Comtech Telecommunications Corp: Form 10-Q for the period ended Apr 30, 2025

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, or the negative of those words and expressions, as well as statements in future tense. 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 Amended 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. Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of the times at, or by which, such performance or results will be achieved. Forward-looking information is based on information available at the time and/or our good faith belief with respect to future events, and is subject to risks and uncertainties that are difficult to predict and many of which are outside of our control. 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 and uncertainty in prevailing economic and political conditions (including financial and capital market conditions), including as a result of Russia's military incursion into Ukraine, the Israel-Hamas war and attacks in the Red Sea region or any tariff, trade restrictions or similar matters; 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 and the "Risk Factors" (Part II, Item 1A) in our Quarterly Report on Form 10-Q filed with the SEC on January 13, 2025. 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 ESTIMATES

We consider certain accounting estimates 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 and Part I. - Financial Information - Item 4. Controls and Procedures for further information.

A cost-to-cost measure of progress is principally used to account for contracts in our Satellite and Space Communications segment and, to a lesser extent, certain location-based and messaging infrastructure contracts in our public safety and location technologies product line within our Terrestrial and Wireless Networks segment.

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

We perform on a broad range of contracts whose revenue is recognized over time, including the development of complex and advanced customized solutions which often require the application of new technologies. Cost estimates on fixed-price development contracts and early stage/low-rate production contracts are inherently more uncertain as to future events than on mature, full-rate production contracts. As a result, for fixed-price development contracts and early stage/low-rate production contracts, there is typically more variability in those estimates and greater financial risk associated with unanticipated cost growth. Risks include, but are not limited to: technical engineering risks related to the underlying technologies being developed; schedule risks related to completing performance obligations timely; and customer risks related to changing specifications.

The estimation of contract revenue, cost and progress toward completion requires the use of judgment, which can be affected by any number of factors over time and which may cause our actual results to differ materially from those estimates, as facts and circumstances change or become known to us. Changes in estimates can occur for a variety of reasons including, but not limited to: changes in the availability, productivity and cost of labor; the effect of change orders on contract scope; the resolution of engineering risks at lower or higher costs than anticipated; the availability and cost of material components and subcontracts, as well as the performance of our subcontractors or suppliers; the impact of unanticipated changes in our customers' schedules; and changes in indirect cost allocations, such as overhead.

The impact of gross favorable and unfavorable changes in contract estimates on reported gross margin is presented in the table below:

Impairment of Long-Lived Assets, Including Goodwill. As of April 30, 2025, 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 April 30, 2025, net intangibles recorded on our Condensed Consolidated Balance Sheet aggregated $178.1 million (of which $42.6 million relates to our Satellite and Space Communications segment and $135.5 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 2022 through 2024 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 April 30, 2025 and 2024, capitalized internal-use software costs were $1.2 million and $1.1 million, respectively. For the nine months ended April 30, 2025 and 2024, capitalized internal-use software costs were $2.7 million in each period.. 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 first quarter of fiscal 2025, 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 discontinued. 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, domestic 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 $18.6 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 $17.0 million unbilled receivable contract asset within our allowance for doubtful accounts.

As also discussed in Part I. - Financial Information - Item 1. - Note (7) - Accounts Receivables, in December 2024, we received a notice from our prime contractor to stop work associated with a next-generation troposcatter terminal contract with the U.S. Marine Corps as the end customer. We remain under a stop work order and believe our customer may be considering a termination of the contract, in whole or in part. As of April 30, 2025, our billed and unbilled receivables related to the U.S. Marine Corps contract approximate $13.9 million and could be at risk of not being collected. Future results of operations related to our troposcatter solutions product line depend, in part, on the nature, timing and amount associated with resolving this matter.

Derivative Instruments and Warrant Liabilities. We evaluate our financial instruments, including our Credit Facility, Amended 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: Third Quarter Results and Business Outlook

Financial results for the third quarter of fiscal 2025 include:

• Consolidated net sales were $126.8 million, compared to $126.6 million in the second quarter of fiscal 2025 and $128.1 million in the third quarter of fiscal 2024;
• Gross margin was 30.7%, compared to 26.7% in our second quarter of fiscal 2025 and 30.4% in our third quarter of fiscal 2024;
• GAAP net loss attributable to common stockholders was $14.5 million and included, among other things: $5.0 million of intangible asset amortization, $4.3 million of restructuring costs and $1.2 million of amortization of stock-based compensation;
• GAAP EPS net loss of $0.49 and Non-GAAP EPS net loss of $0.18;
• Adjusted EBITDA (a Non-GAAP financial measure discussed below) of $12.6 million, or 9.9% of consolidated net sales, compared to an Adjusted EBITDA of $2.9 million, or 2.3% of consolidated net sales, for the second quarter of fiscal 2025 and Adjusted EBITDA of $11.9 million, or 9.3% of consolidated net sales, for the third quarter of fiscal 2024;
• Bookings (also referred to as orders) of $71.0 million, representing a quarterly book-to-bill ratio of 0.56x (a measure defined as bookings divided by net sales); bookings in the more recent quarter reflect a $36.4 million debooking related to the low margin U.S. Army GFSR contract that was protested by and ultimately awarded to the incumbent in May 2025 (see below for additional information); gross bookings for the quarter, excluding such debooking, were $107.4 million, representing a quarterly book-to-bill ratio of 0.85x;
• Backlog of $708.1 million as of April 30, 2025, compared to $798.9 million as of July 31, 2024 and $653.4 million as of April 30, 2024;
• Revenue visibility of approximately $1.2 billion. We measure this revenue visibility as the sum of our $708.1 million of funded backlog, plus the total unfunded value of certain multi-year contracts that we have received and from which we expect future orders; and
• Cash flows provided by operating activities were $2.3 million. Excluding $7.0 million in aggregate payments for restructuring costs, including severance, CEO transition costs and third party professional fees related to the modification of the Amended Subordinated Credit Facility on March 3, 2025, cash flows provided by operating activities during the more recent quarter would have been $9.3 million.

Non-GAAP financial measures discussed above are reconciled to the most directly comparable GAAP financial measures in the table included in the below section “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of the Results of Operations for the Three Months Ended April 30, 2025 and 2024” and “Comparison of the Results of Operations for the Nine Months Ended April 30, 2025 and 2024.”

Other Key Business Developments and Updates

Satellite and Space Communications

Our Satellite and Space Communications segment continues to focus on addressing performance, thoughtfully evaluating the product portfolio and implementing initiatives to improve margins and cash flow generation.

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. The incumbent protested the award of the contract to Comtech several times and we learned on March 12, 2025 that the Government Accountability Office (“GAO”) upheld the most recent protest by the incumbent. In April 2025, we were informed by our customer that it would implement the GAO’s recommendation to reevaluate proposals and make a new award decision. On May 20, 2025, we were informed by the U.S. Army that it awarded the GFSR contract to the incumbent. As a result, we removed all orders associated with the GFSR contract from our backlog as of April 30, 2025.

During the third quarter of fiscal 2025, we were awarded:

• $8.5 million in aggregate orders from three commercial customers for our high-power amplifiers and frequency converters for use in airborne related applications;
• incremental funding of approximately $6.8 million for continued, ongoing training and support of complex cybersecurity operations for U.S. government customers;
• additional funding of approximately $5.8 million from a major U.S. prime contractor in support of NASA's Orion Production and Operations Contract ("OPOC"), or commonly known as the Artemis project;
• approximately $5.0 million in funded orders from a long-time international customer for the procurement of ongoing maintenance and support services related to long range missile and rocket launch tracking systems; and
• in excess of $3.6 million in funded orders calling for the supply of Very Small Aperture Terminal (“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; a decision reaffirmed by the U.S. Army on March 12, 2025; we do not plan any further challenges to the award).

