Annual Report 2024
1
ANNUAL REPORT 2024
Annual Report 2024
2
Creating the world’s most innovative
communications solutions
Annual Report 2024
3
FISCAL 2024
SELECTED FINANCIAL DATA
$ in millions
Comtech’s fiscal year end is July 31
*For a definition and explanation of how “Adjusted EBITDA” (a Non-GAAP financial measure) is calculated as disclosed above, see page
73 of our Fiscal 2024 Annual Report on Form 10-K
$616.7
$581.7
$486.2
$550.0
$540.4
2020
2021
2022
2023
2024
Net Sales
$77.8
$76.5
$39.3
$53.5
$45.7
2020
2021
2022
2023
2024
Adjusted EBITDA*
$584.4
$623.1
$445.5
$594.1
$700.6
2020
2021
2022
2023
2024
Bookings
$620.9
$658.9
$618.1
$662.2
$798.9
2020
2021
2022
2023
2024
Backlog
Annual Report 2024
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended July 31, 2024
☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 0-7928
(Exact name of registrant as specified in its charter)
Delaware
11-2139466
(State or other jurisdiction of incorporation /organization)
(I.R.S. Employer Identification Number)
305 N 54th Street,
Chandler, Arizona
85226
(Address of principal executive offices)
(Zip Code)
(480) 333-2200
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $.10 per share
CMTL
Nasdaq Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act.
☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data file required to be submitted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer,"
"smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☒
Non-accelerated filer
☐
Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.
7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the
registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-
based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §
240.10D-1(b). ☐
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒ No
The aggregate market value of the registrant’s voting stock held by non-affiliates of the registrant, computed by reference to the
closing sales price as quoted on the Nasdaq Global Select Market on January 31, 2024 was approximately $178,712,000.
The number of shares of the registrant’s common stock outstanding on October 23, 2024 was 28,866,682.
DOCUMENTS INCORPORATED BY REFERENCE.
Certain portions of the document listed below have been incorporated by reference into the indicated Part of this Annual Report
on Form 10-K:
Proxy Statement for 2024 Annual Meeting of Stockholders - Part III
INDEX
PART I
ITEM 1.
BUSINESS
1
Business Segments
3
Satellite and Space Communications Segment
4
Terrestrial and Wireless Networks Segment
7
Strategic Transformation
11
Sales, Marketing and Customer Support
11
Backlog
12
Research and Development
13
Intellectual Property
14
Competition
14
Corporate Responsibility and Sustainability
15
Human Capital
15
U.S. Government Contracts and Security Clearances
18
Regulatory Matters
19
ITEM 1A. RISK FACTORS
20
ITEM 1B. UNRESOLVED STAFF COMMENTS
53
ITEM 2.
PROPERTIES
55
ITEM 3.
LEGAL PROCEEDINGS
57
ITEM 4.
MINE SAFETY DISCLOSURES
57
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
57
Stock Performance Graph and Cumulative Total Return
57
Recent Sales of Unregistered Securities
58
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
58
Approximate Number of Equity Security Holders
58
ITEM 6.
[RESERVED]
58
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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
59
Overview
59
Critical Accounting Policies
60
Results of Operations
62
Fiscal 2024 Highlights and Business Outlook for Fiscal 2025
63
Comparison of Fiscal 2024 and 2023
66
Comparison of Fiscal 2023 and 2022
73
Liquidity and Capital Resources
74
Recent Accounting Pronouncements
79
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
79
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
79
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
80
ITEM 9A. CONTROLS AND PROCEDURES
80
ITEM 9B. OTHER INFORMATION
81
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
81
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
82
ITEM 11.
EXECUTIVE COMPENSATION
82
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
82
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
82
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
82
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
83
ITEM 16.
FORM 10-K SUMMARY
86
SIGNATURES
87
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
F-1
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Note: As used in this Annual Report on Form 10-K ("Form 10-K"), the terms "Comtech," "we," "us," "our" and "our Company"
mean Comtech Telecommunications Corp. and its subsidiaries.
Note About Forward-Looking Statements
Certain information in this Form 10-K contains, and oral statements made by our representatives from time to time may
contain, forward-looking statements. Forward-looking statements can be identified by words such as: "anticipate," "believe,"
"continue," "could," "estimate," "expect," "future," "goal," "outlook," "intend," "likely," "may," "plan," "potential," "predict,"
"project," "seek," "should," "strategy," "target," "will," "would," and similar references to future periods. Forward-looking
statements include, among others, statements regarding our expectations for the strategic alternatives process regarding our
Terrestrial and Wireless Networks segment, our expectations for further portfolio-shaping opportunities, our expectations for
other operational initiatives, the intended use of proceeds from the amended Credit Facility and new subordinated term loan
facility, our expectations for completing further financing initiatives, our future performance and financial condition, our plans
to address our ability to continue as a going concern, the plans and objectives of our management and our assumptions
regarding such future performance, financial condition, and plans and objectives that involve certain significant known and
unknown risks and uncertainties and other factors not under our control which may cause our actual results, future performance
and financial condition, and achievement of our plans and objectives of our management to be materially different from the
results, performance or other expectations implied by these forward-looking statements. Factors that could cause actual results
to differ materially from current expectations include, among other things: the outcome and effectiveness of the aforementioned
strategic alternatives process regarding our Terrestrial and Wireless Networks segment, 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 Michael Porcelain and stockholders affiliated with him in furtherance of their
nominations of director candidates for election at our Fiscal 2024 Annual Meeting of Stockholders; the possibility of disruption
from acquisitions or dispositions, making it more difficult to maintain business and operational relationships or retain key
personnel; the risk that we will be unsuccessful in implementing a tactical shift in our Satellite and Space Communications
segment away from bidding on large commodity service contracts and toward pursuing contracts for our niche products and
solutions with higher margins; the nature and timing of our receipt of, and our performance on, new or existing orders that can
cause significant fluctuations in net sales and operating results; the timing and funding of government contracts; adjustments to
gross profits on long-term contracts; risks associated with international sales; rapid technological change; evolving industry
standards; new product announcements and enhancements; changing customer demands and/or procurement strategies and our
ability to scale opportunities and deliver solutions to current and prospective customers; changes in prevailing economic and
political conditions, including as a result of Russia's military incursion into Ukraine, the Israel-Hamas war and attacks in the
Red Sea region; changes in the price of oil in global markets; changes in prevailing interest rates and foreign currency exchange
rates; risks associated with our legal proceedings, customer claims for indemnification, and other similar matters; risks
associated with our obligations under our credit facilities; risks associated with our large contracts; risks associated with supply
chain disruptions; and other factors described in this and our other filings with the Securities and Exchange Commission
("SEC"). However, the risks described in this Form 10-K 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 of this Form 10-K), "Management’s Discussion and Analysis of
Financial Condition and Results of Operations" (Part II, Item 7 of this Form 10-K) and "Quantitative and Qualitative
Disclosures about Market Risk" (Part II, Item 7A of this Form 10-K). 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.
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PART I
ITEM 1. BUSINESS
Founded in 1967, we have a longstanding history of providing critical communications infrastructure technology and solutions
to customers around the world. We serve two core end-markets: secure satellite and wireless communications via our Satellite
and Space Communications segment, and next-generation 911 and public safety via our Terrestrial and Wireless Networks
segment. In both cases, we are at the forefront of the technologies that solve extraordinarily complex communications problems
– whether it’s a 911 call captured, routed, and data-enhanced to optimize the public safety result in situations where every
second matters, or providing communications infrastructure that ensures people, businesses, and governments can connect
anywhere on earth, under any conditions – including on the battlefield. We believe the demand for more, and better,
connectivity is only growing as more devices become connected via the cloud, as growing constellations of communications
satellites enable ubiquitous connectivity, and more data is created, shared and acted upon by increasingly powerful tools
(including AI). This demand will come from government and commercials customers alike, as both private enterprises and
government actors increasingly see the need for, and value of, next-generation communications capabilities.
Fiscal 2024 marked a year of change for our organization.
Our fiscal 2024 results were impacted by refinancing and liquidity headwinds, which in turn weighed on our supply chain, and
lengthened product development and delivery cycles. Despite this commercial overhang, both of our business segments
performed in terms of winning business. The Satellite and Space Communications segment secured competitive contracts on
next-generation modem platforms with government customers, such as the Enterprise Digital Intermediate Frequency Multi-
Carrier (“EDIM”) modem contract with the U.S. Army and a sole-source follow-on contract to support the U.S. Air Force and
Army Anti-Jam Modem (“A3M”) initiative. We concluded a significant product R&D cycle, culminating with the launch in
September 2024 of our new Digital Common Ground (“DCG”) portfolio of modems, which we believe will provide our
Satellite and Space Communications segment with a significant technology advantage. The DCG family of products are
expected to provide our customers with truly next-generation capabilities, including software defined, virtualized
communications networks.
Additionally, over the course of fiscal 2024, we continued to review our operations, streamlining under-performing legacy
products, lines of business and/or legacy growth initiatives that have not met our return expectations, or are no longer core to
our strategic plans. For example, in November 2023, we announced the divestiture of our Power Systems Technology solid-
state power amplifier product line to Stellant Systems, Inc. More recently, we re-evaluated our operations at our Basingstoke
facility in the UK and determined the path to profitable operations was both unclear and expensive. As a result, we made the
decision to exit this product line.
Our Terrestrial and Wireless Networks segment underwent a transformation of its own in fiscal 2024. Led by Jeff Robertson,
who joined Comtech as Terrestrial and Wireless Networks’s President in March 2024, Terrestrial and Wireless Networks saw
improved profitability and achieved a book-to-bill ratio of 1.70x in fiscal 2024. The segment also delivered a strong win rate for
major public safety projects, as evidenced through more than doubling year-over-year bookings of orders for next-generation
solutions. The Terrestrial and Wireless Networks segment recorded multiple key wins, including multi-year renewals for
maintenance of NG-911 systems with longstanding customers, such as the Commonwealth of Massachusetts, the State of
Washington and the North Central Texas Emergency Communications District.
Comtech exited fiscal 2024 with a record funded consolidated backlog of $798.9 million.
Amended Credit Agreement and New Subordinated Term Loan Facility
While revenue generation was healthy, and we were able to grow our backlog, our Adjusted EBITDA in the fourth quarter of
fiscal 2024 was significantly below expectations primarily due to underperformance in our Satellite and Space Communications
segment, causing us to enter into an amendment to our credit facility, dated June 17, 2024. Among other things, the amendment
waives certain defaults or events of default in connection with certain covenants, including the Net Leverage Ratio and Fixed
Charge Coverage Ratio covenants for the fourth quarter of fiscal 2024.
2
Additionally, the amendment added a consent right that limits our borrowing capacity under the revolver portion of our credit
facility. To eliminate the event of default, address the reduced borrowing capacity and bolster liquidity, we entered into a new
$25.0 million subordinated unsecured term loan facility with the existing holders of our convertible preferred stock. Additional
information related to the amended credit facility and new subordinated unsecured term loan facility can be found in a Form 8-
K that was filed with the Securities and Exchange Commission ("SEC") on October 17, 2024, as well as throughout this Form
10-K.
Transformation Strategy to Become a Pure-Play Satellite and Space Communications Company
At the beginning of fiscal 2024, we made a commitment to our shareholders to be a more forward-looking organization. To that
end, on October 17, 2024, we announced a transformation strategy to re-shape our Company as a pure-play satellite and space
communications company, which we believe will unlock, create and deliver value to our shareholders over time. Ongoing and
future actions supporting this transformation strategy include:
•
An exploration of strategic alternatives for our Terrestrial and Wireless Networks segment, which is well underway;
•
The pursuit of further portfolio-shaping opportunities to enhance profitability, efficiency and focus; and
•
The implementation of additional operational initiatives to achieve profitable results from operations and to align our
Company's go-forward cost structure with a pure-play focus on satellite and space communications.
In combination, we expect these three complimentary initiatives to create a pure-play leader in a large and growing market. As
a U.S.-based provider of modems and high-power amplifiers, and a market leader in troposcatter technologies, we have a
history of delivering mission-critical satellite and communications solutions for government and commercial customers. Our
goal is to create a competitive, focused and efficient business delivering sustainable and profitable growth while providing
customers with best-in-class satellite and space communications infrastructure solutions.
Business Segments
We operate two core businesses: Satellite and Space Communications, and Terrestrial and Wireless Networks, each of which
we believe are serving end markets themselves undergoing a period of long-term growth, reinvestment and rapid technological
change. Our Satellite and Space Communications segment is one of a limited number of U.S.-based providers of modems and
high-power amplifiers, a market leader in troposcatter technologies, and serves some of the world’s largest defense contractors
and allied foreign governments, as well as multiple U.S. government agencies, including branches of the U.S. Armed Forces,
U.S. Department of Defense (“DoD”) and U.S. Space Force (“USSF”), among others. Our Terrestrial and Wireless Networks
segment is a leading provider of next generation 911 (“NG-911”) infrastructure and solutions for state and local governments
and carriers.
Satellite and Space Communications Segment
Terrestrial and Wireless Networks Segment
• Contributed approximately 60% of fiscal 2024 net sales
• Satellite Modems and Amplifiers: One of the only U.S.-based
providers of modems and high-power amplifiers, facilitating the
transmission of voice, video and data over GEO, MEO and LEO
satellite constellations
• Troposcatter Technologies: A global leader in troposcatter
technologies, capable of securely transmitting digitized voice, video,
and data over distances up to 200 miles, with strong market share in
existing C-band and X-band troposcatter systems worldwide
• Government Services: Provides specialized onsite and remote
professional engineering and training / support services for U.S.
government customers
• Space Components: Specializes in delivering components for antennas
and high-reliability electronic components and engineering services for
space programs
• Customers include the world’s largest defense contractors, allied
foreign governments, as well as multiple U.S. government agencies
(including all branches of the U.S. Armed Forces)
• Contributed approximately 40% of fiscal 2024 net sales
• Next-Generation 911 Solutions: we provide emergency call routing,
location validation, policy-based routing rules, logging, and security
functionality
• Global Carrier Location and Messaging Services: Software and
equipment for location-based and text messaging services for carriers,
including for public safety, commercial and government services, and
wireless emergency alerts solutions for network operators
• Call-Handling Solutions: we provide comprehensive call handling
applications for Public Safety Answering Points
• Customers include state and local governments across Canada and the
U.S., and several of the largest telecommunications companies in the
world (including AT&T and Verizon)
3
Financial information about our business segments, including net sales, operating results, Adjusted EBITDA (a Non-GAAP
financial measure), total assets, and our operations outside the United States, is provided in "Notes to Consolidated Financial
Statements - Note (12) Segment Information" included in "Part II - Item 8. Financial Statements and Supplementary Data."
