Comtech Telecommunications Corp: Form 10-Q for the period ended Oct 31, 2024

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Certain information in this Quarterly Report on Form 10-Q contains, and oral statements made by our representatives from time to time may contain, forward-looking statements. Forward-looking statements can be identified by words such as: "anticipate," "believe," "continue," "could," "estimate," "expect," "future," "goal," "outlook," "intend," "likely," "may," "plan," "potential," "predict," "project," "seek," "should," "strategy," "target," "will," "would," and similar references to future periods. Forward-looking statements include, among others, statements regarding our expectations for our strategic alternatives process, our expectations for further portfolio-shaping opportunities, our expectations for other operational initiatives, the intended use of proceeds from the Credit Facility and Subordinated Credit Facility, our expectations for completing further financing initiatives, our future performance and financial condition, our plans to address our ability to continue as a going concern, the plans and objectives of our management and our assumptions regarding such future performance, financial condition, and plans and objectives that involve certain significant known and unknown risks and uncertainties and other factors not under our control which may cause our actual results, future performance and financial condition, and achievement of our plans and objectives of our management to be materially different from the results, performance or other expectations implied by these forward-looking statements. Factors that could cause actual results to differ materially from current expectations include, among other things: the outcome and effectiveness of the aforementioned strategic alternatives process, further portfolio-shaping opportunities, other operational initiatives, and the completion of further financing activities; our ability to access capital and liquidity so that we are able to continue as a going concern; our ability to implement changes in our executive leadership; the possibility that the expected synergies and benefits from our strategic activities will not be fully realized, or will not be realized within the anticipated time periods; the risk that acquired businesses will not be integrated successfully; impacts from, and uncertainties regarding, future actions that may be taken by activist stockholders; the possibility of disruption from acquisitions or dispositions, making it more difficult to maintain business and operational relationships or retain key personnel; the risk that we will be unsuccessful in implementing a tactical shift in our Satellite and Space Communications segment away from bidding on large commodity service contracts and toward pursuing contracts for our niche products and solutions with higher margins; the nature and timing of our receipt of, and our performance on, new or existing orders that can cause significant fluctuations in net sales and operating results; the timing and funding of government contracts; adjustments to gross profits on long-term contracts; risks associated with international sales; rapid technological change; evolving industry standards; new product announcements and enhancements; changing customer demands and/or procurement strategies and our ability to scale opportunities and deliver solutions to current and prospective customers; changes in prevailing economic and political conditions, including as a result of Russia's military incursion into Ukraine, the Israel-Hamas war and attacks in the Red Sea region; changes in the price of oil in global markets; changes in prevailing interest rates and foreign currency exchange rates; risks associated with our legal proceedings, customer claims for indemnification, and other similar matters; risks associated with our obligations under our credit facilities; risks associated with our large contracts; risks associated with supply chain disruptions; and other factors described in this and our other filings with the Securities and Exchange Commission ("SEC"). However, these risks are not the only risks that we face. Additional risks and uncertainties, not currently known to us or that do not currently appear to be material, may also materially adversely affect our business, financial condition and/or operating results in the future. We describe risks and uncertainties that could cause actual results and events to differ materially in the "Risk Factors" (Part I, Item 1A), "Management’s Discussion and Analysis of Financial Condition and Results of Operations" (Part II, Item 7) and "Quantitative and Qualitative Disclosures about Market Risk" (Part II, Item 7A) in our Annual Report on Form 10-K filed with the SEC on October 30, 2024. We do not intend to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise, except as required by law.

OVERVIEW

We are a leading provider of satellite and space communications technologies, terrestrial and wireless network solutions, Next Generation 911 ("NG-911") and emergency services and cloud native capabilities. This includes the critical communications infrastructure that people, businesses, and governments rely on when durable, trusted connectivity is required, no matter where they are – on land, at sea, or in the air – and no matter what the circumstances – from armed conflict to a natural disaster. Our solutions are designed to fulfill our customers’ needs for secure wireless communications in the most demanding environments, including those where traditional communications are unavailable or cost-prohibitive, and in mission-critical and other scenarios where performance is crucial. Over the long-term, we anticipate future growth in our end markets due to a trend of increasing demand for global voice, video and data usage in recent years, in addition to the growth of emergency communication networks and related applications. We provide our solutions to both commercial and governmental customers.

We manage our business through two reportable operating segments: Satellite and Space Communications and Terrestrial and Wireless Networks. See Part I. - Financial Information - Item 1. Notes to Condensed Consolidated Financial Statements - Note (15) - Segment Information for further description and information related our segments.

Our Quarterly Financial Information

Quarterly and period-to-period sales and operating results may be significantly affected by, among other things, short-term or long-term contracts with our customers, allowances for bad debt, impairments of long-lived assets (including goodwill) and changes in the estimated fair value of derivative instruments and warrants. In addition, our gross profit is affected by a variety of factors, including, among other things, the mix of products, systems and services sold, production efficiencies, provisions for excess and obsolete inventories, estimates of warranty expense, price competition and general economic conditions. Our gross profit may also be affected by the impact of any cumulative adjustments to contracts that are accounted for over time. In particular, our contracts with the U.S. government (or prime contractors to the U.S. government) can be terminated for convenience at any time and orders are subject to unpredictable funding, deployment and technology decisions by our customers. Some of these contracts are indefinite delivery/indefinite quantity ("IDIQ") contracts and, as such, the U.S. government is not obligated to purchase any equipment or services under these contracts. We have, in the past, experienced and we continue to expect significant fluctuations in sales and operating results from quarter-to-quarter and period-to-period due to these factors. As such, comparisons between periods and our current results may not be indicative of a trend or future performance.

CRITICAL ACCOUNTING POLICIES

We consider certain accounting policies to be critical due to the estimation process involved in each.

Revenue Recognition. In accordance with FASB ASC 606 - Revenue from Contracts with Customers ("ASC 606"), we record revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to customers. See Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (4) - Revenue Recognition for further information.

Impairment of Long-Lived Assets, Including Goodwill. As of October 31, 2024, total goodwill recorded on our Condensed Consolidated Balance Sheet aggregated $204.6 million (of which $30.5 million relates to our Satellite and Space Communications segment and $174.1 million relates to our Terrestrial and Wireless Networks segment). Additionally, as of October 31, 2024, net intangibles recorded on our Condensed Consolidated Balance Sheet aggregated $188.2 million (of which $45.5 million relates to our Satellite and Space Communications segment and $142.7 million relates to our Terrestrial and Wireless Networks segment). For purposes of reviewing impairment and the recoverability of goodwill and other intangible assets, our Satellite and Space Communications and Terrestrial and Wireless Networks segments each constitute a reporting unit and we must make various assumptions in determining their estimated fair values. During our first quarter of fiscal 2025, we recorded a $79.6 million non-cash impairment charge in our Satellite and Space Communications segment related to long-lived assets, including goodwill. See Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (16) - Long-lived Assets, including Goodwill for further information. Ongoing and future actions supporting our transformation strategy could result in a material impairment of our goodwill and/or intangible assets.

Provision for Warranty Obligations. We provide warranty coverage for most of our products, including products under long-term contracts, for a period of at least one year from the date of shipment. We record a liability for estimated warranty expense based on historical claims, product failure rates and other factors. Costs associated with some of our warranties that are provided under long-term contracts are incorporated into our estimates of total contract costs. There exist inherent risks and uncertainties in estimating warranty expenses, particularly on larger or longer-term contracts. If we do not accurately estimate our warranty costs, any changes to our original estimates could be material to our results of operations and financial condition.

Accounting for Income Taxes. Our deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities and applying enacted tax rates expected to be in effect for the year in which we expect the differences to reverse. Our provision for income taxes is based on domestic (including federal, state and local) and international statutory income tax rates in the tax jurisdictions where we operate, permanent differences between financial reporting and tax reporting and available credits and incentives. The U.S. federal government is our most significant income tax jurisdictions.

For tax positions taken or expected to be taken in a tax return, we account for unrecognized tax benefits using a “more-likely-than-not” threshold for financial statement recognition and measurement. We may be challenged upon review by the applicable taxing authority and positions taken by us may not be sustained. We recognize all or a portion of the benefit of income tax positions only when we have made a determination that it is "more-likely-than-not" that the tax position will be sustained upon examination, based upon the technical merits of the position and other factors. For tax positions that are determined as "more-likely-than-not" to be sustained upon examination, the tax benefit recognized is the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. We recognize potential interest and penalties related to uncertain tax positions in income tax expense. In assessing the need for a valuation allowance for deferred tax assets, we consider all positive and negative evidence, including past financial performance, timing and judgments about future taxable income and tax planning strategies. Valuation allowances are established, when necessary, to reduce net deferred tax assets to the amount "more-likely-than-not" expected to be realized. We continuously evaluate additional facts representing positive and negative evidence in determining our ability to realize these deferred tax assets. Significant judgment is required in determining income tax provisions and tax positions. The ultimate outcome of tax 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.

Our U.S. federal income tax returns for fiscal 2021 through 2023 are subject to potential future Internal Revenue Service ("IRS") audit. None of our state income tax returns prior to fiscal 2020 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.

Capitalized Engineering 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, cost capitalized related to software developed for the purpose of selling to third parties was not material, but could increase in the future.

As it relates to software developed for the purpose of internal-use (e.g., hosted "SaaS" applications within our Terrestrial and Wireless Networks segment), costs capitalized primarily consist of direct labor and third-party vendor costs associated with creating the software. Software development projects generally include three stages: the preliminary project stage (all costs are expensed as incurred), the application development stage (certain costs are capitalized and certain costs are expensed as incurred) and the post-implementation/operation stage (all costs are expensed as incurred). Costs capitalized in the application development stage include costs related to the design and implementation of the selected software components, software build and configuration infrastructure, and software interfaces. Capitalization of costs requires judgment in determining when a project has reached the application development stage, the proportion of time spent in the application development stage, and the period over which we expect to benefit from the use of that software. For the three months ended October 31, 2024 and 2023, capitalized internal-use software costs were $1.0 million and $0.6 million, respectively. Capitalized internal use software costs are amortized once the software is placed in service on the straight-line method over the estimated useful life of the software, which is generally three years.