As it relates to our troposcatter product line, throughout most of fiscal 2024, we experienced elevated levels of receivables due to the timing of our performance and billings/collections related to certain large U.S. government and international customer contracts. During principally the first half 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. In December 2024, however, we received a notice from our prime contractor to stop work associated with the U.S. Marine Corps contract. We remain under a stop work order and believe the end customer may be considering a termination of the contract, in whole or in part. As of April 30, 2025, our billed and unbilled receivables related to the U.S. Marine Corps contract approximate $13.9 million and could be at risk of not being collected. Future results of operations related to our troposcatter solutions product line depend, in part, on the nature, timing and amount associated with resolving this matter.

Terrestrial and Wireless Networks

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. New emergency requesting devices, such as "wearables," vehicles, smart speakers and AI capable cameras, and new delivery methods, such as through satellite networks, are expected to drive innovation and growth within the public safety market over time.

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

• a new next-generation 911 (“NG-911”) contract with a state in the Southeastern region of the U.S., valued in excess of $27.0 million over its initial 5-year term;
• various funded orders, aggregating $9.0 million, primarily for wireless location-based messaging services;
• over $2.5 million of initial funding from a new international customer for our location-based messaging services;
• more than $2.5 million of incremental funding from an existing NG-911 state customer in the Midwestern region of the U.S.;
• various funded orders, aggregating $1.4 million, primarily for location and maintenance and support services for another large wireless carrier in the U.S.; and
• additional funding from a Mid-Atlantic state for ancillary network and call handling services.

Additionally, we are nearing the completion of the development of our latest NG-911 call handling solution, which features a new architecture leveraging cloud and AI capabilities and designed to serve first responders in the U.S., Canada and Australia even better. We anticipate launching our revolutionary new product at this year's upcoming National Emergency Number Association ("NENA") conference.

Unallocated and Other Matters, Including an Update on Comtech's Improved Capital Structure

On March 3, 2025, we entered into the Second Amendment to the Credit Facility which, among other things: (i) waived all defaults under the Credit Facility, specifically in connection with our Net Leverage Ratio and Fixed Charge Coverage Ratio covenants as of January 31, 2025; (ii) decreased the interest rate margins applicable to the Term Loan from 12.00% per annum to 9.50% per annum for Base Rate Loans and from 13.00% per annum to 10.50% per annum for SOFR Loans; (iii) permitted the incurrence of an additional $40.0 million of total unsecured subordinated debt (as described below); (iv) suspended testing of the Net Leverage Ratio and the Fixed Charge Coverage Ratio covenants until October 31, 2025; (v) suspended our ability to pay interest in-kind until after the interest rate margins are tested based on net leverage ratios; (vi) permitted partial principal repayments of $27.3 million and $9.1 million on the Term Loan and Revolving Loan, respectively, and waived the prepayment fees that would have been payable under the Credit Facility with regard to such repayments; (vii) permanently reduced commitments under the Revolving Loan Facility by $3.2 million and provided the lenders a consent right with respect to Revolver Loan borrowings above $29.3 million; (viii) reduced the minimum quarterly average liquidity requirement from $20.0 million to $17.5 million; and (ix) provided the lenders the right to appoint an independent director to our Board of Directors after May 31, 2025. As a result of this amendment, there are no ongoing events of default under the Credit Facility.

On March 3, 2025, we entered into an amendment to the Subordinated Credit Agreement (“Amended Subordinated Credit Facility”) which, in addition to providing incremental aggregate principal of $40.0 million, waived all defaults under the Subordinated Credit Agreement, specifically in connection with our Net Leverage Ratio and Fixed Charge Coverage Ratio covenants as of January 31, 2025, and suspends testing of the Net Leverage Ratio and the Fixed Charge Coverage Ratio covenants under the Subordinated Credit Agreement until October 31, 2025. The net proceeds of the Amended Subordinated Credit Facility were principally used to repay a portion of the Term Loan and Revolving Loan on March 3, 2025 (as discussed above), fund our general working capital needs and enable us to negotiate the Second Amendment to the Credit Facility, including the waiver of existing defaults, as discussed above.

In connection with the above transactions, we: (i) agreed to change certain terms of our Convertible Preferred Stock to provide, among other things, the holders with: (x) a board observer right, and (y) the holders with certain information access rights; and (ii) 2,916.76 additional shares of Convertible Preferred Stock. We did not receive any cash proceeds from the exchange and issuance of Convertible Preferred Stock.

Collectively, we believe these actions provide us with enhanced financial flexibility, as we continue to transform our Company and pursue strategic alternatives. See Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (10) - Credit Facility, Note (11) - Amended Subordinated Credit Facility, and Note (18) - Convertible Preferred Stock for further information.

Business Outlook

During the third quarter of fiscal 2025, business conditions continued to be challenging, and the operating environment remains 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 a going concern; fluctuations in interest rates; inflationary pressures, including those related to actual or potential tariffs imposed directly or indirectly on our supply chain; continuing resolutions associated with the U.S. Federal budget, as well as reduced or eliminated spending by the U.S. government as a result of the formation of the Department of Government Efficiency (the "DOGE"); uncertainties related to the U.S. congressional bill referred to as "H.R. 1" or the "One Big Beautiful Bill Act;" 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 April 30, 2025 and 2024 and Comparison of the Results of Operations for the Nine Months Ended April 30, 2025 and 2024.

COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED APRIL 30, 2025 AND 2024

Net Sales. Consolidated net sales were $126.8 million and $128.1 million for the three months ended April 30, 2025 and 2024, respectively, representing a decrease of $1.3 million, or 1.0%. The period-over-period decrease reflects lower net sales in our Satellite and Space Communications segment, offset in part by higher sales in our Terrestrial and Wireless segment, as further discussed below.

Satellite and Space Communications

Net sales in our Satellite and Space Communications segment were $67.6 million for the three months ended April 30, 2025 as compared to $71.4 million for the three months ended April 30, 2024, a decrease of $3.8 million, or 5.3%. Related segment net sales for the three months ended April 30, 2025 primarily reflect lower net sales of our troposcatter solutions to the U.S. Marine Corps and U.S. Army as those two contracts wind down, offset in part by higher net sales of our SATCOM solutions (including VSAT and similar equipment sales to the U.S. Army and satellite ground infrastructure solutions). Our Satellite and Space Communications segment represented 53.3% of consolidated net sales for the three months ended April 30, 2025, as compared to 55.8% for the three months ended April 30, 2024. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the three months ended April 30, 2025 was 0.26x. Excluding the $36.4 million debooking associated with the U.S. Army GFSR contract (see Fiscal 2025: Third Quarter Results and Business Outlook above for further information), our book-to-bill ratio in this segment for the third quarter of fiscal 2025 was 0.80x.

Terrestrial and Wireless Networks

Net sales in our Terrestrial and Wireless Networks segment were $59.2 million for the three months ended April 30, 2025, as compared to $56.6 million for the three months ended April 30, 2024, an increase of $2.6 million, or 4.6%. Related segment net sales for the three months ended April 30, 2025 primarily reflect higher net sales of our next-generation 911 ("NG-911") services and location based solutions, offset in part by lower net sales of our call handling solutions. Our Terrestrial and Wireless Networks segment represented 46.7% of consolidated net sales for the three months ended April 30, 2025 as compared to 44.2% for the three months ended April 30, 2024. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the three months ended April 30, 2025 was 0.91x.