The markets and key technologies for each segment are further described below.
Satellite and Space Communications Segment
Overview
Our Satellite and Space Communications segment designs, builds and supports a variety of sophisticated communications
equipment critical to modern communications infrastructures. We are one of a limited number of U.S.-based providers of
modems and high-power amplifiers, and a market leader in troposcatter technologies. Our Satellite and Space Communications
segment has an innovative portfolio of these mission-critical technologies and serves some of the world’s largest defense
contractors and allied foreign governments, as well as multiple U.S. government agencies, including the U.S. Department of
Defense.
The Satellite and Space Communications segment operates in large and growing end markets that benefit from multiple
tailwinds and demand-drivers, including growing global geopolitical tensions, rising global defense spending, and high barriers
to entry. Further, these end markets are undergoing technology upgrade cycles and modernization initiatives that are expected to
underpin demand for years to come. Fueling these cycles are the USSF’s Commercial Space Strategy and the DoD’s Joint All
Domain Command and Control approach, which are expected to generate strong demand for the Satellite and Space
Communications business’ next-generation digital solutions. Today, only a limited number of companies, including Comtech,
can serve the complex needs of the U.S. and other governments and meet this demand.
Our Satellite and Space Communications segment is organized into four categories: satellite modem and amplifier technologies,
troposcatter technologies, government services and space components.
Satellite Modem and Amplifier Technologies
We believe we are a leading provider of satellite earth station modems, solid-state amplifiers and traveling wave tube
amplifiers. Many of our key satellite earth station modems incorporate forward error correction and bandwidth compression
technologies, which enable our customers to optimize their satellite networks by either reducing their satellite transponder lease
costs or increasing data throughput. We hold strong positions in the market for high-throughput modems used in cellular
backhaul, a market that has been rapidly growing due to increased mobile device usage and increasing data throughput demands
from LTE and 5G deployments worldwide.
An increasing area of focus for many governments, including the U.S. Department of Defense ("DoD") and several coalition
partners, is maturing satellite communications. Many of our satellite communications products have been tested and certified
for use by U.S. and coalition military satellite communications ("MILSATCOM") assets, such as the Wideband Global
SATCOM constellation. We believe this provides us the opportunity to capture the increased demand for MILSATCOM
programs.
In September 2024, we announced the launch of our new Digital Common Ground (“DCG”) portfolio of modems, designed to
enable the U.S. DoD and coalition partners to move to digitized, hybrid satellite network architectures. Built on the our proven
satellite communications (“SATCOM”) modem portfolio, our DCG modems are designed and built at Comtech’s headquarters
in Chandler, AZ and support commercial and government satellite operations on a single common platform that can be
reconfigured rapidly to address changing operational needs.
We believe our DCG portfolio is one of the first product lines on the market today offering robust access to multi-orbit
capabilities across commercial and purpose-built networks. The DCG product line is also one of the first to be Digital
Intermediate Frequency Interoperability (“DIFI”) compliant, adhering to DoD and coalition communications standards to
enable seamless information flow between services, a key tenet of Combined Joint All Domain Command and Control
(“CJADC2”). The DCG product line offers industry leading performance, through multi-gigabit throughput at launch. In
addition, we incorporate modern cybersecurity design principles at every level across our DCG product line, ranging from a
trusted supply chain to a thoughtful software upgrade lifecycle, including in-field updates. We believe the technologies
incorporated into our DCG product line create a meaningful competitive advantage for us.
4
We also provide rugged, highly efficient, and reliable amplifiers for commercial and military applications around the world.
These high-power amplifiers (“HPAs”) are used in critical communications links on the ground, in the air and on the sea; they
support fixed traditional and direct-to-home broadcast, mobile news gathering, transportable and flyaway systems, secure high
data rate communications, and broadband access over SATCOM. These products include configurations that are formally
qualified for use on aircraft and being installed as both retrofit and linefit initiatives.
Troposcatter Technologies
We believe we are a world leader in the design and supply of troposcatter equipment. We have designed, manufactured, and
delivered troposcatter systems for well over fifty years. We have significantly advanced the capabilities of our Troposcatter
Family of Systems (“FoS”): we now deliver a next-generation, software-defined solution that represents a thousand-fold
performance increase over prior generations of equipment.
Over the recent past, our next-generation Troposcatter terminals have been chosen by the U.S. Army, the Marines and defense
organizations overseas to support the tactical communications requirements of our allies. While our traditional buyer is military,
advances in mobility and performance expand our end markets to include new customers. Key industry verticals we are seeking
to sell into include oil and gas, utility, marine and rail uses.
At the same time, the traditional defense market is changing and growing in ways that we believe make our equipment more
relevant: for years, conflicts involving the U.S. and our allies mostly involved actions against unconventional adversaries with
less advanced technology. That is no longer the case, as conflicts involving state actors arise around the globe. Now, U.S. and
allied defense strategies are shifting focus to threats from organized, better equipped and higher technology adversaries. This
places a premium on sophisticated communications technology from trusted, onshore providers, and creates a natural upgrade
cycle for legacy systems deployed globally over the years.
We’re encouraged by the potential for our Troposcatter FoS, as we believe we offer one of the best products, with one of the
best technologies, to a growing list of customers with expanding use cases, and a set of newly-developing end markets that
should provide our business with long-term growth opportunities.
Government Services
We provide training and field support for multiple U.S. government agencies across an array of programs. These are typically
long-term, multi-million dollar contracts, and examples include: Comtech as sole award winner of a 5-year, $544.0 million
Global Field Service Representative (“GFSR”) contract with the U.S. Army to provide onsite professional engineering services,
as well as supply and support communications technologies (we note that this contract is currently under protest by the
incumbent); Comtech as sole award winner of a 5-year, $125.0 million contract to provide complex cybersecurity operations
training for U.S. government customers; and Comtech as one of multiple awardees of a large multi-year Global Tactical
Advanced Communication Systems II (“GTACS II”) contract with the U.S. Army to support Very Small Aperture Terminal
(“VSAT”) satellite systems and related services.
Space Components and Antennas
For over 45 years, we have been recognized as an industry leader and global supplier of high-reliability products and supply
chain management and engineering services, supporting selection of space-qualified parts for satellite and launch vehicle
tracking solutions geared for critical U.S. National Aeronautics and Space Administration ("NASA") programs as well as
several international space and defense agencies. Our engineers are not only involved in the design of products, but our
technical team is heavily involved with the customer development of electronic parts and testing specifications to assure
capability, reliability and radiation tolerance to specific mission/project requirements both as an individual service and for
Electrical, Electronic, and Electromechanical (“EEE”) parts supplied to our customers. We also lead and conduct failure
analysis investigations and assist with manufacturing and test problems at the source and support reporting and selloff with the
customer and its prime (such as the Japanese Space Exploration Agency (“JAXA”) and NASA). Our quality engineering team
assures that the product received from our suppliers and test facilities are compliant to their respective specifications prior to
shipment to our end customers. Our service offerings have been expanded to include kitting to customer bill of materials with
direct shipments to customer designated contract manufacturers.
Within the satellite communications market, we are a leading provider of components that support the mission requirements of
LEO, MEO and GEO satellite communication and tracking requirements, offering a host of high-performance single-band and
multi-band feed solutions. We also supply maritime antenna solutions that are fielded by foreign governments.
5
Satellite and Space Communications: Key Markets and Growth Drivers
As noted previously, the Satellite and Space Communications segment operates in large and growing end markets that benefit
from multiple tailwinds, including technology upgrade cycles and modernization initiatives that are expected to underpin
demand for years to come. The need for more communications infrastructure from governments and enterprise alike is expected
to increase as larger constellations of satellites are deployed, connected devices and end-points proliferate, and elevated
geopolitical tensions persist and re-prioritize government agency and defense spending. We believe that we are well-positioned
to capitalize on this demand through sales of our market-leading, including new next-generation satellite ground infrastructure
technologies that can be used with the thousands of new LEO, MEO and large HTS satellites that are expected to be deployed
over the next several years, and our advanced troposcatter systems.
Examples of end-market applications that are driving long-term demand for our communication technologies include:
•
Government and Military Satellite Communications: Government users rely on high-speed connectivity in a
variety of conditions throughout the world to provide real time information sharing, including Situational
Awareness (“SA”), dissemination of Intelligence, Surveillance, and Reconnaissance (“ISR”) information, and
communications. Our communications solutions provide command and control and satellite networking
capabilities that support U.S. and allied government initiatives for assured and resilient communications
capabilities, as well as supporting interoperability objectives, including the Joint All Domain Command and
Control (“JADC2”) efforts.
•
New LEO, MEO and HTS Satellites: Thousands of new satellites are reportedly in orbit or being launched over
the next several years, according to announcements by companies including Telesat Lightspeed, Eutelsat,
OneWeb, SpaceX Starlink, Amazon Kuiper and Viasat, which we believe will lead to increasingly complex
satellite networks. As service providers work to offer connectivity to these high-speed, high-bandwidth satellites
and expand their networks to handle the demand for new LEO, MEO and HTS applications, we believe our
ELEVATETM, HeightsTM and UHP networking platforms, and our solid-state amplifiers will ultimately be
incorporated into many new installations and equipment upgrades. We continue to provide modems and amplifiers
to existing LEO and MEO communications satellite providers and expect to see growth in imaging satellites
alongside commercial imaging constellations, including conventional, thermal and hyperspectral.
•
Satellite-Based Cellular Backhaul: Demand for satellite-based cellular backhaul services is anticipated to grow
rapidly as a result of the increased penetration of smart cellular phones and network upgrades to 4G and 5G in
developing regions of the world. Ultimately, as 5G services continue to be deployed, we expect that mobile data
services will become more critical. As mobile data penetration expands and mobile data consumption increases,
wireless carriers must invest in their mobile network infrastructures, and we believe businesses will require back-
up communications. In developing regions of the world, and in remote areas where terrestrial network
infrastructure is lacking (or where challenging geography prohibits it), wireless network operators often backhaul,
or transport, their wireless data traffic using satellite-based networking technologies. We are well positioned to
serve the high-performance, high availability needs of satellite-based cellular backhaul through sales of our SCPC
and TDMA satellite modems as well as our HeightsTM, ELEVATETM and UHP networking platforms.
•
Troposcatter Family of Systems: U.S. and allied defense strategies are shifting focus to threats from organized,
better equipped and higher technology adversaries, placing a premium on sophisticated communications
technology from trusted, onshore providers. Comtech’s Troposcatter Family of Systems (“FoS”) delivers a next-
generation, software-defined solution that represents a thousand-fold performance increase over prior generations
of equipment. Further, constant innovation means Comtech’s latest generation of equipment can be packed into
two small cases, offering significant mobility improvements. Our next-generation troposcatter terminals have been
chosen by the U.S. Army, the U.S. Marines and defense organizations overseas to support the tactical
communications requirements of our allies. Additionally, we see multiple opportunities for non-defense
applications, including oil and gas, utility, marine and rail industry use.
6
Satellite and Space Communications: Customer Base
Our customer base for the Satellite and Space Communications segment comprises numerous governments and companies
worldwide with whom we have longstanding relationships, including leading system and network suppliers in the global
satellite, mobile cellular, defense, broadcast and aerospace industries, as well as the U.S. federal government (including the U.S.
Army, Air Force, Marine Corps and Navy), U.S. state and local governments and allied foreign governments. Approximately
55.4% of the segment’s sales are derived from U.S. government and related agency contracts. Representative customer
categories include:
•
The U.S. Army, U.S. Marine Corps, U.S. Navy, prime contractors to the U.S. Armed Forces, NATO and foreign
governments (i.e., ministries of defense)
•
Domestic and international defense customers, as well as prime contractors and system suppliers such as General
Dynamics Corporation, Lockheed Martin Corporation, L3Harris Technologies, Inc., Northrop Grumman Corporation,
Raytheon Technologies Corporation, The Boeing Company and ViaSat Inc.
•
Commercial end-customers also include Claro Argentina, Intelsat S.A., JAXA, NASA, SED Systems (a division of
Calian Ltd.), SES S.A. and Speedcast International Limited
•
Satellite systems integrators, wireless and other communication service providers, and broadcasters, such as
DIRECTTV Group
•
Aviation industry system integrators such as Collins Aerospace, an RTX Business
•
Oil companies such as Shell Oil Company and PETRONAS
Terrestrial and Wireless Networks Segment
Overview
Our Terrestrial and Wireless Networks segment is a leading provider of next generation 911 (“NG-911”) infrastructure and
solutions for state and local governments and carriers. From the moment a 911 call is made, Comtech provides highly reliable
solutions that contribute to emergency calls being processed instantly, with proper routing to first responders. Our solutions
include feature-rich data sets (such as: precise location information, route optimization, text messaging, photos and real-time
video), putting first responders in the best possible position to make decisions when every second counts. Our customers are the
businesses, communities and governments that need to implement and improve 911 infrastructure in the U.S., as well as MNOs
in the U.S. and abroad that have a need to determine subscriber location within a network or to facilitate messaging services.