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 restructure or 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. As discussed in Part I. - Financial Information - Item 1. - Note (8) - Inventories, in connection with our initiatives to transform our Company (e.g., reevaluating our business plans to identify opportunities to focus future investment on our most strategic, high-margin revenue opportunities), during the three months ended October 31, 2024, we recorded a non-cash charge of $11.4 million within Cost of Sales on our Condensed Consolidated Statement of Operations. Such non-cash charge related to the write down of inventory associated with approximately 70 products within our satellite ground infrastructure product line that were either discontinued or being de-emphasized going forward. Such non-cash charge also included the write down of inventory associated with the CGC Divestiture, which was determined during the first quarter of fiscal 2025 to no longer be salable.

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 billing events, collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. In light of ongoing tight credit market conditions and high interest rates, we continue to see requests from our customers for higher credit limits and longer payment terms. We have, on a limited basis, approved certain customer requests. Also, more recently, we experienced a significant increase in the overall level of contract assets (i.e., unbilled receivables) related to large, long-term contracts with certain U.S. government and international customers. We continue to monitor our accounts receivable credit portfolio. Except as discussed below, to-date, there has been no material changes in our billed accounts receivable credit portfolio as a result of the challenging business conditions. Although our overall credit losses have historically been within the allowances we established, we may not be able to accurately predict our future credit loss experience, given the current poor business environment. Measurement of credit losses requires consideration of historical loss experience, including the need to adjust for changing business conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and the financial health of specific customers. Future changes to the estimated allowance for doubtful accounts could be material to our results of operations and financial condition. As discussed in Part I. - Financial Information - Item 1. - Note (7) - Accounts Receivables, during the first quarter of fiscal 2025, we determined that an unbilled receivable contract asset in the amount of $19.0 million, related to an international customer and reseller of our troposcatter technologies, was at risk of not being invoiced or collected, principally due to the customer's near-term ability to secure certain opportunities in its pipeline. As a result and considering that we offered a price concession (i.e., variable consideration) to our customer in the first quarter of fiscal 2025, we reversed $1.6 million of cumulative revenue and associated unbilled receivable contract assets related to this transaction, and recorded a non-cash charge to fully reserve for the remaining $17.4 million unbilled receivable contract asset within our allowance for doubtful accounts.

Derivative Instruments and Warrant Liabilities. We evaluate our financial instruments, including our Credit Facility, Subordinated Credit Facility, Convertible Preferred Stock and warrants to issue our common stock pursuant to the terms of such instruments, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. Such evaluation considers a qualitative and quantitative assessment of whether the host instrument is more debt or equity-like, and if embedded derivatives should be bifurcated from the host instrument and/or combined for accounting purposes. For derivatives that are accounted for as liabilities, the derivative is initially recorded at its estimated fair value and is then re-valued at each reporting date, with changes in its estimated fair value reported in our Condensed Consolidated Financial Statements. To estimate such fair values, with the assistance of a third party valuation expert, we primarily use Monte Carlo simulation models, on a with and without basis, or Black-Scholes option pricing models, each adjusted for instrument-specific terms. Due to the nature of our derivative instruments and warrant liabilities, we must use Level 3 inputs for estimating fair value, which are unobservable inputs developed using the best available information under the circumstances. Level 3 inputs are supported by little or no market activity, are significant to the fair value of the assets or liabilities and reflect our assumptions related to how market participants would use similar inputs to price the asset or liability. Accordingly, our estimates and assumptions could prove to be inaccurate. Also, changes in such estimates and assumptions from period to period could be material to our results of operations and financial condition. See Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (5) – Fair Value Measurements and Financial Instruments for further information.

Fiscal 2025: First Quarter Results and Business Outlook

Financial results for the first quarter of fiscal 2025 include:

• Consolidated net sales were $115.8 million, compared to $126.2 million in the fourth quarter of fiscal 2024 and $151.9 million in the first quarter of fiscal 2024;
• Gross margin was 12.5%, compared to 21.5% in our fourth quarter of fiscal 2024 and 31.5% in our first quarter of fiscal 2024; gross margin in the more recent fiscal quarter includes an $11.4 million non-cash charge related to the write down of certain inventories as a result of restructuring activities during the quarter within our Satellite and Space Communications segment;
• GAAP net loss attributable to common stockholders was $155.9 million and included, among other things: a $79.6 million non-cash impairment charge in our Satellite and Space Communications segment related to goodwill, $17.9 million of restructuring costs (including the non-cash inventory write down, discussed above), a $17.4 million non-cash charge to fully reserve for an unbilled receivable contract asset related to an international customer and reseller of our troposcatter technologies, $6.6 million of intangible asset amortization, $1.6 million of proxy solicitation costs, $0.6 million of CEO transition costs, and $0.3 million of strategic emerging technology costs for next-generation satellite technology; the more recent quarter also reflects the amendment of the Credit Facility, issuance of the Subordinated Credit Facility and extinguishment of the Series B-1 Convertible Preferred Stock upon exchange for the Series B-2 Convertible Preferred Stock on October 17, 2024;
• GAAP EPS net loss of $5.29 and Non-GAAP EPS net loss of $1.27;
• Adjusted EBITDA loss (a Non-GAAP financial measure discussed below) of $19.4 million, compared to Adjusted EBITDA income of $0.3 million, or 0.2% of consolidated net sales for the fourth quarter of fiscal 2024 and $18.4 million, or 12.1% of consolidated net sales for the first quarter of fiscal 2024;
• New bookings (also referred to as orders) of $127.9 million, representing a quarterly book-to-bill ratio of 1.10x (a measure defined as bookings divided by net sales);
• Backlog of $811.0 million as of October 31, 2024, compared to $798.9 million as of July 31, 2024 and $695.9 million as of October 31, 2023;
• Revenue visibility of approximately $1.6 billion. We measure this revenue visibility as the sum of our $811.0 million of funded backlog, plus the total unfunded value of certain multi-year contracts that we have received and from which we expect future orders;
• Cash flows used in operating activities were $21.8 million, due primarily to a decrease in net sales and gross profit during the more recent quarter, in addition to the significant increase in the overall level of contract assets (i.e., unbilled receivables) in fiscal 2024 related to our progress on large, long-term "over-time" contracts awarded to us by certain U.S. government and international customers, as well as the timing of payments to our suppliers as we execute on our backlog. As experienced in the latter part of fiscal 2024, we expect the level of our unbilled receivables to decline throughout fiscal 2025, for instance, as we invoice our U.S. government and domestic customers upon physical delivery of products or the achievement of specified contractual milestones. Additionally, cash flows used in operating activities during the more recent quarter include $5.8 million in aggregate payments for restructuring costs, including severance, CEO transition, proxy solicitation and strategic emerging technology costs for next-generation satellite technology.

Non-GAAP financial measures discussed above are reconciled to the most directly comparable GAAP financial measures in the table included in the below section “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of the Results of Operations for the Three Months Ended October 31, 2024 and 2023.”

Other Key Business Developments and Updates

Satellite and Space Communications

In September 2023, we were awarded a large, multi-year GFSR contract by the U.S. Army with a total potential value of $544.0 million. Through this program, we would provide ongoing communications and IT infrastructure support for the U.S. Army, Air Force, Navy, Marine Corps and NATO. The incumbent protested (and lost) the award of the contract to Comtech several times. In November 2024, the most recent protest had been decided in our favor; however, shortly thereafter, the incumbent once again protested the matter and the award remains under protest.

In September 2023, we won a highly competitive $48.6 million contract to deliver next-generation Enterprise Digital Intermediate Frequency Multi-Carrier (“EDIM”) modems for the U.S. Army's satellite communications ("SATCOM") digitization and modernization programs. We are progressing with our efforts on this contract and pleased to have secured more than $8.5 million in incremental funding this past quarter, bringing the cumulative funding for this contract to $19.1 million.

In September 2024, we announced the launch of our Digital Common Ground ("DCG") platforms, based on the proven success of previous Comtech software-defined modem platforms. Comtech’s DCG portfolio is also designed to evolve over time to incorporate new capabilities and keep pace with the upgrade cycle of new innovative satellite constellations, significantly reducing overall lifecycle costs for customers while also delivering industry leading performance and efficiency.

In September 2024, the U.S. Navy Information Warfare Systems Command awarded us a sole source contract for our software-defined SLM-5650B modems, upgrade kits, firmware and technical support. The contract has a four-year period of performance and is valued in excess of $50.0 million. Funded orders received to date are valued at approximately $2.0 million.

In October 2024, we were awarded a production order, valued in excess of $5.0 million, from an existing customer deploying a new LEO constellation. Deliveries associated with this order are anticipated to begin in the mid-2025 timeframe.

In October 2024, within our satellite ground infrastructure product line, we were awarded over $6.0 million in funded orders from a new international customer for certain frequency-type power amplifiers.

In October 2024, we were awarded approximately $2.0 million in funded orders from a new international customer of our ELEVATETM networking platform. We believe these orders confirm demand for our advanced TDMA VSAT technology, involving mesh connectivity and network optimization.

In July 2024, SES Space & Defense awarded us an initial order for our software defined SLM-5650B and other next-generation modems for use in the O3B mPower infrastructure. During the first quarter of fiscal 2025, we have since received additional awards from SES for software licenses and high-power amplifiers to further support the O3B mPower constellation.

During the three months ended October 31, 2024, we were awarded in excess of $16.0 million of funded orders calling for the supply of VSAT equipment and related services for the U.S. Army. In November 2024, the follow-on contract (referred to as "VSAT IV") was not awarded to Comtech; however, we protested the matter and our protest remains pending.

In November 2024, we announced the appointment of Daniel Gizinski as President of our Satellite and Space Communications segment. Mr. Gizinski brings over 15 years of experience in satellite communications engineering, operations, product strategy and executive management to his new role. Prior to his appointment as President of this segment, Mr. Gizinski served as Chief Strategy Officer and President of the Comtech Satellite Network Technologies division, among other positions within Comtech. With a proven track record of driving growth and fostering innovation, he will oversee all aspects of this segment, including product development, operations and market expansion.