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 April 30, 2025 and 2024 are as follows:

Sales to U.S. government customers include sales to the U.S. Department of Defense ("DoD"), intelligence and civilian agencies, as well as sales directly to or through prime contractors. Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. For the three months ended April 30, 2025 and 2024, except for the U.S. government, there were no customers that represented 10% or more of consolidated net sales. International sales for the three months ended April 30, 2025 and 2024 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $29.7 million and $22.4 million, respectively. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented 10% or more of consolidated net sales for the three months ended April 30, 2025 and 2024.

Gross Profit. Gross profit was $38.9 million and $39.0 million for the three months ended April 30, 2025 and 2024, respectively. Gross profit, as a percentage of consolidated net sales, for the three months ended April 30, 2025 was 30.7% as compared to 30.4% for the three months ended April 30, 2024. Our gross profit (both in dollars and as a percentage of consolidated net sales) primarily reflects a higher percentage of our consolidated net sales generated by our Terrestrial and Wireless Networks segment, as well as product mix changes within each segment, as discussed above. Gross profit, as a percentage of related segment net sales, is further discussed below.

Our Satellite and Space Communications segment's gross profit, in dollars and as a percentage of related segment net sales, for the three months ended April 30, 2025 decreased in comparison to the three months ended April 30, 2024. The gross profit in the more recent period reflects changes in products and services mix, as discussed above. In particular, net sales for the third quarter of fiscal 2025, as compared to the prior year period, included an increase in low margin VSAT and similar equipment sales to the U.S. Army.

Our Terrestrial and Wireless Networks segment's gross profit, in dollars and as a percentage of related segment net sales, for the three months ended April 30, 2025 increased in comparison to the three months ended April 30, 2024. The gross profit percentage in the more recent period reflects changes in products and services mix, as discussed above. In particular, net sales for the third quarter of fiscal 2025 included over $3.0 million of incremental NG-911 services revenue due to reaching an agreement with a statewide customer to retroactively invoice for certain recurring services provided in the past. Given the cumulative catch up nature of this revenue, we do not anticipate similar adjustments for this customer in the future.

Included in consolidated cost of sales for the three months ended April 30, 2025 and 2024 are provisions for excess and obsolete inventory of $1.0 million and $0.8 million, respectively. As discussed in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - Provisions for Excess and Obsolete Inventory," we regularly review our inventory and record a provision for excess and obsolete inventory based on historical and projected usage trends.

Our consolidated gross profit, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each segment, and therefore is inherently difficult to forecast. 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 $30.2 million and $28.7 million for the three months ended April 30, 2025 and 2024, respectively. As a percentage of consolidated net sales, selling, general and administrative expenses were 23.8% and 22.4% for the three months ended April 30, 2025 and 2024, respectively.

During the three months ended April 30, 2025 and 2024, we incurred $4.3 million and $2.8 million, respectively, of restructuring costs primarily to streamline our operations and improve efficiency (including costs related to legal and professional fees associated with our pursuit of strategic alternatives, the wind down of our steerable antenna product line in the U.K. and severance costs). Excluding restructuring costs, selling, general and administrative expenses for the three months ended April 30, 2025 and 2024 would have been $25.9 million, or 20.4%, and $27.3 million, or 20.0%, respectively.

Amortization of stock-based compensation expense recorded as selling, general and administrative expenses was $1.0 million in the three months ended April 30, 2025, as compared to $0.3 million in the three months ended April 30, 2024. The prior year period reflects forfeitures of stock-based awards related to a former CEO. Amortization of stock-based compensation is not allocated to our two reportable operating segments.

Research and Development Expenses. Research and development expenses were $4.4 million and $5.7 million for the three months ended April 30, 2025 and 2024, respectively. As a percentage of consolidated net sales, research and development expenses were 3.5% and 4.5% for the three months ended April 30, 2025 and 2024, respectively.

For the three months ended April 30, 2025 and 2024, research and development expenses of $1.4 million and $3.0 million, respectively, related to our Satellite and Space Communications segment, and $2.9 million and $2.7 million, respectively, related to our Terrestrial and Wireless Networks segment. The remaining research and development expenses in each period related to the amortization of stock-based compensation expense and were nominal. Lower consolidated research and development expenses reflect our prioritization of resources across various programs.

During the three months ended April 30, 2024, we incurred $0.9 million 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. As a result of decision to cease operations related to our steerable antenna product line in the U.K., we do not expect to incur similar strategic emerging technology costs in the future.

Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the three months ended April 30, 2025 and 2024, customers reimbursed us $5.9 million and $5.7 million, respectively, which is not reflected in the reported research and development expenses but is included in net sales with the related costs included in cost of sales.

In addition to increases in customer-funded research and development activities in recent years, during the three months ended April 30, 2025 and 2024, we also experienced an increase in engineering efforts related to cost to fulfill contract assets and internal use software, for which we capitalized $2.0 million and $1.9 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, our research and development expenses for financial reporting purposes 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 April 30, 2025 was $5.0 million (of which $1.4 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) in the three months ended April 30, 2024. The decrease in our Satellite and Space Communications segment's amortization during the more recent quarter reflects the impact of our decision to wind down our steerable antenna product line in the U.K.

CEO Transition Costs. During the three months ended April 30, 2025 and 2024, we recorded $0.8 million and $2.5 million, respectively, of Unallocated expenses associated with our CEO transition-related activities.

Loss on Business Divestiture, Net. On November 7, 2023, we completed the PST Divestiture and recorded an estimated gain of $2.2 million in our Unallocated segment in the second quarter of fiscal 2024. Such estimated gain included a $1.0 million receivable for an amount held in escrow relating to the closing date net working capital. During our third quarter of fiscal 2024, the closing date net working capital was finalized, and we received $0.8 million of the $1.0 million held in escrow. As a result, we recognized a $0.2 million reduction to the estimated gain, resulting in a revised estimated gain on business divestiture, net of $2.0 million for the nine months ended April 30, 2024.

Operating Income (Loss). Operating loss for the three months ended April 30, 2025 and 2024 was $1.5 million and $3.5 million, respectively. Operating income (loss) by reportable segment is shown in the table below:

($ in millions)

Our GAAP operating loss of $1.5 million for the three months ended April 30, 2025 reflects: (i) $5.0 million of amortization of intangibles; (ii) $4.3 million of restructuring costs (of which $0.9 million and $3.4 million related to our Satellite and Space Communications and Unallocated segments, respectively); (iii) $1.2 million of amortization of stock-based compensation; and (iv) $0.8 million of CEO transition costs, as discussed above. Excluding such items, our consolidated operating income for the three months ended April 30, 2025 would have been $9.9 million, or 7.8% of consolidated net sales.

Our GAAP operating loss of $3.5 million for the three months ended April 30, 2024 reflects: (i) $5.3 million of amortization of intangibles; (ii) $2.8 million of restructuring costs (of which $0.6 million and $2.2 million related to our Satellite and Space `Communications and Unallocated segments, respectively); (iii) $2.5 million of CEO transition costs; (iv) $0.4 million of amortization of stock-based compensation; (v) $0.9 million of strategic emerging technology costs; (vi) $0.2 million of amortization of cost to fulfill assets, and (vii) a $0.2 million reduction to estimated gain on the PST Divestiture, as discussed above. Excluding such items, our consolidated operating income for the three months ended April 30, 2024 would have been $8.8 million, or 6.9% of consolidated net sales.