According to Frost & Sullivan, a leading third-party research firm, we were the second leading NG-911 primary contract holder
at year-end 2023, with an estimated market share of 22.1% and a population coverage of nearly 60 million. We have primary
statewide contracts in Arizona, Illinois, Iowa, Massachusetts, Ohio, Pennsylvania, South Carolina and Washington. We hold
direct contracts in counties in Texas and Missouri (St. Louis County). As such, we believe that we are a leader in public safety
communication and location technologies.
On October 17, 2024, we announced that we are executing a strategy to transform Comtech into a pure-play satellite and space
communications company. Ongoing and future actions supporting our transformation strategy include an exploration of
strategic alternatives for our Terrestrial and Wireless Networks segment, which is well underway.
The Terrestrial and Wireless Networks segment is organized into three service areas: next generation 911 and call delivery,
Solacom call handling solutions and trusted location and messaging solutions.
Next Generation 911 and Call Delivery
In addition to 911 call routing, we provide systems integration, geospatial location information, satellite and location
infrastructure terminals, and linkage to NG-911 Emergency Services IP Networks ("ESInet"). We also offer what we believe
are best-in-class 911 call handling solutions under the Solacom brand name. We believe state and local governments need to
upgrade existing legacy networks, location technologies, and call handling systems to modern NG-911 systems infrastructure,
including 911 text messaging services, advanced data, real-time photos, and other types of information sharing over IP
networks.
7
As the U.S., Canada and Australia broadly adopt upgraded NG-911 and call handling solutions, we believe that other countries
will follow similar technology and telecommunications advancements. Comtech’s public safety and location technology
solutions have been deployed since 2006 and are utilized by domestic MNOs, as well as internationally, to provide reliable
device location determination for public safety and commercial applications. Many of our technologies, such as positioning,
mapping and text messaging are embedded in our public safety and location offerings to help address mapping, routing and
geolocations. Our solutions address Federal Communications Commission ("FCC") mandates for emergency services as they
relate to location delivery by supporting precise caller location. Our text messaging platforms are used by wireless carriers to
provide short messaging services (“SMS”) to their end-customers as well as being used to communicate with 911 public safety
answering points (“PSAPs”).
Solacom Call Handling Solutions
Solacom Guardian is our state-of-the-art call handling solution, which provides an integrated call and text-to-and-from 911
solution on a unified platform. The solution provides a flexible user interface, adapts to varying customer environments and
preferences, provides powerful call conferencing capabilities, enhanced reporting capabilities and offers geospatial 911 location
call display directly from a customized map. Because of its advanced features, it allows us to offer an immediate upgrade path
to existing and new customers and has expanded our presence in the public safety solutions market with more than 700 PSAPs
and emergency call centers installed in 5 countries.
The Guardian platform includes an integrated cloud-based texting solution (“Guardian Messenger”) which provides call takers /
dispatchers with the ability to collect, process and share previously unavailable live incident information such as text, photos,
and video via SMS and multimedia messaging services (“MMS”), from one integrated desktop. The Guardian platform also
offers a cloud-based reporting and analytics solution (“Guardian Insights”), designed to assist emergency call center directors to
know their operations, so they can better plan and manage resources and workloads.
We are investing in product enhancements for our Guardian platform, which include additional cloud-based capabilities,
analytics, and cyber security solutions. We have significantly increased our “911-as-a-Service" (“911aaS”) offering, deploying
hosted 911 call centers solutions across numerous states and regions in the U.S. and provinces in Canada, starting with locations
where we have existing NG-911 networks.
Trusted Location and Messaging Solutions
We believe that as the industry moves toward digital transformation, customers will be looking for situational awareness
solutions that are built on top of mapping and geo-services. Our location technology solutions enable the determination of a
mobile device’s geospatial position in a variety of environments, leveraging a wide range of signals including Global
Positioning System ("GPS"), Global Navigation Satellite Systems ("GNSS") and multiple cellular positioning technologies
ranging from 2G through 5G mobile networks. For our installed base of systems, we provide ongoing operational support,
including administration of system components, system optimization, configuration management and maintenance services,
including tracking customer support issues, troubleshooting and developing and installing maintenance releases.
Our Location Studio® platform enables customers, particularly public safety agencies, to build their own applications with end-
user functionality, such as maps, search, geocoding, routing, and navigation, using their own brand. We believe that customers
and prospects are increasingly looking for alternatives to mapping services that are subject to change by the provider, and which
meet market privacy and security requirements. The Location Studio® platform is a complete end-to-end location application
consisting of maps, map data, including our Trusted OpenStreetMap ("TOSM") geo-services, application program interfaces
("APIs") and software development kits ("SDKs") enabling public safety ecosystems and enterprises to customize unique
mapping applications. Map data includes positioning, search, enhanced local content, custom maps, navigation, geo-fencing,
tracking integrated with third party data sources like camera feeds and IoT sensor data via cross-platform APIs and SDKs
supporting all leading operating systems.
We recently began marketing SmartResponse®, a newly developed cloud-based solution that offers a common operational
picture to PSAPs and first responders, enabling an effective data-driven response for security agencies and first responders by
providing a holistic information environment for them. This new solution offers streaming live feeds from traffic cameras at
and near incident location, and accesses caller information like past residences, criminal history, or next-of-kin information at
the tap of a button. Offering a bird's-eye view of integrated data, the SmartResponse® solution empowers first responders to
ensure appropriate resources are on the scene and to better serve the public in emergency situations.
8
Terrestrial and Wireless Networks: Key Markets and Growth Drivers
We are a leading provider of modern public safety and location technologies. Our next generation solutions enable rich,
multimedia information to be delivered alongside 911 calls. Also, our E-911 and NG-911 call routing solutions allow cellular
carriers and voice over the Internet ("VoIP") carriers, as well as legacy telecommunications carriers, to deliver emergency calls
to public safety emergency call centers nationwide. When someone places an emergency call, our technologies identify the call
as an emergency call, access the user’s location information from the wireless or VoIP networks and location databases, and
route the call to the assigned public safety jurisdiction. Today, we provide public safety and location technologies to many U.S.
telecommunication carriers, the largest being Verizon (for which we provide 911 call routing via cellular service). We believe
we service a significant portion of the carrier market for 911 cellular call routing applications, along with one other leading
competitor.
In addition to our growth in core 911 services, the expected expansion of 988 networks in fiscal 2025 and beyond across the
United States is expected to have a positive impact on our business. 988 services provide free and confidential support for
people in distress, suicide prevention and crisis resources. We believe we are uniquely positioned to expand our 911 services
into 988 services and help mitigate some of the core challenges the network is currently experiencing with area code specific
call routing. By connecting the 988 services with our proven 911 infrastructure, we believe that location services critical to
dispatch personnel can be improved for 988 exponentially.
In the growth area of 5G networks, new network-based positioning technologies are poised to deliver opportunities thanks to
the ongoing digital transformation of multiple industry verticals, including the Public Safety, Transportation, Manufacturing,
Healthcare and Retail industries. As these industries increasingly rely on data from connected devices, using location
information in real-time is expected to enhance existing business processes and outcomes as well as end user experiences. We
believe end-market applications such as worker’s safety in high-risk areas, smart manufacturing and autonomous driving would
benefit enormously from new precision-positioning techniques. Also, MNOs can now provide even more advanced location-
based services, in addition to existing connectivity solutions.
Examples of end-market applications that are driving long-term demand for our Terrestrial and Wireless Networks technologies
include:
•
Our XyPoint® Mobile Location Platform: Provided to MNOs globally, our virtualized location-based services
(“LBS”) platform is a high availability robust solution with multiple positioning technologies, that allows
authorized users to locate and track specific mobile devices and monitor specific areas of interest. MNOs can use
this platform for location accuracy to support a wide variety of use cases, including public safety, location
intelligence, network optimization and big data analytics. On the legacy front, our LBS platform is compatible
within 2G through 4G wireless networks, as well as an enabler to the MNOs to seamlessly migrate to cloud native
environments, as they progress their migrations to 5G.
•
Comtech INSIGHTS LightSource: Provides first responders a reporting and analytics platform for the rich data
created in Comtech’s NG-911 core systems. Authorized users at state, regional, and jurisdiction organizations can
see reports and analysis of call, behavior, and location characteristics in both time and geospatial visualizations.
Users are able to interact directly with the visualization in real time to focus on desired characteristics to include
timeframes, call types, media types, and other information. Authorized users can also schedule reports for
automatic delivery via email.
•
Comtech INSIGHTS SmartResponse®: Provides first responders of all types (fire, police, medical, state, regional
emergency communications centers, dispatch centers, emergency management agencies, fusion cells, intelligence
centers, etc.) access to real-time 911 call information and related supplemental information for situational
awareness in a geospatial, mapped context. Authorized users can view 911 calls and emergency response vehicles/
assets in a 3-D map via a single pane of glass view to enhance response. SmartResponse® is available for use in
both emergency centers and response vehicles.
9
•
Wireless Emergency Alerts (“WEA”): WEA, also known as Commercial Mobile Alerts System (“CMAS”) in the
U.S., enable authorized officials to inform the public about life-threatening events by automatically delivering
emergency alerts to mobile devices (including roaming users) via the government alert gateway. Using
standardized infrastructure, ensuring compliance with government regulations globally, our patented technology
facilitates the origination and accurate delivery of geo-targeted emergency alerts, empowering emergency services
providers to better serve the public. Using this technology, for example, MNOs can quickly broadcast emergency
communications, such as severe weather alerts, to all devices in a specific geographical area.
Terrestrial and Wireless Networks: Customer Base
Our customer base for the Terrestrial and Wireless Networks segment serves numerous customers, primarily in North America
and Australia, with whom we have cultivated longstanding relationships, including state and local governments, and a number
of the largest telecommunication companies in the world. Representative customer categories include:
•
U.S. state and local governments, such as the Commonwealth of Massachusetts, the Commonwealth of Pennsylvania
and the states of Arizona, Iowa, Maine, Ohio, South Carolina, Washington, St. Louis County, MO and the North
Central Texas Emergency Communications District
•
End-customers also include AT&T Inc., Comcast Corporation, Nokia Corporation, T-Mobile USA, Inc. and Verizon
Communications Inc.
•
Different solutions deployed with telephone companies and federal, provincial, and local governments in Australia,
Canada, Cayman Islands and New Zealand
Business Results and Challenges: Overview
In fiscal 2024, we achieved consolidated net sales of $540.4 million and Adjusted EBITDA of $45.7 million. Our fiscal 2024
performance and outlook for fiscal 2025 are discussed further in Part II – “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Fiscal 2024 Highlights and Business Outlook for Fiscal 2025.” For a
definition and explanation of Adjusted EBITDA, see Part II – “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations – Comparison of Fiscal 2024 and 2023 – Adjusted EBITDA.”
More Information and Where to Find It
Our Internet website is www.comtech.com, at which you can find our filings with the Securities and Exchange Commission
("SEC"), including investor letters, press releases, annual reports, quarterly reports, current reports, and any amendments to
those filings. We also make announcements regarding company developments and financial and operating performance through
our blog, Signals, at www.comtech.com/signals. We also use our website to disseminate other material information to our
investors (on the Home Page and in the "Investor Relations" section). Among other things, we post on our website our press
releases and information about our public conference calls (including the scheduled dates, times and the methods by which
investors and others can listen to those calls), and we make available for replay webcasts of those calls and other presentations
for a limited time.
We also use social media channels to communicate with customers and the public about our Company, our products, services,
and other issues, and we use social media and the Internet to communicate with investors, including information about our
stockholder meetings. Information and updates about our Annual Meetings will continue to be posted on our website at
www.comtech.com in the "Investors" section.
None of the information on our website, blog or any other website identified herein is incorporated by reference in this Form
10-K and such information should not be considered a part of this Form 10-K.
10
Strategic Transformation
In order to position ourselves to take advantage of additional growth opportunities and meet our strategic objectives, we have
followed, and will continue to follow, a disciplined approach in identifying, executing and capitalizing on acquisitions and
divestitures of businesses and enabling technologies. Material acquisitions and divestitures in the recent past include:
On November 7, 2023, we completed the divestiture of our solid-state RF microwave high power amplifiers and control
components product line, which was included in our Satellite and Space Communications segment, pursuant to a stock sale
agreement entered into on October 11, 2023 (the "PST Divestiture"). Net proceeds from the PST Divestiture in fiscal 2024 were
$33.2 million and used in part to repay a portion of our outstanding debt at the time, as well as to fund working capital needs.
On October 17, 2024, we announced that we are executing a strategy to transform Comtech into a pure-play satellite and space
communications company. Ongoing and future actions supporting our transformation strategy include: an exploration of
strategic alternatives for our Terrestrial and Wireless Networks segment, which is well underway; the pursuit of further
portfolio-shaping opportunities to enhance profitability, efficiency and focus; and the implementation of additional operational
initiatives to both achieve profitable results from operations as well as to align our go-forward cost structure with a pure-play
focus on satellite and space communications. In connection with this transformation strategy, we have also undertaken a
detailed evaluation of our Satellite and Space Communications segment's product portfolio to identify opportunities to divest,
separate and/or rationalize businesses or facilities that are not core to our go-forward focus. Consistent with this effort, in our
fourth quarter of fiscal 2024, we made the decision to exit our operations in Basingstoke, United Kingdom. Such operations
were established in connection with the prior management team’s fiscal 2020 acquisition of CGC Technology Limited, which
primarily served customers in Europe. Following the acquisition, Comtech continued to invest in the Basingstoke facility to
advance LEO constellation-based antenna technologies in anticipation of significant production orders. Taking into
consideration the significant ongoing investment as well as unfavorable contract terms on prospective antenna sales, we
concluded such operations would not generate an attractive return on invested capital and made the decision to exit these
operations. Furthermore, over the past several months, we have conducted an intensive review of our product portfolio to focus
future investment on our most strategic, high-margin revenue opportunities within the Satellite and Space Communications
segment. There can be no assurance that the exploration of strategic alternatives will result in a transaction or other strategic
changes or outcomes. While anticipated to improve our profitability in future periods, such actions may result in near-term
restructuring charges.