As it relates to our troposcatter product line, throughout most of fiscal 2024, we experienced elevated levels of unbilled receivables due to the timing of our performance and billings related to certain large U.S. government and international customer contracts. During the first quarter of fiscal 2025, we maintained deliveries of next-generation troposcatter terminals related to our U.S. Marine Corps and U.S. Army contracts, contributing to a meaningful reduction of our consolidated unbilled receivables (before allowances for doubtful accounts), from $123.7 million at July 31, 2024 to $111.7 million at October 31, 2024. In December 2024, however, we received a notice from our prime contractor to stop work associated with the U.S. Marine Corps contract. While information is limited at this point in time, we believe the end customer may be considering a possible termination of the contract, in whole or in part. As of December 31, 2024, our unbilled receivables related to the U.S. Marine Corps contract approximated $10.8 million. Future results of operations related to our troposcatter solutions product line will depend on the nature, timing and amounts associated with resolving this matter.

Terrestrial and Wireless Networks

During the first quarter of 2025, we were pleased to have been awarded the following:

• Large, multi-year location-based services maintenance and support contract from one of the largest wireless carriers in the U.S. The contract has a five-year period of performance and is valued in excess of $19.0 million. During the fiscal quarter, this customer also awarded us over $2.5 million in various other orders for location-based services and related solutions;
• Renewal of critical enhanced 911 call routing services, valued in excess of $30.0 million, for one of the largest wireless carriers in the U.S.;
• Next-generation ("NG-911") Guardian call handling solution for a city located in south-central British Columbia, Canada. These services, valued in excess of $2.0 million over the next several years, support emergency communications for various PSAPs and citizens located in that municipality;
• In the prior fiscal year, we were awarded a large multi-year NG-911 contract by the Commonwealth of Massachusetts, valued at over $250.0 million. During the most recent quarter, we were awarded over $1.0 million of incremental funding to continue servicing certain PSAPs within the state; and
• Incremental funding related to our NG-911 deployment in South Carolina in excess of $1.0 million. During the quarter, we were successful in expanding the number of PSAPs and counties being serviced by our solutions within the state.

With strategic wins in the U.S., Canada and Australia, we believe Comtech's position as a trusted leader in 911, NG-911 and public safety applications positions us increasingly well when it comes to delivering similarly sophisticated solutions for other types of emergencies.

Unallocated and Other Matters

In November 2024, we announced that our Board of Directors (the “Board”) unanimously elected Kenneth H. Traub as the Executive Chairman of our Company. Mark Quinlan stepped down from his role as Chairman of the Board and will continue serving on the Board. Former U.S. Army Chief Information Officer, Lieutenant General (Retired) Bruce T. Crawford, was also elected to serve as Lead Independent Director. Additionally, the Board has named Mr. Traub as President and Chief Executive Officer, effective as of January 13, 2025, in addition to his current role as Chairman, replacing Mr. Ratigan effective immediately. Pursuant to his separation agreement and release, Mr. Ratigan resigned from his position as President and Chief Executive Officer and as a director.

In November 2024, we announced that our Board entered into a cooperation agreement with Fred Kornberg, Michael Porcelain, and Oleg Timoshenko (the “Investor Group”). Pursuant to the agreement: we appointed Michael Hildebrandt, Senior Investment Professional at Freshford Capital Management, to the Board, effective immediately; the Board will appoint an additional new independent director mutually acceptable to both our Board and the Investor Group (the “Additional Director”); two of our current directors will not stand for reelection at the 2024 Annual Meeting; the Investor Group will support our slate of directors for election at the 2024 Annual Meeting and will withdraw its nomination of eight directors for election at the meeting; the Investor Group has agreed to customary standstill restrictions and voting commitments until the nomination deadline for our Fiscal 2025 Annual Meeting of Stockholders, or until the nomination deadline for our Fiscal 2026 Annual Meeting of Stockholders if we nominate Mr. Hildebrandt and the Additional Director for reelection at the Fiscal 2025 Annual Meeting of Stockholders.

In November 2024, we released our first-ever Corporate Social Responsibility (“CSR”) report for fiscal 2024. Among other things, the CSR report highlights our progress in environmental impact, workforce development and community investment. Our FY24 CSR Report presents a great opportunity to outline what we stand for, and how our investments in our team and responsible business practices drive momentum and value within our organization, throughout our supplier network and in our communities.

Subsequent to quarter-end, in connection with our initiatives to optimize our go-forward cost structure with our future expected business, we reduced our workforce by approximately 7%. Such reductions were made in our Satellite and Space Communications and Unallocated segments. Annualized cost savings associated with this action, representing total labor costs but before severance costs, approximate $18.0 million. Severance associated with such actions of approximately $1.1 million will be expensed in the second quarter of fiscal 2025. As of the issuance date, we had approximately 1,500 employees, compared to 1,676 employees as of July 31, 2024.

Business Outlook

During the second quarter of fiscal 2025, business conditions continue to be challenging, and the operating environment is largely unpredictable, due to many factors including, but not limited to: uncertainties related to our recently announced transformation strategy and associated actions we may take; uncertainties related to our ability to operate as going concern, fluctuations in interest rates; inflation; continuing resolutions associated with the U.S. Federal budget; repercussions of military conflicts in Russia, Ukraine and the Middle East; and a potential global recession. Order and production delays, contract protests and/or terminations, delayed cash collections from customers, disruptions in component availability and/or quality, increased pricing both for labor and parts, lower levels of factory utilization and higher logistics and operational costs resulting from such conditions have or could impact our business as well. In light of these business conditions and resulting challenges, we anticipate variability from time to time as we move through our transformation strategy. Accordingly, we are not providing forward-looking guidance on a GAAP or Non-GAAP basis.

Additional information related to our Business Outlook for Fiscal 2025 and a definition and explanation of Adjusted EBITDA is included in the below section Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of the Results of Operations for the Three Months Ended October 31, 2024 and 2023.

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2024 AND 2023

Net Sales. Consolidated net sales were $115.8 million and $151.9 million for the three months ended October 31, 2024 and 2023, respectively, representing a decrease of $36.1 million, or 23.8%. The period-over-period decrease reflects significantly lower net sales in our Satellite and Space Communications segment offset, in part, by higher net sales in our Terrestrial and Wireless Networks segment, as further discussed below.

Satellite and Space Communications

Net sales in our Satellite and Space Communications segment were $58.9 million for the three months ended October 31, 2024 as compared to $102.4 million for the three months ended October 31, 2023, a significant decrease of $43.5 million or 42.5%. Related segment net sales for the three months ended October 31, 2024 primarily reflect lower net sales of our troposcatter and SATCOM solutions (including progress toward delivering next-generation troposcatter terminals to the U.S. Marine Corps and U.S. Army, VSAT equipment to the U.S. Army and COMET terminals to an international customer), high power solid state amplifiers related to the PST Divestiture (which was completed in November 2023), and satellite ground station solutions (primarily X/Y steerable antennas related to the CGC Divestiture initiated in our fourth quarter of fiscal 2024). Our Satellite and Space Communications segment represented 50.9% of consolidated net sales for the three months ended October 31, 2024 as compared to 67.4% for the three months ended October 31, 2023. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the three months ended October 31, 2024 was 0.99x.

Terrestrial and Wireless Networks

Net sales in our Terrestrial and Wireless Networks segment were $56.9 million for the three months ended October 31, 2024, as compared to $49.5 million for the three months ended October 31, 2023, an increase of $7.4 million, or 14.9%. Related segment net sales for the three months ended October 31, 2024 primarily reflect higher net sales of our call handling and NG-911 services, offset in part by lower net sales of our location based solutions. Our Terrestrial and Wireless Networks segment represented 49.1% of consolidated net sales for the three months ended October 31, 2024 as compared to 32.6% for the three months ended October 31, 2023. Our book-to-bill ratio in this segment for the three months ended October 31, 2024 was 1.22x.

Bookings, sales and profitability in both segments can fluctuate dramatically from period-to-period due to many factors, including unpredictable funding, deployment and technology decisions by our customers and changes in the general business environment. Period-to-period fluctuations in bookings are normal for our segments. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance. Also, we announced that we are exploring strategic alternatives for our businesses. Accordingly, future results of operations can be impacted by the timing and outcome of such initiatives. There can be no assurance that the exploration of strategic alternatives will result in a transaction or other strategic changes or outcomes.

Geography and Customer Type

Sales by geography and customer type, as a percentage of related sales, for the three months ended October 31, 2024 and 2023 are as follows:

Sales to U.S. government customers include sales to the DoD, intelligence and civilian agencies, as well as sales directly to or through prime contractors. Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. For the three months ended October 31, 2024 and 2023, except for the U.S. government, there were no customers that represented 10% or more of consolidated net sales. International sales for the three months ended October 31, 2024 and 2023 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $18.8 million and $37.2 million, respectively. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented 10% or more of consolidated net sales for the three months ended October 31, 2024 and 2023.

Gross Profit. Gross profit was $14.5 million and $47.9 million for the three months ended October 31, 2024 and 2023, respectively, a decrease of $33.4 million. Gross profit, as a percentage of consolidated net sales, for the three months ended October 31, 2024 was 12.5% as compared to 31.5% for the three months ended October 31, 2023. Our gross profit in our first quarter of fiscal 2025 (both in dollars and as a percentage of consolidated net sales) reflects: (i) overall product mix changes, as discussed above; (ii) a non-cash charge of $11.4 million related to the write down of certain inventories as a result of restructuring activities within our Satellite and Space Communications segment; (iii) the expensing of work in process inventory related to certain loss contracts in our satellite ground infrastructure product line; (iv) higher expected costs at completion, as we advanced certain nonrecurring engineering related projects in our satellite ground infrastructure product line through development and toward production; and (v) late delivery penalties related to a Modular Transportable Transmission Systems (or "MTTS" troposcatter solutions) order. Excluding the non-cash inventory-related charge, our gross profit, as a percentage of consolidated net sales, for the first quarter of fiscal 2025 would have been 22.4%, a decrease to the 31.5% reported in our first quarter of fiscal 2024, but a sequential increase to the 21.5% reported in our fourth quarter of fiscal 2024. Gross profit (both in dollars and as a percentage of consolidated net sales) in the first quarter of fiscal 2024 was influenced by a large, high margin sale of COMET terminals to an international customer, which did not repeat in the first quarter of fiscal 2025. Gross profit, as a percentage of related segment net sales, is further discussed below.