The increase, excluding the above items, from $8.8 million of operating income to $9.9 million of operating income for the more recent period primarily reflects lower selling, general and administrative 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 April 30, 2025 primarily reflects lower net sales and gross profit, both in dollars and as a percentage of related segment net sales, offset in part by lower selling, general and administrative expenses (due to cost reduction actions), research and development expenses and amortization of intangibles, as discussed above.

The increase in our Terrestrial and Wireless Networks segment operating income, both in dollars and as a percentage of the related segment net sales, for the three months ended April 30, 2025 primarily reflects higher net sales and gross profit, both in dollars and as a percentage of related segment net sales, offset in part by higher selling, general and administrative expenses and research and development expenses, as discussed above.

Excluding the impact of CEO transition costs, the reduction to the gain on the PST Divestiture and its respective portion of restructuring charges in each period, Unallocated expenses for the three months ended April 30, 2025 would have been $8.4 million, as compared to $7.1 million for the three months ended April 30, 2024. The increase in Unallocated expenses, excluding such items, was primarily due to higher selling, general and administrative expenses (including stock based compensation), as discussed above.

Interest Expense and Other. Interest expense was $12.9 million and $5.1 million for the three months ended April 30, 2025 and 2024, respectively. The increase during the more recent period is primarily due to: accreted interest and the immediate expensing of financing fees related to the first amendment to our Subordinated Credit Facility; higher interest rates and fees and average debt balance outstanding during the more recent period related to our Credit Facility; and amortization of deferred financing costs and debt discounts related to both facilities, as discussed further in Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (10) - Credit Facility and Note (11) - Amended Subordinated Credit Facility. Our effective interest rate (including amortization of deferred financing costs and debt discount) in the three months ended April 30, 2025 was approximately 28.5%, as compared to 12.3% in the prior year period. Our current cash borrowing rate (which excludes the amortization of deferred financing costs) under our Credit Facility approximates 14.2%, which reflects the benefit of the March 3, 2025 waiver and amendment to the Credit Facility, as compared to 9.4% in the corresponding prior year period.

Interest (Income) and Other. Interest (income) and other for both the three months ended April 30, 2025 and 2024 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 and Debt Discounts. In connection with the March 3, 2025 amendments to the Credit Facility and Amended Subordinated Credit Facility, and in particular the prepayment of Term Loan principal and reduced commitments under the Credit Facility, $3.5 million of deferred financing fees and debt discounts were immediately expensed during the three months ended April 30, 2025.

Change in Fair Value of Warrants and Derivatives. During the three months ended April 30, 2025 and 2024, we recorded a non-cash benefit of $49.5 million and $6.4 million, respectively, due to the remeasurement of warrants and derivatives related to our Credit Facility, Amended Subordinated Credit Facility and Convertible Preferred Stock. The remeasurement and resulting non-cash benefit for the three months ended April 30, 2025 primarily reflects a decrease in the estimated probability of events that could result in additional and/or accelerated payments to holders of our Convertible Preferred Stock. See Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (10) - Credit Facility, Note (11) - Amended Subordinated Credit Facility and Note (18) - Convertible Preferred Stock for more information.

Benefit from Income Taxes. For the three months ended April 30, 2025 and 2024, we recorded a tax benefit of $1.8 million and $5.4 million, respectively. Our effective tax rate (excluding discrete tax items) for the three months ended April 30, 2025 and 2024 was (0.05)% and 2.0%, respectively. The change in rate from 2.0% to (0.05)% is primarily due to changes in expected product and geographic mix and not providing for tax benefits on U.S. deferred tax assets in the more recent period.

For purposes of determining our (0.05)% 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 April 30, 2025 and 2024, we recorded a net discrete tax benefit of $0.5 million and $0.8 million, respectively. The benefit for each period was primarily related to the reversal of tax contingencies no longer required due to the expiration of applicable statute of limitations and the deductible portion of CEO transition costs.

Our U.S. federal income tax returns for fiscal 2022 through 2024 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.

Net Loss Attributable to Common Stockholders. During the three months ended April 30, 2025 and 2024, consolidated net loss attributable to common stockholders was $14.5 million and $1.0 million, respectively. In addition to those items discussed above, during the three months ended April 30, 2025, we recorded $48.4 million of net dividends related to our Convertible Preferred Stock, and during the three months ended April 30, 2024, we recorded $3.8 million of net dividends related to our Convertible Preferred Stock and $0.1 million of Convertible Preferred Stock issuance costs.

Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both the three months ended April 30, 2025 and 2024 are shown in the table below (numbers in the table may not foot due to rounding):

($ in millions)

The increase in consolidated Adjusted EBITDA, both in dollars and as a percentage of consolidated net sales, for the three months ended April 30, 2025 as compared to the three months ended April 30, 2024 reflects lower selling, general and administrative expenses and 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 lower net sales and gross profit (both in dollars and as a percentage of related segment net sales), offset in part by lower selling, general and administrative expenses (due to cost reduction actions) and research and development expenses, as discussed above.

The increase in our Terrestrial and Wireless Networks segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, reflects higher net sales and gross profit (both in dollars and as a percentage of related segment net sales), offset in part by higher selling, general and administrative expenses and research and development expenses, 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 (non-inventory related), strategic emerging technology costs (for next-generation satellite technology) and write-off of deferred financing costs and debt discounts, 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 and Amended Subordinated 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 April 30, 2024 was computed using weighted average diluted shares outstanding of 28,936,000 during the period.

($ in millions, except for per share amount)

COMPARISON OF RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED APRIL 30, 2025 AND 2024

Net Sales. Consolidated net sales were $369.2 million and $414.2 million for the nine months ended April 30, 2025 and 2024, respectively, representing a decrease of $45.0 million, or 10.9%. 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 $200.2 million for the nine months ended April 30, 2025 as compared to $252.4 million for the nine months ended April 30, 2024, a significant decrease of $52.2 million, or 20.7%. Related segment net sales for the nine months ended April 30, 2025 primarily reflect lower net sales of our troposcatter solutions (in particular, next-generation troposcatter terminals to the U.S. Marine Corps and 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 EEE space components and antennas (including those related to the CGC Divestiture initiated in our fourth quarter of fiscal 2024), offset in part by higher net sales of our SATCOM solutions (including VSAT and similar equipment sales to the U.S. Army and satellite ground infrastructure solutions). Our Satellite and Space Communications segment represented 54.2% of consolidated net sales for the nine months ended April 30, 2025, as compared to 60.9% for the nine months ended April 30, 2024. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the nine months ended April 30, 2025 was 0.62x. Excluding the $36.4 million debooking associated with the U.S. Army GFSR contract (see Fiscal 2025: Third Quarter Results and Business Outlook above for further information), our book-to-bill ratio in this segment for the nine months ended April 30, 2025 was 0.80x.

Terrestrial and Wireless Networks

Net sales in our Terrestrial and Wireless Networks segment were $168.9 million for the nine months ended April 30, 2025, as compared to $161.8 million for the nine months ended April 30, 2024, an increase of $7.1 million, or 4.4%. Related segment net sales for the nine months ended April 30, 2025 primarily reflect higher net sales of our NG-911 services and call handling solutions, offset in part by lower net sales of our location based solutions. Our Terrestrial and Wireless Networks segment represented 45.8% of consolidated net sales for the nine months ended April 30, 2025, as compared to 39.1% for the nine months ended April 30, 2024. Our book-to-bill ratio in this segment for the nine months ended April 30, 2025 was 0.92x.