Sales, Marketing and Customer Support
Sales and marketing strategies include direct sales through sales, marketing and engineering personnel, indirect sales through
independent representatives, value-added resellers, and sales through a combination of the foregoing. We devote resources to
evaluating and responding to requests for proposals by governmental agencies around the world and, as needed, we employ the
use of specialized consultants to develop our proposals and bids.
We intend to continue to expand international marketing efforts, as needed, by engaging additional independent sales
representatives, distributors and value-added resellers and by establishing foreign sales offices. In addition, we expect to
leverage our relationships with larger companies (such as prime contractors to the U.S. government and large mobile wireless
operators) to market our technology solutions. In fiscal 2025, we expect to continue expanding our social media and Internet
presence and further developing an updated marketing and branding strategy.
We are pre-qualified as an approved vendor for certain government contracts. We collaborate in sales efforts under various
arrangements with integrators. Our marketing efforts also include advertising, public relations, speaking engagements and
attending and sponsoring industry conferences.
Our management, technical and marketing personnel establish and maintain relationships with customers. Our sales strategies
include a commitment to providing ongoing customer support for our systems and equipment. This support involves providing
direct access to engineering staff or trained technical representatives to resolve technical or operational issues.
Our products and services in many of our product lines have long sales cycles. Once a product is designed into a system,
customers may be reluctant to change the incumbent supplier due to the extensive qualification process and potential redesign
required in using alternative sources. In addition, in recent years, we have found that overall sales cycles for each of our product
lines have significantly increased, as we continue to support our customer's overall migration and upgrade to newer designs and
technologies.
11
Sales by geography and customer type, as a percentage of related net sales, are as follows:
Fiscal Years Ended July 31,
2024
2023
2022
2024
2023
2022
2024
2023
2022
Satellite and Space
Communications
Terrestrial and Wireless Networks
Consolidated
U.S. government
55.4 %
49.9 %
45.6 %
1.1 %
1.7 %
2.4 %
33.7 %
31.3 %
27.2 %
Domestic
15.1 %
16.7 %
18.0 %
89.4 %
89.2 %
88.1 %
44.8 %
44.7 %
47.8 %
Total U.S.
70.5 %
66.6 %
63.6 %
90.5 %
90.9 %
90.5 %
78.5 %
76.0 %
75.0 %
International
29.5 %
33.4 %
36.4 %
9.5 %
9.1 %
9.5 %
21.5 %
24.0 %
25.0 %
Total
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
Sales to U.S. government customers include sales to the DoD, intelligence and civilian agencies, as well as sales directly to or
through prime contractors.
Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. For fiscal 2024, except
for the U.S. government, there were no customers that represented more than 10% of consolidated net sales. For fiscal 2023 and
2022, included in domestic sales are sales to Verizon Communications Inc. ("Verizon"), which were 10.6% and 11.1% of
consolidated net sales, respectively.
International sales for fiscal 2024, 2023 and 2022 (which include sales to U.S. domestic companies for inclusion in products
that are sold to international customers) were $115.9 million, $132.1 million and $121.4 million, respectively. When we sell
internationally, we denominate most of our contracts in U.S. dollars. Some of our sales to international customers are paid for
by letters of credit or on an open account. From time to time, some of our international customers may require us to provide
performance guarantees.
Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to
a foreign country) represented more than 10% of consolidated net sales for fiscal 2024, 2023 and 2022.
Backlog
Our backlog as of July 31, 2024 was $798.9 million (of which $278.9 million was attributed to the Satellite and Space
Communications segment and $520.0 million was attributed to the Terrestrial and Wireless Networks segment). Such amount
represented a new record level of consolidated backlog for our Company. We estimate that a substantial portion of the backlog
as of July 31, 2024 will be recognized as sales during the next twenty-four month period, with the rest thereafter. Such estimate
could be impacted by our transformation strategy discussed above, under the section "Strategic Transformation."
At July 31, 2024, 66.6% of our backlog consisted of orders for use by U.S. commercial customers, 18.8% consisted of U.S.
government contracts, subcontracts and government funded programs and 14.6% consisted of orders for use by international
customers (including sales to U.S. domestic companies for inclusion in products that will be sold to international customers).
Our backlog is defined as orders (sometimes also referred to herein as bookings) that we believe to be firm. Backlog that is
derived from U.S. government orders relates to U.S. government contracts that have been awarded, signed and funded. Backlog
for our U.S. government customers also includes amounts appropriated by Congress and allotted to the contract by the
procuring government agency. Such backlog does not include the value of options that may be exercised in the future on multi-
year contracts, nor does it include the value of additional purchase orders that we may receive under indefinite delivery/
indefinite quantity ("IDIQ") contracts or basic ordering agreements. In some cases, such as contracts received from large U.S.
based telecommunication companies, our backlog may include the value of customer authorizations to proceed or may be
computed by multiplying the most recent month’s contract or revenue by the months remaining under the existing long-term
agreements, which we consider to be the best available information for anticipating revenue under those agreements. When we
acquire a company with existing contracts, we only record bookings for those contracts that meet our definition. Almost all of
the contracts in our backlog (including firm orders previously received from the U.S. government) are subject to modification,
cancellation at the convenience of the customer, or for default in the event that we are unable to perform under the contract.
Please see "Strategic Transformation" section discussed above, as well as Item 1A – “Risk Factors” under Part I of this Form
10-K for more information about risks pertaining to recognition of our backlog.
12
A significant portion of the backlog from our U.S. commercial customers relates to large, multi-year contracts to provide state
and local governments (and their agencies) with 911 public safety and location technology solutions. Although the contracts
themselves represent legal, binding obligations of these governments, funding is often subject to the approval of budgets (for
example, on an annual or bi-annual basis). Although funding for these multi-year contracts is dependent on future budgets being
approved, we include the full estimated value of these large, multi-year contracts in our backlog given the critical nature of the
services being provided and the positive historical experience of our state and local government customers passing their
respective budgets.
There can be no assurance that our backlog will result in actual revenue in any particular period, or at all, or that any contract
included in backlog will be profitable. There is a higher degree of risk in this regard with respect to unfunded backlog. The
actual amount and timing of any revenue is subject to various contingencies, many of which are beyond our control. The actual
recognition of revenue on contracts included in backlog may never occur or may change because a program schedule could
change, a customer may not follow up with order details (e.g., delivery instructions), fluctuations in currency exchange rates
after an order is placed could cause our products to become too expensive for a foreign customer, a customer’s program could
be canceled, a contract could be reduced, modified or terminated early due to changes in a customer’s priorities, funding may
not be included in future budgets, actual indirect rates being reimbursed on U.S. government contracts may ultimately be less
than those indirect rates included in our initial proposals, or an option that we had assumed would be exercised is not exercised.
As a result of these contingencies, we may adjust our backlog if we determine that such orders are no longer firm and/or
funded. In addition to adjustments from these types of contingencies, variations in backlog from time to time are attributable, in
part, to changes in sales mix, the timing of contract proposals, the timing of contract awards, delivery schedules on specific
contracts, new bookings obtained through acquisitions or reductions due to divestitures or other restructuring type activities. A
large majority of the solutions in our satellite ground infrastructure technologies product line within our Satellite and Space
Communications segment operate under short lead times. Backlog in both our Satellite and Space Communications segment
and Terrestrial and Wireless Networks segment has been, and could be, highly influenced by the nature and timing of orders
received from federal, state and local governments and defense-related agencies, causing such orders to be subject to
unpredictable funding, deployment and technology decisions by such customers. As a result, we believe our backlog and orders,
at any point in time, are not necessarily indicative of the total sales anticipated for any future period.
Research and Development
We have established leading technology positions in our fields through internal and customer-funded research and development
activities.
Internal research and development expenses are reported as research and development expenses for financial reporting purposes
and were $24.1 million, $48.6 million and $52.5 million in fiscal 2024, 2023 and 2022, respectively, representing 4.5%, 8.8%
and 10.8% of total consolidated net sales, respectively, for these periods. Customer-funded research and development activities
relate to the adaptation of our basic technology to specialized customer requirements which is recoverable under contracts and
is reflected in net sales with the related costs included in cost of sales. Certain of our government customers also contract with
us from time to time to conduct research on telecommunications software, equipment and systems. During fiscal 2024, 2023
and 2022, we were reimbursed by customers for such activities in the amounts of $18.9 million, $14.0 million and $9.8 million,
respectively.
In addition to the recent increases in customer-funded research and development activities, in fiscal 2024, we also experienced
an increase in engineering efforts related to cost to fulfill contract assets and internal use software, for which we capitalized
$2.9 million and $3.8 million, respectively. As a result of these trends and the impact of prior reductions in force announced in
fiscal 2023, our research and development expenses for financial reporting purposes significantly decreased in fiscal 2024 as
compared to historical periods.
During fiscal 2024, 2023 and 2022, we incurred $4.1 million, $3.8 million and $1.2 million, respectively, of strategic emerging
technology costs for next-generation satellite technology to advance our solutions offerings to be used with new broadband
satellite constellations. A significant portion of the fiscal 2024 costs related to our steerable antenna operations in Basingstoke,
United Kingdom, which we decided to exit in the fourth quarter of fiscal 2024, as discussed above in the section "Strategic
Transformation." We are evaluating this new market in relation to our long-term business strategies, and expect to incur
additional costs in fiscal 2025. However, such costs will be reported in the future as part of our ongoing research and
development activities and not added back to our Adjusted EBITDA.
13
Intellectual Property
We rely upon trade secrets, technical know-how, continuing technological innovation and, with respect to certain key
technologies, patents to develop and maintain our competitive position. The products we sell require significant engineering
design and manufacturing expertise. For technological capabilities that are not protected by patents or licenses, we generally
rely on the expertise of our employees and our learned experiences in both the design and manufacture of our products and the
delivery of our services.
Some of our key Satellite and Space Communications segment technology is protected by patents that are significant to
protecting our proprietary technology. We have been issued several U.S. patents relating to forward error correction technology
that is utilized in our TPC-enabled satellite modems. Due to our market leadership position, we do not expect that upon
expiration of these patents, our future results will be negatively impacted.
We have a portfolio of several hundred patents worldwide relating to wireless location services, text messaging, GPS ephemeris
data, emergency public safety data routing, electronic commerce and other areas. To-date, our strategy has been to avoid
offensive and defensive patent litigation and focus on building meaningful partnerships with other companies through direct
licensing, cross licensing, and other forms of agreements. We do not believe that any single patent or group of patents, patent
application or patent license agreement is material to our operations.
We have filed additional patent applications for certain apparatus and processes we believe we have invented covering key
features of location services, wireless text alerts, SMS Center, mobile-originated data and E911 network software. There is no
assurance that any patent application will result in a patent being issued by the U.S. Patent and Trademark Office or other patent
offices, nor is there any guarantee that any issued patent will be valid and enforceable. Additionally, foreign patent rights may
or may not be available or pursued in any technology area for which U.S. patent applications have been filed.
Almost all the products and services we sell to the U.S. government include technology and other technical know-how that we
have internally developed. In past instances where we have provided government-purpose rights, to our knowledge, the U.S.
government has not exercised any of these rights. To the extent that we have provided or will provide government-purpose
rights in the future, we believe that given the rapidly changing nature of our technology, our future success will depend
primarily on the technical competence and creative skill of our personnel, rather than any contractual protection.
Competition
Our businesses are highly competitive and are characterized by rapid technological change. Some of our competitors are
substantially larger, have significantly greater financial, marketing, research and development, technological and operating
resources and broader product lines than we have. Other companies are developing new technologies and the shift towards open
standards such as IP-based satellite networks will likely result in increased competition. A significant technological
breakthrough by others, including new companies, our existing competitors and our customers, could have a material adverse
effect on our business. Our future success depends on, among other things, our ability to keep pace with such changes and
developments and to respond to the increasing variety of electronic equipment users and transmission technologies.
Some large defense-based companies have subsidiaries or divisions that compete against us in one or more business segments.
In addition, new and potential competitors are always emerging. Certain of our customers, such as prime contractors who
currently outsource their engineering and manufacturing requirements to us, have technological capabilities in our product areas
and could choose to replace our products with products they develop. In some cases, we partner or team with companies (both
large and mid-tier) to compete against other teams for large defense programs. In some cases, these same companies may be
among our competitors.
14
Listed below, in alphabetical order, are some of our competitors in each of our two business segments:
Satellite and Space Communications – Advantech Co., Ltd., Aethercomm Inc. (acquired by Frontgrade Technologies,
a portfolio company of Veritas Capital), Agilis Satcom, AMERGINT Technologies, Inc., Amkom Design Group Inc.,
AnaCom, Inc., Codan Limited, Communications and Power Industries (also referred to as "CPI"), Datum Systems,
Inc., dB Control Corp. (a subsidiary of HEICO Corp.), ETM Electromatic Inc. (acquired by Teledyne Technologies
Inc.), Gilat Satellite Networks Ltd., Empower RF Systems, Inc., General Dynamics Corporation, Hughes Network
Systems, LLC (a subsidiary of EchoStar), KVH Industries, Inc., Kratos Defense and Security Solutions (Including
Kratos RT Logic and Avtec Systems, Inc.), L3Harris Technologies, Inc., Mission Microwave Technologies, LLC, ND
Satcom GmbH, Novelsat LTD, Panasonic Corporation, Paradise Datacom Ltd. (a subsidiary of Teledyne Technologies
Incorporated), Raytheon Technologies Corporation, SatixFy Israel Ltd., ST Engineering iDirect, Inc. (including
Newtec), Starlink Services, LLC (a wholly owned subsidiary of SpaceX), Terrasat Communications Inc., Trace
Systems Inc., TrellisWare Technologies, Inc., Ultra Intelligence and Communications, and ViaSat, Inc.
