of Operations for the Nine Months Ended April 30, ~~2021~~2022 and ~~2020~~.2021."

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, ~~2021~~2022 AND ~~2020~~2021

Net Sales. Consolidated net sales were ~~$139.4~~$122.1 million and ~~$135.1~~$139.4 million for the three months ended April 30, 2022 and 2021, ~~and 2020, respectively.~~respectively, representing a decrease of $17.3 million, or 12.4%. The period-over-period ~~increase~~decrease in net sales reflects ~~higher net sales in our Commercial Solutions segment, offset in part by~~ lower net sales in both of our ~~Government Solutions segment. Net sales by operating segment are~~segments, as further discussed below.

Commercial Solutions

Net sales in our Commercial Solutions segment were $88.1 million for the three months ended April 30, 2022, as compared to $91.4 million for the three months ended April 30, 2021, ~~as compared to $78.3 million for the three months ended April 30, 2020, an increase~~a decrease of ~~$13.1~~$3.3 million, or ~~16.7%~~3.6%. Our Commercial Solutions segment represented ~~65.6%~~72.2% of consolidated net sales for the three months ended April 30, ~~2021~~2022 as compared to ~~58.0%~~65.6% for the three months ended April 30, ~~2020.~~2021. Our book-to-bill ratio (a measure defined as bookings divided by net sales) for this segment was ~~0.82.~~0.75x. Period-to-period fluctuations in bookings are normal for this segment.

Net sales in the three months ended April 30, ~~2021~~2022 of our satellite ground station technologies were ~~higher than~~comparable to the three months ended April 30, ~~2020. This~~2021. Our results for the third quarter of fiscal 2022 and 2021 include nominal sales from our TDMA satellite networking technologies acquired on March 2, 2021. Our satellite earth station product line ~~continues to be~~has been impacted by overall challenging business conditions, including the COVID-19 pandemic's effect on customer demand, particularly in international markets, which historically represents a large majority of end-users for this product line. ~~However, we benefited this quarter from a number~~Although our backlog for satellite earth station products has increased since the beginning of ~~awards, including: (i) a contract valued at more than $3.0 million for QV-band traveling wave tube amplifiers (“TWTAs”)~~the year, shortages of components are impacting shipments. We continue to ~~support a~~monitor our inventory needs and navigate supply chain constraints which are impacting the timing of new high-speed satellite network; (ii) an order valued at more than $2.0 million for state-of-the-art 500W Ka-band high power amplifiers supporting a leading high throughput satellite customer; (iii) a $2.0 million order for rugged Ka-band high power TWTAs for a U.S. military communications system; (iv) an order exceeding $1.0 million for our Falcon 50Ka solid-state power amplifiers (“SSPAs”) for an in-flight connectivity ("IFC") application;orders, deliveries and ~~(v) an order exceeding $1.0 million for X-band SSPAs and block up converters for a transportable military satellite communications system.~~installations. In addition, ~~demand~~we expect to make no new sales to Russian customers for the rest of fiscal 2022. Overall, we expect sales of our ~~HEIGHTS technology solutions is strong and we recently received a multi-million-dollar award from an international customer. The most recent quarter included a nominal amount of net sales related~~satellite earth station products in fiscal 2022 to ~~our acquisition of UHP Networks Inc. ("UHP") on March 2,~~decline as compared to fiscal 2021.

~~Index~~

~~Net~~Although quarterly bookings for our public safety and location technology solutions were the highest all year, net sales in the three months ended April 30, ~~2021~~2022 of our public safety and location technology solutions were ~~higher~~lower than the three months ended April 30, ~~2020,~~2021, reflecting the ~~benefit~~timing of ~~incremental~~non-recurring sales of certain of our ~~next-generation 911~~NG-911 services. As a result of challenging business conditions, we are no longer expecting to book certain large opportunities during the fourth quarter of fiscal 2022. We do not believe these opportunities to be lost and ~~location-based solutions, offset~~now expect them to occur in ~~part by the absence~~fiscal 2023. Overall, we believe that sales of 911 wireless call routing sales to AT&T. During the three months ended April 30, 2021, we received contract awards, including: (i) a $9.8 million contract with a major tier-one mobile network operator ("MNO") for a broad suite of new capabilities and services centered around virtualized applications and 5G products; (ii) over $4.5 million in follow on orders related to a previously awarded statewide NG-911 contract; (iii) orders exceeding $3.8 million with a tier-one MNO for additional capabilities related to our Virtual Mobility Location Center platform; (iv) a $1.6 million NG-911 services contract to provide Solacom’s Guardian call management solution to the Toronto Paramedic Services, the largest municipal paramedic service in Canada; (v) a $1.3 million contract renewal with a tier-one MNO to support messaging services; and (vi) our first international 5G services contract with a leading tier-one MNO in Australia.

~~To-date, the business impact of COVID-19 on~~ our public safety and location technology solutions has been relatively muted and long-term demand for our products and services appears strong. Although COVID-19 has resulted in the cancellation of several key public safety trade shows and some states and municipalities have announced budget constraints, we believe that other potential customers are increasing their funding for NG-911 solutions, recognizing the critical importance of upgrading their 911 systems. Overall, we remain optimistic that fiscal 2021 net sales for this segment will be ~~slightly~~ higher than the amount we achieved in fiscal ~~2020.~~2021.

In aggregate, net sales for our Commercial Solutions segment is anticipated to be lower than the amount we achieved in fiscal 2021. Bookings, sales and profitability in our Commercial Solutions segment can fluctuate from period-to-period due to many factors, including changes in the general business environment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance.

Government Solutions

Net sales in our Government Solutions segment were $34.0 million for the three months ended April 30, 2022 as compared to $48.0 million for the three months ended April 30, 2021, ~~as compared to $56.8 million for the three months ended April 30, 2020,~~ a decrease of ~~$8.8~~$14.0 million or ~~15.5%~~29.2%. Our Government Solutions segment represented ~~34.4%~~27.8% of consolidated net sales for the three months ended April 30, ~~2021~~2022 as compared to ~~42.0%~~34.4% for the three months ended April 30, ~~2020.~~2021. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for ~~our third quarter of fiscal 2021~~the three months ended April 30, 2022 was ~~0.85.~~1.38x. Period-to-period fluctuations in bookings are normal for this segment.

~~The most recent~~Net sales for the third quarter of fiscal 2022 primarily ~~reflects~~reflect significantly lower sales of global field support services, advanced VSAT products and other programs to the U.S. ~~Army, offset in part by higher~~Army. Net sales ofduring the three months ended April 30, 2021 also included revenue related to our ~~solid-state, high-power amplifiers and high reliability Electrical, Electronic and Electromechanical (“EEE”) satellite-based space components.~~

~~Notable orders~~performance on our 10-year, $211.0 million IDIQ contract awarded to us ~~during~~by a prime contractor to provide next-generation troposcatter systems in support of the U.S. Marine Corps. There were nominal corresponding sales in the third quarter of fiscal ~~2021 include: (i) $9.2 million of orders to provide ongoing system refurbishment, sustainment services and baseband equipment to~~2022. We believe the U.S. Army, which will support the sustainment of the U.S. Army’s AN/TSC-198 Secret Internet Protocol Router (“SIPR”) and Non-secure Internet Protocol Router (“NIPR”) Access Point (“SNAP”) family of ground satellite terminals; (ii) $6.5 millionnext round of funding from the U.S. government for our Joint Cyber Analysis Course (“JCAC”) training solutions; (iii) $6.2 million of funding to support the U.S. Army’s Project Manager Mission Command (“PM MC”) Blue Force Tracking (“BFT-1”) program; (iv) a $3.0 million order from an overseas agency for maintenance of down range tracking stations; (v) a $2.0 million order to provide the U.S. Marine Corps with rugged baseband command and control modules for Program Manager Light Armored Vehicles; and (vi) a $1.6 millionon this IDIQ contract ~~for RF microwave solid-state amplifiers from a major domestic prime contractor.~~will now occur in fiscal 2023.

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In ~~April 2021, the U.S. government announced that it intended to fully withdraw troops from Afghanistan by September 2021. This change will result in lower revenues than previously anticipated~~aggregate, net sales for certain programs we currently participate in. In addition, the U.S. presidential administration released its fiscal 2022 budget request. This budget request includes less money for certain legacy programs but additional funding for modernization and new programs. We believe these budget changes will benefit us over the longer-term, but it will result in revenues in our Government Solutions segment are anticipated to be significantly lower than the amount we achieved in fiscal ~~2020.~~

~~We are seeing strong interest across~~2021. As discussed in our Form 10-Q filed with the ~~board for~~SEC on June 8, 2021, our recently introduced Comtech COMET terminals and other new solutions we are discussing with our customers. During the third quarter, we conducted successful in-field demonstrations including our industry leading troposcatter solution that we are currently providingrevenues in fiscal 2022 were expected to decline due to the U.S. ~~Marines. Other military commands have shown strong interest.~~government’s decision to fully withdraw troops from Afghanistan and make certain program changes. In addition, as ~~we enter our fourth quarter of fiscal 2021, in support~~a direct result of the ~~U.S. Army's network modernization efforts,~~Russia/Ukraine military conflict, we ~~have been working~~no longer expect to ~~respond~~receive and ship orders to a new proposal request related to the development of the Mounted Mission Command-Transport ("MMC-T") terminal, which is the successor to the U.S. Army's Blue Force Tracking-2 ("BFT-2") terminal. We estimate that there are over 120,000 legacy BFT terminals across the Army and Joint services. Over the years, we have been providing BFT-1 sustainment services to the U.S. Army, along with other development and engineering typeUkraine in fiscal 2022. That customer had an immediate need for wireless communication services and ~~we believe that we are well-positioned~~has redirected procurement dollars to ~~meaningfully participate on this new program.~~war-fighting equipment.

~~Index~~

Bookings, sales and profitability in our Government Solutions segment can fluctuate dramatically from period-to-period due to many factors, including unpredictable funding, deployment and technology decisions by our U.S. and international government customers. 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, ~~2021~~2022 and ~~2020~~2021 are as follows:

Three months ended April 30,
2021 2020 2021 2020 2021 2020
Commercial Solutions Government Solutions Consolidated
U.S. government 16.5 % 9.2 % 65.0 % 60.3 % 33.2 % 30.7 %
Domestic 61.2 % 65.8 % 18.9 % 16.4 % 46.6 % 45.0 %
Total U.S. 77.7 % 75.0 % 83.9 % 76.7 % 79.8 % 75.7 %
International 22.3 % 25.0 % 16.1 % 23.3 % 20.2 % 24.3 %
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. Included in domestic sales are sales to Verizon Communications Inc. ("Verizon"), which accounted for 11.4% of consolidated net sales for the three months ended April 30, 2021. Except for the U.S. government, there were no customers that represented more than 10.0% of consolidated net sales during the three months ended April 30, 2020.

International sales for the three months ended April 30, 2021 and 2020 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $28.2 million and $32.8 million, respectively. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented more than 10% of consolidated net sales for the three months ended April 30, 2021 and 2020.

~~Gross Profit.~~ Gross profit was $53.0 million for both the three months ended April 30, 2021 and 2020. Gross profit, as a percentage of consolidated net sales, for the three months ended April 30, 2021 was 38.0% as compared to 39.2% for the three months ended April 30, 2020. Our gross profit during the most recent fiscal quarter reflects changes in overall product mix and significant increases in costs due to production delays, minor supply chain disruptions, lower levels of factory utilization and higher logistics and operational costs resulting from the COVID-19 pandemic. Our gross profit during the most recent quarter also reflects a benefit of $2.0 million from the refund of historical excise tax paid, which was recorded in our Unallocated segment. Gross profit, as a percentage of related segment net sales, is further discussed below.

Our Commercial Solutions segment's gross profit, as a percentage of related segment net sales, for the three months ended April 30, 2021 decreased in comparison to the three months ended April 30, 2020. The decrease in gross profit percentage primarily reflects changes in products and services mix, including the cessation of sales to AT&T for 911 wireless call routing services and an increase of sales related to a recently awarded statewide NG-911 deployment (which has lower margins than our 911 wireless call routing services).

Our Government Solutions segment's gross profit, as a percentage of related segment net sales, for the three months ended April 30, 2021 decreased in comparison to the three months ended April 30, 2020. The decrease in gross profit percentage primarily reflects lower net sales. Also, during the most recent quarter, we incurred $0.4 million of incremental operating costs for our antenna facility in the United Kingdom due to the impact of the COVID-19 pandemic. Although operations in the United Kingdom have largely resumed, we continue to experience lingering impacts from the shut-down.

Included in consolidated cost of sales for the three months ended April 30, 2021 and 2020 are provisions for excess and obsolete inventory of $0.8 million and $0.3 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.~~

~~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 $27.0 million and $32.3 million for the three months ended April 30, 2021 and 2020, respectively. As a percentage of consolidated net sales, selling, general and administrative expenses were 19.4% and 23.9% for the three months ended April 30, 2021 and 2020, respectively.

Excluding $0.6 million of restructuring costs related to the relocation of certain of our satellite earth station production facilities to a new 146,000 square foot facility in Chandler, Arizona, selling, general and administrative expenses for the three months ended April 30, 2021 would have been $26.4 million, or 18.9% of consolidated net sales. Excluding $0.5 million of estimated contract settlement costs, selling, general and administrative expenses for the three months ended April 30, 2020 would have been $31.8 million, or 23.6% of consolidated net sales. The decrease in our selling, general and administration expenses is largely attributable to the benefit from our efforts to streamline business operations in both of our segments.

Amortization of stock-based compensation expense recorded as selling, general and administrative expenses was $1.1 million in the three months ended April 30, 2021 as compared to $0.9 million in the three months ended April 30, 2020. Amortization of stock-based compensation is not allocated to our two reportable operating segments.

~~Research and Development Expenses.~~Research and development expenses were $13.1 million and $12.3 million for the three months ended April 30, 2021 and 2020, respectively, representing an increase of $0.8 million, or 6.5%. As a percentage of consolidated net sales, research and development expenses were 9.4% and 9.1% for the three months ended April 30, 2021 and 2020, respectively.

For the three months ended April 30, 2021 and 2020, research and development expenses of $10.9 million and $10.8 million, respectively, related to our Commercial Solutions segment, and $2.1 million and $1.4 million, respectively, related to our Government Solutions segment. The remaining research and development expenses of $0.1 million in both the three months ended April 30, 2021 and 2020 related to the amortization of stock-based compensation expense.

During the most recent fiscal quarter, our Government Solutions segment incurred $0.3 million of strategic emerging technology costs 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 over the next twelve months.

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, 2021 and 2020, customers reimbursed us $3.7 million and $3.1 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 was $5.3 million (of which $4.2 million was for the Commercial Solutions segment and $1.1 million was for the Government Solutions segment) for the three months ended April 30, 2021 and $5.5 million (of which $4.3 million was for the Commercial Solutions segment and $1.2 million was for the Government Solutions segment) for the three months ended April 30, 2020.

~~Acquisition Plan Expenses.~~ During the three months ended April 30, 2021, we incurred $5.3 million of acquisition plan expenses due to the April 2021 settlement of litigation related to our 2019 acquisition of GD NG-911 as well as the March 2021 closing of our acquisition of UHP. During the three months ended April 30, 2020, we incurred $6.0 million of acquisition plan expenses primarily related to our acquisitions of CGC Technology Limited and UHP, as well as Gilat Satellite Networks Ltd. which was terminated in October 2020. These expenses are primarily recorded in our Unallocated segment. We do not expect to incur any significant acquisition plan expenses in the remainder of fiscal 2021.