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 nine months ended April 30, 2025 and 2024 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 nine months ended April 30, 2025 and 2024, except for the U.S. government, there were no customers that represented 10% or more of consolidated net sales. International sales for the nine months ended April 30, 2025 and 2024 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $72.6 million and $93.9 million, respectively. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented 10% or more of consolidated net sales for the nine months ended April 30, 2025 and 2024.

Gross Profit. Gross profit was $87.2 million and $130.0 million for the nine months ended April 30, 2025 and 2024, respectively, a decrease of $42.8 million. Gross profit, as a percentage of consolidated net sales, for the nine months ended April 30, 2025 was 23.6% as compared to 31.4% for the nine months ended April 30, 2024. Our gross profit for the nine months ended April 30, 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) 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; (iv) late delivery penalties related to a Modular Transportable Transmission Systems (or "MTTS") troposcatter solutions order; and (v) the expensing of work in process inventory related to certain loss contracts in our satellite ground infrastructure product line. Excluding the non-cash inventory-related charge, our gross profit, as a percentage of consolidated net sales, for the nine months ended April 30, 2025 would have been 26.7%, a decrease from the 31.4% reported in the nine months ended April 30, 2024. Gross profit (both in dollars and as a percentage of consolidated net sales) in the nine months ended April 30, 2024 was influenced by a large, high margin sale of COMET terminals to an international customer, which did not repeat in the nine months ended April 30, 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 nine months ended April 30, 2025 decreased significantly in comparison to the nine months ended April 30, 2024. 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 for the nine months ended April 30, 2025 increased and, as a percentage of related segment net sales, was comparable to the nine months ended April 30, 2024. The gross profit percentage in the more recent period reflects changes in products and services mix, as discussed above.

Included in consolidated cost of sales for the nine months ended April 30, 2025 and 2024 are provisions for excess and obsolete inventory of $14.5 million and $2.2 million, respectively. As discussed in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Estimates - 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 the nine months ended April 30, 2025, 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 discontinued. 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 $115.7 million and $91.7 million for the nine months ended April 30, 2025 and 2024, respectively. As a percentage of consolidated net sales, selling, general and administrative expenses were 31.3% and 22.1% for the nine months ended April 30, 2025 and 2024, respectively.

During the first quarter of fiscal 2025, we determined that an unbilled receivable contract asset in the amount of $18.6 million, related to an international customer and reseller of our troposcatter technologies, was at risk of not being invoiced or collected, principally due to a change in 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 $17.0 million unbilled receivable contract asset within our allowance for doubtful accounts. Also, during the nine months ended April 30, 2025 and 2024, we incurred $14.2 million million and $9.2 million of restructuring costs within selling, general and administrative expenses, respectively, primarily to streamline our operations and improve efficiency (including costs related to legal and professional fees associated with our pursuit of strategic alternatives, the wind down of our steerable antenna product line in the U.K. initiated in our fourth quarter of fiscal 2024 and severance costs). Excluding such provision for doubtful accounts and restructuring costs, selling, general and administrative expenses for the nine months ended April 30, 2025 and 2024 would have been $84.5 million, or 22.9% and $82.5 million or 19.9%, respectively, of consolidated net sales. The increase in our selling, general and administrative expenses, in dollars and as a percentage of consolidated net sales, excluding such items is primarily due to significantly lower consolidated net sales and higher legal and professional fees and cash-based incentive compensation, offset in part by lower stock-based compensation, as discussed below.

Amortization of stock-based compensation expense recorded as selling, general and administrative expenses was $2.0 million in the nine months ended April 30, 2025, as compared to $4.5 million in the nine months ended April 30, 2024. During the nine months ended April 30, 2025, 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 and former Chief Executive Officer, whose employment were both terminated during the more recent period. Additionally, 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. Amortization of stock-based compensation is not allocated to our two reportable operating segments.

Research and Development Expenses. Research and development expenses were $12.5 million and $20.4 million for the nine months ended April 30, 2025 and 2024, respectively, representing a decrease of $7.9 million, or 38.8%. As a percentage of consolidated net sales, research and development expenses were 3.4% and 4.9% for the nine months ended April 30, 2025 and 2024, respectively.

For the nine months ended April 30, 2025 and 2024, research and development expenses of $3.8 million and $12.0 million, respectively, related to our Satellite and Space Communications segment and $8.5 million and $8.1 million, respectively, related to our Terrestrial and Wireless Networks segment. The remaining research and development expenses of $0.2 million and $0.3 million in the nine months ended April 30, 2025 and 2024, 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 nine months ended April 30, 2025 and 2024, we incurred $0.3 million and $3.2 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. As a result of our decision to cease operations related to our steerable antenna product line in the U.K., we do not expect to incur similar strategic emerging technology costs in the future.

Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the nine months ended April 30, 2025 and 2024, customers reimbursed us $12.1 million and $12.2 million, respectively, which is not reflected in the reported research and development expenses, but is included in net sales with the related costs included in cost of sales.

In addition to increases in customer-funded research and development activities in recent years, during the nine months ended April 30, 2025 and 2024, we also experienced an increase in engineering efforts related to cost to fulfill contract assets and internal use software, for which we capitalized $5.4 million and $4.8 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 nine months ended April 30, 2025 and 2024 was $16.7 million (of which $5.8 million was for the Satellite and Space Communications segment and $10.9 million was for the Terrestrial and Wireless Networks segment) compared to $15.9 million (of which $5.0 million was for the Satellite and Space Communications segment and $10.9 million was for the Terrestrial and Wireless Networks segment), respectively. The increase in our Satellite and Space Communications segment's amortization during the more recent period reflects the impact of our decision to wind down our steerable antenna product line in the U.K.

Impairment of Long-Lived Assets, including Goodwill. Based on lower-than-expected financial performance during the first quarter of fiscal 2025 within our Satellite and Space Communications segment, and other factors, 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 nine months ended April 30, 2025, we incurred $2.7 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. During the nine months ended April 30, 2025 and 2024, we recorded $1.1 million and $2.5 million, respectively, related to CEO transition costs. Such Unallocated expenses primarily represent legal expenses related to a former CEO, severance related to another former CEO, third party CEO search firm expenses and expense related to a sign-on bonus for our current CEO.

Gain on Business Divestiture, Net. On November 7, 2023, we completed the PST Divestiture and recorded an estimated gain of $2.2 million in our Unallocated segment in the second quarter of fiscal 2024. Such estimated gain included a $1.0 million receivable for an amount held in escrow relating to the closing date net working capital. During our third quarter of fiscal 2024, the closing date net working capital was finalized, and we received $0.8 million of the $1.0 million held in escrow. As a result, we recognized a $0.2 million reduction to the estimated gain, resulting in a revised estimated gain on business divestiture, net of $2.0 million for the nine months ended April 30, 2024.

Operating (Loss) Income. Operating loss for the nine months ended April 30, 2025 was $141.0 million, as compared to operating income of $1.6 million for the nine months ended April 30, 2024. Operating (loss) income by reportable segment is shown in the table below:

($ in millions)

Our GAAP operating loss of $141.0 million for the nine months ended April 30, 2025 reflects: (i) a non-cash goodwill impairment charge of $79.6 million; (ii) $16.7 million of amortization of intangibles; (iii) $14.2 million of restructuring costs (of which $4.7 million, $0.1 million and $9.4 million related to our Satellite and Space Communications, Terrestrial and Wireless Networks and Unallocated segments, respectively); (iv) $2.7 million of proxy solicitation costs; (v) $2.5 million of amortization of stock-based compensation; (vi) $1.1 million of CEO transition costs; (vii) $0.3 million of strategic emerging technology costs; and (viii) $0.3 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating loss for the nine months ended April 30, 2025 would have been $23.7 million.