Terrestrial and Wireless Networks – AT&T Inc., Atos, Bandwidth.com, Carbyne, Central Square Technologies, 8x8,
Inc., Everbridge, Inc., Hexagon AB, Immersive Labs, INdigital (acquired by Novacap), Intersec, Intrado Corporation
(formerly West Corporation), LM Ericsson, Lumen Technologies, Inc. (formerly CenturyLink, Inc.), Mobilaris AB,
Mobile Arts AB, Motorola Solutions, Inc., NGA911, NextNav, Inc., Nokia Networks (a subsidiary of Nokia
Corporation), Polaris Wireless, RapidDeploy, Inc., RapidSOS, Rave Mobile Safety, Sinch AB (Inteliquent), Synergem
Technologies, SS8, TomTom N.V., Versaterm Public Safety Inc., WestTel, and Zetron.
We believe that competition in all our markets is based primarily on technology innovation, product performance, reputation,
delivery times, customer support and price. Due to our proprietary know-how, we believe we can develop, produce and deliver
products and services on a cost-effective basis faster than many of our competitors.
Corporate Responsibility and Sustainability
We recognize the need for driving corporate responsibility within our organization, throughout our supplier network and in our
communities. To drive this responsibility, we will continue to target effective corporate governance, ethical behavior in the
workplace and social responsibility, while also updating and enhancing this focus with initiatives, such as:
•
refreshing the roles and responsibilities of the committees of our Board of Directors, including with the establishment
of an Environment, Social and Governance ("ESG") task force supervised by our Board of Directors,
•
developing a company-wide People Strategy to foster and promote workplace talent and diversity, and
•
organizing a company-wide strategic sourcing group that will be accountable for tracking and driving resource
reduction targets, such as resource-efficient manufacturing, reduction of hazardous substances, and take-back,
recycling and reuse of products.
Human Capital
Our employees are one of our most valuable assets and we believe our success depends on the talent we attract and retain. Our
comprehensive people strategy continues to focus on developing a meaningful plan to enhance our employees’ engagement and
interests, which will complement and build on our strong foundation. We are passionate about building meaningful employee
engagement and happiness through a variety of programs, initiatives, and other opportunities that are addressed in our People
Strategy. As part of this strategy, we are providing a foundation for a diverse, inclusive and equitable workplace where
employees feel they belong, their views are valued, and they are empowered to pursue opportunities they are passionate about.
Our People Strategy is also focused on meeting and executing our strategic recruitment initiatives, developing and promoting
talent; supporting competitive benefits and wellness programs; and emphasizing the importance of our employees’ health,
safety and wellness.
Fostering Proactive Belonging
We believe the principle of hospitality acts as a catalyst for fostering a sense of proactive belonging, a key component for
achieving a sustainable impact. At the heart of our approach is the intentional act of bringing people together across social,
cultural, and experiential gaps. By creating opportunities for provocative thinking and meaningful experiences, we are able to
challenge assumptions that disrupt our innate habits of thinking and behaving.
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We expect our employees and contractors to foster authentic connections, cultivate hospitable spaces, embrace disorienting
dilemmas, and emphasize continuous learning. Our policy promotes equal employment opportunities without discrimination or
harassment on the basis of race, color, national origin, religion, sex, age, disability, or any other status protected by law. Our
Chief People Officer is committed to driving these policies and efforts across the enterprise to cultivate a strong culture of
inclusivity.
We value a workforce that is diverse by thought. To promote this initiative, we reach out to a variety of institutions, attend
recruiting events aimed at attracting talent of various backgrounds and cultures; and emphasize creating opportunities of
belonging during our talent, promotion, and succession planning.
At least once per month we organize an event or engagement where employees are encouraged to participate to celebrate our
workforce and our communities. Events include Asian American Pacific Islander Heritage Month, International Women’s Day,
Breast Cancer Awareness Month, and Pride Month, among others. In fiscal 2024, we emphasized our commitment to
celebrations like Pride Month by featuring a lunch and learn webinar led by one of our Executive Team Leaders who discussed
their journey as a member of the LGBTIQA+ community. Each year we also commemorate "Honor Week” by spotlighting our
veteran employees and recognizing their accomplishments. In fiscal 2024, we also launched our first Employee Resource Group
focusing on Women’s Leadership to deepen and expand our efforts in this space.
Employee Workforce
Employee workforce consists of the following at July 31, 2024 and 2023:
2024
2023
Women
24 %
22 %
People of Color*
39 %
38 %
Veterans
12 %
10 %
People with Disabilities
7 %
5 %
*People of Color include employees who identify with any race other than white.
Developing and Retaining Talent
Our employees are one of our most valuable assets and we believe our success depends on the talent we attract and retain. Our
comprehensive people strategy continues to focus on developing a meaningful plan to enhance our employees’ engagement and
interests, which will complement and build on our strong foundation.
To meet and execute our strategic business goals, we are focused on sourcing, attracting, and retaining top talent, including
those with engineering, science, and technical backgrounds. To boost our talent attraction efforts, we partner with local
university student organizations, such as Arizona State University, to educate students about our work and to hire interns
throughout our organization. This year, our total internship class was comprised of 24 students, up from 12 students in fiscal
2023. We designed our internship program to be a hands-on program that exposes students to a wide variety of activities and
allows them to learn from real-world projects. All interns are paired with a mentor and are invited to attend weekly lunch and
learns to receive insights about our culture and working environment.
We value employee development at all career stages and performance levels. We have made significant investments to provide
ongoing training and career development opportunities by offering courses through our online learning management system.
We offer job-specific skills training to promote and develop advancement within the organization and to enhance skills. In
fiscal 2024 we launched Comtech University through a learning management system that is available year-round for
development courses facilitated by a training coordinator. We are developing additional courses focusing on financial,
leadership, and lean management skills. We also developed a “Program Management Office” academy for program
management employees which includes courses and training to become a certified project manager and introduce company-
wide best practices and procedures.
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We are working to build stronger employee engagement through several new initiatives. We believe that strong communication
is key to providing the foundation for an engaged workforce. Company news, employee opportunities, company initiatives, and
events are communicated through our internal and external blogs and our redesigned company-wide intranet. Since launching
our new MyComtech intranet site, we have identified new ways to recognize our employees. We commenced our Meet the
Team series profiling one employee each month in a monthly article released on our intranet. Through the series, employees are
able to learn about a fellow team member including their current position, career path, background, and interests outside of
work. Mentorship and collegiality are strongly valued at Comtech. We value exceptional employees who make a difference to
the communities where we operate. In addition to spotlighting employee achievements through our communication channels,
we have introduced other initiatives such as awards to motivate and recognize employees who go the extra mile.
At July 31, 2024, we had 1,676 employees (including temporary employees and contractors), 1,048 of whom were engaged in
production and production support, 337 in research and development and other engineering support and 291 in marketing and
administrative functions. None of our U.S. based employees are represented by a labor union. Of our 1,676 employees, 345
employees are based outside of the United States, including 142 employees in Canada, 88 employees in the United Kingdom,
and 87 employees in India. We believe that our employee relations are good. Subsequent to our fiscal year end, headcount
based in the United Kingdom was significantly reduced as a result of our fourth quarter of fiscal 2024 decision to cease
operations at such location.
Safety and Wellness
We strive to maintain a robust health, safety and wellness program to ensure a healthy work environment, promote workforce
resiliency, and enhance business value. We encourage employee participation to identify opportunities for improvement and
review and monitor our performance with safety committees at our local sites. Local safety committees identify safety programs
and ensure completion of all training and target learning objectives.
Employee wellness is important to Comtech. All employees and their households have access to an employee assistance
program, as well as a health advocate program to help with all aspects of benefits, family life, financial concerns, legal issues
and transition to retirement. Assistance is available 365 days per year, 24 hours per day. This year employees had an
opportunity to participate in wellness events as a company-wide challenge.
We rigorously review our benefit and compensation plans to maintain competitive packages that reflect the wellness needs of
our workforce and the marketplace. These programs include 401(k) plans, comprehensive health packages, and welfare
benefits, among many others. We support pay equity for all employees within the same geographic area, experience level, and
performance standards. This year we added several new benefits including a legal plan and discounted pet insurance.
Environment
We are committed to reducing our environmental impact across our value chain, including in the design of our products,
operation of our facilities, and procurement of materials. We are also committed to maintaining compliance with the various
global environmental regulations that are applicable to our business segments, including with the respect to the waste and
emissions generated at our facilities. Our Board of Directors is responsible for the oversight of our environmental efforts, and
the management of climate-related issues is overseen by our Chief Legal Officer.
In September 2023, we completed our first climate change disclosure through CDP, which includes a baseline greenhouse gas
inventory for company-wide Scope 1 and 2 emissions. In fiscal 2024, we completed our second Greenhouse Gas ("GHG")
inventory. Having established a foundation, we are working to build on our environmental strategy and initiatives.
We seek to increase efficient usage of building space, respond to increased work-from-home and reduced requirements for
office space, and encourage reduced employee commuting. We offer our employees incentives to promote greener commuting
options through rideshare programs.
We are committed to providing a workplace which values the health, safety, and well-being of our employees, contractors, and
visitors to our facilities, complying with Environment, Health and Safety ("EHS") legal requirements, and minimizing EHS
risk. In fiscal 2024, we developed a comprehensive EHS Management System ("EHSMS"), designed to align with the core
elements of international standards for environmental and occupational health and safety management systems, while placing a
risk-based focus on the elements most relevant to our operations. The EHSMS has the goals of engaging employees at all levels
of the organization in the prevention of work-related injuries and illnesses, reducing environmental impacts, and fostering a
culture of continuous improvement.
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U.S. Government Contracts and Security Clearances
The U.S. government operates on an October-to-September fiscal year. Generally, in February of each year, the President of the
United States presents to the U.S. Congress ("Congress") the proposed budget for the upcoming fiscal year and from February
through September of each year, the appropriations and authorization committees of Congress review the President’s budget
proposals and establish the funding levels for the upcoming fiscal year. Once these levels are enacted into law, the Executive
Office of the President administers the funds to the agencies. Thereafter, we can receive orders pursuant to sole-source or
competitively awarded contracts, which we describe below.
The U.S. government may be unable to complete its budget process before the end of any given government fiscal year and
when the fiscal budget is not approved in a timely manner, the U.S. government is required either to shut down or be funded
pursuant to a "continuing resolution" that authorizes agencies of the U.S. government to continue operations but does not
authorize new spending initiatives, either of which could result in reduced or delayed orders or payments for products and
services we provide.
Sole-source contracts are generally awarded to a single contractor without a formal competition when a single contractor is
deemed to have an expertise or technology superior to that of competing contractors or when there is an urgent need by the U.S.
government that cannot wait for a full competitive process. Potential suppliers compete informally through research and
development and marketing efforts. Competitively-bid contracts are awarded based on a formal proposal evaluation established
by the procuring agency and interested contractors prepare bids. Competitively-bid contracts are awarded after a formal bid and
proposal competition among suppliers.
The U.S. government has a stated policy direction to reduce the number of sole-source contract awards across all procuring
agencies. In addition, the U.S. government is increasing the use of multiple-award IDIQ contracts to increase its procurement
options. IDIQ contracts allow the U.S. government to select a group of eligible contractors for the same program. When the
government awards IDIQ contracts to multiple bidders under the same program, a company that has already competed to be
selected as a participant in the program must subsequently compete for individual delivery orders. As a result of this U.S.
government shift toward multiple award IDIQ contracts, we expect to face greater competition for future U.S. government
contracts and, at the same time, greater opportunities for us to participate in program areas that we do not currently participate
in.
As a U.S. government contractor and subcontractor, we are subject to a variety of rules and regulations, such as the Federal
Acquisition Regulations ("FAR"). Individual agencies can also have acquisition regulations. For example, the DoD implements
the FAR through the U.S. Defense Federal Acquisition Regulation Supplement (commonly known as "DFARS"). For all
Federal government entities, the FAR regulates the phases of any product or service acquisition, including: acquisition
planning, competition requirements, contractor qualifications, protection of source selection and vendor information, and
acquisition procedures. In addition, the FAR addresses the allowability of supplier costs, while Cost Accounting Standards
address how those costs can be allocated to contracts. The FAR also subjects suppliers to audits and other government reviews.
These reviews cover issues such as cost, performance and accounting practices relating to our contracts. The government may
challenge a supplier's costs and fees or require corrective actions which can delay programs and increase our costs. Suppliers
are also required to comply with the National Industrial Security Program Operating Manual which relates to the handling of
classified materials and programs and is administered by the Defense Counterintelligence and Security Agency (“DCSA”).
Suppliers who do not comply with these various regulations may lose and/or become ineligible for facility security clearances
and/or participation in classified and non-classified programs.
Under firm fixed-price contracts, we perform for an agreed-upon price and we can derive benefits from cost savings, but bear
the risk of cost overruns. Our cost-reimbursable type contracts typically provide for reimbursement of allowable costs incurred
plus a negotiated fee. Cost-plus-incentive-fee orders typically provide for sharing with the U.S. government savings accrued
from orders performed for less than the target costs and costs incurred in excess of targets up to a negotiated ceiling price
(which is higher than the target cost), and for the supplier to carry the entire burden of costs exceeding the negotiated ceiling
price.
In fiscal 2024, $182.3 million or 33.7% of our consolidated net sales were to the U.S. government (including sales to prime
contractors to the U.S. government). Of this amount, firm fixed-price and cost-reimbursable type contracts (including fixed-fee,
incentive-fee and time and material type contracts) accounted for $135.5 million and $46.8 million, respectively.
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Regulatory Matters
In addition to the rules and regulations that pertain to us as a U.S. government contractor and subcontractor, we are also subject
to a variety of local, state and federal governmental regulations.