~~Operating Income (Loss).~~ Operating income for the three months ended April 30, 2021 was $2.4 million as compared to an operating loss of $3.1 million for the three months ended April 30, 2020. Operating income (loss) by reportable segment is shown in the table below:

~~Index~~

Three months ended April 30,
2021 2020 2021 2020 2021 2020 2021 2020
($ in millions) Commercial Solutions Government Solutions Unallocated Consolidated
Operating income (loss) $ 9.3 4.0 0.8 4.2 (7.7) (11.4) $ 2.4 (3.1)
Percentage of related
net sales 10.2 % 5.1 % 1.7 % 7.4 % NA NA 1.7 % NA

The increase in our Commercial Solutions segment operating income, both in dollars and as a percentage of related segment net sales, for the three months ended April 30, 2021 was driven primarily by higher net sales, offset in part by a lower gross profit percentage and $0.6 million of restructuring costs, as discussed above.

The decrease in our Government Solutions segment operating income for the three months ended April 30, 2021, both in dollars and as a percentage of related segment net sales, was driven primarily by lower net sales, a lower gross profit percentage and higher research and development expenses, as discussed above.

The decrease in unallocated expenses for the three months ended April 30, 2021 as compared to the three months ended April 30, 2020 reflects lower overall spending during the most recent quarter, including a decrease in legal and professional fees and, as discussed above, a benefit of $2.0 million from the refund of historical excise tax paid. Amortization of stock-based compensation was $1.2 million and $1.0 million, respectively, for the three months ended April 30, 2021 and 2020.

Excluding: (i) $5.3 million of acquisition plan expenses; (ii) $0.6 million of restructuring costs; (iii) $0.4 million of incremental operating costs due to the impact of COVID-19; and (iv) $0.3 million of strategic emerging technology costs, consolidated operating income for the three months ended April 30, 2021 would have been $8.9 million, or 6.4% of consolidated net sales. Excluding: $6.0 million of acquisition plan expenses and $0.5 million of estimated contract settlement costs, consolidated operating income for the three months ended April 30, 2020 would have been $3.3 million, or 2.5% of consolidated net sales. The increase in operating income, both in dollars and as a percentage of consolidated net sales, was due primarily to higher consolidated net sales and lower selling, general and administrative expenses during the most recent quarter, as discussed above.

~~Interest Expense and Other.~~ Interest expense was $1.5 million for both the three months ended April 30, 2021 and 2020. Our effective interest rate (including amortization of deferred financing costs) in the three months ended April 30, 2021 was approximately 3.0%. Our current cash borrowing rate (which excludes the amortization of deferred financing costs) under our existing Credit Facility approximates 2.4%.

~~Interest (Income) and Other.~~ Interest (income) and other for both the three months ended April 30, 2021 and 2020 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.

~~Provision for (Benefit from) Income Taxes.~~ Our income tax provision or benefit is computed by applying an estimated annual effective tax rate for the full fiscal year to “ordinary” income or loss for the reporting period (“ordinary” is generally defined as pre-tax income or loss excluding unusual or infrequently occurring discrete tax items). For the three months ended April 30, 2021, we recorded a tax expense of $0.3 million as compared to a tax benefit of $0.8 million for the three months ended April 30, 2020. Our effective tax rate (excluding discrete tax items) for the three months ended April 30, 2021 and 2020 was 11.5% and 31.0%, respectively. The decrease from 31.0% to 11.5% is primarily due to expected product and geographical mix changes reflected in our Business Outlook for Fiscal 2021.

For purposes of determining our 11.5% estimated annual effective tax rate for fiscal 2021, the $70.0 million of acquisition plan expense paid to Gilat, during our first quarter of fiscal 2021, was considered an unusual and infrequently occurring discrete tax item and excluded from the computation of our effective tax rate. In addition, no financial statement benefit was recorded for the $70.0 million payment to Gilat.

During the three months ended April 30, 2021, we recorded a net discrete tax expense of $0.2 million, primarily related to updating our effective tax rate for the fiscal year, as well as the finalization of certain tax accounts in connection with the filing of our fiscal 2020 U.S. federal income tax return. Such items were offset, in part, by the release of valuation allowances previously established on the deferred tax assets of one of our Canadian subsidiaries. During the three months ended April 30, 2020, we recorded a net discrete tax expense of $0.7 million primarily related to updating our fiscal 2020 effective tax rate.

~~Index~~

Our U.S. federal income tax returns for fiscal 2017 through 2020 are subject to potential future IRS audit. None of our state income tax returns prior to fiscal 2016 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 Income (Loss).~~ ~~During the three months ended April 30, 2021, consolidated net income was $0.8 million as compared to a net loss of $4.0 million during the three months ended April 30, 2020.~~

~~Adjusted EBITDA.~~ Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both the three months ended April 30, 2021 and 2020 are shown in the table below (numbers in the table may not foot due to rounding):

Three months ended April 30,
2021 2020 2021 2020 2021 2020 2021 2020
($ in millions) Commercial Solutions Government Solutions Unallocated Consolidated
Net income (loss) $ 9.0 3.5 0.8 4.3 (9.0) (11.7) $ 0.8 (4.0)
Provision for (benefit from) income taxes 0.3 0.5 (0.1) (0.1) 0.1 (1.2) 0.3 (0.8)
Interest (income) and other — 0.1 0.1 — (0.4) — (0.3) 0.1
Interest expense — — — — 1.5 1.5 1.5 1.5
Amortization of stock-based compensation — — — — 1.2 1.0 1.2 1.0
Amortization of intangibles 4.2 4.3 1.1 1.2 — — 5.3 5.5
Depreciation 1.8 2.0 0.4 0.4 0.1 0.2 2.3 2.7
Estimated contract settlement costs — 0.5 — — — — — 0.5
Acquisition plan expenses — 0.7 — — 5.3 5.3 5.3 6.0
Restructuring costs 0.6 — — — — — 0.6 —
COVID-19 related costs — — 0.4 — — — 0.4 —
Strategic emerging technology costs — — 0.3 — — — 0.3 —
Adjusted EBITDA $ 15.9 11.5 3.0 5.8 (1.2) (4.9) $ 17.7 12.5
Percentage of related net sales 17.4 % 14.7 % 6.3 % 10.3 % NA NA 12.7 % 9.2 %

The increase in consolidated Adjusted EBITDA, both in dollars and as a percentage of consolidated net sales, for the three months ended April 30, 2021 as compared to the three months ended April 30, 2020 is primarily attributable to higher consolidated net sales and lower selling, general and administrative expenses, partially offset by a lower gross profit percentage and higher research and development expenses, as discussed above.

The increase in our Commercial Solutions segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is primarily due to higher net sales, offset in part by a lower gross profit percentage, as discussed above.

The decrease in our Government Solutions segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is primarily due to lower net sales, a lower gross profit percentage and higher research and development expenses, as discussed above.

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.

~~Index~~

~~A reconciliation of our fiscal 2020 GAAP Net Income to Adjusted EBITDA is shown in the table below (numbers in the table may not foot due to rounding):~~


~~($ in millions)~~	~~Fiscal Year 2020~~
~~Reconciliation of GAAP Net Income to Adjusted EBITDA:~~
~~Net income~~	$	~~7.0~~
~~Provision for income taxes~~	~~2.3~~
~~Interest (income) and other~~	~~(0.2)~~
~~Interest expense~~	~~6.1~~
~~Amortization of stock-based compensation~~	~~9.3~~
~~Amortization of intangibles~~	~~21.6~~
~~Depreciation~~	~~10.6~~
~~Estimated contract settlement costs~~	~~0.4~~
~~Acquisition plan expenses~~	~~20.8~~
~~Adjusted EBITDA~~	$	~~77.8~~

Reconciliations of our GAAP consolidated operating income (loss), net income (loss) and net income (loss) per diluted share for the three months ended April 30, 2021 and 2020 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). In addition, non-GAAP income per diluted share adjustments for the three months ended April 30, 2020 were computed using 25,058,000 weighted average diluted shares outstanding during the respective period:

Three months ended April 30, 2021
($ in millions, except for per share amount) Operating Income Net Income Net Income per
Diluted Share
Reconciliation of GAAP to Non-GAAP Earnings:
GAAP measures, as reported $ 2.4 $ 0.8 $ 0.03
    Acquisition plan expenses 5.3 4.7 0.18
    Restructuring costs 0.6 0.5 0.02
COVID-19 related costs 0.4 0.4 0.01
    Strategic emerging technology costs 0.3 0.3 0.01
    Net discrete tax expense — 0.2 0.01
Non-GAAP measures $ 8.9 $ 6.8 $ 0.26
Three months ended April 30, 2020
($ in millions, except for per share amount) Operating (Loss) Income Net (Loss) Income Net (Loss) Income per
Diluted Share
Reconciliation of GAAP to Non-GAAP Earnings:
GAAP measures, as reported $ (3.1) $ (4.0) $ (0.16)
    Acquisition plan expenses 6.0 4.1 0.16
    Estimated contract settlement costs 0.5 0.3 0.01
    Net discrete tax expense — 0.7 0.03
Non-GAAP measures $ 3.3 $ 1.2 $ 0.05

~~Index~~

Our Adjusted EBITDA is a Non-GAAP measure that represents earnings (loss) before income taxes, interest (income) and other, write-off of deferred financing costs, interest expense, amortization of stock-based compensation, amortization of intangibles, depreciation expense, estimated contract settlement costs, settlement of intellectual property litigation, acquisition plan expenses, restructuring costs, COVID-19 related costs, strategic emerging technology costs (for next-generation satellite technology), facility exit costs, strategic alternatives analysis expenses and other. Our definition of Adjusted EBITDA 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, in assessing our performance and comparability of our results with other companies. Our Non-GAAP measures for consolidated operating income, net income and net income per diluted share reflect the GAAP measures as reported, adjusted for certain items as described. 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 in the above tables, 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 fiscal 2021 Adjusted EBITDA target to the most directly comparable GAAP measure because items such as stock-based compensation, adjustments to the provision for income taxes, amortization of intangibles and interest expense, which are specific items that impact these measures, have not yet occurred, are out of our control, or cannot be predicted. For example, quantification of stock-based compensation expense requires inputs such as the number of shares granted and market price that are not currently ascertainable. Accordingly, reconciliations to the Non-GAAP forward looking metrics are not available without unreasonable effort and such unavailable reconciling items could significantly impact our financial results.

~~COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 2021 AND 2020~~

~~Net Sales.~~ Consolidated net sales were $435.9 million and $467.0 million for the nine months ended April 30, 2021 and 2020, respectively, representing a decrease of $31.1 million, or 6.7%. The period-over-period decrease in net sales reflects lower net sales in both of our segments, as further discussed below.

~~Commercial Solutions~~

Net sales in our Commercial Solutions segment were $261.0 million for the nine months ended April 30, 2021, as compared to $268.8 million for the nine months ended April 30, 2020, a decrease of $7.8 million, or 2.9%. Our Commercial Solutions segment represented 59.9% of consolidated net sales for the nine months ended April 30, 2021 as compared to 57.5% for the nine months ended April 30, 2020. Our book-to-bill ratio (a measure defined as bookings divided by net sales) for this segment was 1.23. Period-to-period fluctuations in bookings are normal for this segment.

Net sales in the nine months ended April 30, 2021 of our satellite ground station technologies were lower than the nine months ended April 30, 2020. This product line continues to be impacted by the COVID-19 pandemic's effect on customer demand, particularly in international markets, which historically represents a large majority of end-users for this product line. However, we benefited during the nine months ended April 30, 2021 from a number of awards, including: (i) $11.4 million in delivery orders from the U.S. Naval Information Warfare Systems Command for our latest generation SLM-5650B satellite modems and firmware; (ii) a contract valued at more than $3.0 million for QV-band TWTAs to support a new high-speed satellite network; (iii) an order valued at more than $2.0 million for state-of-the-art 500W Ka-band high power amplifiers supporting a leading high throughput satellite customer; (iv) a $2.0 million order for rugged Ka-band high power TWTAs for a U.S. military communications system; (v) $1.7 million in orders from a large government entity in Asia, who selected our equipment to support a significant network upgrade, replacing a mix of vendors’ installed equipment; (vi) a $1.6 million follow-on order for Ka-band SSPAs that use state-of-the-art GaN technology for an IFC application; (vii) $1.5 million in orders for satellite modems and optimization equipment from a North American communications service provider; (viii) a $1.5 million order for Single Channel Per Carrier (“SCPC”) satellite modems from a tier-one defense contractor to upgrade and expand an existing network with our CDM-625A advanced satellite modems; (ix) an order exceeding $1.0 million for our Falcon 50Ka SSPAs for an IFC application; and (x) an order exceeding $1.0 million for X-band SSPAs and block up converters for a transportable military satellite communications system. In addition, demand for our HEIGHTS technology solutions remain strong and we recently received a multi-million-dollar award from an international customer. The most recent period included a nominal amount of net sales related to our acquisition of UHP on March 2, 2021.

~~Index~~

Net sales in the nine months ended April 30, 2021 of our public safety and location technology solutions were lower than the nine months ended April 30, 2020, reflecting the absence of 911 wireless call routing sales to AT&T, offset in part by increased sales of our location-based technology solutions.

During the nine months ended April 30, 2021, we were awarded a statewide contract valued at up to $175.1 million to design, deploy, and operate NG-911 services for the Commonwealth of Pennsylvania. The total contract value includes multi-year contract extension options. The Commonwealth of Pennsylvania initially funded the contract at $137.4 million, $111.6 million of which was booked during our second quarter of fiscal 2021. This contract was awarded to us shortly after we announced the receipt of a $54.0 million contract to design, deploy and operate NG-911 services for the State of South Carolina, for which we received over $7.5 million of additional funding. Other notable public safety and location technology solutions orders received during the first nine months of fiscal 2021 include: (i) a $9.8 million contract with a major tier-one MNO for a broad suite of new capabilities and services centered around virtualized applications and 5G products; (ii) a contract renewal for location and mapping technologies worth $4.2 million with a tier-one MNO; (iii) orders exceeding $3.8 million with a tier-one MNO for additional capabilities related to our Virtual Mobility Location Center platform; (iv) a contract valued at up to $2.9 million to provide NG-911 services, including our Solacom Guardian Intelligent 911 Workstations, to the Toronto Police Service; (v) a contract valued at up to $2.4 million to provide NG-911 services, including our Solacom Guardian Intelligent 911 Workstations, to the City of Edmonton’s police and fire rescue services; (vi) a $1.6 million NG-911 services contract to provide Solacom’s Guardian call management solution to the Toronto Paramedic Services, the largest municipal paramedic service in Canada; (vii) a one-year contract renewal valued at up to $1.6 million to provide hosted location-based service ("LBS") platforms to a tier-one U.S. MNO; (viii) a contract renewal valued at up to $1.3 million to provide maintenance and support services to a Canadian MNO; (ix) a $1.3 million contract renewal by a tier-one MNO to support messaging services; and (x) our first international 5G services contract with a leading tier-one MNO in Australia.

To-date, the business impact of COVID-19 on our public safety and location technology solutions has been relatively muted and long-term demand for our products and services appears strong. Although COVID-19 has resulted in the cancellation of several key public safety trade shows and some states and municipalities have announced budget constraints, we believe that other potential customers are increasing their funding for NG-911 solutions, recognizing the critical importance of upgrading their 911 systems. Overall, we remain optimistic that fiscal 2021 net sales for this segment will be slightly higher than the amount we achieved in fiscal 2020.

Bookings, sales and profitability in our Commercial Solutions segment can fluctuate from period-to-period due to many factors, including changes in the general business environment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance.