Our Satellite and Space Communications segment's gross profit, both in dollars and as a percentage of related segment net sales, for the three months ended October 31, 2024 decreased significantly in comparison to the three months ended October 31, 2023. The gross profit percentage in the more recent period reflects changes in products and services mix, as well as other segment related items, as discussed above.

Our Terrestrial and Wireless Networks segment's gross profit, in dollars, increased and, as a percentage of related segment net sales, decreased for the three months ended October 31, 2024 in comparison to the three months ended October 31, 2023. The gross profit percentage in the more recent period reflects changes in products and services mix, as discussed above.

Included in consolidated cost of sales for the three months ended October 31, 2024 and 2023 are provisions for excess and obsolete inventory of $12.5 million and $0.1 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. As discussed above and in Part I. - Financial Information - Item 1. - Note (8) - Inventories, in connection with our initiatives to transform our Company, during three months ended October 31, 2024, we recorded a non-cash charge of $11.4 million within Cost of Sales on our Condensed Consolidated Statement of Operations related to the write down of inventory associated with approximately 70 products within our satellite ground infrastructure product line that were either discontinued or being de-emphasized going forward. Such non-cash charge also included the write down of inventory associated with the CGC Divestiture that was no longer considered salable during the period.

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. Our consolidated gross profit, as a percentage of consolidated net sales, may also be impacted by the timing and outcome of actions we may take related to our transformation strategy.

Selling, General and Administrative Expenses. Selling, general and administrative expenses were $51.6 million and $32.7 million for the three months ended October 31, 2024 and 2023, respectively. As a percentage of consolidated net sales, selling, general and administrative expenses were 44.6% and 21.5% for the three months ended October 31, 2024 and 2023, respectively.

During the first quarter of fiscal 2025, we determined that an unbilled receivable contract asset in the amount of $19.0 million, related to an international customer and reseller of our troposcatter technologies, was at risk of not being invoiced or collected, principally due to the customer's near-term ability to secure certain opportunities in its pipeline. As a result and considering that we offered a price concession (i.e., variable consideration) to our customer in the first quarter of fiscal 2025, we reversed $1.6 million of cumulative revenue and associated unbilled receivable contract assets related to this transaction, and recorded a non-cash charge to fully reserve for the remaining $17.4 million unbilled receivable contract asset within our allowance for doubtful accounts. Also, during the three months ended October 31, 2024 and 2023, we incurred $6.5 million and $3.7 million of restructuring costs within selling, general and administrative expenses, respectively, primarily to streamline our operations and improve efficiency, including severance costs and costs associated with those activities supporting our announced pursuit of strategic alternatives. Excluding such provision for doubtful accounts and restructuring costs, selling, general and administrative expenses for the three months ended October 31, 2024 and 2023 would have been $27.7 million, or 23.9% and $29.0 million or 19.1%, 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, as discussed above. Also, during the first quarter of fiscal 2025, we experienced higher legal, professional and accounting related fees as compared to the first quarter of fiscal 2024.

Amortization of stock-based compensation expense recorded as selling, general and administrative expenses in the three months ended October 31, 2024 was not material. Amortization of stock-based compensation expense recorded as selling, general and administrative expenses in the three months ended October 31, 2023 was $2.2 million. During the three months ended October 31, 2024, we reversed a portion of our stock-based compensation expense related to performance shares due to lower-than-estimated achievement of fiscal 2022 performance share goals. Stock-based compensation expense for the more recent period also reflects the forfeiture of awards related to our former Chief Operating Officer, whose employment was terminated during our first quarter of fiscal 2025. With respect to stock-based compensation expense reported in the prior year period, we had determined to settle fiscal 2024 non-equity annual incentive awards accrued during such period with stock-based awards in lieu of cash. Also, contributing to the higher stock-based compensation expense in the prior year period was our annual grant of stock-based awards to non-executive employees. Due to the number of shares available for grant under the 2023 Plan, such grants of stock-based awards did not occur in our first quarter of fiscal 2025. Amortization of stock-based compensation is not allocated to our two reportable operating segments.

Research and Development Expenses. Research and development expenses were $3.7 million and $7.8 million for the three months ended October 31, 2024 and 2023, respectively, representing a decrease of $4.1 million or 52.5%. As a percentage of consolidated net sales, research and development expenses were 3.2% and 5.1% for the three months ended October 31, 2024 and 2023, respectively.

For the three months ended October 31, 2024 and 2023, research and development expenses of $0.9 million and $4.7 million, respectively, related to our Satellite and Space Communications segment and $2.7 million and $2.9 million, respectively, related to our Terrestrial and Wireless Networks segment. The remaining research and development expenses of $0.1 million and $0.2 million in the three months ended October 31, 2024 and 2023, respectively, related to the amortization of stock-based compensation expense. Lower research and development expenses reflect our prioritization of resources across various programs.

During the three months ended October 31, 2024 and 2023, we incurred $0.3 million and $1.4 million, respectively, of strategic emerging technology costs in our Satellite and Space Communications segment for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations. We expect strategic emerging technology costs to decrease in fiscal 2025 as a result of our fourth quarter fiscal 2024 decision to cease operations related to our steerable antenna product line in the U.K.

Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the three months ended October 31, 2024 and 2023, customers reimbursed us $1.5 million and $4.0 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.

In addition to increases in customer-funded research and development activities in recent years, during the three months ended October 31, 2024 and 2023, we also experienced an increase in engineering efforts related to cost to fulfill contract assets and internal use software, for which we capitalized $2.1 million and $1.1 million, respectively. As a result of these trends, a more focused prioritization of resources across various programs and the impact of prior reductions in force announced in fiscal 2023, our research and development expenses for financial reporting purposes has significantly decreased more recently as compared to historical periods.

Amortization of Intangibles. Amortization relating to intangible assets with finite lives for the three months ended October 31, 2024 and 2023 was $6.6 million (of which $3.0 million was for the Satellite and Space Communications segment and $3.6 million was for the Terrestrial and Wireless Networks segment) compared to $5.3 million (of which $1.7 million was for the Satellite and Space Communications segment and $3.6 million was for the Terrestrial and Wireless Networks segment), respectively. The increase in our Satellite and Space Communications segment's amortization during the more recent quarter reflects the acceleration of amortization of CGC's intangibles due to the impact of the CGC Divestiture.

Impairment of Long-Lived Assets, including Goodwill. Based on the lower-than-expected financial performance during the first quarter of fiscal 2025, and other recent developments through the issuance date, within our Satellite and Space Communications segment, we determined that we were required to perform an interim quantitative goodwill impairment test as of October 31, 2024. Based on our quantitative evaluation, we determined that our Satellite and Space Communications reporting unit had an estimated fair value below its carrying value and concluded that our goodwill in this reporting unit was impaired. As a result, in the first quarter of fiscal 2025, we recognized a $79.6 million non-cash goodwill impairment charge in our Satellite and Space Communications reporting unit. In addition to testing goodwill for impairment, we also assessed the recoverability of the carrying values of our other long-lived assets in this segment, including identifiable intangible assets with finite useful lives. Based on our evaluation, we determined that the fair values of such assets were not impaired. See Part I. - Financial Information - Item 1. - Note (16) - Long-Lived Assets, including Goodwill for further information.

Proxy Solicitation Costs. During three months ended October 31, 2024, we incurred $1.6 million of proxy solicitation costs (including legal and advisory fees) in our Unallocated segment as a result of a now-settled proxy contest. There were no similar costs in the prior year.

CEO Transition Costs. CEO transition costs were $0.6 million for the three months ended October 31, 2024, consisting principally of legal and advisory fees, including those related to a third party CEO search firm. There were no similar costs in the corresponding period of the prior year.

Operating Income (Loss). Operating loss for the three months ended October 31, 2024 was $129.2 million, as compared to operating income of $2.1 million for the three months ended October 31, 2023. Operating income (loss) by reportable segment is shown in the table below:

($ in millions)

Our GAAP operating loss of $129.2 million for the three months ended October 31, 2024 reflects: (i) a non-cash goodwill impairment charge of $79.6 million; (ii) $17.9 million of restructuring costs, including a non-cash inventory write down during the quarter (of which $13.8 million, $0.1 million and $4.0 million related to our Satellite and Space Communications, Terrestrial and Wireless Networks and Unallocated segments, respectively); (iii) $6.6 million of amortization of intangibles; (iv) $1.6 million of proxy solicitation costs; (v) $0.6 million of CEO transition costs; (vi) $0.3 million of strategic emerging technology costs; (vii) $0.3 million of amortization of cost to fulfill assets; and (viii) $0.2 million of amortization of stock-based compensation, as discussed above. Excluding such items, our consolidated operating loss for the three months ended October 31, 2024 would have been $22.3 million.

Our GAAP operating income of $2.1 million for the three months ended October 31, 2023 reflects: (i) $5.3 million of amortization of intangibles; (ii) $3.7 million of restructuring costs (of which $0.8 million and $2.9 million related to our Satellite and Space Communications and Unallocated segments, respectively); (iii) $2.6 million of amortization of stock-based compensation; (iv) $1.4 million of strategic emerging technology costs; and (v) $0.2 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating income for the three months ended October 31, 2023 would have been $15.3 million, or 10.1% of consolidated net sales.

The decrease, excluding the above items, from $15.3 million of operating income to $22.3 million of operating loss for the more recent period primarily reflects lower consolidated net sales and gross profit (both in dollars and as a percentage of consolidated net sales) and higher selling, general and administrative expenses, offset in part by lower research and development expenses, as discussed above. Operating income (loss) by reportable segment is further discussed below.