Our GAAP operating income of $1.6 million for the nine months ended April 30, 2024 reflects: (i) $15.9 million of amortization of intangibles; (ii) $9.2 million of restructuring costs (of which $2.8 million and $6.4 million related to our Satellite and Space Communications and Unallocated segments, respectively); (iii) $5.2 million of amortization of stock-based compensation; (iv) $3.2 million of strategic emerging technology costs; (v) a $2.0 million estimated gain, net on the PST Divestiture reported in our Unallocated segment; (vi) $2.5 million of CEO transition costs; and (vii) $0.7 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating income for the nine months ended April 30, 2024 would have been $36.3 million, or 8.8% of consolidated net sales.

The decrease, excluding the above items, from $36.3 million of operating income to $23.7 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 nine months ended April 30, 2025 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 and impacts of the PST and CGC divestitures), higher selling, general and administrative expenses (driven by a $17.0 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 decrease in our Terrestrial and Wireless Networks segment operating income, both in dollars and as a percentage of the related segment net sales, for the nine months ended April 30, 2025 primarily reflects higher selling, general and administrative expenses and research and development expenses, offset in part by higher gross profit, as discussed above.

Excluding the net gain on the PST Divestiture and the impact of proxy solicitation costs, CEO transition costs and its respective portion of restructuring charges in each period, Unallocated expenses for the nine months ended April 30, 2025 would have been $29.9 million, as compared to $24.2 million for the nine months ended April 30, 2024. 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 $33.4 million and $15.3 million for the nine months ended April 30, 2025 and 2024, respectively. The increase during the more recent period is primarily due to: higher interest rates and fees and average debt balance outstanding during the more recent period related to our Credit Facility; accreted interest and the immediate expensing of financing fees related to the first amendment to our Subordinated Credit Facility; and amortization of deferred financing costs and debt discounts related to both facilities, as discussed further in Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (10) - Credit Facility and Note (11) - Amended Subordinated Credit Facility. Our effective interest rate (including amortization of deferred financing costs) in the nine months ended April 30, 2025 was approximately 22.8%, as compared to 11.4% in the prior year period. Our current cash borrowing rate (which excludes the amortization of deferred financing costs) under our Credit Facility approximates 14.2%, which reflects the benefit of the March 3, 2025 waiver and amendment to the Credit Facility, as compared to 9.4% in the corresponding prior year period.

Interest (Income) and Other. Interest (income) and other for both the nine months ended April 30, 2025 and 2024 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 and Debt Discounts. In connection with the October 17, 2024 and March 3, 2025 amendments to the Credit Facility and Amended Subordinated Credit Facility, and in particular, the prepayment of Term Loan principal and reduced commitments under the Credit Facility, $4.9 million of deferred financing fees and debt discounts were immediately expensed during the nine months ended April 30, 2025.

Change in Fair Value of Warrants and Derivatives. During the nine months ended April 30, 2025 and 2024, we recorded a $15.5 million and $6.4 million non-cash benefit, respectively, due to the remeasurement of warrants and derivatives related to our Credit Facility, Amended Subordinated Credit Facility and Convertible Preferred Stock. The remeasurement and resulting non-cash benefit for the nine months ended April 30, 2025 primarily reflects a decrease in the estimated probability of events that could result in additional and/or accelerated payments to holders of our Convertible Preferred Stock. See Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (10) - Credit Facility, Note (11) - Amended Subordinated Credit Facility and Note (18) - Convertible Preferred Stock for more information.

(Benefit from) Provision for Income Taxes. For the nine months ended April 30, 2025, we recorded a tax benefit of $0.6 million as compared to a tax expense of $0.6 million for the nine months ended April 30, 2024. Our effective tax rate (excluding discrete tax items) for the nine months ended April 30, 2025 and 2024 was (0.05)% and 2.0%, respectively. The change in rate from 2.0% to (0.05)% 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 (0.05)% 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 nine months ended April 30, 2025, we recorded a net discrete tax benefit of $0.7 million primarily related to the reversal of tax contingencies no longer required due to the expiration of applicable statute of limitations and proxy solicitation costs. During the nine months ended April 30, 2024, we recorded a net discrete tax expense of $1.0 million primarily related to the anticipated timing of the settlement of contingent consideration related to the PST Divestiture.

Our U.S. federal income tax returns for fiscal 2022 through 2024 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 nine months ended April 30, 2025 and 2024, consolidated net loss attributable to common stockholders was $192.7 million and $34.8 million, respectively. In addition to those items discussed above: (i) the nine months ended April 30, 2025 includes $80.7 million of net dividends related to our Convertible Preferred Stock, offset in part by 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; and (ii) the nine months ended April 30, 2024 includes: a $13.6 million loss related to the exchange of our Series A-1 Convertible Preferred Stock for Series B Convertible Preferred Stock on January 22, 2024; $7.6 million of dividends related to our Convertible Preferred Stock; and $4.3 million of Convertible Preferred Stock issuance costs.

Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both the nine months ended April 30, 2025 and 2024 are shown in the table below (numbers in the table may not foot due to rounding):

($ in millions)

The decrease in consolidated Adjusted EBITDA for the nine months ended April 30, 2025 as compared to the nine months ended April 30, 2024 reflects lower consolidated net sales and gross profit (both in dollars and as a percentage of consolidated net sales, and including an $11.4 million non-cash charge related to inventory) and higher selling, general and administrative expenses (driven by a $17.0 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 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 (driven by a $17.0 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 Terrestrial and Wireless Networks segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, reflects higher selling, general and administrative expenses and research and development expenses, offset in part by higher gross profit, 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 (non-inventory related), strategic emerging technology costs (for next-generation satellite technology) and write-off of deferred financing costs and debt discounts, 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 and Amended Subordinated 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 nine months ended April 30, 2024 was computed using weighted average diluted shares outstanding of 28,948,000 during the period.

($ in millions, except for per share amount)

69

LIQUIDITY AND CAPITAL RESOURCES

Our cash and cash equivalents were $28.4 million and $32.4 million at April 30, 2025 and July 31, 2024, respectively. For the nine months ended April 30, 2025, our cash flows reflect the following:

• Net cash used in operating activities was $19.7 million and $45.0 million for the nine months ended April 30, 2025 and 2024, respectively. The period-over-period improvement in cash flows from operations reflects overall changes in net working capital requirements, principally the timing of progress toward completion on contracts accounted for over time, including related shipments, billings and collections, and payments to vendors. Over the past several quarters, we experienced elevated levels of contract assets (i.e., unbilled receivables) related to large, long-term contracts with certain U.S. government, domestic and international customers. While such contract assets are trending lower more recently, such contract activity resulted in a material increase in working capital requirements in prior periods. Net cash used in operating activities for the nine months ended April 30, 2025 also reflects lower net sales and gross profit as compared to the nine months ended April 30, 2024.
• Net cash used in investing activities for the nine months ended April 30, 2025 was $6.5 million 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 investing activities for the nine months ended April 30, 2024 was $24.3 million and includes $33.3 million of net cash proceeds from the PST Divestiture.
• Net cash provided by financing activities was $22.3 million and $28.9 million for the nine months ended April 30, 2025 and 2024, respectively. During the nine months ended April 30, 2025: (a) we entered into a Amended Subordinated Credit Facility with existing holders of our Convertible Preferred Stock and received proceeds of $60.8 million, net of transaction related costs; and (b) had net repayments under our Credit Facility of $36.3 million. During the nine months ended April 30, 2024: (x) we received proceeds of $39.0 million from the holders of our Convertible Preferred Stock, net of issuance costs; (y) had net repayments under our prior credit facility of $3.1 million; and (z) paid deferred financing costs of $3.2 million. We also made $1.2 million and $3.8 million of payments to remit employees' statutory tax withholding requirements related to the net settlement of stock-based awards during the nine months ended April 30, 2025 and 2024, respectively.