~~Government Solutions~~

Net sales in our Government Solutions segment were $174.9 million for the nine months ended April 30, 2021 as compared to $198.2 million for the nine months ended April 30, 2020, a decrease of $23.3 million or 11.8%. Our Government Solutions segment represented 40.1% of consolidated net sales for the nine months ended April 30, 2021 as compared to 42.5% for the nine months ended April 30, 2020. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the nine months ended April 30, 2021 was 0.77. Period-to-period fluctuations in bookings are normal for this segment.

The most recent period primarily reflects lower sales of advanced VSAT products and other programs to the U.S. Army, offset in part by higher sales of our solid-state, high-power amplifiers. Sales during the nine months ended April 30, 2021 include ongoing performance on our 10-year, $211.0 million IDIQ contract awarded to us by a prime contractor to provide next-generation troposcatter systems in support of the U.S. Marine Corps. During the nine months ended April 30, 2021, we benefited from the inclusion of nominal sales of X/Y antenna products that we now offer as a result of our January 2020 acquisition of CGC.

During the nine months ended April 30, 2021, we were awarded $20.7 million of orders related to a new multi-year contract valued at up to $235.7 million to provide ongoing system refurbishment, sustainment services and baseband equipment to the U.S Army, which will support the sustainment of the U.S. Army's AN/TSC-198 SNAP family of ground satellite terminals, to include spare parts, repairs, upgrades, refurbishments, logistics and engineering services and training. This multi-year contract includes a base year award and three one-year option periods exercisable by the U.S. Army. We expect that additional funding will be authorized over the remaining contract period.

~~Index~~

Other notable orders awarded during the nine months ended April 30, 2021 include: (i) $16.1 million of orders from the U.S. government for our JCAC training solutions; (ii) a $10.4 million contract from the U.S. military for the first phase of a full-motion large aperture antenna tracking system; (iii) $6.2 million of funding to support the U.S. Army’s PM MC's BFT-1 program; (iv) $5.9 million of funding on our contract to provide the U.S. Army with global field support services for military satellite communication (“SATCOM”) terminals around the world; (v) a $3.5 million contract for solid-state, high-power RF amplifiers from a major domestic medical instrumentation provider; (vi) $3.0 million of funding for a 12-month extension on an existing contract to provide the State of Maryland’s Department of Human Services with statewide information technology (“IT”) services; (vii) a $3.0 million order from an overseas agency for maintenance of down range tracking stations; (viii) a $2.8 million contract for high-power amplifier systems from an international prime contractor to be incorporated into electronic warfare systems; (ix) a $2.7 million contract from a major international oil and gas company which will provide the first over-the-horizon system for a floating liquefied natural gas facility utilizing our software-defined CS67PLUS radio/modem; (x) $2.6 million of orders to supply Manpack Satellite Terminals, networking equipment and other advanced VSAT products to the U.S. Army under our GTACS contract; and (xi) a $2.0 million order to provide the U.S. Marine Corps with rugged baseband command and control modules for Program Manager Light Armored Vehicles.

In April 2021, the U.S. government announced that it intended to fully withdraw troops from Afghanistan by September 2021. This change will result in lower revenues than previously anticipated for certain programs we currently participate in. In addition, the U.S. presidential administration released its fiscal 2022 budget request. This budget request includes less money for certain legacy programs but additional funding for modernization and new programs. We believe these budget changes will benefit us over the longer-term, but it will result in revenues in our Government Solutions segment to be significantly lower than the amount we achieved in fiscal 2020.

We are seeing strong interest across the board for our recently introduced Comtech COMET terminals and other new solutions we are discussing with our customers. During the third quarter, we conducted successful in-field demonstrations including our industry leading troposcatter solution that we are currently providing to the U.S. Marines. Other military commands have shown strong interest. In addition, as we enter our fourth quarter of fiscal 2021, in support of the U.S. Army's network modernization efforts, we have been working to respond to a new proposal request related to the development of the MMC-T terminal, which is the successor to the U.S. Army's BFT-2 terminal. We estimate that there are over 120,000 legacy BFT terminals across the Army and Joint services. Over the years, we have been providing BFT-1 sustainment services to the U.S. Army, along with other development and engineering type services and we believe that we are well-positioned to meaningfully participate on this new program.

~~Geography and Customer Type~~

~~Sales by geography and customer type, as a percentage of related sales, for the nine months ended April 30, 2021 and 2020 are as follows:~~


		Nine months ended April 30,													Three months ended April 30,
		2021		2020		2021		2020		2021		2020			2022		2021		2022		2021		2022		2021
		Commercial Solutions				Government Solutions				Consolidated					Commercial Solutions				Government Solutions				Consolidated
U.S. government	U.S. government	15.8	%	15.3	%	68.7	%	69.1	%	37.1	%	38.1	%	U.S. government	9.3	%	16.5	%	59.7	%	65.0	%	23.3	%	33.2	%
Domestic	Domestic	58.7	%	59.1	%	13.2	%	11.4	%	40.4	%	38.8	%	Domestic	61.7	%	61.2	%	14.5	%	18.9	%	48.6	%	46.6	%
Total U.S.	Total U.S.	74.5	%	74.4	%	81.9	%	80.5	%	77.5	%	76.9	%	Total U.S.	71.0	%	77.7	%	74.2	%	83.9	%	71.9	%	79.8	%

International	International	25.5	%	25.6	%	18.1	%	19.5	%	22.5	%	23.1	%	International	29.0	%	22.3	%	25.8	%	16.1	%	28.1	%	20.2	%
Total	Total	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	100.0	%	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. Included in domestic sales are sales to Verizon, which accounted for ~~11.2%~~10.6% and 11.4% of consolidated net sales for the ~~nine~~three months ended April 30, ~~2021. Except for the U.S. government, there were no customers that represented more than 10.0% of consolidated net sales during the nine months ended April 30, 2020.~~

~~Index~~

2022 and 2021, respectively.

International sales for the ~~nine~~three months ended April 30, ~~2021~~2022 and ~~2020~~2021 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were ~~$98.1~~$34.3 million and ~~$107.5~~$28.2 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 more than 10% of consolidated net sales for the ~~nine~~three months ended April 30, ~~2021~~2022 and ~~2020.~~2021.

Gross Profit.Gross profit was ~~$158.9~~$46.7 million and ~~$177.2~~$53.0 million for the ~~nine~~three months ended April 30, 2022 and 2021, ~~and 2020,~~ respectively. ~~The decrease of $18.3 million primarily reflects the decrease in consolidated net sales, as discussed above.~~ Gross profit, as a percentage of consolidated net sales, for the ~~nine~~three months ended April 30, ~~2021~~2022 was ~~36.5%~~38.2% as compared to ~~37.9%~~38.0% for the ~~nine~~three months ended April 30, ~~2020.~~2021. Our gross profit during the ~~nine months ended April 30,~~third quarter of fiscal 2021 also reflects significant increases in costs due to production delays, minor supply chain disruptions, lower levels of factory utilization and higher logistics and operational costs resulting from the COVID-19 pandemic. Our gross profit during the most recent nine month period also reflects a benefit of $2.0 million from the refund of historical excise tax paid, which was recorded in our Unallocated segment. Excluding such benefit, our gross profit, as a percentage of consolidated net sales, in the third quarter of fiscal 2021 would have been 36.6%. Gross profit during the most recent quarter reflects a more favorable product mix and a lower provision for warranty obligations during the three months ended April 30, 2022 in light of the reduced level of sales activity during the period, offset in part by the impact of lower consolidated net sales. Our gross profit in both periods also reflects start-up costs associated with the opening of our new high-volume technology manufacturing centers, as well as increased costs resulting from the ongoing impacts of the COVID-19 pandemic and inflationary pressures. Gross profit, as a percentage of related segment net sales, is further discussed below.

Our Commercial Solutions segment's gross profit, as a percentage of related segment net sales, for the ~~nine~~three months ended April 30, ~~2021 decreased~~2022 increased in comparison to the ~~nine~~three months ended April 30, ~~2020.~~2021. The ~~decrease in~~ gross profit percentage in the most recent quarter primarily reflects changes in products and services mix, ~~including the cessation~~offset in part by lower levels of ~~sales to AT&T for 911 wireless call routing services~~factory utilization and ~~an increase of sales related to a recently awarded statewide NG-911 deployment (which has lower margins than our 911 wireless call routing services).~~higher logistics and operational costs resulting from global supply chain constraints.

Index

Our Government Solutions segment's gross profit, as a percentage of related segment net sales, for the ~~nine~~three months ended April 30, 2022 decreased in comparison to the three months ended April 30, 2021 ~~decreased~~and reflects changes in ~~comparison to~~product and services mix in the ~~nine~~most recent quarter, as discussed above. Also, during the three months ended April 30, ~~2020. The decrease in gross profit percentage primarily reflects lower net sales. Also, during the most recent period,~~2022 and 2021, we incurred ~~$0.6~~$0.1 million and $0.4 million, respectively, of incremental operating costs ~~for~~related to our antenna facility located in the United Kingdom due to the impact of the COVID-19 pandemic. Although operations in the United Kingdom have largely resumed, we continue to experience lingering impacts from COVID-19 and the ~~shut-down.~~shut-down in fiscal 2021.

Included in consolidated cost of sales for the ~~nine~~three months ended April 30, ~~2021~~2022 and ~~2020~~2021 are provisions for excess and obsolete inventory of ~~$3.2~~$1.1 million and ~~$1.2~~$0.8 million, respectively. As discussed in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Provisions for Excess and Obsolete Inventory," we regularly review our inventory and record a provision for excess and obsolete inventory based on historical and projected usage trends.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were ~~$84.0~~$27.6 million and ~~$93.5~~$27.0 million for the ~~nine~~three months ended April 30, 2022 and 2021, ~~and 2020, respectively, representing a decrease of $9.5 million, or 10.2%.~~respectively. As a percentage of consolidated net sales, selling, general and administrative expenses were ~~19.3%~~22.6% and ~~20.0%~~19.4% for the ~~nine~~three months ended April 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

~~Excluding $1.2~~During the three months ended April 30, 2022 and 2021, we incurred $1.6 million and $0.6 million, respectively, of restructuring costs to streamline our operations, including costs related to the ongoing relocation of certain of our satellite earth station production facilities to a new 146,000 square foot facility in Chandler, ~~Arizona,~~Arizona. Excluding restructuring costs, selling, general and administrative expenses for the ~~nine~~three months ended April 30, 2022 and 2021 would have been ~~$82.8~~$26.0 million, or 19.0% of consolidated net sales. Excluding $0.4 million of estimated contract settlement costs principally related to the repositioning of our location technologies solutions offerings in our Commercial Solutions segment, selling, general21.3%, and ~~administrative expenses for the nine months ended April 30, 2020 would have been $93.1~~$26.4 million, or ~~19.9%~~18.9%, respectively, of consolidated net sales. The ~~decrease~~increase in our selling, general and ~~administration~~administrative expenses, ~~both in dollars and~~ as a percentage of consolidated net sales, is ~~largely attributable~~primarily due to lower consolidated net sales. Our selling, general and administrative expenses in the ~~benefit from~~most recent quarter also reflect higher labor costs associated with a tight global labor market, increased investments in marketing, including new social media activities and other investments we are making to achieve our ~~efforts~~long term business goals. Such spending is expected to ~~streamline business operations in both~~continue during our fourth quarter of ~~our segments.~~fiscal 2022.

Amortization of stock-based compensation expense recorded as selling, general and administrative expenses was ~~$2.8~~$0.9 million in the ~~nine~~three months ended April 30, ~~2021~~2022 as compared to ~~$2.7~~$1.1 million in the ~~nine~~three months ended April 30, ~~2020.~~2021. Amortization of stock-based compensation is not allocated to our two reportable operating segments.

Research and Development Expenses. Research and development expenses were ~~$37.4~~$14.3 million and ~~$40.9~~$13.1 million for the ~~nine~~three months ended April 30, 2022 and 2021, ~~and 2020, respectively, representing a decrease of $3.5 million, or 8.6%.~~respectively. As a percentage of consolidated net sales, research and development expenses were ~~8.6%~~11.7% and ~~8.8%~~9.4% for the ~~nine~~three months ended April 30, ~~2021~~2022 and ~~2020,~~2021, respectively.

~~Index~~

For the ~~nine~~three months ended April 30, ~~2021~~2022 and ~~2020,~~2021, research and development expenses of ~~$30.7~~$12.3 million and ~~$35.7~~$10.9 million, respectively, related to our Commercial Solutions segment, and ~~$6.5~~$1.9 million and ~~$5.1~~$2.1 million, respectively, related to our Government Solutions segment. The remaining research and development expenses of ~~$0.2~~$0.1 million in both the ~~nine~~three months ended April 30, ~~2021~~2022 and ~~2020~~2021 related to the amortization of stock-based compensation expense.

During the ~~most recent period, our Government Solutions segment~~three months ended April 30, 2022 and 2021, we incurred $0.9 million and $0.3 million, respectively, of strategic emerging technology costs for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations. WeOf the fiscal 2022 amount, $0.3 million and $0.6 million, respectively, was incurred in our Commercial Solutions and Government Solutions segments. All of the fiscal 2021 amount was incurred in our Government Solutions segment. As we have stated in the past, we are evaluating this new market in relation to our long-term business strategies, and we may incur additional costs ~~over~~in the ~~next twelve months.~~future.

Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the ~~nine~~three months ended April 30, ~~2021~~2022 and ~~2020,~~2021, customers reimbursed us ~~$11.0~~$2.7 million and ~~$8.2~~$3.7 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.

Index

Amortization of ~~Intangibles~~Intangibles. . Amortization relating to intangible assets with finite lives was ~~$15.7~~$5.3 million (of which ~~$12.8~~$4.2 million was for the Commercial Solutions segment and ~~$2.9~~$1.1 million was for the Government Solutions segment) for the ~~nine~~three months ended April 30, ~~2021~~2022 and ~~$16.0~~$5.3 million (of which ~~$13.0~~$4.2 million was for the Commercial Solutions segment and ~~$2.9~~$1.1 million was for the Government Solutions segment) for the ~~nine~~three months ended April 30, ~~2020.~~2021.

Acquisition Plan Expenses. During the ~~nine~~three months ended April 30, 2021, ~~and 2020,~~ we incurred ~~$99.8~~$5.3 million ~~and $14.4 million, respectively,~~ of acquisition plan ~~expenses. For~~expenses in our Unallocated segment related to the ~~nine~~acquisition of TDMA satellite networking technologies and GD NG-911 acquisition-related litigation. There were no similar costs incurred during the three months ended April 30, 2021, $88.3 million related to the previously announced litigation and merger termination with Gilat, including $70.0 million paid in cash to Gilat. The remaining costs primarily related to the April 2021 settlement of litigation associated with our 2019 acquisition of GD NG-911 as well as the March 2021 closing of our acquisition of UHP. These expenses are primarily recorded in our Unallocated segment. We do not expect to incur any significant acquisition plan expenses in the remainder of fiscal 2021.2022.