The decrease in our Satellite and Space Communications segment operating income for the three months ended October 31, 2024 primarily reflects a non-cash goodwill impairment charge of $79.6 million, significantly lower net sales and gross profit, both in dollars and as a percentage of related segment net sales (including an $11.4 million non-cash charge related to the write down of certain inventory), higher selling, general and administrative expenses (due primarily to a $17.4 million non-cash charge related to an allowance for doubtful accounts) and higher amortization of intangibles, offset in part by lower research and development expenses, as discussed above.

The increase in our Terrestrial and Wireless Networks segment operating income, both in dollars and as a percentage of the related segment net sales, for the three months ended October 31, 2024 primarily reflects higher net sales, offset in part by a lower gross profit percentage, as discussed above.

Excluding the impact of proxy solicitation costs, CEO transition costs and its respective portion of restructuring charges in each period, Unallocated expenses for the three months ended October 31, 2024 would have been $9.5 million, as compared to $9.2 million for the three months ended October 31, 2023. The increase in Unallocated expenses, excluding such items, was primarily due to higher selling, general and administrative expenses, as discussed above.

Interest Expense and Other. Interest expense was $9.5 million and $4.9 million for the three months ended October 31, 2024 and 2023, respectively. The increase is primarily due to higher interest rates and fees under our Credit Facility entered into on June 17, 2024 and subsequently amended on October 17, 2024 (the "Credit Facility"), as discussed in Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (10) - Credit Facility and, to a lesser extent, a higher average debt balance outstanding during the more recent period. Our effective interest rate (including amortization of deferred financing costs) in the three months ended October 31, 2024 was approximately 19.0%, as compared to 10.5% in the prior year period. Our cash borrowing rate (which excludes the amortization of deferred financing costs) under our Credit Facility approximated 16.6%, as compared to 9.2% in the prior year period.

Interest (Income) and Other. Interest (income) and other for both the three months ended October 31, 2024 and 2023 was nominal. All of our available cash and cash equivalents are currently invested in bank deposits and money market deposit accounts which, at this time, are currently yielding an immaterial interest rate.

Write-off of Deferred Financing Costs. During the three months ended October 31, 2024, in connection with the October 17, 2024 amendment to the Credit Facility and due to the borrowing capacity of the Revolver Loan being limited by the revolving lender's and Agent's consent right, a pro-rata amount of financing fees totaling $1.4 million were immediately expensed during three months ended October 31, 2024.

Change in Fair Value of Warrants and Derivatives. During the three months ended October 31, 2024, we recorded a $5.5 million non-cash expense due to the remeasurement of warrants and derivatives related to our Credit Facility, Subordinated Credit Facility and Convertible Preferred Stock. See Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (10) - Credit Facility, Note (11) - Subordinated Credit Facility and Note (18) - Convertible Preferred Stock for more information. These warrants and derivatives were not outstanding in the corresponding period of the prior year.

Provision for (Benefit from) Income Taxes. For the three months ended October 31, 2024, we recorded a tax expense of $2.1 million, as compared to a tax benefit of $1.3 million recorded in the three months ended October 31, 2023. Our effective tax rate (excluding discrete tax items) for the three months ended October 31, 2024 and 2023 was (3.8)% and 122.00%, respectively. The change in rate from 122.0% to (3.8)% is primarily due to changes in expected product and geographical mix and not providing for tax benefits on U.S. deferred tax assets in the more recent period.

For purposes of determining our (3.8)% estimated annual effective tax rate for fiscal 2025, the impairment of long-lived assets, including goodwill, the change in fair value of warrants and derivatives, proxy solicitation costs and CEO transition costs are considered significant, unusual or infrequently occurring discrete tax items and are excluded from the computation of our effective tax rate.

During the three months ended October 31, 2024, we recorded a net discrete tax benefit of $0.1 million primarily related to proxy solicitation costs and CEO transition costs. During the three months ended October 31, 2023, we recorded a net discrete tax benefit of $2.0 million primarily related to our decision to sell our Power Systems Technology product line (the "PST Divestiture') in a taxable transaction and settlement of stock-based awards.

Our U.S. federal income tax returns for fiscal 2021 through 2023 are subject to potential future IRS audit. None of our state income tax returns prior to fiscal 2020 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.

Net Loss Attributable to Common Stockholders. During the three months ended October 31, 2024 and 2023, consolidated net loss attributable to common stockholders was $155.9 million and $3.3 million, respectively. In addition to those items discussed above, the more recent period includes: (i) $58.6 million of dividends related to our Convertible Preferred Stock outstanding during the quarter; offset in part by (ii) a $51.2 million gain related to the exchange of our Series B-1 Convertible Preferred Stock for Series B-2 Convertible Preferred Stock on October 17, 2024.

Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both the three months ended October 31, 2024 and 2023 are shown in the table below (numbers in the table may not foot due to rounding):

($ in millions)

The decrease in consolidated Adjusted EBITDA, both in dollars and as a percentage of consolidated net sales, for the three months ended October 31, 2024 as compared to the three months ended October 31, 2023 reflects lower consolidated net sales and gross profit (both in dollars and as a percentage of consolidated net sales) and higher selling, general and administrative expenses (due to a $17.4 million non-cash charge related to an allowance for doubtful accounts), offset in part by lower research and development expenses, as discussed above.

The decrease in our Satellite and Space Communications segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, reflects significantly lower net sales and gross profit (both in dollars and as a percentage of related segment net sales) and higher selling, general and administrative expenses (due to a $17.4 million non-cash charge related to an allowance for doubtful accounts), offset in part by lower research and development expenses, as discussed above.

The increase in our Terrestrial and Wireless Networks segment's Adjusted EBITDA, in dollars, reflects higher net sales, offset in part by a lower gross profit percentage, as discussed above.

A reconciliation of our fiscal 2024 GAAP Net Loss to Adjusted EBITDA is shown in the table below (numbers in the table may not foot due to rounding):

($ in millions)

Our Adjusted EBITDA is a Non-GAAP measure that represents earnings (loss) before interest, income taxes, depreciation, amortization of intangibles, impairment of long-lived assets, including goodwill, amortization of cost to fulfill assets, amortization of stock-based compensation, CEO transition costs, change in fair value of warrants and derivatives, proxy solicitation costs, restructuring costs, strategic emerging technology costs (for next-generation satellite technology) and write-off of deferred financing costs, and in the recent past, acquisition plan expenses, change in fair value of the convertible preferred stock purchase option liability, COVID-19 related costs, facility exit costs, strategic alternatives expenses and other and loss on business divestiture. 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. Although closely aligned, our definition of Adjusted EBITDA is different than EBITDA (as such term is defined in our Credit Facility) utilized for financial covenant calculations and also may differ from the definition of EBITDA or Adjusted EBITDA used by other companies and therefore may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA is also a measure frequently requested by our investors and analysts. We believe that investors and analysts may use Adjusted EBITDA, along with other information contained in our SEC filings, including GAAP measures, in assessing our performance and comparability of our results with other companies. Our Non-GAAP measures reflect the GAAP measures as reported, adjusted for certain items as described herein and also excludes the effects of our outstanding convertible preferred stock.

These Non-GAAP financial measures have limitations as an analytical tool as they exclude the financial impact of transactions necessary to conduct our business, such as the granting of equity compensation awards, and are not intended to be an alternative to financial measures prepared in accordance with GAAP. These measures are adjusted as described in the reconciliation of GAAP to Non-GAAP measures in the tables presented herein, but these adjustments should not be construed as an inference that all of these adjustments or costs are unusual, infrequent or non-recurring. Non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, financial measures determined in accordance with GAAP. Investors are advised to carefully review the GAAP financial results that are disclosed in our SEC filings. As we have not provided future financial targets, there is no need to reconcile our business outlook to the most directly comparable GAAP measures. Furthermore, even if targets had been provided, 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 would not be available without unreasonable effort and such unavailable reconciling items could significantly impact our financial results.

Reconciliations of our GAAP consolidated operating income (loss), net income (loss) attributable to common stockholders and net income (loss) per diluted common share to the corresponding Non-GAAP measures are shown in the tables below (numbers and per share amounts in the tables may not foot due to rounding). Non-GAAP net income (loss) attributable to common stockholders and non-GAAP net income (loss) per diluted common share reflect Non-GAAP provisions for income taxes based on year-to-date results, as adjusted for the Non-GAAP reconciling items included in the tables below. We evaluate our Non-GAAP effective income tax rate on an ongoing basis, and it can change from time to time. Our Non-GAAP effective income tax rate can differ materially from our GAAP effective income tax rate. In addition, due to the GAAP net loss for the period, Non-GAAP net income per diluted common share for the three months ended October 31, 2023 was computed using weighted average diluted shares outstanding of 28,982,000 during the period.

($ in millions, except for per share amount)

57

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents were $29.6 million and $32.4 million at October 31, 2024 and July 31, 2024, respectively. For the three months ended October 31, 2024, our cash flows reflect the following:

• Net cash used in operating activities was $21.8 million and $14.5 million for the three months ended October 31, 2024 and 2023, respectively. The period-over-period decrease in cash flows from operating activities reflects lower net sales and gross profit in the first quarter of fiscal 2025, as well as overall changes in net working capital requirements, principally the timing of: (i) payments to vendors; and (ii) progress toward completion on contracts accounted for over time, including related shipments, billings and collections. Over the past several quarters, we have experienced elevated levels of contract assets (i.e., unbilled receivables) related to large, long-term contracts with certain U.S. government and international customers. While such contract assets are trending lower more recently due to shipments, billings and collections from our customers, such contract activity has resulted in a material increase in working capital requirements.
• Net cash used in investing activities for the three months ended October 31, 2024 and 2023 was $2.4 million and $3.2 million, respectively, and primarily reflects capital expenditures to build-out cloud-based computer networks to support our previously announced NG-911 contract wins and capital investments and building improvements in connection with our manufacturing facilities.
• Net cash provided by financing activities was $21.4 million and $17.0 million for the three months ended October 31, 2024 and 2023, respectively. During the three months ended October 31, 2024, we: (i) entered into a Subordinated Credit Facility with existing holders of our convertible preferred stock and received proceeds of $25.0 million; and (ii) paid deferred financing costs of $2.8 million in connection with both the Subordinated Credit Facility and our Credit Facility. During the three months ended October 31, 2023, we: (i) had net borrowings under our prior credit facility of $19.6 million; and (ii) paid deferred financing costs of $0.3 million. We also made $0.7 million and $1.7 million of payments to remit employees' statutory tax withholding requirements related to the net settlement of stock-based awards during the three months ended October 31, 2024 and 2023, respectively.