The Credit Facility, Amended 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) - Amended 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 are required to 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 $1.5 million and $141.0 million in the three and nine months ended April 30, 2025. 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 $19.7 million in the nine months ended April 30, 2025. 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 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 and March 3, 2025 (the "Credit Facility"). The Credit Facility consists of a committed $162.0 million term loan (“Term Loan”) and $56.8 million revolving loan (“Revolver Loan”). At April 30, 2025 and June 6, 2025 (the date closest to the issuance date), total outstanding borrowings under the Credit Facility were $168.0 million. At April 30, 2025 and June 6, 2025, $23.4 million was drawn on the Revolver Loan. As of the issuance date, our available sources of liquidity approximate $27.3 million, consisting of qualified cash and cash equivalents and the remaining available portion of the committed Revolver Loan.

The Credit Facility was amended on October 17, 2024 (the "First Amendment") which among other things (i) waived all defaults under the Credit Facility, specifically in connection with our Net Leverage Ratio and Fixed Charge Coverage Ratio covenants as of July 31, 2024; (ii) increased the interest rate margins applicable to the Term Loan to 12.00% per annum for Base Rate Loans and 13.00% per annum for SOFR Loans and increased interest rate margins applicable to the Revolving Loan by 1.00% at each level; (iii) permitted the incurrence of $25.0 million of total unsecured subordinated debt (as described below); (iv) suspended testing of the Net Leverage Ratio and the Fixed Charge Coverage Ratio covenants until January 31, 2025; (v) provided the lenders a consent right with respect to Revolver Loan borrowings above $32.5 million; and (vi) 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 Amended Subordinated Credit Facility (as defined below) becomes due and payable.

The Credit Facility was amended again on March 3, 2025 (the "Second Amendment") which, among other things, (i) waived all defaults under the Credit Facility, specifically in connection with our Net Leverage Ratio and Fixed Charge Coverage Ratio covenants as of January 31, 2025; (ii) decreased the interest rate margins applicable to the Term Loan from 12.00% per annum to 9.50% per annum for Base Rate Loans and from 13.00% per annum to 10.50% per annum for SOFR Loans; (iii) permitted the incurrence of an additional $40.0 million of total unsecured subordinated debt (as described below); (iv) suspended testing of the Net Leverage Ratio and the Fixed Charge Coverage Ratio covenants until October 31, 2025; (v) suspended our ability to pay interest in-kind until after the interest rate margins are tested based on net leverage ratios; (vi) permitted partial principal repayments of $27.3 million and $9.1 million on the Term Loan and Revolving Loan, respectively, and waived the prepayment fees that would have been payable under the Credit Facility with regard to such repayments; (vii) permanently reduced commitments under the Revolving Loan Facility by $3.2 million and provided the lenders a consent right with respect to Revolver Loan borrowings above $29.3 million; (viii) reduced the minimum quarterly average liquidity requirement from $20.0 million to $17.5 million; and (ix) provided the lenders the right to appoint an independent director to our Board of Directors after May 31, 2025.

The Credit Facility, as amended, requires compliance with restrictive and financial covenants, including: a maximum Net Leverage Ratio of 3.15x commencing with the four fiscal quarter period ending October 31, 2025; a minimum Fixed Charge Coverage Ratio of 1.25x commencing with the four fiscal quarter period ending October 31, 2025; a minimum Average Liquidity requirement at each fiscal quarter end of $17.5 million; and a minimum EBITDA of $35.0 million for the four fiscal quarter period ending October 31, 2025. Such covenants adjust under the Credit Facility in future periods. Over the next twelve months beyond the issuance date, we believe that it is probable we will not be able to comply with one or more of these covenants.

As discussed further in Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements – Note (11) - Amended Subordinated Credit Facility, on October 17, 2024, we entered into a subordinated credit agreement (the "Subordinated Credit Agreement") with the existing holders of our Convertible Preferred Stock, which provided for an initial subordinated unsecured term loan facility in the aggregate principal amount of $25.0 million. On March 3, 2025, we entered into an amendment to the Subordinated Credit Agreement (the “Amended Subordinated Credit Facility”) which, in addition to providing incremental aggregate principal of $40.0 million, waived certain events of default under the Subordinated Credit Agreement, specifically in connection with our Net Leverage Ratio and Fixed Charge Coverage Ratio covenants as of January 31, 2025, and suspends testing of the Net Leverage Ratio and the Fixed Charge Coverage Ratio covenants under the Subordinated Credit Agreement until October 31, 2025. The net proceeds of the Amended Subordinated Credit Facility were principally used to repay a portion of the Term Loan and Revolving Loan on March 3, 2025 (as discussed above), fund our general working capital needs and enable us to negotiate the Second Amendment to the Credit Facility, including the waiver of existing defaults, as discussed above. At April 30, 2025 and June 6, 2025 (the date closest to the issuance date), total outstanding borrowings under the Amended Subordinated Credit Facility (excluding accreted interest and make-whole adjustments) were $65.0 million.

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 and Amended Subordinated 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 and Amended Subordinated 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 and Amended Subordinated 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 including, but not limited to, the initiatives set forth below;
• an exploration of strategic alternatives for our various businesses and product lines, including the potential sale or divestiture of assets or business lines;
• the pursuit of further portfolio-shaping opportunities to enhance profitability, efficiency and focus;
• the implementation of operational initiatives to reduce the cost structure and better align operating costs with revenue expectations;
• pursuing initiatives to reduce investments in working capital, namely accounts receivable and inventory;
• improving process disciplines to achieve operating profitability 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 reduce capital expenditures; and
• seeking opportunities to improve liquidity through any combination of debt and/or equity financing (including potentially further amending our Credit Facility, Convertible Preferred Stock and/or Amended Subordinated Credit Facility).

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, as described above, there 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 loan amortization, 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 Amended 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 customer or 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 and beyond.

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 during the past 12 months, we will not be able to file a new shelf registration statement following the expiration date. Accordingly, we would file a long-form registration statement in connection with any securities offering by the Company until we become eligible to utilize a new shelf registration statement.

On September 29, 2020, our Board of Directors authorized a $100.0 million stock repurchase program, which replaced our prior program. The $100.0 million stock repurchase program has no time restrictions and repurchases may be made from time to time in open-market or privately negotiated transactions, or by other means in accordance with federal securities laws. There were no repurchases of our common stock during the nine months ended April 30, 2025 and 2024.

In fiscal 2023, we adjusted our 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 and Amended Subordinated Credit Facility, as well as Board approval and certain voting rights of holders of our Convertible Preferred Stock.