Operating Income (Loss) ~~Income.~~. Operating loss for the ~~nine~~three months ended April 30, ~~2021~~2022 was ~~$78.0~~$0.6 million as compared to operating income of ~~$12.4~~$2.4 million for the ~~nine~~three months ended April 30, ~~2020.~~2021. Operating income (loss) by reportable segment is shown in the table below:


		Nine months ended April 30,																Three months ended April 30,
		2021			2020		2021		2020		2021	2020	2021		2020			2022			2021		2022	2021		2022	2021	2022		2021
($ in millions)	($ in millions)	Commercial Solutions					Government Solutions				Unallocated		Consolidated				($ in millions)	Commercial Solutions					Government Solutions			Unallocated		Consolidated
Operating income (loss)	Operating income (loss)	$	27.4		26.5		8.8		16.3		(114.2)	(30.4)	$	(78.0)	12.4		Operating income (loss)	$	7.4		9.3		(2.9)	0.8		(5.1)	(7.7)	$	(0.6)	2.4
Percentage of related net sales	Percentage of related net sales	10.5		%	9.9	%	5.0	%	8.2	%	NA	NA	NA		2.7	%	Percentage of related net sales	8.4		%	10.2	%	NA	1.7	%	NA	NA	NA		1.7	%

~~The increase in~~

Our GAAP operating loss of $0.6 million for the three months ended April 30, 2022 reflects: (i) $1.6 million of restructuring costs; (ii) $0.9 million of strategic emerging technology costs; and (iii) $0.1 million of incremental operating costs due to the lingering impact of COVID-19, as discussed above. Excluding such items, our ~~Commercial Solutions segment~~consolidated operating income ~~both in dollars and as a percentage of the related segment net sales,~~ for the ~~nine~~three months ended April 30, 2022 would have been $2.1 million or 1.6% of consolidated net sales. Our GAAP operating income of $2.4 million for the three months ended April 30, 2021 primarily reflects the benefit of cost saving measures previously implemented, offset in part by lower segment net sales and gross profit percentage and $1.2 million of restructuring costs, as discussed above.

The decrease in our Government Solutions segment operating income, both in dollars and as a percentage of related segment net sales, for the nine months ended April 30, 2021 was driven primarily by lower net sales and gross profit percentage, as discussed above.

The increase in unallocated expenses for the nine months ended April 30, 2021 as compared to the nine months ended April 30, 2020 is primarily due to acquisition plan expenses, as discussed above. Amortization of stock-based compensation was $3.2 million and $3.1 million, respectively, for the nine months ended April 30, 2021 and 2020.

~~Index~~

~~Excluding~~reflects: (i) ~~$99.8~~$5.3 million of acquisition plan expenses; (ii) ~~$1.2~~$0.6 million of restructuring costs; (iii) ~~$0.6~~$0.4 million of incremental operating costs due to the impact of COVID-19; and (iv) $0.3 million of strategic emerging technology costs, as discussed above. Excluding such items, our consolidated operating income for the ~~nine~~three months ended April 30, 2021 would have been ~~$23.9~~$8.9 million, or 5.5% of consolidated net sales. Excluding $14.4 million of acquisition plan expenses and $0.4 million of estimated contract settlement costs, consolidated operating income for the nine months ended April 30, 2020 would have been $27.2 million, or 5.8%6.4% of consolidated net sales. The decrease in operating income from $8.9 million to $2.1 million in the most recent quarter was primarily due to lower consolidated net sales. Operating income (loss) by reportable segment is further discussed below.

The decrease in our Commercial Solutions segment operating income, both in dollars and as a percentage of ~~consolidated~~related segment net sales, for the three months ended April 30, 2022 was ~~due~~driven primarily toby lower ~~consolidated~~net sales, higher restructuring costs and higher research and development expenses, as discussed above.

The decrease in our Government Solutions segment operating income for the three months ended April 30, 2022 was driven primarily by lower net sales and a lower gross profit percentage, as discussed above.

The decrease in unallocated expenses for the three months ended April 30, 2022 as compared to the three months ended April 30, 2021 was primarily due to not having acquisition plan expenses in the three months ended April 30, 2022, offset in part by ~~lower selling, general and administrative~~the $2.0 million benefit in the three months ended April 30, 2021, related to a refund of historical excise tax paid, as discussed above.

It is difficult to predict GAAP operating results for fiscal 2022, as it will be impacted by both start-up expenses and ~~research~~restructuring costs associated with the opening of Comtech’s new high-volume technology manufacturing centers and ~~development expenses, as discussed above.~~COVID-19 related costs.

Interest Expense and Other. Interest expense was ~~$5.2~~$1.0 million and ~~$4.9~~$1.5 million for the ~~nine~~three months ended April 30, 2022 and 2021, ~~and 2020,~~ respectively. ~~Interest expense for the nine months ended April 30, 2021 includes $1.2 million of incremental interest expense related to a now terminated financing commitment letter. Excluding the $1.2 million, our~~Our effective interest rate (including amortization of deferred financing costs) in the ~~nine~~three months ended April 30, ~~2021~~2022 was approximately ~~2.8%~~3.3%. Our current cash borrowing rate (which excludes the amortization of deferred financing costs) under our existing Credit Facility approximates ~~2.4%~~2.5%.

Interest (Income) and Other. Interest (income) and other for both the ~~nine~~three months ended April 30, ~~2021~~2022 and ~~2020~~2021 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.

(

Index

Change in Fair Value of Convertible Preferred Stock Purchase Option Liability. During the three months ended April 30, 2022, we recorded a $0.3 million non-cash benefit from the remeasurement of the convertible preferred stock purchase option liability. See "Notes to Condensed Consolidated Financial Statements - Note (17) - Convertible Preferred Stock" for more information.

Benefit ~~from) Provision for~~from Income Taxes. Our income tax provision or benefit is computed by applying an estimated annual effective tax rate for the full fiscal year to “ordinary” income or loss for the reporting period (“ordinary” is generally defined as pre-tax income or loss excluding significant, unusual or infrequently occurring discrete tax items). For the ~~nine~~three months ended April 30, ~~2021,~~2022, we recorded a tax benefit of ~~$2.1~~$0.8 million as compared to a tax ~~provision~~expense of ~~$1.5~~$0.3 million for the ~~nine~~three months ended April 30, ~~2020.~~2021. Our effective tax rate (excluding discrete tax items) for the ~~nine~~three months ended April 30, 2022 and 2021 was 28.25% and ~~2020 was~~ 11.5% ~~and 31.0%~~, respectively. The ~~decrease from 31.0% to 11.5%~~increase is primarily due to expected product and geographical mix changes reflected in our Business Outlook for Fiscal ~~2021.~~2022.

For purposes of determining our ~~11.5%~~28.25% estimated annual effective tax rate for fiscal ~~2021, the $70.0 million of acquisition plan expense paid to Gilat, during our first quarter of fiscal 2021, was~~2022, former CEO transition costs and proxy solicitation costs are considered ansignificant, unusual ~~and~~or infrequently occurring discrete tax ~~item~~items and are excluded from the computation of our effective tax rate. ~~In addition, no financial statement benefit was recorded for the $70.0 million payment to Gilat.~~

During the ~~nine~~three months ended April 30, 2022, we recorded a net discrete tax expense of $0.2 million, primarily related to the expiration of equity based awards, partially offset by the finalization of certain tax accounts in connection with the filing of our fiscal 2021 federal income tax return. During the three months ended April 30, 2021, we recorded a net discrete tax ~~benefit~~expense of ~~$0.6~~$0.2 million, primarily related to updating our effective tax rate for the ~~release of valuation allowances previously established on the deferred tax assets of one of our Canadian subsidiaries. This benefit was offset, in part, by~~fiscal year, as well as the finalization of certain tax accounts in connection with the filing of our fiscal 2020 U.S. federal income tax ~~return. During~~return, partially offset by the ~~nine months ended April 30, 2020, we recorded a net discrete~~release of valuation allowances previously established on the deferred tax ~~benefit~~assets of ~~$0.8 million, primarily related to stock-based awards that were settled during the period and the finalization of certain tax deductions in connection with the filing~~one of our ~~fiscal 2019 U.S. federal income tax return.~~Canadian subsidiaries.

Our U.S. federal income tax returns for fiscal ~~2017~~2019 through ~~2020~~2021 are subject to potential future IRS audit. None of our state income tax returns prior to fiscal ~~2016~~2017 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) ~~Income.~~Income Attributable to Common Stockholders. During the ~~nine~~three months ended April 30, ~~2021,~~2022, consolidated net loss attributable to common stockholders was ~~$80.8~~$1.7 million as compared to net income attributable to common stockholders of ~~$5.9~~$0.8 million during the ~~nine~~three months ended April 30, ~~2020.~~2021.

5347

Index

Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both the ~~nine~~three months ended April 30, ~~2021~~2022 and ~~2020~~2021 are shown in the table below (numbers in the table may not foot due to rounding):

Nine months ended April 30,
2021 2020 2021 2020 2021 2020 2021 2020
($ in millions) Commercial Solutions Government Solutions Unallocated Consolidated
Net income (loss) $ 26.6 26.0 9.1 16.4 (116.6) (36.5) $ (80.8) 5.9
Provision for (benefit from) income taxes 0.9 0.4 (0.5) (0.1) (2.4) 1.2 (2.1) 1.5
Interest (income) and other — 0.1 0.1 — (0.3) — (0.3) —
Interest expense — — 0.1 — 5.2 4.9 5.2 4.9
Amortization of stock-based compensation — — — — 3.2 3.1 3.2 3.1
Amortization of intangibles 12.8 13.0 2.9 2.9 — — 15.7 16.0
Depreciation 5.7 6.4 1.3 1.1 0.3 0.6 7.3 8.0
Estimated contract settlement costs — 0.4 — — — — — 0.4
Acquisition plan expenses (1.1) 0.7 — — 100.9 13.7 99.8 14.4
Restructuring costs 1.2 — — — — — 1.2 —
COVID-19 related costs — — 0.6 — — — 0.6 —
Strategic emerging technology costs — — 0.3 — — — 0.3 —
Adjusted EBITDA $ 46.1 47.1 13.9 20.3 (9.9) (13.1) $ 50.1 54.3
Percentage of related net sales 17.7 % 17.5% 7.9% 10.2% NA NA 11.5% 11.6 %


	Three months ended April 30,
	2022			2021		2022	2021		2022	2021	2022			2021
($ in millions)	Commercial Solutions					Government Solutions			Unallocated		Consolidated
Net income (loss)	$	6.6		9.0		(1.8)	0.8		(4.8)	(9.0)	$	—		0.8
Provision for (benefit from) income taxes	0.8			0.3		(0.7)	(0.1)		(0.9)	0.1	(0.8)			0.3
Interest (income) and other	—			—		(0.4)	0.1		—	(0.4)	(0.4)			(0.3)
Change in fair value of convertible preferred stock purchase option liability	—			—		—	—		(0.3)	—	(0.3)			—
Interest expense	—			—		—	—		1.0	1.5	1.0			1.5
Amortization of stock-based compensation	—			—		—	—		1.1	1.2	1.1			1.2
Amortization of intangibles	4.2			4.2		1.1	1.1		—	—	5.3			5.3
Depreciation	2.0			1.8		0.4	0.4		—	0.1	2.5			2.3


Amortization of cost to fulfill assets	—			—		0.2	—		—	—	0.2			—
Restructuring costs	1.3			0.6		0.3	—		—	—	1.6			0.6
COVID-19 related costs	—			—		0.1	0.4		—	—	0.1			0.4
Strategic emerging technology costs	0.3			—		0.6	0.3		—	—	0.9			0.3
Acquisition plan expenses	—			—		—	—		—	5.3	—			5.3

Adjusted EBITDA	$	15.3		15.9		(0.1)	3.0		(3.9)	(1.2)	$	11.2		17.7
Percentage of related net sales	17.4		%	17.4	%	NA	6.3	%	NA	NA	9.2		%	12.7	%

The decrease in consolidated Adjusted EBITDA, both in dollars and as a percentage of consolidated net sales, for the ~~nine~~three months ended April 30, ~~2021~~2022 as compared to the ~~nine~~three months ended April 30, ~~2020~~2021 is primarily attributable to lower consolidated net sales, ~~and a lower gross profit percentage, offset in part by lower selling, general and administrative expenses and lower research and development expenses,~~ as discussed above.

The slight decrease in our Commercial Solutions segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is primarily due to lower net sales and higher research and development expenses, offset in part by a ~~lower~~higher gross profit percentage, ~~substantially offset by the benefit of cost saving measures previously implemented,~~ as discussed above.

The decrease in our Government Solutions segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is ~~driven~~ primarily bydue to lower ~~segment~~ net sales, ~~and a lower gross profit percentage,~~ as discussed above.

5448

Index

A reconciliation of our fiscal ~~2020~~2021 GAAP Net ~~Income~~Loss to Adjusted EBITDA is shown in the table below (numbers in the table may not foot due to rounding):


($ in millions)	Fiscal Year ~~2020~~2021
Reconciliation of GAAP Net ~~Income~~Loss to Adjusted EBITDA:
Net ~~income~~loss	$	~~7.0~~ (73.5)
~~Provision for~~Benefit from income taxes	~~2.3~~ (1.5)
Interest (income) and other	~~(0.2)~~(0.1)
Interest expense	~~6.1~~6.8
Amortization of stock-based compensation	~~9.3~~10.0
Amortization of intangibles	~~21.6~~21.0
Depreciation	~~10.6~~
~~Estimated contract settlement costs~~	~~0.4~~9.4
Acquisition plan expenses	~~20.8~~100.3
Restructuring costs	2.8
COVID-19 related costs	1.0
Strategic emerging technology costs	0.3
Adjusted EBITDA	$	~~77.8~~76.5

Reconciliations of our GAAP consolidated operating income (loss), net income (loss) and net income (loss) per diluted share for the nine months ended April 30, 2021 and 2020 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). In addition, non-GAAP income per diluted share adjustments for the nine months ended April 30, 2021 were computed using 26,016,000 weighted average diluted shares outstanding during the respective period:

Nine months ended April 30, 2021
($ in millions, except for per share amount) Operating (Loss) Income Net (Loss) Income Net (Loss) Income per
Diluted Share
Reconciliation of GAAP to Non-GAAP Earnings:
GAAP measures, as reported $ (78.0) $ (80.8) $ (3.12)
    Acquisition plan expenses 99.8 96.4 3.70
    Restructuring costs 1.2 1.1 0.04
    COVID-19 related costs 0.6 0.5 0.02
    Strategic emerging technology costs 0.3 0.3 0.01
Interest expense — 1.0 0.04
    Net discrete tax benefit — (0.6) (0.02)
Non-GAAP measures $ 23.9 $ 17.8 $ 0.69
Nine months ended April 30, 2020
($ in millions, except for per share amount) Operating Income Net Income Net Income per
Diluted Share
Reconciliation of GAAP to Non-GAAP Earnings:
GAAP measures, as reported $ 12.4 $ 5.9 $ 0.24
    Acquisition plan expenses 14.4 9.9 0.40
    Estimated contract settlement costs 0.4 0.3 0.01
    Net discrete tax benefit — (0.8) (0.03)
Non-GAAP measures $ 27.2 $ 15.3 $ 0.62

~~Index~~

Our Adjusted EBITDA is a Non-GAAP measure that represents earnings (loss) before income taxes, interest (income) and other, change in fair value of the convertible preferred stock purchase option liability, write-off of deferred financing costs, interest expense, amortization of stock-based compensation, amortization of intangibles, depreciation expense, amortization of cost to fulfill assets, estimated contract settlement costs, settlement of intellectual property litigation, acquisition plan expenses, restructuring costs, COVID-19 related costs, strategic emerging technology costs (for next-generation satellite technology), facility exit costs, former CEO transition costs, proxy solicitation costs, strategic alternatives analysis expenses and other. Our definition of Adjusted EBITDA 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, in assessing our performance and comparability of our results with other companies. Our Non-GAAP measures ~~for consolidated operating income, net income and net income per diluted share~~ reflect the GAAP measures as reported, adjusted for certain items as ~~described.~~ 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 in the ~~above~~ 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 fiscal ~~2021~~2022 Adjusted EBITDA target to the most directly comparable GAAP measure because items such as stock-based compensation, adjustments to the provision for income taxes, amortization of intangibles and interest expense, which are specific items that impact these measures, have not yet occurred, are out of our control, or cannot be predicted. For example, quantification of stock-based compensation expense requires inputs such as the number of shares granted and market price that are not currently ascertainable. Accordingly, reconciliations to the Non-GAAP forward looking metrics are not available without unreasonable effort and such unavailable reconciling items could significantly impact our financial results.