The Credit Facility, Subordinated Credit Facility and Convertible Preferred Stock are discussed below and in Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements – Note (10) – Credit Facility, Note (11) - Subordinated Credit Facility and Note (18) – Convertible Preferred Stock.

Liquidity and Going Concern

Pursuant to the requirements of ASC Topic 205-40, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, we are required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern. This evaluation does not take into consideration the potential mitigating effect of our plans that have not been fully implemented or are not within our control as of the date the unaudited Condensed Consolidated Financial Statements are issued. When substantial doubt exists, we evaluate whether the mitigating effect of our plans sufficiently alleviates substantial doubt about our ability to continue as a going concern. The mitigating effect of our plans, however, is only considered if both (i) it is probable that the plans will be effectively implemented within one year after the date that the unaudited Condensed Consolidated Financial Statements are issued, and (ii) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about our ability to continue as a going concern within one year after the date that the unaudited Condensed Consolidated Financial Statements are issued.

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

Over the past three fiscal years, we incurred operating losses of $79.9 million, $14.7 million and $33.8 million in fiscal 2024, 2023 and 2022, respectively. More recently, we recognized an operating loss of $129.2 million in the three months ended October 31, 2024. In addition, over the past three fiscal years, net cash used in operating activities was $54.5 million and $4.4 million in fiscal 2024 and 2023, respectively, and net cash provided by operating activities was $2.0 million in fiscal 2022. More recently, net cash used in operating activities was $21.8 million in the three months ended October 31, 2024. Our ability to meet future anticipated liquidity needs over the next year beyond the issuance date will largely depend on our ability to generate positive cash inflows from operations, maximize our borrowing capacity under our Credit Facility, as discussed further below, and/or secure other sources of outside capital. While we believe we will be able to generate sufficient positive cash inflows, maximize our borrowing capacity and secure outside capital, there can be no assurance our plans will be successfully implemented and, as such, we may be unable to continue as a going concern over the next year beyond the issuance date.

As discussed further in Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements – Note (10) – Credit Facility, on June 17, 2024, we entered into a $222.0 million credit facility with a new syndicate of lenders, which replaced our prior credit facility. As further discussed below, we subsequently amended the credit facility on October 17, 2024 (the "Credit Facility"). The Credit Facility consists of a committed $162.0 million term loan (“Term Loan”) and $60.0 million revolving loan (“Revolver Loan”). At both October 31, 2024 and January 10, 2025 (the date closest to the issuance date), total outstanding borrowings under the Credit Facility were $199.5 million. At both October 31, 2024 and January 10, 2025, $32.5 million was drawn on the Revolver Loan. As of the issuance date, our available sources of liquidity approximate $28.5 million, consisting solely of qualified cash and cash equivalents. That is, our available sources of liquidity do not include the remaining portion of the committed Revolver Loan due to the revolving lender's and Agent's consent right, discussed below, to any borrowings that exceed $32.5 million.

The Credit Facility, among other things, requires compliance with new restrictive and financial covenants, including: a maximum Net Leverage Ratio of 3.25x commencing with the fiscal quarter ending January 31, 2025; a minimum Fixed Charge Coverage Ratio of 1.20x commencing with the four fiscal quarter period ending January 31, 2025; a minimum Average Liquidity requirement at each fiscal quarter end of $20.0 million; and a minimum EBITDA of $35.0 million for the four fiscal quarter period ending October 31, 2025. Such ratios adjust under the Credit Facility in future periods. Over the next twelve months beyond the issuance date, commencing with our fiscal quarter ending January 31, 2025, we believe that we will not be able to comply with one or more of these covenants.

The Credit Facility was amended on October 17, 2024 to waive certain defaults or events of default, including in connection with our Net Leverage Ratio and Fixed Charge Coverage Ratio covenants as of July 31, 2024. The amendment also, among other things: (i) increased the interest rate margins applicable to the loans; (ii) modified certain financial and collateral reporting requirements; (iii) provided a consent right to the revolving lender and Agent with respect to $27.5 million of Revolver Loan borrowings above $32.5 million; (iv) permitted the incurrence of $25.0 million of senior unsecured subordinated debt (as described below); (v) amended the maturity date to the earlier of (x) July 31, 2028 or (y) 90 days prior to the earliest date that the debt under the Subordinated Credit Agreement (as defined below) becomes due and payable; and (vi) suspended certain financial covenant testing through the end of our fiscal quarter ending January 31, 2025.

In addition, we entered into a Subordinated Credit Agreement with the existing holders of our Convertible Preferred Stock (the “Subordinated Credit Agreement”) on October 17, 2024, which provides a subordinated unsecured term loan facility in the aggregate principal amount of $25.0 million (the “Subordinated Credit Facility”). The proceeds of the Subordinated Credit Facility: (i) cured our default on certain financial covenants under the Credit Facility, as discussed above; (ii) provided additional liquidity to us; and (iii) funded our general working capital needs.

Our ability to meet our current obligations as they become due may be impacted by our ability to remain compliant with the financial covenants required by the Credit Facility, or to obtain future waivers or amendments from the lenders in the event compliance is not maintained. While we believe we will be able to secure such waivers or amendments, as needed, there can be no assurance such waivers or amendments will be secured or on terms that are acceptable to us. If we are unable to secure waivers or amendments, the lenders may declare an event of default, which would cause an immediate acceleration and repayment of all outstanding principal, interest and fees due under our Credit Facility. Absent our ability to repay the forgoing amounts upon the declaration of an event of default, the lenders may exercise their rights and remedies under the Credit Facility, which may include, among others, a seizure of substantially all of our assets and/or the liquidation of our operations. If an event of default occurs that allows the lenders to exercise these rights and remedies over the next year beyond the issuance date, we will be unable to continue as a going concern.

As of the issuance date, our plans to address our ability to continue as a going concern include, among other things:

• executing a strategy to transform Comtech (ongoing and future actions supporting our transformation strategy include: an exploration of strategic alternatives for our various businesses and product lines; the pursuit of further portfolio-shaping opportunities to enhance profitability, efficiency and focus; and the implementation of additional operational initiatives to both achieve profitable results from operations as well as to align our go-forward cost structure with our future state business), as discussed further in Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements – Note (21) – Cost Reduction and Restructuring Related Activities;
• pursuing initiatives to reduce investments in working capital, namely accounts receivable and inventory;
• improving process disciplines to attain and maintain profitable operations by entering into more favorable sales or service contracts;
• reevaluating our business plans to identify opportunities (e.g., within each of our segments) to focus future investment on our most strategic, high-margin revenue opportunities;
• reevaluating our business plans to identify opportunities to further reduce capital expenditures;
• seeking opportunities to improve liquidity through any combination of debt and/or equity financing (including possibly restructuring our Credit Facility, Convertible Preferred Stock and/or Subordinated Credit Facility); and
• seeking other strategic transactions and/or measures including, but not limited to, the potential sale or divestiture of assets in addition to the wind down of our steerable antenna product line in Basingstoke, U.K.

While we believe the implementation of some or all of the elements of our plans over the next year beyond the issuance date will be successful, these plans are not all solely within management’s control and, as such, we can provide no assurance our plans are probable of being effectively implemented as of the issuance date. Therefore, the adverse conditions and events described above are uncertainties that raise substantial doubt about our ability to continue as a going concern. The accompanying Condensed Consolidated Financial Statements in Part I. - Item 1. have been prepared on the basis that we will continue to operate as a going concern, which contemplates we will be able to realize assets and settle liabilities and commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying Condensed Consolidated Financial Statements do not include any adjustments that may result from the outcome of these uncertainties.

Our material cash requirements are for working capital, debt service (including interest and fees), capital expenditures, income tax payments, facilities lease payments and dividends related to our Convertible Preferred Stock, which are payable in kind or in cash under certain circumstances.

Our material cash requirements could increase beyond our current expectations due to factors, including but not limited to: (i) an inability to meet our current obligations under our Credit Facility and/or Subordinated Credit Facility as they become due, or to obtain future waivers or amendments from the lenders in the event compliance is not maintained; (ii) a future redemption by the holders of our Convertible Preferred Stock; (iii) general economic conditions; (iv) a change in government spending priorities and/or contracting decisions; (v) larger than usual customer orders; or (vi) actions we may take related to our strategic transformation.

Also, in light of our recently announced strategic transformation initiatives, we continue to review and evaluate our capital allocation plans. Furthermore, we may choose to raise additional funds through equity and debt financing transactions to provide additional flexibility or to pursue acquisitions. Although it is difficult in the current economic and credit environment to predict the terms and conditions of financing that may be available in the future, we believe that we would have sufficient access to credit from financial institutions and/or financing from public and private debt and equity markets.

In addition to making capital investments for our 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. We expect capital investments for these and other initiatives to continue throughout fiscal 2025.

Our investment policy relating to our cash and cash equivalents is intended to minimize principal loss while at the same time maximize the income we receive without significantly increasing risk. To minimize risk, we generally invest excess cash and cash equivalents in money market mutual funds (both government and commercial), certificates of deposit, bank deposits, and U.S. Treasury securities. Money market mutual funds we invest in are direct obligations of the U.S. government, bank securities guaranteed by the Federal Deposit Insurance Corporation, certificates of deposit and commercial paper and other securities issued by other companies. While we cannot predict future market conditions or market liquidity, we believe our investment policies are appropriate in the current environment. Ultimately, the availability of our cash and cash equivalents is dependent on a well-functioning liquid market.

On July 13, 2022, we filed a $200.0 million shelf registration statement with the SEC for the sale of various types of securities, including debt securities. This shelf registration statement was declared effective by the SEC as of July 25, 2022 and expires on July 25, 2025. To date, we have not issued any securities pursuant to our $200.0 million shelf registration statement. Because of delinquencies in our Exchange Act reporting, we cannot issue securities under the shelf registration statement without first filing a post-effective amendment to such shelf registration statement with the SEC.