Our products that are incorporated into wireless communications systems must comply with various government regulations,
including those of the FCC. Our manufacturing facilities, which may store, handle, emit, generate and dispose of hazardous
substances that are used in the manufacture of our products, are subject to a variety of local, state and federal regulations,
including those issued by the Environmental Protection Agency. Our products are also subject to European Union directives
related to the recycling of electrical and electronic equipment.
Our international sales are subject to U.S. and foreign regulations such as the Arms Export Control Act, the International
Emergency Economic Powers Act ("IEEPA"), the International Traffic in Arms Regulations ("ITAR"), the Export
Administration Regulations ("EAR") and the trade sanctions laws and regulations administered by the U.S. Department of the
Treasury’s Office of Foreign Assets Control ("OFAC"), the Department of Commerce ("DoC") and their foreign counterparts as
well as other applicable laws relating to trade, export controls and foreign corrupt practices, the violation of which could
adversely affect our operations. We must comply with all applicable export control laws and regulations of the U.S. and other
countries. Certain of our products and systems may require licenses from U.S. government agencies for export from the U.S. or
other countries, and some of our products are not permitted to be exported. We cannot be certain that we will be able to obtain
necessary export licenses, and such failure would materially adversely affect our operations. If we are unable to receive
appropriate export authorizations in the future, we may be prohibited from selling our products and services internationally,
which may limit our sales and have a material adverse effect on our business, results of operations and financial condition. In
addition, in certain cases, U.S. and foreign export controls also severely limit unlicensed technical discussions, such as
discussions with any persons who are not U.S. citizens or permanent residents. As a result, in cases where we may need an
export license, our ability to compete against a non-U.S. domiciled foreign company that may not be subject to the same U.S.
laws may be materially adversely affected. In addition, we are subject to the FCPA and other local laws that generally bar
bribes or unreasonable gifts to foreign governments or officials. Violations of these laws or regulations could result in
significant sanctions, including disgorgement of profits, fines, and criminal sanctions against us, our officers, our directors, or
our employees, more onerous compliance requirements, more extensive debarments from export privileges or loss of
authorizations needed to conduct aspects of our international business. A violation of any of the regulations enumerated above
could materially adversely affect our business, financial condition and results of operations. Additionally, changes in regulatory
requirements could further restrict our ability to deliver services to our international customers or negatively impact our
business, including the addition of a country to the list of sanctioned countries under the IEEPA or similar legislation.
In the past, we have self-reported violations of export control laws or regulations to the U.S. Department of State, Directorate of
Defense Trade Controls ("DDTC"), DoC, OFAC and their foreign counterparts. In addition, we have made various
commitments to U.S. government agencies that oversee trade and export matters that we will maintain certain policies and
procedures including maintaining a company-wide Office of Trade Compliance and conducting ongoing internal assessments
and reporting any future violations to those agencies.
Our financial reporting, corporate governance, public disclosure and compliance practices are governed by laws such as the
Sarbanes-Oxley Act of 2002, Dodd-Frank Act of 2010, and rules and regulations issued by the SEC. The SEC has adopted rules
which require, among other things, public companies to conduct certain inquiries to determine whether or not Conflict Minerals
(as that term is defined in the SEC rules) that are necessary to the functionality of their manufactured products or their product's
production processes originated in a Covered Country (as that term is defined in the SEC rules) and ultimately file a report with
the SEC. Conflict Minerals are widely used in many industries, including the telecommunications industry and almost all of our
products include component parts purchased from third-party suppliers and we must rely heavily on information received from
suppliers to determine the origin of those materials. We have implemented a due diligence program consistent with the
Organization for Economic Co-operation and Development guidelines to collect information concerning the country of origin
of Conflict Minerals and in that regard, have adopted a policy that requires our suppliers (both public and private) to commit to
a code of conduct relating to the responsible sourcing of minerals and to establish a policy to reasonably assure that the
products they manufacture do not contain Conflict Minerals that originated in a Covered Country. Efforts to comply with this
SEC rule have resulted in additional costs to us and, we believe, to our suppliers. As such, the availability of raw materials used
in our operations could be negatively impacted and/or raw material prices could increase. Further, if we are unable to certify
that our products are conflict free, we may face challenges with our customers, which could place us at a competitive
disadvantage and could harm our reputation.
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Laws and regulations have been enacted that affect companies conducting business on the Internet, including the European
General Data Protection Regulation ("GDPR"). The GDPR imposes certain privacy related requirements on companies that
receive or process personal data of residents of the European Union that are currently different than those in the United States
and include significant penalties for non-compliance. Similarly, there are several legislative proposals in the United States, at
both the federal and state level, that could impose new obligations in areas affecting our business, such as liability for personal
data protection. In addition, some countries are considering or have passed legislation implementing data protection
requirements or requiring local storage and processing of data or similar requirements that could increase the cost and
complexity of delivering our services. Our costs to comply with the GDPR as well any other similar laws and regulations that
emerge may negatively impact our business.
ITEM 1A. RISK FACTORS
The following describes major risks to our business and should be considered carefully. Any of these factors could significantly
and negatively affect our business, prospects, financial condition, or operating results, which could cause the trading prices of
our equity securities to decline. The risks described below are not the only risks we may face. Additional risks and uncertainties
not presently known to us, or risks that we currently consider immaterial, could also negatively affect us.
Summary of Risk Factors
The following is a summary of the principal risks that could significantly and negatively affect our business, prospects,
financial conditions, or operating results. For a more complete discussion of the material risks facing our business, please see
below:
Global Risks
•
New and ongoing challenges relating to current supply chain constraints and impacts from inflation, including for
satellite ground station and troposcatter components, could adversely impact our revenue, gross margins and financial
results.
•
If global economic business and political conditions deteriorate as compared to the current environment it could have a
material adverse impact on our business outlook and our business, operating results and financial condition.
•
We have significant operations in locations which could be materially and adversely impacted in the event of a
terrorist attack and government responses thereto or significant disruptions (including natural disasters) to our
business.
•
Ongoing instability and conflicts in global markets, including in the Ukraine and Eastern Europe, Israel, Lebanon, the
Gaza Strip and the Middle East and Asia, and the attending possibility of economic sanctions, have created and may
continue to create economic and political disruption that could adversely impact our revenue, gross margins and
financial results.
Strategic Transformation Risks
•
We may fail to realize all of the anticipated benefits of our operational initiatives, including the strategic alternatives
for our Terrestrial and Wireless Networks segment and further portfolio-shaping opportunities, or those benefits may
take longer to realize than expected.
•
Our transformation strategy may require a substantial portion of the time and attention of our management team, which
may have an adverse effect on our business and results of operations, and we may face increased levels of employee
attrition.
Business Risks
•
Our current cash and liquidity projections raise substantial doubt about our ability to continue as a going concern.
•
Our business outlook is difficult to forecast and operating results are subject to significant fluctuations and are likely to
be volatile.
•
Our backlog is subject to customer cancellation or modification and such cancellations or modifications could result in
a decline in sales and increased provisions for excess and obsolete inventory.
•
Our efforts to invoice and collect unbilled receivables may be unsuccessful.
20
•
Contract cost growth on our firm fixed-price contracts exposes us to reduced profitability and the potential loss of
future business and other risks.
•
Our business is highly dependent on the budgetary decisions of our government customers.
•
Our contracts with the U.S. government are subject to unique business, commercial and government audit risks.
•
Our dependence on sales to international customers exposes us to unique business, commercial and export compliance
audit risks.
•
A change in our relationship with our large wireless carrier customers could have a material adverse effect.
•
A change by wireless carrier partners in the pricing and other terms by which they offer our products to their end-
customers could have a material adverse affect.
•
Disputes with our subcontractors or key suppliers or their inability to deliver on a timely basis, could cause delays in
our shipments.
•
Our estimates regarding future warranty obligations may change based on a variety of factors, impacting future cost of
revenue.
Strategic Growth Risks
•
We face a number of risks relating to the expected long-term growth of our business.
•
Loss of our executive officers or other key personnel or other changes to our management team could disrupt our
operations and growth plans or harm our business.
•
We must service the debt and maintain compliance with various covenants under a credit facility that imposes
restrictions on our business.
•
Divestitures of portions of our business in the course of pursuing strategic alternatives and revisiting our portfolio
could prove difficult to carve out, disrupt our business, dilute stockholder value or adversely affect operating results or
the market price of our common stock.
•
Our investments in recorded goodwill and other intangible assets have been impaired and may be further impaired as a
result of future business conditions, a deterioration of the global economy or if we change our reporting unit structure
as we pursue strategic alternatives.
Cybersecurity Risks
•
We could be negatively impacted by a system failure, breach, attack or intrusion of our IT networks or those we
operate for certain customers, or third-party data center facilities, servers and related systems.
•
The measures we have implemented to secure information we collect and store or enable access to may be breached.
Legal, Regulatory and Litigation Risks
•
Changes in U.S. federal, state and local and foreign tax law could adversely affect our business and financial
condition.
•
Our U.S. federal, state and local and foreign tax returns are subject to audit and a resulting tax assessment or settlement
could have a material adverse effect on our business, results of operations and financial condition.
•
We may be subject to environmental liabilities.
•
The success of our business is dependent on compliance with FCC rules and regulations and similar foreign, state and
local laws and regulations.
•
Regulation of the mobile communications industry and VoIP is evolving, and unfavorable changes or our failure to
comply with existing and potential new legislation or regulations could harm our business and operating results.
21
•
Ongoing compliance with the provisions of securities laws, related regulations and financial reporting standards could
unexpectedly materially increase our costs and compliance related expenses.
•
Indemnification provisions in our contracts could have a material adverse effect on our consolidated results of
operations, financial position, or cash flows.
•
We are, from time to time, and could become a party to additional litigation or subject to claims. Additionally, we may
become subject to government investigations, which may have an adverse effect on our financial condition.
•
Protection of our intellectual property is limited and pursuing infringers of our patents and other intellectual property
rights can be costly.
•
Third parties may claim we are infringing their intellectual property rights and we could be prevented from selling our
products, or suffer significant litigation expense, even if these claims have no merit.
Competitive Risks
•
All of our business activities are subject to rapid technological change, new entrants, the introduction of other
distribution models and long development and testing periods each of which may harm our competitive position.
•
Our business is highly competitive, we are reliant upon the success of our partners, and some of our competitors have
significantly greater resources than we do, which could result in a loss of customers, market share and/or market
acceptance.
•
We rely upon various third-party companies and their technology to provide services to our customers.
•
Because our software may contain defects or errors, and our hardware products may incorporate defective components,
our sales could decrease if these defects or errors adversely affect our reputation or delay shipments of our products.
Risks Related to our Common Stock
•
Our stock price is volatile.
•
Future issuances of our shares of common stock could dilute a stockholder's ownership interest in Comtech and reduce
the market price of our shares of common stock.
•
Actions of activist stockholders could impact the pursuit of our business strategies and adversely affect our results of
operations, financial condition and/or share price.
•
Provisions in our corporate documents and Delaware law could delay or prevent a change in control of Comtech.
Global Risks
New and ongoing challenges relating to current supply chain constraints and impacts from inflation, including for
satellite ground station and troposcatter components, could adversely impact our revenue, gross margins and financial
results.
The global supply chain for certain raw materials and components, including those used in our satellite ground station and
troposcatter equipment, has experienced significant strain in recent periods. The constrained supply environment has adversely
affected, and could further affect, availability and lead times of raw materials and components, thereby impeding our ability to
meet customer demand in circumstances where we cannot timely secure supply of components that meet our quality standards.
Even when raw materials and components are available, they often come with higher prices reflecting an imbalance between
supply and demand, as well as inflationary pressures affecting global markets.
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.
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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 during fiscal 2024, 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.
Heading into our fiscal 2025, we have a significant portion of our targeted revenues in our backlog. However, if shipments from
our backlog are delayed or we are unable to obtain expected orders or components, our business outlook will prove to be
inaccurate. These aforementioned supply chain constraints, and their related challenges could result in future shortages,
increased material costs or use of cash, engineering design changes, and delays in new product introductions, each of which
could adversely impact our revenue, gross margins and financial results. There can be no assurance that the impacts of all the
aforementioned conditions will not continue, or worsen, in the future.
If global economic business and political conditions deteriorate as compared to the current environment it could have a
material adverse impact on our business outlook and our business, operating results and financial condition.
Many of the end-markets for our products and services may be significantly impacted for other issues that result in adverse
global economic conditions. For example, many of our international end-customers are in emerging and developing countries
that are subject to sweeping economic and political changes. Many governments around the world are under pressure to reduce
their spending. From time to time, global oil and natural gas prices have been volatile and have significantly impaired the
ability of certain of our government customers in the oil and gas producing regions of the world to invest in telecommunications
products and infrastructure. Additionally, from time to time, the relative strength of the U.S. dollar against many international
currencies has negatively impacted the purchasing power for many of our international end-customers because most of our sales
are denominated in U.S. dollars. We generate significant sales from many emerging and developing countries and any such
reduced purchasing power of our customers could adversely impact our sales and backlog.
If credit in financial markets outside of the U.S. remains difficult to obtain, our international customers and suppliers may find
it difficult to obtain financing, which could result in a decrease in or cancellation of orders for our products and increased
transaction costs (e.g., insurance, performance bonds). Volatility of financing conditions may cause our customers to be
reluctant to spend funds required to purchase our solutions and could cause their projects to be postponed or canceled. In
addition, if an adverse economic environment and lack of financing results in insolvencies for our customers, it would adversely
impact the recoverability of our accounts receivable and/or inventories which would, in turn, adversely impact our results of
operations.