Index

Reconciliations of our GAAP consolidated operating (loss) income, net (loss) income attributable to common stockholders and net (loss) income per diluted common share for the three months ended April 30, 2022 and 2021 to the corresponding Non-GAAP measures are shown in the tables below (numbers and per share amounts in the tables may not foot due to rounding). Non-GAAP net (loss) income attributable to common stockholders and net (loss) income per diluted common share reflect Non-GAAP provisions for income taxes based on year-to-date results, as adjusted for the Non-GAAP reconciling items included in the tables below. We evaluate our Non-GAAP effective income tax rate on an ongoing basis, and it can change from time to time. Our Non-GAAP effective income tax rate can differ materially from our GAAP effective income tax rate. In addition, due to the GAAP net loss for the period, Non-GAAP EPS for the three months ended April 30, 2022 was computed using 27,225,000 weighted average diluted shares outstanding during the period.


	Three months ended April 30, 2022
($ in millions, except for per share amount)	Operating (Loss) Income		Net (Loss) Income Attributable to Common Stockholders		Net (Loss) Income per Diluted Common Share
Reconciliation of GAAP to Non-GAAP Earnings:
GAAP measures, as reported	$	(0.6)	$	(1.7)	$	(0.06)
Adjustments to reflect redemption value of convertible preferred stock		—		1.7		0.06




Restructuring costs		1.6		1.1		0.04
COVID-19 related costs		0.1		0.1		—
Strategic emerging technology costs		0.9		0.7		0.03
Change in fair value of convertible preferred stock purchase option liability		—		(0.3)		(0.01)


Net discrete tax expense		—		0.2		0.01
Non-GAAP measures	$	2.1	$	1.7	$	0.06

	Three months ended April 30, 2021
($ in millions, except for per share amount)	Operating Income		Net Income		Net Income per Diluted Share
Reconciliation of GAAP to Non-GAAP Earnings:
GAAP measures, as reported	$	2.4	$	0.8	$	0.03

Acquisition plan expenses		5.3		4.7		0.18

Restructuring costs		0.6		0.5		0.02
COVID-19 related costs		0.4		0.4		0.01
Strategic emerging technology costs		0.3		0.3		0.01
Net discrete tax expense		—		0.2		0.01
Non-GAAP measures	$	8.9	$	6.8	$	0.26

Index

COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 2022 AND 2021

Net Sales. Consolidated net sales were $359.3 million and $435.9 million for the nine months ended April 30, 2022 and 2021, respectively, representing a decrease of $76.6 million, or 17.6%. The period-over-period decrease in net sales reflects lower net sales in both of our segments, as further discussed below.

Commercial Solutions

Net sales in our Commercial Solutions segment were $248.3 million for the nine months ended April 30, 2022, as compared to $261.0 million for the nine months ended April 30, 2021, a decrease of $12.7 million, or 4.9%. Our Commercial Solutions segment represented 69.1% of consolidated net sales for the nine months ended April 30, 2022 as compared to 59.9% for the nine months ended April 30, 2021. Our book-to-bill ratio (a measure defined as bookings divided by net sales) for this segment was 0.81x. Period-to-period fluctuations in bookings are normal for this segment.

Net sales in the nine months ended April 30, 2022 of our satellite ground station technologies were lower than the nine months ended April 30, 2021. Such decrease reflects the timing of receipt of and performance on orders related to our U.S. government customers. Our results for the nine months ended April 30, 2022 and 2021 include nominal sales from our TDMA satellite networking technologies acquired on March 2, 2021. Our satellite earth station product line has been impacted by overall challenging business conditions, including the COVID-19 pandemic's effect on customer demand, particularly in international markets, which historically represents a large majority of end-users for this product line. Although our backlog of our satellite earth station products has increased since the beginning of the year, shortages of components are impacting shipments. We continue to monitor our inventory needs and navigate supply chain constraints which are impacting the timing of new orders, deliveries and installations. In addition, we expect to make no new sales to Russian customers for the rest of fiscal 2022. Overall, we expect sales of our satellite earth station products in fiscal 2022 to decline as compared to fiscal 2021.

Net sales in the nine months ended April 30, 2022 of our public safety and location technology solutions were higher than the nine months ended April 30, 2021, reflecting increased sales of our location-based technology solutions and NG-911 services. As a result of challenging business conditions, we are no longer expecting to book certain large opportunities during the fourth quarter of fiscal 2022. We do not believe these opportunities to be lost and now expect them to occur in fiscal 2023. Overall, we believe that sales of our public safety and location technology solutions will be higher than the amount we achieved in fiscal 2021.

Government Solutions

Net sales in our Government Solutions segment were $110.9 million for the nine months ended April 30, 2022 as compared to $174.9 million for the nine months ended April 30, 2021, a decrease of $64.0 million or 36.6%. Our Government Solutions segment represented 30.9% of consolidated net sales for the nine months ended April 30, 2022 as compared to 40.1% for the nine months ended April 30, 2021. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the nine months ended April 30, 2022 was 0.92x. Period-to-period fluctuations in bookings are normal for this segment.

Net sales for the nine months ended April 30, 2022 primarily reflect significantly lower sales of global field support services, advanced VSAT products and other programs to the U.S. Army, offset in part by higher sales of our satellite-based mobile communications and tracking systems, high reliability EEE satellite-based space components and solid-state, high-power amplifiers. Net sales during the nine months ended April 30, 2021 included revenue related to our performance on our 10-year, $211.0 million IDIQ contract awarded to us by a prime contractor to provide next-generation troposcatter systems in support of the U.S. Marine Corps. There were nominal corresponding sales during the nine months ended April 30, 2022. We believe the next round of funding on this IDIQ contract will now occur in fiscal 2023.

In aggregate, net sales for our Government Solutions segment are anticipated to be significantly lower than the amount we achieved in fiscal 2021. As discussed in our Form 10-Q filed with the SEC on June 8, 2021, our revenues in fiscal 2022 were expected to decline due to the U.S. government’s decision to fully withdraw troops from Afghanistan and make certain program changes. In addition, as a direct result of the Russia/Ukraine military conflict, we no longer expect to receive and ship orders to Ukraine in fiscal 2022. That customer had an immediate need for wireless communication services and has redirected procurement dollars to war-fighting equipment.

Index

Geography and Customer Type

Sales by geography and customer type, as a percentage of related sales, for the nine months ended April 30, 2022 and 2021 are as follows:


	Nine months ended April 30,
	2022		2021		2022		2021		2022		2021
	Commercial Solutions				Government Solutions				Consolidated
U.S. government	12.7	%	15.8	%	58.4	%	68.7	%	26.8	%	37.1	%
Domestic	62.9	%	58.7	%	15.3	%	13.2	%	48.2	%	40.4	%
Total U.S.	75.6	%	74.5	%	73.7	%	81.9	%	75.0	%	77.5	%

International	24.4	%	25.5	%	26.3	%	18.1	%	25.0	%	22.5	%
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. Included in domestic sales are sales to Verizon, which accounted for 11.1% and 11.2% of consolidated net sales for the nine months ended April 30, 2022 and 2021, respectively.

International sales for the nine months ended April 30, 2022 and 2021 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $89.9 million and $98.1 million, respectively. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented more than 10% of consolidated net sales for the nine months ended April 30, 2022 and 2021.

Gross Profit. Gross profit was $134.3 million and $158.9 million for the nine months ended April 30, 2022 and 2021, respectively. Gross profit, as a percentage of consolidated net sales, for the nine months ended April 30, 2022 was 37.4% as compared to 36.5% for the nine months ended April 30, 2021. During the nine months ended April 30, 2022, we recorded a $2.5 million benefit to cost of sales as we reduced a warranty accrual due to lower than expected warranty claims in our NG-911 product line. During the nine months ended April 30, 2021, we recorded a $2.0 million benefit to cost of sales in our Unallocated segment related to a refund of historical excise tax paid. Excluding such items, gross profit, as a percentage of consolidated net sales, for the nine months ended April 30, 2022 and 2021 was 36.7% and 36.0%, respectively. Gross profit during the most recent period reflects the impact of an overall favorable product mix and a lower provision for warranty obligations during the nine months ended April 30, 2022 in light of the reduced level of sales activity during the period, offset in part by lower consolidated net sales. Our gross profit in both periods also reflects start-up costs associated with the opening of our new high-volume technology manufacturing centers, as well as increased costs resulting from the ongoing impacts of the COVID-19 pandemic and inflationary pressures. Gross profit, as a percentage of related segment net sales, is further discussed below.

Our Commercial Solutions segment's gross profit, as a percentage of related segment net sales, for the nine months ended April 30, 2022 was comparable to the nine months ended April 30, 2021. The gross profit percentage in the most recent nine-month period primarily reflects changes in products and services mix and lower than expected warranty claims, as discussed above, as well as lower levels of factory utilization and higher logistics and operational costs resulting from global supply chain constraints.

Our Government Solutions segment's gross profit, as a percentage of related segment net sales, for the nine months ended April 30, 2022 decreased in comparison to the nine months ended April 30, 2021 and reflects changes in products and services mix, as discussed above. Also, during the nine months ended April 30, 2022 and 2021, we incurred $1.1 million and $0.6 million, respectively, of incremental operating costs related to our antenna facility located in the United Kingdom due to the impact of the COVID-19 pandemic. Although operations in the United Kingdom have largely resumed, we continue to experience lingering impacts from COVID-19 and the shut-down in fiscal 2021.

Index

Included in consolidated cost of sales for the nine months ended April 30, 2022 and 2021 are provisions for excess and obsolete inventory of $3.3 million and $3.2 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.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $85.7 million and $84.0 million for the nine months ended April 30, 2022 and 2021, respectively. As a percentage of consolidated net sales, selling, general and administrative expenses were 23.9% and 19.3% for the nine months ended April 30, 2022 and 2021, respectively.

During the nine months ended April 30, 2022 and 2021, we incurred $4.0 million and $1.2 million, respectively, of restructuring costs to streamline our operations, including costs related to the ongoing relocation of certain of our satellite earth station production facilities to a new 146,000 square foot facility in Chandler, Arizona. Excluding restructuring costs, selling, general and administrative expenses for the nine months ended April 30, 2022 and 2021 would have been $81.7 million or 22.7% and $82.8 million or 19.0%, respectively, of consolidated net sales. The increase in our selling, general and administrative expenses, as a percentage of consolidated net sales, is primarily due to lower consolidated net sales. Our selling, general and administrative expenses in the most recent period also reflect higher labor costs associated with a tight global labor market, increased investments in marketing, including new social media activities and other investments we are making to achieve our long term business goals. Such spending is expected to continue during our fourth quarter of fiscal 2022.

Amortization of stock-based compensation expense recorded as selling, general and administrative expenses was $3.5 million in the nine months ended April 30, 2022 as compared to $2.8 million in the nine months ended April 30, 2021. Such amortization for the nine months ended April 30, 2022 includes $0.8 million related to the retirement, in December 2021, of three, long-standing members of the Board of Directors. Amortization of stock-based compensation is not allocated to our two reportable operating segments.

Research and Development Expenses. Research and development expenses were $39.4 million and $37.4 million for the nine months ended April 30, 2022 and 2021, respectively, representing an increase of $2.0 million, or 5.3%. As a percentage of consolidated net sales, research and development expenses were 11.0% and 8.6% for the nine months ended April 30, 2022 and 2021, respectively.

For the nine months ended April 30, 2022 and 2021, research and development expenses of $35.0 million and $30.7 million, respectively, related to our Commercial Solutions segment and $4.1 million and $6.5 million, respectively, related to our Government Solutions segment. The remaining research and development expenses of $0.3 million and $0.2 million in the nine months ended April 30, 2022 and 2021, respectively, related to the amortization of stock-based compensation expense.

During the nine months ended April 30, 2022 and 2021, we incurred $0.9 million and $0.3 million, respectively, of strategic emerging technology costs for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations. Of the fiscal 2022 amount, $0.3 million and $0.6 million, respectively, was incurred in our Commercial Solutions and Government Solutions segments. Of the fiscal 2021 amount, all was incurred in our Government Solutions segment. As we have stated in the past, 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, 2022 and 2021, customers reimbursed us $8.0 million and $11.0 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 was $16.0 million (of which $12.8 million was for the Commercial Solutions segment and $3.2 million was for the Government Solutions segment) for the nine months ended April 30, 2022 and $15.7 million (of which $12.8 million was for the Commercial Solutions segment and $2.9 million was for the Government Solutions segment) for the nine months ended April 30, 2021.

Index

Proxy Solicitation Costs. During the nine months ended April 30, 2022, we incurred $11.2 million of proxy solicitation costs (including legal and advisory fees and costs associated with a related lawsuit) in our Unallocated segment as a result of a now settled proxy contest initiated by a shareholder during the first quarter of fiscal 2022. There were no similar costs in the comparable period of the prior year. During our first quarter of fiscal 2022, we entered into a Cooperation Agreement with such shareholder and do not expect to incur any further proxy solicitation costs during the remainder of fiscal 2022.

Former CEO Transition Costs. On December 31, 2021, our Board of Directors appointed Mr. Porcelain as CEO. Prior to that, Mr. Porcelain served as our President and COO. Transition costs related to our former CEO, Mr. Kornberg, were $13.6 million and all expensed in our Unallocated segment in the nine months ended April 30, 2022. Of such amount, $10.3 million related to Mr. Kornberg's severance payments and benefits upon termination of his employment; the remainder related to Mr. Kornberg agreeing to serve as a Senior Technology Advisor for a minimum of two years. There were no similar costs in the comparable period of the prior year.

Acquisition Plan Expenses. During the nine months ended April 30, 2021, we incurred $99.8 million of acquisition plan expenses, of which $88.3 million related to the previously announced litigation and merger termination with Gilat, including $70.0 million paid in cash to Gilat. The remaining costs primarily related to the acquisition of TDMA satellite networking technologies and GD NG-911 acquisition-related litigation. These expenses are primarily recorded in our Unallocated segment. There were no similar costs incurred during the nine months ended April 30, 2022.

Operating Income (Loss). Operating loss for the nine months ended April 30, 2022 and 2021 was $31.7 million and $78.0 million, respectively. Operating income (loss) by reportable segment is shown in the table below:


	Nine months ended April 30,
	2022			2021		2022	2021		2022	2021	2022		2021
($ in millions)	Commercial Solutions					Government Solutions			Unallocated		Consolidated
Operating income (loss)	$	14.2		27.4		(4.5)	8.8		(41.3)	(114.2)	$	(31.7)	(78.0)
Percentage of related net sales	5.7		%	10.5	%	NA	5.0	%	NA	NA	NA		NA

Our GAAP operating loss of $31.7 million for the nine months ended April 30, 2022 reflects: (i) $13.6 million of former CEO transition costs; (ii) $11.2 million of proxy solicitation costs; (iii) $4.0 million of restructuring costs; (iv) $1.1 million of incremental operating costs due to the lingering impact of COVID-19; and (v) $0.9 million of strategic emerging technology costs, as discussed above. Excluding such items, our consolidated operating loss for the nine months ended April 30, 2022 would have been $0.8 million. Our GAAP operating loss of $78.0 million for the nine months ended April 30, 2021 reflects: (i) $99.8 million of acquisition plan expenses; (ii) $1.2 million of restructuring costs; (iii) $0.6 million of incremental operating costs due to the impact of COVID-19; and (iv) $0.3 million of strategic emerging technology costs, as discussed above. Excluding such items, our consolidated operating income for the nine months ended April 30, 2021 would have been $23.9 million, or 5.5% of consolidated net sales. The decrease in operating income from $23.9 million for the nine months ended April 30, 2021 to an operating loss of $0.8 million for the nine months ended April 30, 2022 was primarily due to lower consolidated net sales, as discussed above. Operating income (loss) by reportable segment is further discussed below.