On September 29, 2020, our Board of Directors authorized a $100.0 million stock repurchase program, which replaced our prior program. The $100.0 million stock repurchase program has no time restrictions and repurchases may be made from time to time in open-market or privately negotiated transactions, or by other means in accordance with federal securities laws. There were no repurchases of our common stock during the three months ended October 31, 2024 and 2023.

In fiscal 2023, we adjusted the Company’s capital allocation plans and determined to forgo a common stock dividend. Future common stock dividends, if any, remain subject to compliance with financial covenants under our Credit Facility, as well as Board approval and certain voting rights of holders of our Convertible Preferred Stock.

At October 31, 2024, cash and cash equivalents includes $0.3 million of cash deposited as collateral in connection with outstanding standby letters of credit to guarantee future performance on certain customer contracts.

Commitments

In the normal course of business, other than as discussed below, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment. We do not expect that these commitments, as of October 31, 2024, will materially adversely affect our liquidity. At October 31, 2024, cash payments due under contractual obligations (including estimated interest expense on our Credit Facility), excluding purchase orders that we entered into in our normal course of business, are as follows:

($ in thousands)

See Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (10) - Credit Facility and Note (11) - Subordinated Credit Facility for additional information on the commitments under our Credit Facility and Subordinated Credit Facility, respectively, and Note (12) - Leases for additional information on our lease commitments. As stated above, the amounts in the table represent cash payments due under contractual obligations. However, over the next twelve months beyond the issuance date, commencing with our fiscal quarter ending January 31, 2025, we believe that we will not be able to comply with one or more of our financial covenants related to our Credit Facility and Subordinated Credit Facility. As a result, all amounts outstanding under our Credit Facility and Subordinated Credit Facility have been presented as current liabilities on our Condensed Consolidated Balance Sheets as of October 31, 2024.

As discussed in Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (18) – Convertible Preferred Stock, the holders of the Convertible Preferred Stock have the option to redeem such shares for cash: (i) in the event of the occurrence of an asset sale meeting certain criteria; (ii) on or after April 30, 2027 in the event of a satisfaction of the existing Credit Facility; and (iii) in all other cases, October 31, 2028. As the Convertible Preferred Stock are not mandatorily redeemable for cash, the redemption value of such shares are not presented in the table above.

In the ordinary course of business, we include indemnification provisions in certain of our customer contracts. Pursuant to these agreements, we have agreed to indemnify, hold harmless and reimburse the indemnified party for certain losses suffered or incurred by the indemnified party, including but not limited to losses related to third-party intellectual property claims. It is not possible to determine the maximum potential amount under these agreements due to a history of nominal claims and the unique facts and circumstances involved in each particular agreement.

As discussed further in Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (20) - Legal Proceedings and Other Matters, we are subject to certain pending and threatened legal actions and a number of indemnification demands and we are incurring ongoing legal expenses in connection with these matters. Our insurance policies may not cover the cost of defending and/or resolving such matters. As a result, pending or future claims asserted against us by a party could result in legal costs and damages that could have a material adverse effect on our consolidated results of operations and financial condition.

We have entered into employment and/or change of control agreements, as well as indemnification agreements with certain of our executive officers and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of the Company or termination of the employee.

Our Condensed Consolidated Balance Sheet at October 31, 2024 includes total liabilities of $8.7 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"). See Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (3) – Adoption of Accounting Standards and Updates for further information.

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 $3.3 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 October 31, 2024, we had cash and cash equivalents of $29.6 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 October 31, 2024, 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.

Evaluation of Disclosure 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 Chief Executive Officer and Chief Financial Officer.

Based on this evaluation, we concluded that our disclosure controls and procedures were not effective as of October 31, 2024, as a result of the material weaknesses in our internal control over financial reporting discussed below.

Notwithstanding our material weaknesses, we have concluded that the condensed consolidated financial statements and other financial information included in this Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the U.S. ("U.S. GAAP").

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.

Material Weaknesses in Internal Control over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

As previously disclosed in our Annual Report on Form 10-K for the year ended July 31, 2024, we did not design and maintain an effective control environment commensurate with our financial reporting requirements based on the criteria in the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control Framework (2013), as we lacked a sufficient complement of resources with an appropriate level of knowledge and experience to establish effective process and controls. The control environment material weakness contributed to other material weaknesses within our system of internal control over financial reporting at the control activity level, where we did not design and implement effective control activities, including controls related to revenue, inventory and other assets. Deficiencies in control activities contributed to accounting errors and the potential for there to have been material accounting errors within revenue, inventory and other assets.

In connection with our preparation of our Quarterly Report on Form 10-Q for the three months ended October 31, 2024, we identified an additional deficiency that individually represents a material weakness in our internal control over financial reporting. Specifically, we did not have a sufficient complement of internal and external resources with appropriate technical accounting expertise to perform control activities, or to reach appropriate accounting conclusions for complex accounting matters and transactions, which included debt, convertible preferred stock and related embedded derivatives.

Changes In Internal Control Over Financial Reporting

Other than for the material weaknesses described above, there have been no changes in our internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during our fiscal quarter ended October 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Remediation Plan

Our remediation efforts are ongoing and we will continue our initiatives to hire additional skilled resources in program management and accounting and finance related functions, and implement and document policies, procedures, and internal controls. Remediation of the identified material weaknesses and strengthening of our internal control environment will require a substantial effort throughout fiscal 2025 and beyond, as necessary. We will test the ongoing operating effectiveness of the new and existing controls in future periods. The material weaknesses cannot be considered completely remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.

The certifications of our Chief Executive Officer 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.

PART II

OTHER INFORMATION

Except as set forth below, there have been no material changes to the description of the risk factors affecting our business previously disclosed in “Part I. - Item 1A. - Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended July 31, 2024, as filed with the SEC on October 30, 2024, which are hereby incorporated by reference.

We may fail to realize all of the anticipated benefits of our strategic and operational initiatives, or those benefits may take longer to realize than expected.

We are continuing to execute a strategy to transform Comtech through the exploration of strategic alternatives for our various businesses and product lines, the pursuit of further portfolio-shaping opportunities to enhance profitability, efficiency and focus, and the implementation of additional operational initiatives to both achieve profitable results from operations, as well as to align our go-forward cost structure with our future state business. There can be no assurance that any of these initiatives will result in outcomes on terms acceptable to us or at all. Even if any of these initiatives were completed, there can be no assurance as to the timing of completing these activities. Moreover, we may not realize any or all of the anticipated benefits from our pursuit of these initiatives, and related transactions could in fact adversely affect our business. Our ability to realize the anticipated benefits of our transformation strategy will depend, to a large extent, on our ability to continue to focus on, and to achieve more predictable growth, related to our remaining business. Some of the anticipated benefits may not occur for a significant period of time. In addition, we may retain certain liabilities or obligations related to any disposed of businesses that may arise under contract or law, or may have difficulties enforcing our rights, contractual or otherwise, against the buyer. The outcome of these initiatives and the related transactions may not enhance long-term stockholder value as anticipated. Further, our strategic transformation could result in near term restructuring charges and a material impairment of our goodwill and/or intangible assets, among other things.

Many of these factors will be outside of our control and any one of them could result in increased costs, including restructuring charges, decreases in the amount of expected revenues and diversion of management’s time and energy, which could adversely affect our business, financial condition and results of operations. In addition, the process of such strategic transformations, including divesting assets, carries an inherent risk of market fluctuations and economic uncertainties that could undermine the value we expect to realize.

Our current cash and liquidity projections raise substantial doubt about our ability to continue as a going concern.

Pursuant to the requirements of ASC Topic 205-40, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, we are required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern. This evaluation does not take into consideration the potential mitigating effect of our plans that have not been fully implemented or are not within our control as of the date the unaudited Condensed Consolidated Financial Statements are issued. When substantial doubt exists, we evaluate whether the mitigating effect of our plans sufficiently alleviates substantial doubt about our ability to continue as a going concern. The mitigating effect of our plans, however, is only considered if both (i) it is probable that the plans will be effectively implemented within one year after the date that the unaudited Condensed Consolidated Financial Statements are issued, and (ii) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about our ability to continue as a going concern within one year after the date that the unaudited Condensed Consolidated Financial Statements are issued.

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

Over the past three fiscal years, we incurred operating losses of $79.9 million, $14.7 million and $33.8 million in fiscal 2024, 2023 and 2022, respectively. More recently, we recognized an operating loss of $129.2 million in the three months ended October 31, 2024. In addition, over the past three fiscal years, net cash used in operating activities was $54.5 million and $4.4 million in fiscal 2024 and 2023, respectively, and net cash provided by operating activities was $2.0 million in fiscal 2022. More recently, net cash used in operating activities was $21.8 million in the three months ended October 31, 2024. Our ability to meet future anticipated liquidity needs over the next year beyond the issuance date will largely depend on our ability to generate positive cash inflows from operations, maximize our borrowing capacity under our Credit Facility, as discussed further below, and/or secure other sources of outside capital. While we believe we will be able to generate sufficient positive cash inflows, maximize our borrowing capacity and secure outside capital, there can be no assurance our plans will be successfully implemented and, as such, we may be unable to continue as a going concern over the next year beyond the issuance date.

As discussed further in Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements – Note (10) – Credit Facility, on June 17, 2024, we entered into a $222.0 million credit facility with a new syndicate of lenders, which replaced our prior credit facility. As further discussed below, we subsequently amended the credit facility on October 17, 2024 (the "Credit Facility"). The Credit Facility consists of a committed $162.0 million term loan (“Term Loan”) and $60.0 million revolving loan (“Revolver Loan”). At both October 31, 2024 and January 10, 2025 (the date closest to the issuance date), total outstanding borrowings under the Credit Facility were $199.5 million. At both October 31, 2024 and January 10, 2025, $32.5 million was drawn on the Revolving Loan. As of the issuance date, our available sources of liquidity approximate $28.5 million, consisting solely of qualified cash and cash equivalents. That is, our available sources of liquidity do not include the remaining portion of the committed Revolver Loan due to the revolving lender's and Agent's consent right, discussed below, to any borrowings that exceed $32.5 million.