We believe that the current global economic business environment is unstable and sudden negative changes could result in the
immediate suppression of end-market demand for many of our products such as satellite ground station technologies and other
short lead-time products. The timing, impact, severity and duration of these conditions are difficult to predict. If U.S. or global
economic conditions deteriorate, or political conditions become unstable, or additional economic sanctions are imposed on
some of our end-customers, it could adversely impact our business in a number of ways. In the past, our businesses have been
negatively affected by uncertain economic environments in the overall market and, more specifically, in the
telecommunications sector. Our customers have reduced their budgets for spending on telecommunications equipment and
systems and in some cases postponed or reduced the purchase of our products and systems. In the future, our customers may
again reduce their spending on telecommunications equipment and systems which would negatively impact our business. If this
occurs, it would adversely affect our outlook, net sales, profitability and the recoverability of our assets, including intangible
assets such as goodwill.
We have significant operations in Arizona, Florida, California, Washington State, Maryland and other locations which
could be materially and adversely impacted in the event of a terrorist attack and government responses thereto or
significant disruptions (including natural disasters) to our business.
Terrorist attacks, the U.S. and other governments' responses thereto, and threats of war could adversely impact our business,
results of operations and financial condition. For example, our 911 hosted location-based services and satellite teleport services
operations depend on our ability to maintain our computer equipment and systems in effective working order, and to protect our
systems against damage from fire, natural disaster, terrorist attack, power loss, telecommunications failure, sabotage,
unauthorized access to our system or similar events.
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Any unanticipated interruption or delay in our operations or breach of security could have an adverse effect on our business,
results of operations and financial condition. Our property and business interruption insurance may not be adequate to
compensate us for any losses that may occur in the event of a terrorist attack, threat, system failure or a breach of security.
Insurance may not be available to us at all or, if available, may not be available to us on commercially reasonable terms.
We currently, and intend to continue to, operate a high-volume technology manufacturing center located in Arizona. A terrorist
attack or similar future event may disrupt our operations or those of our customers or suppliers and may affect the availability
of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and
finished products to customers. If a natural disaster or other business interruption occurred with respect to our high-volume
technology manufacturing center, we do not have immediate access to other manufacturing facilities and, as a result, our
business, results of operations and financial condition could be materially adversely affected. The loss of our facility in Arizona
would have a negative impact on our production capability and we would incur unexpected costs and lost revenue associated
with our inability to meet our contractual commitments.
We design and manufacture our over-the-horizon microwave equipment and systems in Florida, where major hurricanes have
occurred in the past, and amplifiers in Santa Clara, California, an area close to major earthquake fault lines. Additionally,
certain of our Terrestrial and Wireless Networks segment activities are conducted in Washington State near a fault line. We
maintain operations in Maryland near a U.S. Navy facility which may be more prone to a terrorist attack. Our operations in
these and other locations (such as in our high-volume technology manufacturing center located in Arizona), could be subject to
natural disasters or other significant disruptions, including hurricanes, tornadoes, typhoons, tsunamis, floods, earthquakes, fires,
water shortages, other extreme weather conditions, medical epidemics, acts of terrorism, power shortages and blackouts,
telecommunications failures, and other natural and man-made disasters or disruptions.
We cannot be sure that our systems will operate appropriately if we experience hardware or software failure, intentional
disruptions of service by third parties, an act of God or an act of war. A failure in our systems could cause delays in transmitting
data, and as a result we may lose customers or face litigation that could involve material costs and distract management from
operating our business.
In the event of any such disaster or other disruption, we could experience disruptions or interruptions to our operations or the
operations of our suppliers, distributors, resellers or customers; destruction of facilities; and/or loss of life, all of which could
materially increase our costs and expenses and adversely affect our business, results of operations and financial condition.
Ongoing instability and conflicts in global markets, including in the Ukraine and Eastern Europe, Israel, Lebanon, the
Gaza Strip and the Middle East and Asia, and the attending possibility of economic sanctions, have created and may
continue to create economic and political disruption that could adversely impact our revenue, gross margins and
financial results.
The U.S. government and other nations have imposed significant restrictions on most companies’ ability to do business in
Russia. It is not possible to predict the broader or longer-term consequences of this conflict, which could include further
sanctions, embargoes, regional instability, geopolitical shifts, adverse effects on macroeconomic conditions, security conditions,
currency exchange rates and financial markets. Such geo-political instability and uncertainty could have a negative impact on
our ability to sell to, ship products to, collect payments from, and support customers in certain regions based on trade
restrictions, embargoes, export control law restrictions, and logistics restrictions including closures of air space, and could
increase the costs, risks and adverse impacts from these new challenges. We may also be the subject of increased cyber-attacks
as a result of the conflict.
The military conflict between Russia and Ukraine has impacted our sales pipeline and continues to have repercussions for our
business. Although sales into Russia represented approximately 1% of our consolidated net sales in fiscal 2024 and 2023,
consolidated net sales into Russia in fiscal 2025 and beyond had been expected to grow. As a result of the economic sanctions
against Russia, however, we have stopped accepting new orders in Russia and initiated a wind down of operations in fiscal
2024.
As a result of this conflict, from time to time over the past two years, we believe that certain customers (including the U.S.
government, Ukraine and neighboring countries) paused procurement and deployment of satellite and troposcatter
communication systems, and instead began purchasing war-fighting equipment.
24
Accordingly, it has become difficult to predict the timing or dollar amount of our contract awards in the region. For example,
we anticipated being awarded several opportunities to provide wireless communication systems (including troposcatter
systems) to Ukraine and neighboring countries for a variety of both defense and communications uses. However, while we
continue to track such opportunities and believe that they will ultimately be awarded to us, such opportunities continue to be
delayed. Additionally, funding for opportunities with other customers that we expected to book and ship has also been shifted to
other programs and/or temporarily delayed as a result of changes in defense spending priorities.
Prior to this conflict, we maintained a small group of employees who supported certain UHP-branded satellite communications
products. In fiscal 2024, we continued to expand our operations and shift certain commercial software development and support
activities to Canada. However, as we are currently in an environment where software engineering talent is already in high
demand and commands a premium, we expect to incur additional annual expenses in connection with this personnel shift for
our UHP products. We may not be able to timely ramp up our operations in Canada or elsewhere on a sufficient scale to support
anticipated growth of our UHP products, which could adversely impact future revenues, gross margins and operations.
The U.S. Government's budget deficit, as well as a breach of the debt ceiling, could have an adverse impact on our
operations.
Our sales to government customers are highly dependent on the U.S. defense budget, which in turn is driven by an annual
appropriation by Congress. These appropriations rarely align with the performance period of our contracts—for instance, most
of our government contracts are only partially funded at inception. DoD budgets are driven by factors that are outside our
control (such as economic conditions, administration policy shifts within the Executive branch and geopolitical events). Any
one or combination of these factors may adversely impact our operations, resulting in a decline of sales and operating income.
Strategic Transformation Risks
We may fail to realize all of the anticipated benefits of our operational initiatives, including the strategic alternatives for
our Terrestrial and Wireless Networks segment and further portfolio-shaping opportunities, or those benefits may take
longer to realize than expected.
On October 17, 2024, we announced that we are executing a strategy to transform Comtech into a pure-play satellite and space
communications company. There can be no assurance that the exploration of strategic alternatives will result in a transaction on
terms acceptable to us or other strategic changes or outcomes. Even if a transaction or series of transactions were completed,
there can be no assurance as to the timing of completing these activities. Moreover, we may not realize any or all of the
anticipated benefits from our pursuit of strategic alternatives for our Terrestrial and Wireless Networks segment, or the
anticipated benefits from further portfolio-shaping opportunities, and related transactions could in fact adversely affect our
business. Our ability to realize the anticipated benefits of our transformation strategy and further portfolio-shaping opportunities
will depend, to a large extent, on our ability to continue to focus on satellite and space communications and to achieve more
predictable growth in the absence of any divested businesses, including the Terrestrial and Wireless Networks segment. Some
of the anticipated benefits may not occur for a significant period of time. In addition, we may retain certain liabilities or
obligations related to our Terrestrial and Wireless Networks segment or other businesses that may arise under contract or law,
or may have difficulties enforcing our rights, contractual or otherwise, against the buyer. The focus on becoming a pure-play
satellite and space communications company and the related transactions may not enhance long-term stockholder value as
anticipated. Further, our strategic transformation could result in near term restructuring charges and a material impairment of
our goodwill and/or intangible assets, among other things.
Many of these factors will be outside of our control and any one of them could result in increased costs, including restructuring
charges, decreases in the amount of expected revenues and diversion of management’s time and energy, which could adversely
affect our business, financial condition and results of operations. In addition, the process of such strategic transformations,
including divesting assets, carries an inherent risk of market fluctuations and economic uncertainties that could undermine the
value we expect to realize.
25
Our transformation strategy may require a substantial portion of the time and attention of our management team,
which may have an adverse effect on our business and results of operations, and we may face increased levels of
employee attrition.
Our management team has spent, and continues to spend, a significant amount of time and effort focusing on our transformation
strategy. This diversion of attention may have an adverse effect on the conduct of our business, and, as a result, on our financial
condition and results of operations, particularly if the time it takes to complete our transformation strategy is protracted. During
the pendency of the transformation strategy, our employees may face considerable distraction and uncertainty and we may
experience increased levels of employee attrition. A loss of key personnel or material erosion of employee morale could have a
materially adverse effect on our ability to meet customer expectations, thereby adversely affecting our business and results of
operations. The failure to retain or attract members of our management team and other key personnel could impair our ability to
execute our strategy and implement operational initiatives, thereby having a material adverse effect on our financial condition
and results of operations. Likewise, we could experience losses of customers who may be concerned about our ongoing long-
term viability.
Business Risks
Our current cash and liquidity projections raise substantial doubt about our ability to continue as a going concern.
Pursuant to the requirements of ASC Topic 205-40, "Disclosure of Uncertainties About an Entity’s Ability to Continue as a
Going Concern," we are required to evaluate whether there are conditions or events, considered in the aggregate, that raise
substantial doubt about our ability to continue as a going concern. This evaluation does not take into consideration the potential
mitigating effect of our plans that have not been fully implemented or are not within our control as of the date the audited
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 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 Consolidated Financial Statements are issued.
As of the date these financial statements were issued (the "issuance date"), we evaluated whether the following adverse
conditions, when 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. 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. 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 "Notes to Consolidated Financial Statements - Note (8) - Credit Facility" included in "Part II - Item 8.
Financial Statements and Supplementary Data," included in this Form 10-K (which discussion is incorporated herein by
reference), on June 17, 2024, we entered into a $222.0 million credit facility with a new syndicate of lenders, which replaced
our prior credit facility. As further discussed below, we subsequently amended the credit facility on October 17, 2024 (the
"Credit Facility"). The Credit Facility consists of a committed $162.0 million term loan (“Term Loan”) and $60.0 million
revolver loan (“Revolver Loan”). At July 31, 2024 and October 25, 2024 (the date closest to the issuance date), total
outstanding borrowings under the Credit Facility were $194.2 million and $199.1 million, respectively. At both July 31, 2024
and October 25, 2024, $32.5 million was drawn on the Revolver Loan. As of the issuance date, our available sources of
liquidity approximate $28.7 million, consisting solely of qualified cash and cash equivalents. That is, our available sources of
liquidity do not include the remaining portion of the committed Revolver Loan due to the lenders' consent right, discussed
below, to any borrowings that exceed $32.5 million.
The Credit Facility, among other things, requires compliance with new restrictive and financial covenants, including: a
maximum allowable Net Leverage Ratio of 3.25x for the fiscal quarter ending January 31, 2025; a minimum Fixed Charge
Coverage Ratio of 1.20x for the fiscal quarter ending January 31, 2025; a minimum Average Liquidity requirement at each
26
quarter end of $20.0 million; and a minimum EBITDA of $35.0 million for the fiscal quarter ending October 31, 2025. Such
ratios adjust under the Credit Facility in future periods.
The Credit Facility was amended on October 17, 2024 to waive certain defaults or events of default, including in connection
with our Net Leverage Ratio and Fixed Charge Coverage Ratio covenants as of July 31, 2024. The amendment also provides
for, among other things: (i) increases the interest rate margins applicable to the loans; (ii) modifies certain financial and
collateral reporting requirements; (iii) provides a lender consent right with respect to $27.5 million of Revolver Loan
borrowings above $32.5 million; (iv) permits the incurrence of $25.0 million of senior unsecured subordinated debt (as
described below); (v) amends the maturity date to the earlier of (x) July 31, 2028 or (y) 90 days prior to the earliest date that the
debt under the Subordinated Credit Agreement (as defined below) becomes due and payable; and (vi) suspends financial
covenant testing through the end of our fiscal quarter ending January 31, 2025.
In addition, we entered into a Subordinated Credit Agreement with the existing holders of our Convertible Preferred Stock (the
“Subordinated Credit Agreement”) on October 17, 2024, which provides a subordinated unsecured term loan facility in the
aggregate principal amount of $25.0 million (the “Subordinated Credit Facility”). The proceeds of the Subordinated Credit
Facility: (i) cured our default on certain financial covenants under the Credit Facility, as discussed above; (ii) provides
additional liquidity to us; and (iii) funds our general working capital needs, including support of our strategic transformation
initiatives, as discussed below.
Our ability to meet our current obligations as they become due may be impacted by our ability to remain compliant with the
financial covenants required by the Credit Facility, or to obtain future waivers or amendments from the lenders in the event
compliance is not maintained. While we believe we will be able to secure such waivers or amendments, as needed, there can be
no assurance such waivers or amendments will be secured or on terms that are acceptable to us. If we are unable to secure
waivers or amendments, the lenders may declare an event of default, which would cause an immediate acceleration and
repayment of all outstanding principal, interest and fees due under our Credit Facility. Absent our ability to repay the forgoing
amounts upon the declaration of an event of default, the lenders may exercise their rights and remedies under the Credit
Facility, which may include, among others, a seizure of substantially all of our assets and/or the liquidation of our operations. If
an event of default occurs that allows the lenders to exercise these rights and remedies over the next year beyond the issuance
date, we will be unable to continue as a going concern.