At April 30, 2025, 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 April 30, 2025, will materially adversely affect our liquidity. At April 30, 2025, cash payments due under contractual obligations (including estimated interest expense on our Credit Facility, as further described below), excluding purchase orders that we entered into in the normal course of our business, are as follows:

($ in thousands)

As stated above, the amounts in the above table represent cash payments due under contractual obligations. Interest payments presented related to our Credit Facility were calculated based the outstanding borrowings at April 30, 2025, as adjusted for the partial paydown of the Term Loan and Revolver Loan in connection with the March 3, 2025 amendments to the Credit Facility and Subordinated Credit Facility, which also reduced interest rate margins applicable to the Term Loan. Interest related to the Credit Facility was calculated based on the SOFR forward curve plus the applicable margin pursuant to the March 3, 2025 amendment and does not assume any interest paid-in-kind. The Amended Subordinated Credit Facility Make-Whole Amount represents the outstanding principal amount multiplied by the applicable 33.0% make-whole rate as of April 30, 2025. The Amended Subordinated Credit Facility and Make-Whole Amount are not included in the total due within one year column given the timing of such payment is subject to the timing of certain repayments, prepayments and maturity date associated with the Credit Facility. See Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (10) - Credit Facility and Note (11) - Amended Subordinated Credit Facility for additional information on the commitments under our Credit Facility and Amended Subordinated Credit Facility, respectively, and Note (12) - Leases for additional information on our lease commitments. Over the next twelve months beyond the issuance date, we believe that it is probable we will not be able to comply with one or more of our financial covenants related to our Credit Facility and Amended Subordinated Credit Facility. As a result, all amounts outstanding under our Credit Facility and Amended Subordinated Credit Facility have been presented as current liabilities on our Condensed Consolidated Balance Sheets as of April 30, 2025.

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, directors and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of the Company or termination of the employee.

Our Condensed Consolidated Balance Sheet at April 30, 2025 includes total liabilities of $8.2 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 $2.4 million over a one-year period. Although we do not currently use interest rate derivative instruments to manage exposure to interest rate changes, we may choose to do so in the future in connection with our Credit Facility.

Our earnings and cash flows are also subject to fluctuations due to changes in interest rates on our investment of available cash balances. As of April 30, 2025, we had cash and cash equivalents of $28.4 million, which consisted of cash and highly-liquid money market deposit accounts. Many of these investments are subject to fluctuations in interest rates, which could impact our results. Based on our investment portfolio balance as of April 30, 2025, 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(e) and 15d-15(e) 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 April 30, 2025, 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").

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 processes 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.

Additionally, as previously disclosed in 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.

Deficiencies in control activities contributed to accounting errors and the potential for there to have been material accounting errors within revenue, inventory, other assets, debt, convertible preferred stock and related embedded derivatives.

Remediation Plan

Our remediation efforts are ongoing and we will continue our initiatives to hire additional skilled resources in the program management and accounting and finance related functions, and design, implement and document policies, procedures and internal controls. Management is committed to the remediation of the material weaknesses described above.

To date, management undertook the following remedial actions in conjunction with the above remediation plan:

• Reorganized and reassigned responsibilities for executing specific internal controls over financial reporting to staff within the finance organization whose experience aligns more closely with these responsibilities;
• Hired more qualified staff with sufficient knowledge and experience to strengthen our financial reporting;
• Third-party consultants performed a comprehensive review of our accounting and reporting functions to assist in designing our remediation plan;
• Designed a comprehensive remediation plan to enhance our internal control environment that was approved by the Audit Committee;
• Initiated and will continue the process to document, implement and redesign controls, policies, and procedures with an appropriate level of precision to detect a material misstatement, and to retain sufficient documentation to support the operating effectiveness of controls over revenue, inventory, other assets, debt, convertible preferred stock and related embedded derivatives; and
• Hired third-party specialists to assist management with the accounting and reporting over complex accounting matters and transactions.

These actions represent significant progress in addressing the material weaknesses. However, they do not represent the full suite of improvements that we plan to make in order to strengthen our internal control over financial reporting. Additional components of our remediation plan include:

• Conducting training sessions for all control owners and relevant personnel to improve documentation that supports effective control activities, including evidence over the completeness and accuracy of information used in controls; and
• Conducting specialized training sessions for those employees involved in the estimate at completion (“EAC”) process on any newly designed or enhanced control activities that were put in place for preparing and reviewing an EAC and its impact on the accuracy of financial reporting.

We plan to fully implement and operate redesigned processes and procedures in future quarters. The material weaknesses will not be considered remediated until these controls have operated for a sufficient period of time and management has concluded, through testing, that the controls are operating effectively.

Changes In Internal Control Over Financial Reporting

Other than for the on-going remediation efforts 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 April 30, 2025, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitation on Effectiveness of Controls

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. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

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, and in “Part II. - Item 1A. - Risk Factors” of our Quarterly Report on Form 10-Q for the fiscal quarter ended October 31, 2024, as filed with the SEC on January 13, 2025, which are hereby incorporated by reference.

New and ongoing challenges relating to current supply chain constraints, including for satellite ground station and troposcatter components, and impacts from inflation and any new or increased tariffs on imports and other trade restrictions, could adversely impact our revenue, gross margins and financial results.

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

The effects of inflation and labor challenges have caused, and we expect will continue to cause further delays in the supply chain. Despite our attempts to mitigate the impact on our business, constrained supply chain conditions have and are expected to continue to adversely impact our costs of goods sold and may impact the timing and amount of revenue we realize. During fiscal 2024, we experienced disruptions in our supply chain relating to later-than-expected delivery of certain key components from several suppliers that adversely impacted our revenue in fiscal 2024. In addition, the ongoing supply chain issues have affected the quality of the components we receive. Certain parts received in fiscal 2024 did not meet our quality specifications and we were unable to use them.

In addition, the United States recently announced changes to U.S. trade policy, including adding new or modifying existing tariffs on imports, in some cases significantly. The impact of these tariffs is subject to a number of factors, including the effective date and duration of such tariffs, changes in the amount, scope and nature of the tariffs in the future, any retaliatory responses to such actions that the target countries may take and any mitigating actions that may become available. Tariffs and any retaliatory actions, if implemented, could significantly increase the cost of our products and result in lower demand for our products, delivery delays, and terminations of orders by customers. The uncertainty in the trade environment may also contribute to broader macroeconomic and financial market weakness and volatility, such as inflationary pressures affecting interest rates and volatility in the stock market affecting the price of our common stock. While we continue to evaluate the potential impact of the new tariffs on our business, given the volatility and uncertainty regarding the scope and duration of such tariffs and other aspects of U.S. and foreign government trade policies, their ultimate impact on our operations and financial results remains uncertain.

We obtain certain components and subsystems from a single source or a limited number of sources. Some of our single source suppliers, particularly those that provide satellite ground station and troposcatter components, have reported to us that they are having disruptions in their respective supply chains. These single source components, which include items such as RF filters and custom fiber connectors are in limited supply with very long lead times. In some cases, we have now depleted our stock inventory and we are on waiting lists to obtain additional components. In order to ship certain items in the future, we must obtain additional components to produce certain finished goods. We continue to seek new suppliers and inventory elsewhere. In light of current challenges in the supply chain, we may not be able to qualify alternate suppliers for our components timely, or at all.

For the remainder of fiscal 2025, we have a significant portion of anticipated revenues in our backlog. However, if shipments from our backlog are delayed or we are unable to obtain expected orders or components, our business outlook will prove to be inaccurate. These aforementioned supply chain constraints, and their related challenges could result in, among other things, future shortages, increased material costs or use of cash, engineering design changes, late delivery penalties and delays in new product introductions, each of which could adversely impact our revenue, gross margins and financial results. There can be no assurance that the impacts of all the aforementioned conditions will not continue, or worsen, in the future.