The decrease in our Commercial Solutions segment operating income, both in dollars and as a percentage of the related segment net sales, for the nine months ended April 30, 2022 was driven primarily by lower net sales, higher restructuring costs and higher research and development expenses, as discussed above.

The decrease in our Government Solutions segment operating income for the nine months ended April 30, 2022 was driven primarily by lower net sales and a lower gross profit percentage, partially offset by lower research and development expenses, as discussed above.

Index

The decrease in unallocated expenses for the nine months ended April 30, 2022 as compared to the nine months ended April 30, 2021 was primarily due to no acquisition plan expenses incurred during the most recent nine-month period, partially offset by former CEO transition costs and proxy solicitation costs during the nine months ended April 30, 2022, as discussed above. Amortization of stock-based compensation was $4.0 million and $3.2 million, respectively, for the nine months ended April 30, 2022 and 2021. Stock-based compensation expense for the nine months ended April 30, 2022 includes $0.8 million related to the retirement of three, long-standing Board members, who retired in December 2021. Excluding the impact of former CEO transition costs, proxy solicitation costs, the higher amortization of stock-based compensation expense and acquisition plan expenses in their respective periods, unallocated expenses would have been $15.7 million and $13.4 million, respectively, for the nine months ended April 30, 2022 and 2021. Our unallocated expenses for the nine months ended April 30, 2021 reflects a benefit of $2.0 million related to a refund of historical excise tax paid.

It is difficult to predict GAAP operating results for fiscal 2022 as it will be impacted by both start-up expenses and restructuring costs associated with the opening of Comtech’s new high-volume technology manufacturing centers and COVID-19 related costs.

Interest Expense and Other. Interest expense was $3.6 million and $5.2 million for the nine months ended April 30, 2022 and 2021, respectively. Interest expense for the nine months ended April 30, 2021 includes $1.2 million of incremental interest expense related to a now terminated financing commitment letter. Our effective interest rate (including amortization of deferred financing costs) in the nine months ended April 30, 2022 was approximately 3.2%. Our current cash borrowing rate (which excludes the amortization of deferred financing costs) under our existing Credit Facility approximates 2.5%.

Interest (Income) and Other. Interest (income) and other for both the nine months ended April 30, 2022 and 2021 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 Convertible Preferred Stock Purchase Option Liability. During the nine months ended April 30, 2022, we recorded a $1.0 million non-cash benefit from the remeasurement of the convertible preferred stock purchase option liability. See "Notes to Condensed Consolidated Financial Statements - Note (17) - Convertible Preferred Stock" for more information.

Benefit from Income Taxes. Our income tax provision or benefit is computed by applying an estimated annual effective tax rate for the full fiscal year to “ordinary” income or loss for the reporting period (“ordinary” is generally defined as pre-tax income or loss excluding significant, unusual or infrequently occurring discrete tax items). For the nine months ended April 30, 2022 and 2021, we recorded a tax benefit of $6.1 million and $2.1 million, respectively. Our effective tax rate (excluding discrete tax items) for the nine months ended April 30, 2022 and 2021 was 28.25% and 11.5%, respectively. The increase is primarily due to expected product and geographical mix changes reflected in our Business Outlook for Fiscal 2022.

For purposes of determining our 28.25% estimated annual effective tax rate for fiscal 2022, former CEO transition costs and proxy solicitation 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, 2022, we recorded a net discrete tax benefit of $3.5 million, primarily related to proxy solicitation costs, the deductible portion of former CEO transition costs and the finalization of certain tax accounts in connection with the filing of our fiscal 2021 federal income tax return. During the nine months ended April 30, 2021, we recorded a net discrete tax benefit of $0.6 million, primarily related to the release of valuation allowances previously established on the deferred tax assets of one of our Canadian subsidiaries, partially offset by the finalization of certain tax accounts in connection with the filing of our fiscal 2020 U.S. federal income tax return.

Our U.S. federal income tax returns for fiscal 2019 through 2021 are subject to potential future IRS audit. None of our state income tax returns prior to fiscal 2017 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, 2022 and 2021, consolidated net loss attributable to common stockholders was $36.4 million and $80.8 million, respectively.

Index

Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both the nine months ended April 30, 2022 and 2021 are shown in the table below (numbers in the table may not foot due to rounding):


	Nine months ended April 30,
	2022			2021		2022		2021		2022	2021	2022			2021
($ in millions)	Commercial Solutions					Government Solutions				Unallocated		Consolidated
Net income (loss)	$	13.3		26.6		(3.1)		9.1		(38.0)	(116.6)	$	(27.9)		(80.8)
Provision for (benefit from) income taxes	0.9			0.9		(1.3)		(0.5)		(5.7)	(2.4)	(6.1)			(2.1)
Interest (income) and other	0.1			—		(0.2)		0.1		(0.1)	(0.3)	(0.3)			(0.3)
Change in fair value of convertible preferred stock purchase option liability	—			—		—		—		(1.0)	—	(1.0)			—
Interest expense	—			—		0.1		0.1		3.5	5.2	3.6			5.2
Amortization of stock-based compensation	—			—		—		—		4.0	3.2	4.0			3.2
Amortization of intangibles	12.8			12.8		3.2		2.9		—	—	16.0			15.7
Depreciation	5.7			5.7		1.2		1.3		0.2	0.3	7.1			7.3
Amortization of cost to fulfill assets	—			—		0.2		—		—	—	0.2			—
Former CEO transition costs	—			—		—		—		13.6	—	13.6			—
Proxy solicitation costs	—			—		—		—		11.2	—	11.2			—
Restructuring costs	3.8			1.2		0.2		—		—	—	4.0			1.2
COVID-19 related costs	—			—		1.1		0.6		—	—	1.1			0.6
Strategic emerging technology costs	0.3			—		0.6		0.3		—	—	0.9			0.3
Acquisition plan expenses	—			(1.1)		—		—		—	100.9	—			99.8

Adjusted EBITDA	$	36.8		46.1		2.1		13.9		(12.4)	(9.9)	$	26.5		50.1
Percentage of related net sales	14.8		%	17.7	%	1.9	%	7.9	%	NA	NA	7.4		%	11.5	%

The decrease in consolidated Adjusted EBITDA, both in dollars and as a percentage of consolidated net sales, for the nine months ended April 30, 2022 as compared to the nine months ended April 30, 2021 is primarily attributable to lower consolidated net sales, as discussed above.

The decrease in our Commercial Solutions segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is primarily due to lower net sales and higher research and development expenses, as discussed above.

The decrease in our Government Solutions segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, is primarily due to lower net sales and a lower gross profit percentage, partially offset by lower research and development expenses, as discussed above.

Index

A reconciliation of our fiscal 2021 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 2021
Reconciliation of GAAP Net Loss to Adjusted EBITDA:
Net loss	$	(73.5)
Benefit from income taxes	(1.5)
Interest (income) and other	(0.1)
Interest expense	6.8
Amortization of stock-based compensation	10.0
Amortization of intangibles	21.0
Depreciation	9.4
Acquisition plan expenses	100.3
Restructuring costs	2.8
COVID-19 related costs	1.0
Strategic emerging technology costs	0.3
Adjusted EBITDA	$	76.5

Our Adjusted EBITDA is a Non-GAAP measure that represents earnings (loss) before income taxes, interest (income) and other, change in fair value of the convertible preferred stock purchase option liability, write-off of deferred financing costs, interest expense, amortization of stock-based compensation, amortization of intangibles, depreciation expense, amortization of cost to fulfill assets, estimated contract settlement costs, settlement of intellectual property litigation, acquisition plan expenses, restructuring costs, COVID-19 related costs, strategic emerging technology costs (for next-generation satellite technology), facility exit costs, former CEO transition costs, proxy solicitation costs, strategic alternatives analysis expenses and other. Our definition of Adjusted EBITDA 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, 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 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 fiscal 2022 Adjusted EBITDA target to the most directly comparable GAAP measure because items such as stock-based compensation, adjustments to the provision for income taxes, amortization of intangibles and interest expense, which are specific items that impact these measures, have not yet occurred, are out of our control, or cannot be predicted. For example, quantification of stock-based compensation expense requires inputs such as the number of shares granted and market price that are not currently ascertainable. Accordingly, reconciliations to the Non-GAAP forward looking metrics are not available without unreasonable effort and such unavailable reconciling items could significantly impact our financial results.

Index

Reconciliations of our GAAP consolidated operating (loss) income, net (loss) income attributable to common stockholders and net (loss) income per diluted common share for the nine months ended April 30, 2022 and 2021 to the corresponding Non-GAAP measures are shown in the tables below (numbers and per share amounts in the tables may not foot due to rounding). Non-GAAP net (loss) income attributable to common stockholders and net (loss) income per diluted common share reflect Non-GAAP provisions for income taxes based on year-to-date results, as adjusted for the Non-GAAP reconciling items included in the tables below. We evaluate our Non-GAAP effective income tax rate on an ongoing basis, and it can change from time to time. Our Non-GAAP effective income tax rate can differ materially from our GAAP effective income tax rate. In addition, due to the GAAP net loss for the period, Non-GAAP EPS for the nine months ended April 30, 2021 was computed using 26,016,000 weighted average diluted shares outstanding during the period.


	Nine months ended April 30, 2022
($ in millions, except for per share amount)	Operating Loss		Net Loss Attributable to Common Stockholders		Net Loss per Diluted Common Share
Reconciliation of GAAP to Non-GAAP Earnings:
GAAP measures, as reported	$	(31.7)	$	(36.4)	$	(1.37)
Adjustments to reflect redemption value of convertible preferred stock		—		8.5		0.32
Former CEO transition costs		13.6		13.0		0.49
Proxy solicitation costs		11.2		8.7		0.33



Restructuring costs		4.0		3.1		0.12
COVID-19 related costs		1.1		0.9		0.03
Strategic emerging technology costs		0.9		0.7		0.03
Change in fair value of convertible preferred stock purchase option liability		—		(1.0)		(0.04)


Net discrete tax benefit		—		(0.3)		(0.01)
Non-GAAP measures	$	(0.8)	$	(2.9)	$	(0.11)

	Nine months ended April 30, 2021
($ in millions, except for per share amount)	Operating (Loss) Income		Net (Loss) Income		Net (Loss) Income per Diluted Share
Reconciliation of GAAP to Non-GAAP Earnings:
GAAP measures, as reported	$	(78.0)	$	(80.8)	$	(3.12)
Acquisition plan expenses		99.8		96.4		3.70


Restructuring costs		1.2		1.1		0.04
COVID-19 related costs		0.6		0.5		0.02
Strategic emerging technology costs		0.3		0.3		0.01
Interest expense		—		1.0		0.04
Net discrete tax benefit		—		(0.6)		(0.02)
Non-GAAP measures	$	23.9	$	17.8	$	0.69

Index

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents ~~decreased $8.7~~were $32.8 million ~~from $47.9 million at July 31, 2020 to $39.2~~and $30.9 million at April 30, ~~2021. The decrease in cash~~2022 and ~~cash equivalents during~~July 31, 2021, respectively. For the nine months ended April 30, ~~2021 was driven by~~2022, our cash flows reflect the following:

•Net cash provided by operating activities was $8.4 million for the nine months ended April 30, 2022 as compared to net cash used in operating activities ~~was~~of $56.6 million for the nine months ended April 30, ~~2021 as compared~~2021. During the nine months ended April 30, 2022, we paid $13.5 million in aggregate payments related to our former CEO transition and settled proxy contest. Excluding such payments, net cash provided by operating activities ~~of $39.0 million for the nine months ended April 30, 2020.~~would have been $21.9 million. During the nine months ended April 30, 2021, in connection with an agreement to terminate our acquisition of Gilat, we made a $70.0 million payment to Gilat. Excluding such payment, net cash provided by operating activities would have been $13.4 million. The period-over-period ~~decrease~~increase in cash flow from operating activities (excluding the $13.5 million and $70.0 million ~~payment to Gilat)~~payments) reflects ~~lower consolidated net sales and~~ overall changes in net working capital requirements, principally the timing of shipments, billings and payments.

•Net cash used in investing activities for the nine months ended April 30, 2022 and 2021 was $14.4 million and ~~2020 was~~ $7.6 million, ~~and $16.4 million,~~ respectively. ~~During~~Net cash used in the nine months ended April 30, ~~2021~~2022 primarily reflects capital expenditures to build-out cloud-based computer networks to support our recent NG-911 contract wins and ~~2020, we paid $0.8 million~~capital investments and ~~$11.2 million, respectively,~~building improvements in connection with the opening of our acquisition of CGC Technology Limited, net of cash acquired. During the nine months ended April 30, 2020, we paid $0.8 million in connection with our acquisition of NG-911 Inc. The remaining portion of netnew high-volume technology manufacturing centers. Net cash used in both periods also relates to expenditures for property, plant and equipment upgrades and enhancements. ~~Also, offsetting cash used during the most recent period is $1.4 million of net cash acquired from our acquisition of UHP, as discussed further in "Notes to Condensed Consolidated Financial Statements~~ - ~~Note (2)~~ - ~~Acquisitions - UHP Networks Inc.~~"

•Net cash provided by financing activities was $8.0 million and $55.5 million for the nine months ended April 30, 2022 and 2021, ~~as compared to net cash used in financing activities of $17.6 million for the nine months ended April 30, 2020.~~respectively. During the nine months ended April 30, ~~2021,~~2022, we ~~had~~received an aggregate of $100.0 million in proceeds related to the issuance of a new series of Convertible Preferred Stock to certain investors. During the nine months ended April 30, 2022, we also made net payments under our Credit Facility of $74.0 million as compared to net borrowings under our Credit Facility of $65.5 million during the nine months ended April 30, 2021, primarily ~~due~~related to the $70.0 million payment we made to Gilat. During the nine months ended April 30, ~~2021~~2022 and ~~2020,~~2021, we paid ~~$7.7~~$8.4 million and ~~$7.6~~$7.7 million, respectively, in cash dividends to our common stockholders. We also made ~~$2.8~~$6.1 million and ~~$5.3~~$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, ~~2021~~2022 and ~~2020,~~2021, respectively.

The Credit Facility is discussed below and in "Notes to Condensed Consolidated Financial Statements -– Note (10) -– Credit Facility."

The Convertible Preferred Stock is discussed below and in "

56Notes to Condensed Consolidated Financial Statements – Note (17) – Convertible Preferred Stock."

~~Index~~

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.

AsIn addition to capital investments for our two 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. In total, with respect to capital investments for these and other initiatives, we expect to incur approximately $30.0 million of capital expenditures in fiscal 2022, of which we have paid $14.4 million during the nine months ended April 30, 2021, our material short-term cash requirements primarily consist of: (i) interest payments under our Credit Facility; (ii) payments related to lease commitments; (iii) our ongoing working capital needs, including income tax payments; and (iv) payment of accrued quarterly dividends.2022.