The Credit Facility, among other things, requires compliance with new restrictive and financial covenants, including: a maximum Net Leverage Ratio of 3.25x commencing with the fiscal quarter ending January 31, 2025; a minimum Fixed Charge Coverage Ratio of 1.20x commencing with the four fiscal quarter period ending January 31, 2025; a minimum Average Liquidity requirement at each fiscal quarter end of $20.0 million; and a minimum EBITDA of $35.0 million for the four fiscal quarter period ending October 31, 2025. Such ratios adjust under the Credit Facility in future periods. Over the next twelve months beyond the issuance date, commencing with our fiscal quarter ending January 31, 2025, we believe that we will not be able to comply with one or more of these covenants.

The Credit Facility was amended on October 17, 2024 to waive certain defaults or events of default, including in connection with our Net Leverage Ratio and Fixed Charge Coverage Ratio covenants as of July 31, 2024. The amendment also, among other things: (i) increased the interest rate margins applicable to the loans; (ii) modified certain financial and collateral reporting requirements; (iii) provided a consent right to the revolving lender and Agent with respect to $27.5 million of Revolver Loan borrowings above $32.5 million; (iv) permitted the incurrence of $25.0 million of senior unsecured subordinated debt (as described below); (v) amended the maturity date to the earlier of (x) July 31, 2028 or (y) 90 days prior to the earliest date that the debt under the Subordinated Credit Agreement (as defined below) becomes due and payable; and (vi) suspended certain financial covenant testing through the end of our fiscal quarter ending January 31, 2025.

In addition, we entered into a Subordinated Credit Agreement with the existing holders of our Convertible Preferred Stock (the “Subordinated Credit Agreement”) on October 17, 2024, which provides a subordinated unsecured term loan facility in the aggregate principal amount of $25.0 million (the “Subordinated Credit Facility”). The proceeds of the Subordinated Credit Facility: (i) cured our default on certain financial covenants under the Credit Facility, as discussed above; (ii) provided additional liquidity to us; and (iii) funded our general working capital needs.

Our ability to meet our current obligations as they become due may be impacted by our ability to remain compliant with the financial covenants required by the Credit Facility, or to obtain future waivers or amendments from the lenders in the event compliance is not maintained. While we believe we will be able to secure such waivers or amendments, as needed, there can be no assurance such waivers or amendments will be secured or on terms that are acceptable to us. If we are unable to secure waivers or amendments, the lenders may declare an event of default, which would cause an immediate acceleration and repayment of all outstanding principal, interest and fees due under our Credit Facility. Absent our ability to repay the forgoing amounts upon the declaration of an event of default, the lenders may exercise their rights and remedies under the Credit Facility, which may include, among others, a seizure of substantially all of our assets and/or the liquidation of our operations. If an event of default occurs that allows the lenders to exercise these rights and remedies over the next year beyond the issuance date, we will be unable to continue as a going concern.

As of the issuance date, our plans to address our ability to continue as a going concern include, among other things:

• executing a strategy to transform Comtech (ongoing and future actions supporting our transformation strategy include: an exploration of strategic alternatives for our various businesses and product lines; the pursuit of further portfolio-shaping opportunities to enhance profitability, efficiency and focus; and the implementation of additional operational initiatives to both achieve profitable results from operations as well as to align our go-forward cost structure with our future state business), as discussed further in Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements – Note (21) – Cost Reduction and Restructuring Related Activities;
• pursuing initiatives to reduce investments in working capital, namely accounts receivable and inventory;
• improving process disciplines to attain and maintain profitable operations by entering into more favorable sales or service contracts;
• reevaluating our business plans to identify opportunities (e.g., within each of our segments) to focus future investment on our most strategic, high-margin revenue opportunities;
• reevaluating our business plans to identify opportunities to further reduce capital expenditures;
• seeking opportunities to improve liquidity through any combination of debt and/or equity financing (including possibly restructuring our Credit Facility, Convertible Preferred Stock and/or Subordinated Credit Facility); and
• seeking other strategic transactions and/or measures including, but not limited to, the potential sale or divestiture of assets in addition to the wind down of our steerable antenna product line in Basingstoke, U.K.

While we believe the implementation of some or all of the elements of our plans over the next year beyond the issuance date will be successful, these plans are not all solely within management’s control and, as such, we can provide no assurance our plans are probable of being effectively implemented as of the issuance date. Therefore, the adverse conditions and events described above are uncertainties that raise substantial doubt about our ability to continue as a going concern. The accompanying Condensed Consolidated Financial Statements in Part I. - Item 1. have been prepared on the basis that we will continue to operate as a going concern, which contemplates we will be able to realize assets and settle liabilities and commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying Condensed Consolidated Financial Statements do not include any adjustments that may result from the outcome of these uncertainties.

In addition, the perception that we may not be able to continue as a going concern may cause customers, vendors and others to review and alter their business relationships and terms with us, and may affect our credit rating. If we seek additional financing to fund operations and there remains substantial doubt about our ability to continue as a going concern, financing sources may be unwilling to provide such funding to us on commercially reasonable terms, or at all. Uncertainty regarding our ability to continue as a going concern could also have a material and adverse impact on the price of our common stock, which could negatively impact our ability to obtain additional stock-based financing or enter into strategic transactions.

We may not continue to have access to the credit markets on acceptable terms and conditions, which could limit our ability to secure bonds required for existing and new projects.

We occasionally access the credit markets to obtain performance bonds, bid bonds, standby letters of credit and surety bonds to secure our performance of contractual obligations. We may not continue to have access to the capital markets or bank credit markets on terms acceptable to us, which could negatively affect our ability to bid new projects and our operating cash flows. Uncertainty with respect to the availability of these credit support lines could also impact the attractiveness and valuation of the relevant lines of business in connection with our strategic process. In addition, a downgrade in our credit rating could limit our ability to access the credit markets in order to provide performance bonds, bid bonds, standby letters of credit and surety bonds. Moreover, our customers and financial institutions with which we interact may exercise the right to require additional collateral based on market perceptions or market conditions, which could impair our access to and cost of funding certain projects.

Our business is highly dependent on the budgetary decisions of our government customers, including the U.S. government (including prime contractors to the U.S. government), and changes in the U.S. government’s fiscal policies or budgetary priorities may have a material adverse effect on our business, operating results and financial condition.

During our fiscal years ended July 31, 2024, 2023 and 2022, sales to the U.S. government (including sales to prime contractors to the U.S. government) were $182.3 million, $172.0 million and $132.6 million, or 33.7%, 31.3% and 27.2% of our consolidated net sales, respectively. In addition, a large portion of our existing backlog consists of orders related to U.S. government contracts and our Business Outlook for Fiscal 2025 and beyond depends, in part, on significant new orders from the U.S. government, which undergoes extreme budgetary pressures from time to time.

We rely on U.S. government spending on our communication solutions, and our receipt of future orders depends in large part on continued funding by the U.S. government for the programs in which we participate. These spending levels are not generally correlated with any specific economic cycle, but rather follow the cycle of general public policy and political support for this type of spending. Government contracts are conditioned upon the continuing availability of congressional appropriations and Congress’ failure to appropriate funds, or Congress’s actions to reduce or delay spending on, or reprioritize its spending away from, U.S. government programs which we participate in, could negatively affect our results of operations. Because many of the items we sell to the U.S. government are included in large programs realized over a period of several years, it is difficult, if not impossible, to determine specific amounts that are or will be appropriated for our products and services. As such, our assessments relating to the impact of changes in U.S. government spending may prove to be incorrect.

Further, the recent presidential election and congressional seat turnover may result in increased regulatory and economic uncertainty, including the spending priorities of the new U.S. presidential administration and Congress and what challenges budget reductions will present for us and our industry generally. For example, on November 12, 2024, President-elect Trump announced a planned advisory commission, the “Department of Government Efficiency,” to reform federal government processes and reduce expenditures. Changes in federal policy by the executive branch and regulatory agencies may occur over time through the new presidential administration’s and/or Congress’s policy and personnel changes, which could lead to changes involving the defense industry. However, the nature, timing and economic and political effects of such potential changes remain highly uncertain. Any future changes in U.S. policy and the United States’ response to global geopolitical developments could affect us in substantial and unpredictable ways. At this time, it is unclear whether and how any future changes or uncertainty surrounding future changes will adversely affect our operating environment and, therefore, demand for our products, our business, financial condition and results of operations.

The federal debt limit continues to be actively debated as plans for long-term national fiscal policy are discussed. The outcome of these discussions, which will be affected by the changes in presidential administration and in Congress following the elections in 2024, could have a significant impact on defense spending broadly and programs we support in particular. The failure of Congress to approve future budgets and/or increase the debt ceiling of the U.S. on a timely basis could delay or result in the loss of contracts for the procurement of our products and services and we may be asked or required to continue to perform for some period of time on certain of our U.S. government contracts, even if the U.S. government is unable to make timely payments. A decrease in DoD or Department of Homeland Security expenditures, the elimination or curtailment of a material program in which we are involved, or changes in payment patterns of our customers as a result of changes in U.S. government spending could have an adverse effect on our business, results of operations and financial condition.

On December 21, 2024, President Biden signed a bipartisan Continuing Resolution (CR; H.R. 10545) to extend federal spending and avert a government shutdown through March 14, 2025. Accordingly, it is still possible that a partial shutdown of the U.S. government may occur, or additional interim budgets may be adopted. As such, we may experience delayed orders, delayed payments and adverse impacts on our results of operations. We may experience related supply chain delays, disruptions or other problems associated with financial constraints faced by our suppliers and subcontractors. All of the aforementioned conditions and factors could have a material adverse effect on our business, results of operations and financial condition. Additionally, cost cutting, efficiency initiatives, reprioritization, other affordability analyses, and changes in budgetary priorities by our governmental customers, including the U.S. government, could adversely impact both of our operating segments. We are unable to predict the impact these or similar events could have on our business, financial position, results of operations or cash flows.