Index

As discussed ~~further~~ in ""Notes to Condensed Consolidated Financial Statements - Note (2) - Acquisitions - UHP Networks ~~Inc~~Inc.,"~~.,"~~ we completed our acquisition of UHP on March 2, 2021. Pursuant to the stock purchase agreement, during fiscal 2021, at closing, we funded the ~~initial~~$24.0 million and $5.0 million up-front ~~payment of approximately $23.9 million was paid mostly in~~payments with 1,026,567 shares of our common stock, ~~with~~based on a ~~nominal amount paid~~volume weighted average stock price of $28.14 per share, plus $0.1 million in cash. ~~An additional $5.0~~The stock purchase agreement also provided for a contingent earn-out payment of up to $9.0 million, payable at our option in cash and or shares of common stock, was placed in escrow and is subject to certain conditions that we expect will be satisfied within twelve months after the acquisition. The stock purchase agreement also provides for an earn-out payment of up to an additional $9.0 million, also payable at our ~~option in cash and or~~ common stock, if specified sales milestones ~~are~~were reached during ~~the eighteen-month~~a defined period ending September 30, 2022. As of April 30, 2022, the specified sales milestones were reached, and the full $9.0 million earn-out payment was earned. We have not yet decided how we will settle such payment.

On March 3, 2021, we filed a shelf registration statement with the SEC for the sale of up to 1,381,567 shares of our common stock by the selling shareholder of UHP. The shelf registration statement was declared effective by the SEC as of March 15, 2021. To-date, we have issued 1,026,567 shares ~~pursuant to~~of our common stock that is registered under this shelf registration statement to satisfy initial payment and escrow arrangements under the terms of the stock purchase agreement. We plan to file an amended shelf registration statement with the SEC for the sale of additional shares of our common stock necessary to fund all or a portion of the $9.0 million earn-out payment expected to occur in the fourth quarter of fiscal 2022. Our shelf registration statement filed with the SEC on March 3, 2021 included 355,000 shares of common stock for the earn-out payment, and we may need to register additional shares depending on the portion of the earn-out payment we choose to pay in shares of our common stock. The terms of the stock purchase agreement provide an ability for us to substitute cash in lieu of the common stock that was initially placed into escrow.

In ~~December 2018,~~the fourth quarter of fiscal 2022, we ~~filed~~also expect to file a ~~$400.0~~new $200.0 million shelf registration statement with the SEC for the sale of various types of securities, including debt. ~~The~~This new shelf registration statement ~~was declared effective by~~would replace the ~~SEC as of~~prior unused $400.0 million shelf registration statement that expired in December ~~14, 2018.~~2021.

On September 29, 2020, our Board of Directors authorized a new $100.0 million stock repurchase program, which replaced our prior program. The new $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, ~~2021~~2022 and ~~2020.~~2021.

On ~~September 29, 2020,~~October 4, 2021, December 9, ~~2020~~2021 and March ~~11, 2021,~~10, 2022, our Board of Directors declared a dividend of $0.10 per common share, which were paid on ~~October 27, 2020,~~November 12, 2021, February ~~19, 2021~~18, 2022 and May ~~21, 2021,~~20, 2022 respectively. On June ~~8, 2021,~~9, 2022, our Board of Directors declared a dividend of $0.10 per common share, payable on August ~~20, 2021~~19, 2022 to stockholders of record at the close of business on July ~~21, 2021.~~20, 2022. Future common stock dividends remain subject to compliance with financial covenants under our Credit Facility, as well as Board ~~approval.~~approval and certain voting rights of holders of our Series A Convertible Preferred Stock.

Our material ~~long-term~~ cash requirements ~~primarily consist of mandatory interest~~are for working capital, capital expenditures, income tax payments, ~~pursuant~~debt service, facilities lease payments and dividends related to our ~~Credit Facility and lease commitments.~~Convertible Preferred Stock, which are payable in kind or in cash at our election.

We have historically met ~~both~~ our ~~short-term and long-term~~ 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. In our fiscal quarter ended October 31, 2021, we secured a $100.0 million strategic growth investment to enhance our financial flexibility and strengthen our ability to capitalize on recent large contract awards and growing customer demand by making crucial investments in our satellite technologies and next-generation 911 public safety solutions. Based on our ~~anticipated level of future sales and operating income,~~current revenue visibility, we believe that our existing cash and cash equivalent balances, our cash generated from operating activities and amounts potentially available under our Credit Facility will be sufficient to meet ~~both~~ our ~~currently anticipated~~ short-term ~~and long-term operating~~ cash requirements.

Our material cash requirements could increase beyond our current expectations due to factors such as general economic conditions, a change in government spending priorities, or larger than usual customer orders. In addition, 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 to predict the terms and conditions of financing that may be available in the future, ~~should our short-term or long-term cash requirements increase beyond our current expectations,~~ we believe that we would have sufficient access to credit from financial institutions and/or financing from public and private debt and equity markets.

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Credit Facility

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

~~Index~~

The Credit Facility provides a senior secured loan facility of up to $550.0 million consisting of: (i) a revolving loan facility ("Revolving Loan Facility") with a borrowing limit of $300.0 million; (ii) an accordion feature allowing us to make a request to borrow up to an additional $250.0 ~~million;~~million subject to satisfaction of specified conditions, including approval by our lenders; (iii) a $35.0 million letter of credit sublimit; and (iv) a swingline loan credit sublimit of $25.0 million.

The Credit Facility matures on October 31, 2023 (the "Revolving Maturity Date"). If we issue new unsecured debt in excess of $5.0 million with a maturity date that is less than 91 days from October 31, 2023, the Revolving Maturity Date would automatically accelerate so that it would be 91 days earlier than the maturity date of the new unsecured debt.

As of April 30, ~~2021,~~2022, the amount outstanding under our Credit Facility was ~~$215.0~~$127.0 million, which is reflected in the non-current portion of long-term debt on our Condensed Consolidated Balance Sheet. At April 30, ~~2021,~~2022, we had ~~$2.0~~$0.9 million of standby letters of credit outstanding under our Credit Facility related to our guarantees of future performance on certain customer contracts and no outstanding commercial letters of credit. During the nine months ended April 30, ~~2021,~~2022, we had outstanding balances under the Credit Facility ranging from ~~$125.0~~$100.0 million to ~~$217.0~~$212.0 million.

As of April 30, ~~2021,~~2022, our Secured Leverage Ratio was ~~2.78x~~2.40x TTM Adjusted EBITDA compared to the maximum allowable Secured Leverage Ratio of 3.75x TTM Adjusted EBITDA. Our Interest Expense Coverage Ratio as of April 30, ~~2021~~2022 was ~~13.78x~~12.12x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25x TTM Adjusted EBITDA. Although we do expect our Secured Leverage Ratio to increase during the fourth quarter of fiscal 2022 as we make payments to various vendors associated with the build-out of our high-volume technology manufacturing facilities and working capital needs for our existing contracts, given our overall expected business performance, we anticipate maintaining compliance with the terms and financial covenants in our Credit Facility for the foreseeable future.

Capitalized terms used but not defined herein have the meanings set forth for such terms in the Credit Facility, which has been documented and filed with the SEC.

~~Off-Balance Sheet Arrangements~~61

~~As of April 30,~~

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Convertible Preferred Stock

On October 18, 2021, we ~~did not~~entered into a Subscription Agreement (the “Subscription Agreement”) with certain affiliates and related funds of White Hat Capital Partners LP and Magnetar Capital LLC (collectively, the “Investors”), relating to the issuance and sale of up to 125,000 shares of a new series of the Company's Series A Convertible Preferred Stock, par value $0.10 per share (the "Convertible Preferred Stock"), for an aggregate purchase price of up to $125.0 million, or $1,000 per share. On October 19, 2021 (the “Initial Closing Date”), pursuant to the terms of the Subscription Agreement, the Investors purchased an aggregate of 100,000 shares of Convertible Preferred Stock (the “Initial Issuance”) for an aggregate purchase price of $100.0 million. The Investors have a one-time option exercisable at any ~~off-balance sheet arrangements~~time on or prior to March 31, 2023 to purchase additional shares of Convertible Preferred Stock for an aggregate purchase price of $25.0 million. This purchase option is commonly referred to as a “Green Shoe” and together with the Initial Issuance, is collectively referred to as the “Issuance.”

The initial conversion price for the shares issued in the Initial Issuance is $24.50, subject to an increase in the conversion price to $26.00 upon the achievement of $76.0 million of Adjusted EBITDA (as defined in ~~Item 303(a)(4) of Regulation S-K.~~the Subscription Agreement) for our fiscal 2022 year, and the initial conversion price for the Green Shoe is $32.00.

The Convertible Preferred Stock ranks senior to the shares of our common stock, with respect to the payment of dividends and the distribution of assets upon a liquidation, dissolution or winding up of the Company. The Convertible Preferred Stock initially had a liquidation preference of $1,000 per share with each share entitled to a cumulative dividend (the “Dividend”) at the rate of 6.5% per annum, compounding quarterly, paid-in-kind or paid in cash, at our election. For any quarter in which we elect not to pay the Dividend in cash with respect to a share of Convertible Preferred Stock, such Dividend becomes part of the liquidation preference of such share. In addition, no dividend or other distribution on our common stock in excess of $0.10 per share per quarter will be declared or paid on the common stock unless, at the time of such declaration and payment, an equivalent dividend or distribution is declared and paid on the Convertible Preferred Stock (the “Participating Dividend”), provided that in the case of any such dividend in the form of cash, in lieu of a cash payment, such Participating Dividend will become part of the liquidation preference of the shares of the Convertible Preferred Stock. Such Participating Dividend results in the Convertible Preferred Stock meeting the definition of a "participating security" for purposes of our earnings per share calculations.

The Convertible Preferred Stock is convertible into shares of common stock at the option of the holders thereof at or following the earlier to occur of (a) the filing of our Annual Report on Form 10-K for the fiscal year ending July 31, 2022, but no later than October 19, 2022 and (b) immediately prior to (and conditioned upon) the consummation of a Change of Control. At any time after October 19, 2024, we have the right to mandate the conversion of the Convertible Preferred Stock, subject to certain restrictions, based on the price of the common stock in the preceding thirty trading days.

Holders of the Convertible Preferred Stock are entitled to vote with the holders of the common stock on an as-converted basis, as well as are entitled to a separate class vote with respect to, among other things, amendments to our organizational documents that have an adverse effect on the Convertible Preferred Stock, authorizations or issuances of securities of the Company, the payment of dividends other than dividends on common stock in the ordinary course consistent with past practice on a quarterly basis in an amount not to exceed our current dividend rate of $0.10 per share per quarter, related party transactions, repurchases or redemptions of securities of the Company (other than the repurchase of up to $25.0 million of shares of common stock), dispositions of businesses or assets, the incurrence of indebtedness and certain amendments or extensions of our existing Credit Facility.

Holders have the right to require the Company to repurchase such holder's Convertible Preferred Stock on a date occurring either (a) on or after October 19, 2026 (the “Optional Repurchase Trigger Date”) at a price equal to the liquidation preference or (b) in connection with a conversion of Convertible Preferred Stock, pursuant to which the number of shares of common stock issuable upon such conversion would exceed 19.99% of the issued and outstanding shares of common stock as of October 18, 2021 (such excess shares, "Excess Conversion Shares"), at any time after the date that is 91 days after the maturity date of the Company's existing Credit Facility, at a price per share equal to the number of Excess Conversion Shares multiplied by the Last Reported Sales Price (as defined) of common stock on the applicable conversion date. In addition, each holder will have the right to cause the Company to repurchase its shares of Convertible Preferred Stock in connection with a Change of Control, at a price equal to the liquidation preference.

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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, ~~2021,~~2022, will materially adversely affect our liquidity.

~~Index~~

At April 30, ~~2021,~~2022, cash payments due under long-term obligations (including estimated interest expense on our Credit Facility), excluding purchase orders that we entered into in our normal course of business, are as follows:


		Obligations Due by Fiscal Years or Maturity Date (in thousands)							Obligations Due by Fiscal Years or Maturity Date (in thousands)
		Total		Remainder of 2021	2022 and 2023	2024 and 2025	After 2025		Total		Remainder of 2022	2023 and 2024	2025 and 2026	After 2026
Credit Facility - principal payments	Credit Facility - principal payments	$	215,000	—	—	215,000	—	Credit Facility - principal payments	$	127,000	—	127,000	—	—
Credit Facility - interest payments	Credit Facility - interest payments	14,332		1,423	11,486	1,423	—	Credit Facility - interest payments	5,528		954	4,574	—	—
Operating and finance lease obligations	Operating and finance lease obligations	59,122		2,596	18,143	12,812	25,571	Operating and finance lease obligations	66,116		2,947	19,145	15,018	29,006
Contractual cash obligations	Contractual cash obligations	$	288,454	4,019	29,629	229,235	25,571	Contractual cash obligations	$	198,644	3,901	150,719	15,018	29,006

As discussed in "Notes to Condensed Consolidated Financial Statements - Note (2) - Acquisitions - UHP Networks Inc.," we completed our acquisition of UHP on March 2, 2021. Pursuant to the stock purchase agreement, during fiscal 2021, at closing, we funded the $24.0 million and $5.0 million up-front payments with 1,026,567 shares of our common stock, based on a weighted average stock price of $28.14, plus $0.1 million in cash. The stock purchase agreement also provided for a contingent earn-out payment of up to $9.0 million, payable at our option in cash and or shares of our common stock, if specified sales milestones were reached during a defined period ending September 30, 2022. As of April 30, 2022, the specified sales milestones were reached, and the full $9.0 million earn-out payment was earned. We have not yet decided how we will settle such payment.

As discussed further in "Notes to Condensed Consolidated Financial Statements - Note (10) - Credit Facility," our Credit Facility provides a senior secured loan facility of up to $550.0 million consisting of: (i) a revolving loan facility ("Revolving Loan Facility") with a borrowing limit of $300.0 million; (ii) an accordion feature allowing us to make a request to borrow up to an additional $250.0 ~~million;~~million subject to satisfaction of specified conditions including approval by our lenders; (iii) a $35.0 million letter of credit sublimit; and (iv) a swingline loan credit sublimit of $25.0 million. The Credit Facility matures on October 31, 2023 (the "Revolving Maturity Date"). In addition, if we issue new unsecured debt in excess of $5.0 million with a maturity date that is less than 91 days from October 31, 2023, the Revolving Maturity Date would automatically accelerate so that it would be 91 days earlier than the maturity date of the new unsecured debt. At April 30, ~~2021,~~2022, we have approximately ~~$2.0~~$0.9 million of standby letters of credit outstanding under our Credit Facility related to our guarantees of future performance on certain customer contracts. Such amounts are not included in the above table.

As discussed ~~further~~ in "Notes to Condensed Consolidated Financial Statements - Note (17) - Convertible Preferred Stock," the holders of the Convertible Preferred Stock have the option to redeem such shares for cash commencing in October 2026. As the Convertible Preferred Stock are not mandatorily redeemable for cash, the redemption value of such shares are not presented in the table above.

As discussed further in "Notes to Condensed Consolidated Financial Statements - Note (18) - Stockholders’ Equity," on June ~~8, 2021,~~9, 2022, our Board of Directors declared a dividend of $0.10 per common share, payable on August ~~20, 2021~~19, 2022 to stockholders of record at the close of business on July ~~21, 2021.~~20, 2022. Future common stock dividends remain subject to compliance with financial covenants under our Credit Facility, as well as Board ~~approval.~~

~~As discussed in "Notes to Condensed Consolidated Financial Statements~~ - ~~Note (2)~~ - ~~Acquisitions - UHP Networks Inc.," we completed our acquisition~~approval and certain voting rights of ~~UHP on March 2, 2021. Pursuant to a stock purchase agreement, the initial up-front payment of approximately $23.9 million was paid mostly in shares~~holders of our common stock, with a nominal amount paid in cash. An additional $5.0 million, payable at our option in cash and or shares of common stock, was placed in escrow and is subject to certain conditions that we expect will be satisfied within twelve months after the acquisition. The stock purchase agreement also provides for an earn-out payment of up to an additional $9.0 million, also payable at our option in cash and or common stock, if specified sales milestones are reached during the eighteen-month period ending September 30, 2022.Series A Convertible Preferred Stock.

At the start of our fourth quarter of fiscal 2021, we entered into a multi-year agreement enabling a customer to potentially order hundreds of millions of dollars of our next-generation satellite earth station technology. Shortly after we signed this agreement, we received our first order valued at more than $13.0 million to make certain customizations on behalf of this customer. Work on these efforts has commenced immediately.

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.

Index

As discussed further in "Notes to Condensed Consolidated Financial Statements - Note ~~(18)~~(19) - Legal Proceedings and Other Matters," we are subject to a number of indemnification demands and we are incurring ongoing legal expenses in connection with these matters. Our insurance policies may not cover the cost of defending indemnification claims or providing indemnification. As a result, pending or future claims asserted against us by a party that we may agree or have agreed to indemnify could result in legal costs and damages that could have a material adverse effect on our consolidated results of operations and financial condition.

We have an employment agreement and change inof control ~~agreements, severance agreements~~agreement with Mr. Porcelain, our President and ~~indemnification~~CEO and member of our Board of Directors. We have also entered into change of control agreements with certain of our executive officers and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of our Company or ~~an involuntary~~a termination of ~~employment without cause.~~

~~Index~~

the employee.

Our Condensed Consolidated Balance Sheet at April 30, ~~2021~~2022 includes total liabilities of ~~$9.2~~$9.8 million for uncertain tax positions, including interest, any or all of which may result in a cash payment. The future payments related to uncertain tax positions have not been presented in the table above due to the uncertainty of the amounts and timing of any potential cash settlement with the taxing authorities.

RECENT ACCOUNTING PRONOUNCEMENTS

We are required to prepare our condensed consolidated financial statements in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") which is the source for all authoritative U.S. generally accepted accounting principles, which is commonly referred to as "GAAP." The FASB ASC is subject to updates by the FASB, which are known as Accounting Standards Updates ("ASUs").

As further discussed in "Notes to Condensed Consolidated Financial Statements – Note (3) - Adoption of Accounting Standards and Updates" during the nine months ended April 30, ~~2021,~~2022, we adopted:

•FASB ASU No. ~~2016-13,~~2019-12, which requires companies to utilize an impairment model (current expected credit loss ("CECL")) for most financial assets measured at amortized cost and certain other financial instruments, which include, but are not limited to trade receivables and contract assets. This accounting standard replaced the incurred loss model with a model that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate those losses. On August 1, 2020, we adopted this ASU on a modified-retrospective basis and recorded a $0.2 million decrease to opening retained earnings.

•FASB ASU No. 2018-13, which modifies the disclosure requirements for fair value measurements in Topic 820. On August 1, 2020, we adopted this ASU. Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.

•FASB ASU No. 2018-15, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this ASU. On August 1, 2020, we adopted this ASU. Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.

•FASB ASU No. 2018-17, which requires entities to consider indirect interests held through related parties under common control on a proportional basis, rather than as the equivalent of a direct interest in its entirety, when determining whether a decision-making fee is a variable interest. On August 1, 2020, we adopted this ASU.~~Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.~~

•FASB ASU No. 2019-08, which requires that an entity measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. The amount recorded as a reduction of the transaction price is required to be measured on the basis of the grant-date fair value of the share-based payment award. On August 1, 2020, we adopted this ASU.~~Our adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.~~

~~Index~~

~~In addition, the following FASB ASUs have been issued and incorporated into the FASB ASC and have not yet been adopted by us as of April 30, 2021:~~

•~~FASB ASU No. 2019-12, issued in December 2019 is intended to simplify~~simplifies various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ~~This ASU is effective for fiscal years beginning after December 15, 2020 (our fiscal year beginning on August 1, 2021) and interim periods therein, with early~~Our adoption ~~permitted. We are evaluating the impact~~ of this ASU on August 1, 2021 did not have a material impact on our ~~condensed~~ consolidated financial statements ~~and~~or disclosures.

•FASB ASU No. 2020-01, ~~issued in January 2020,~~which clarifies the interactions between Topics 321, 323 and 815. This ASU clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with Topic 321 immediately before applying or upon discontinuing the equity method. In addition, the amendments clarify the accounting for certain forward contracts and purchased options accounted for under Topic 815. ~~This~~Our adoption of this ASU ~~is effective for fiscal years beginning after December 15, 2020 (our fiscal year beginning~~ on August 1, ~~2021)~~2021 did not impact our condensed consolidated financial statements or disclosures.

•FASB ASU No. 2020-06, which simplifies the accounting for convertible instruments by removing certain separation models (including the cash conversion model and ~~interim periods therein. We~~the beneficial conversion feature model) for convertible instruments. As a result, for convertible instruments with conversion features that are ~~evaluating~~not required to be accounted for as derivatives under Topic 815 or that do not result in substantial premiums accounted for as paid-in capital, the ~~impact~~embedded conversion features are no longer separated from the host contract. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, and convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost as long as no other features require bifurcation and recognition as derivatives. On August 1, 2021, we early adopted this ASU. Our early adoption of this ASU did not have any impact on our condensed consolidated financial statements ~~and disclosures; however, we do not expect the adoption to have any effect given that we have not historically had equity method investments~~ or ~~purchased options and forward contracts to acquire investments.~~disclosures.

•FASB ASU No. 2021-08, which requires that an acquirer recognize, and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, as if it had originated the contracts. Prior to this ASU, an acquirer generally recognized contract assets and contract liabilities assumed that arose from contracts with customers at fair value on the acquisition date. On August 1, 2021, we early adopted this ASU. Our early adoption of this ASU did not have any impact on our condensed consolidated financial statements or disclosures.

Index

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from borrowings under our Credit Facility. Based on the amount of outstanding debt under our Credit Facility, a hypothetical change in interest rates by 10% would change interest expense by approximately ~~$0.5~~$0.3 million over a one-year period. Although we do not currently use interest rate derivative instruments to manage exposure to interest rate changes, we may choose to do so in the future in connection with our Credit Facility.

Our earnings and cash flows are also subject to fluctuations due to changes in interest rates on our investment of available cash balances. As of April 30, ~~2021,~~2022, we had cash and cash equivalents of ~~$39.2~~$32.8 million, which consisted of cash and highly-liquid money market deposit accounts. Many of these investments are subject to fluctuations in interest rates, which could impact our results. Based on our investment portfolio balance as of April 30, ~~2021,~~2022, a hypothetical change in interest rates of 10% would have a nominal impact on interest income over a one-year period. Ultimately, the availability of our cash and cash equivalents is dependent on a well-functioning liquid market.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934), was carried out by us under the supervision and with the participation of our management, including our President and Chief Executive Officer ~~and Chairman~~ and Chief Financial Officer. Based on that evaluation, our President and Chief Executive Officer ~~and Chairman~~ and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by the report to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to management, as appropriate, to allow timely decisions regarding required disclosure. A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

There have been no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The certifications of our President and Chief Executive Officer ~~and Chairman~~ and Chief Financial Officer, that are Exhibits 31.1 and 31.2, respectively, should be read in conjunction with the foregoing information for a more complete understanding of the references in those Exhibits to disclosure controls and procedures and internal control over financial reporting.

6165

Index

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

See "Notes to Condensed Consolidated Financial Statements – Note ~~(18)~~(19) – Legal Proceedings and Other Matters" of this Form 10-Q for information regarding legal proceedings and other matters.

Item 1A. Risk Factors

~~There have been no material changes from~~Investing in our securities involves a high degree of risk. Before investing in our securities, you should consider carefully the ~~risk factors previously disclosed~~information contained in this report and in our 2021 Annual Report contained in our Form 10-K for ~~the~~our fiscal year ended July 31, ~~2020.~~2021, including the risk factors identified in Item 1A of Part I thereof (Risk Factors).

This report contains forward-looking statements that involve risks and uncertainties. See “Cautionary Statement Regarding Forward-Looking Statements” in “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” above. Our actual results could differ materially from those contained in the forward-looking statements. Any of the risks discussed in our 2021 Annual Report, in this report, in other reports we file with the SEC, and other risks we have not anticipated or discussed, could have a material adverse impact on our business, financial condition or results of operations. Except as set forth below, there has been no material change to our Risk Factors from those presented in our 2021 Annual Report.

Although we have lowered our expected fiscal 2022 targets as a result of the conditions described in our Risk Factors, including the following Risk Factors, reliable forecasting continues to be a challenge. If for any reason we are not able to anticipate and manage these and other risks effectively, our expected fiscal 2022 targets may not be achievable.

New and ongoing challenges relating to current supply chain constraints and impacts from inflation, including for satellite ground station and troposcatter components, could adversely impact our revenue, gross margins and financial results.

The global supply chain for certain raw materials and components, including those used in our satellite ground station and troposcatter equipment, has experienced significant strain in recent periods. The constrained supply environment has adversely affected, and could further affect, availability and lead times of raw materials and components, thereby impeding our ability to meet customer demand in circumstances where we cannot timely secure supply of components that meet our quality standards. Even when raw materials and components are available, they often come with higher prices reflecting an imbalance between supply and demand, as well as inflationary pressures affecting global markets.

In the past several months, variants of COVID-19 surged across Europe, the U.S. and China, causing further delays in the supply chain. Despite our attempts to mitigate the impact on our business, constrained supply conditions have and are expected to continue to adversely impact our costs of goods sold and may impact the timing and amount of revenue we realize. During the second and third quarters of fiscal 2022, we experienced disruptions in our supply chain relating to later-than-expected delivery of certain key components from several suppliers that adversely impacted our revenue for the second and third quarters of fiscal 2022. In addition, certain parts did not meet our quality specifications and we were unable to use them.

We obtain certain components and subsystems from a single source or a limited number of sources. Some of our single source suppliers, particularly those that provide satellite ground station and troposcatter components, have reported to us that they are having disruptions in their respective supply chains. These single source components, which includes items such as cooling fans and power supplies, are in limited supply. In some cases, we have now depleted our stock inventory and we are on waiting lists to obtain additional components. Although we have reduced our fiscal 2022 financial targets to account for supply chain risks, in order to ship certain items during our fourth quarter of fiscal 2022, we must obtain additional components to produce certain finished goods. We continue to seek new suppliers and inventory elsewhere. Although we had been successful in the past in qualifying alternate suppliers, when necessary, in light of current challenges in the supply chain, we may not be able to do so.

In February 2022, Russia’s military incursion into Ukraine exacerbated supply chain issues. In response to Russia’s actions, many governments around the world have imposed sanctions on Russia and many businesses have suspended or stopped doing business with Russia. Limits on manufacturing availability or capacity, or delays in production or delivery of components or raw materials due to these sanctions or suspension of business could further delay or inhibit our ability to obtain supply of components and produce finished goods.

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Heading into the fourth quarter of our fiscal 2022, we have a significant portion of our fourth quarter's targeted revenues in our backlog. However, if shipments from our backlog are delayed or we are unable to obtain expected orders or components, our business outlook will prove to be inaccurate. These aforementioned supply chain constraints, and their related challenges could result in future shortages, increased material costs or use of cash, engineering design changes, and delays in new product introductions, each of which could adversely impact our revenue, gross margins and financial results. There can be no assurance that the impacts of all the aforementioned conditions will not continue, or worsen, in the future.

The military conflict between Russia and Ukraine, and the global response to it could adversely impact our revenues, gross margins and financial results.

The U.S. government and other nations have imposed significant restrictions on most companies’ ability to do business in Russia. It is not possible to predict the broader or longer-term consequences of this conflict, which could include further sanctions, embargoes, regional instability, geopolitical shifts and adverse effects on macroeconomic conditions, security conditions, currency exchange rates and financial markets. Such geo-political instability and uncertainty could have a negative impact on our ability to sell to, ship products to, collect payments from, and support customers in certain regions based on trade restrictions, embargoes and export control law restrictions, and logistics restrictions including closures of air space, and could increase the costs, risks and adverse impacts from these new challenges. We may also be the subject of increased cyber-attacks.

The military conflict between Russia and Ukraine has impacted our sales pipeline and continues to have significant repercussions for our business. Although sales into Russia represented approximately 1.0% of our consolidated net sales in both fiscal 2021 and in the nine months ended April 30, 2022, consolidated net sales into Russia in fiscal 2022 and beyond were expected to significantly grow. As a result of the economic sanctions against Russia, we are assuming no new sales in Russia for the remainder of fiscal 2022 and the foreseeable future.

As a result of this conflict, certain customers (including the U.S. and Ukrainian government) have paused procurement and deployment of satellite and troposcatter communication systems, and instead began purchasing war-fighting equipment. The U.S. defense budget, and defense budgets worldwide, are being adjusted in real-time to reflect spending plans materially different from those of just six months ago.

For example, we had several opportunities to provide wireless communication systems (including troposcatter systems) to Ukraine for a variety of both defense and communications uses. Funding for these systems was expected to be provided by Ukraine and by the U.S. government and these items were expected to be awarded and shipped in the second half of fiscal 2022. As result of the conflict in Ukraine, it has now become impossible for us to predict the timing or dollar amount of these awards. Additionally, funding for opportunities with other customers that we expected to book and ship has also been shifted to other programs and/or temporarily delayed as a result of changes in defense spending priorities.

Prior to this conflict, we maintained a small group of employees in Moscow, Russia who supported certain UHP-branded satellite communications products. We are actively hiring new employees, expanding our Canadian operations and shifting certain commercial software development and support activities outside of Russia. However, as we are currently in an environment where software engineering talent is already in high demand and commands a premium, we expect to incur additional annual expenses. We may not be able to timely ramp up our operations in Canada or elsewhere on a sufficient scale to support anticipated growth of our UHP products, which could adversely impact future revenues, gross margins and operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On March 2, 2021, in connection with our acquisition of UHP Networks Inc. ("UHP"), we issued 1,026,567 shares of our common stock, based on a volume weighted average stock price of approximately $28.14 per share, to satisfy initial payment and escrow arrangements under the terms of the stock purchase agreement. These shares were issued in reliance upon Section 4(a)(2) of the Securities Act of 1933, as amended, which exempts from the registration requirements any security that is issued in a transaction by an issuer not involving any public offering.Not applicable.

~~On March 3, 2021, we filed a shelf registration statement on Form S-3 (No. 333-253827) with the SEC for the sale by the selling stockholder of UHP of up to 1,381,567 shares of our common stock. See "Notes to Condensed Consolidated Financial Statements~~ - ~~Note (2)~~ - ~~Acquisitions - UHP Networks Inc." for further information concerning the acquisition.~~

Item 4. Mine Safety Disclosures

Not applicable.

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Item 6. Exhibits

Exhibit 31.1 - Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 - Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2 - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 101.INS - The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended April 30, ~~2021,~~2022, formatted in inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity, (iv) Condensed Consolidated Statement of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements

Exhibit 101.SCH - Inline XBRL Taxonomy Extension Schema Document

Exhibit 101.CAL - Inline XBRL Taxonomy Extension Calculation Linkbase Document

Exhibit 101.LAB - Inline XBRL Taxonomy Extension Labels Linkbase Document

Exhibit 101.PRE - Inline XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 101.DEF - Inline XBRL Taxonomy Extension Definition Linkbase Document

Exhibit 104 - Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COMTECH TELECOMMUNICATIONS CORP.

(Registrant)



Date:	June ~~8, 2021~~9, 2022	By: /s/ ~~Fred Kornberg~~Michael D. Porcelain
	(Date)	~~Fred Kornberg~~Michael D. Porcelain
		~~Chairman of the Board~~President and
		Chief Executive Officer
		(Principal Executive Officer)

Date:	June ~~8, 2021~~9, 2022	By: /s/ Michael A. Bondi
	(Date)	Michael A. Bondi
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

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