As of the issuance date, our plans to address our ability to continue as a going concern include, among other things:
•
executing a strategy to transform Comtech into a pure-play satellite and space communications company (ongoing
and future actions supporting our transformation strategy include: an exploration of strategic alternatives for our
Terrestrial and Wireless Networks segment, which is well underway; the pursuit of further portfolio-shaping
opportunities to enhance profitability, efficiency and focus; and the implementation of additional operational
initiatives to both achieve profitable results from operations as well as to align our go-forward cost structure with a
pure-play focus on satellite and space communications), as discussed further in Note (18) – “Cost Reduction
Activities;”
•
pursuing initiatives to reduce investments in working capital, namely accounts receivable and inventory;
•
improving process disciplines to attain and maintain profitable operations by entering into more favorable sales or
service contracts;
•
reevaluating our business plans to identify opportunities (e.g., within our Satellite and Space Communications
segment) to focus future investment on our most strategic, high-margin revenue opportunities;
•
reevaluating our business plans to identify opportunities to further reduce capital expenditures;
•
seeking opportunities to improve liquidity through any combination of debt and/or equity financing (including
possibly restructuring our Credit Facility, Convertible Preferred Stock and/or Subordinated Credit Agreement); and
•
seeking other strategic transactions and/or measures including, but not limited to, the potential sale or divestiture of
assets.
While we believe the implementation of some or all of the elements of our plans over the next year beyond the issuance date
will be successful, these plans are not all solely within management’s control and, as such, we can provide no assurance our
plans are probable of being effectively implemented as of the issuance date. Therefore, the adverse conditions and events
described above are uncertainties that raise substantial doubt about our ability to continue as a going concern. The
accompanying consolidated financial statements 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 consolidated financial statements do not include any
adjustments that may result from the outcome of these uncertainties.
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In addition, the perception that we may not be able to continue as a going concern may cause customers, vendors and others to
review and alter their business relationships and terms with us, and may affect our credit rating. If we seek additional financing
to fund operations and there remains substantial doubt about our ability to continue as a going concern, financing sources may
be unwilling to provide such funding to us on commercially reasonable terms, or at all. Uncertainty regarding our ability to
continue as a going concern could also have a material and adverse impact on the price of our common stock, which could
negatively impact our ability to obtain additional stock-based financing or enter into strategic transactions.
Our business outlook is difficult to forecast and operating results are subject to significant fluctuations and are likely to
be volatile.
Historically, our business outlook is difficult to forecast and backlog (sometimes referred to herein as orders or bookings), net
sales and operating results may vary significantly from period to period due to a number of factors including: the impact of
strategic alternatives and portfolio reshaping; sales mix; fluctuating market demand; price competition; delayed collections
from customers; new product introductions by us or our competitors; customer bankruptcies; changing customer partnering
procurement strategies; fluctuations in foreign currency exchange rates; unexpected changes in the timing of delivery of
components or subsystems; the financial performance and impact of acquisitions or divestitures; new accounting standards;
political instability; regulatory developments; changes in income tax rates or tax credits; the price and expected volatility of our
stock (which will impact, among other items, the amount of stock-based compensation expense we may record); perceptions of
our financial condition and ability to continue as a going concern; general global economic conditions, and the impact of natural
disasters or global pandemics, such as the COVID-19 pandemic.
We have experienced, and will experience in the future, significant fluctuations in bookings, net sales and operating results
from period to period. For example, a sudden change in global economic or political conditions could have an immediate
impact on a large portion of our net sales, a large amount of which are derived from products such as satellite ground station
technologies, amplifier products and mission-critical technologies that generally have short order and lead times. Similarly,
sales of certain of our public safety and location technologies are subject to sudden changes in wireless carrier procurement
strategies, including decisions to sole-source such solutions or to perform such solutions internally. As a result, bookings and
backlog related to these solutions are extremely sensitive to short-term fluctuations in customer demand.
In addition, a large portion of our consolidated net sales are derived in part from large U.S. federal and state government
programs or large foreign government opportunities that are subject to lengthy sales cycles (including funding requirements)
and are therefore difficult to predict.
Our backlog is subject to customer cancellation or modification and such cancellations or modifications could result in a
decline in sales and increased provisions for excess and obsolete inventory.
We currently have a backlog of orders, mostly under contracts that our customers may modify or terminate. Almost all of the
contracts in our backlog (including firm orders previously received from the U.S. government) are subject to cancellation at the
convenience of the customer or for default in the event that we are unable to perform under the contract. For some contracts,
where we are a subcontractor (and not the prime contractor), the U.S. government could terminate the prime contractor for
convenience without regard for our performance as a subcontractor.
In some cases, such as contracts received from large U.S. based telecommunication companies, our backlog is computed by
multiplying the most recent month’s contract or revenue by the months remaining under the existing long-term agreements,
which we consider to be the best available information for anticipating revenue under those agreements. Also, a significant
portion of the backlog from our U.S. commercial customers relates to large, multi-year contracts to provide state and local
governments (and their agencies) with public safety and location technology solutions. Funding of these contracts is often
subject to the approval of budgets (for example, on an annual or bi-annual basis). Although funding for these multi-year
contracts are dependent on future budgets being approved, we include the full estimated value of these large, multi-year
contracts in our backlog given the critical nature of the services being provided and the positive historical experience of our
state and local government customers passing their respective budgets.
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There can be no assurance that our backlog will result in actual revenue in any particular period, or at all, particularly during
periods of economic instability. Nor can there be any assurance that any contract included in backlog will be profitable. The
actual amount and timing of any revenue is subject to various contingencies, many of which are beyond our control. The actual
recognition of revenue on contracts included in backlog may never occur or may change because a program schedule could
change; a customer may not follow up with order details (e.g., delivery instructions), fluctuations in currency exchange rates
after an order is placed could cause our products to become too expensive for a foreign customer; a customer’s program could
be canceled, a contract could be reduced, modified or terminated early due to changes in a customer’s priorities; funding may
not be included in future budgets; actual indirect rates being reimbursed on U.S. government contracts may ultimately be less
than those indirect rates included in our initial proposals; or an option that we had assumed would be exercised is not exercised.
We record a provision for excess and obsolete inventory based on historical and projected usage trends and other factors,
including the consideration of the amount of backlog we have on hand at any particular point in time. If orders in our backlog
are canceled or modified, our estimates of future product demand may prove to be inaccurate, in which case we may have
understated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory is
overvalued, we will be required to recognize such costs in our financial statements at the time of such determination. Any such
charges could be materially adverse to our results of operations and financial condition.
Our efforts to invoice and collect unbilled receivables may be unsuccessful.
As of July 31, 2024, we had $123.7 million of contract assets recorded on our Consolidated Balance Sheet, commonly referred
to as unbilled receivables. Under U.S. generally accepted accounted principles, such contract assets generally result from timing
differences between (a) when we must recognize revenue on contracts based on our activities to satisfy performance obligations
related to products that have no alternative use and for which we have the right to payment in the event of a contract
termination, and (b) when we can invoice our customers under the terms of those associated contracts (i.e., which is often based
on our successful achievement of a milestone, such as an acceptance test or physical delivery of a product). Unbilled
receivables remain at risk for collection due to several factors, including but not limited to our inability to meet invoicing
milestones, customer contracts being terminated for default or actual indirect rates on cost reimbursable contracts ultimately
being less than those rates estimated for revenue recognition purposes.
Contract cost growth on our firm fixed-price contracts, including most of our government contracts, cost reimbursable
type contracts and other contracts that cannot be justified as an increase in contract value due from customers exposes
us to reduced profitability and the potential loss of future business and other risks.
A substantial portion of our products and services are sold under firm fixed-price contracts. Firm fixed-price contracts
inherently have more risk than flexibly priced contracts, particularly if they involve non-recurring engineering efforts that are
not yet proven. This means that we bear the risk of unanticipated technological, manufacturing, supply or other problems, price
increases or other increases in the cost of performance. Future events could result in either upward or downward adjustments to
those estimates which could negatively impact our profitability. Operating margin could be materially adversely affected when
contract costs that cannot be billed to the customer are incurred. This cost growth can occur if initial estimates used for
calculating the contract price were incorrect, if estimates to complete increase or if we encounter unanticipated growth in
research and development activity to support our firm fixed-price development contracts. To a lesser extent, we provide
products and services under cost reimbursable type contracts which carry the entire burden of costs exceeding a negotiated
contract ceiling price. Also, if contract costs grow beyond our or our customer's expectations, we may not be awarded future
anticipated orders from customers related to their longer-term production needs.
The cost estimation process requires significant judgment and expertise. Reasons for cost growth may include unavailability
and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of
materials, the effect of any delays in performance, availability and timing of funding from the customer, natural disasters, and
the inability to recover any claims included in the estimates to complete. A significant change in an estimate on one or more
programs could have a material adverse effect on our business, results of operations and financial condition.
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Our business is highly dependent on the budgetary decisions of our government customers, including the U.S.
government (including prime contractors to the U.S. government), and changes in the U.S. government’s fiscal policies
or budgetary priorities may have a material adverse effect on our business, operating results and financial condition.
During our fiscal years ended July 31, 2024, 2023 and 2022, sales to the U.S. government (including sales to prime contractors
to the U.S. government) were $182.3 million, $172.0 million and $132.6 million, or 33.7%, 31.3% and 27.2% of our
consolidated net sales, respectively. In addition, a large portion of our existing backlog consists of orders related to U.S.
government contracts and our Business Outlook for Fiscal 2025 and beyond depends, in part, on significant new orders from
the U.S. government, which undergoes extreme budgetary pressures from time to time.
We rely on U.S. government spending on our communication solutions, and our receipt of future orders depends in large part
on continued funding by the U.S. government for the programs in which we participate. These spending levels are not generally
correlated with any specific economic cycle, but rather follow the cycle of general public policy and political support for this
type of spending. Government contracts are conditioned upon the continuing availability of congressional appropriations and
Congress’ failure to appropriate funds, or Congress’s actions to reduce or delay spending on, or reprioritize its spending away
from, U.S. government programs which we participate in, could negatively affect our results of operations. Because many of
the items we sell to the U.S. government are included in large programs realized over a period of several years, it is difficult, if
not impossible, to determine specific amounts that are or will be appropriated for our products and services. As such, our
assessments relating to the impact of changes in U.S. government spending may prove to be incorrect.
The federal debt limit continues to be actively debated as plans for long-term national fiscal policy are discussed. The outcome
of these discussions, which could be affected by the presidential and congressional elections in 2024, could have a significant
impact on defense spending broadly and programs we support in particular. The failure of Congress to approve future budgets
and/or increase the debt ceiling of the U.S. on a timely basis could delay or result in the loss of contracts for the procurement of
our products and services and we may be asked or required to continue to perform for some period of time on certain of our
U.S. government contracts, even if the U.S. government is unable to make timely payments. A decrease in DoD or Department
of Homeland Security expenditures, the elimination or curtailment of a material program in which we are involved, or changes
in payment patterns of our customers as a result of changes in U.S. government spending could have an adverse effect on our
business, results of operations and financial condition.
On September 25, 2024, the U.S. Senate voted to pass a bipartisan Continuing Resolution (CR; H.R. 9747) to extend federal
spending and avert a government shutdown through December 20, 2024. The U.S. House passed the measure that same day and
the measure was signed by President Biden prior to the beginning of fiscal year 2025. Accordingly, it is still possible that a
partial shutdown of the U.S. government may occur, or additional interim budgets may be adopted. As such, we may experience
delayed orders, delayed payments and adverse impacts on our results of operations. We may experience related supply chain
delays, disruptions or other problems associated with financial constraints faced by our suppliers and subcontractors. All of the
aforementioned conditions and factors could have a material adverse effect on our business, results of operations and financial
condition. Additionally, cost cutting, efficiency initiatives, reprioritization, other affordability analyses, and changes in
budgetary priorities by our governmental customers, including the U.S. government, could adversely impact both of our
operating segments. We are unable to predict the impact these or similar events could have on our business, financial position,
results of operations or cash flows.
Our contracts with the U.S. government are subject to unique business, commercial and government audit risks.
We depend on the U.S. government for a significant portion of our revenues. Our contracts with the U.S. government are
subject to unique business and commercial risks, including:
•
protest following an award by an unsuccessful bidder, resulting in a stop-work order;
•
unexpected contract or project terminations or suspensions;
•
unpredictable order placements, reductions, accelerations, delays or cancellations;
•
higher than expected final costs, particularly relating to software and hardware development, for work performed
under contracts where we commit to specified deliveries for a fixed-price; and
•
unpredictable cash collections of unbilled receivables that may be subject to acceptance of contract deliverables by the
customer and contract close out procedures, including government audit and approval of final indirect rates.
30
Although we take steps to mitigate our risk with respect to contracts with the U.S. government, we may not be able to do so in
every instance for any of the following reasons, among others:
•
Our U.S. government contracts can easily be terminated by the U.S. government - Our U.S. government contracts and
subcontracts can be terminated by the U.S. government for its convenience or upon an event of default by us.
Termination for convenience provisions provide us with little to no recourse related to: our potential recovery of costs
incurred or costs committed, potential settlement expenses and hypothetical profit on work completed prior to
termination.
•
Our U.S. government contracts are subject to funding by the U.S. Congress - Our U.S. government contracts are
conditioned upon the continuing approval by Congress of the necessary funding. Congress usually appropriates funds
for a given program on a fiscal year basis even though contract performance may take more than one year.
Consequently, at the beginning of a major program, the contract may not be fully funded, and additional monies are
normally committed to the contract only if, and when, appropriations are made by Congress for future fiscal years.
Delays or changes in funding can impact the timing of awards or lead to changes in program content. We obtain
certain of our U.S. government contracts through a competitive bidding process. There can be no assurance that we
will win additional contracts or that actual contracts that are awarded will ultimately be profitable.
•
Failure to comply with government contractor obligations can result in adverse consequences for the company - As a
supplier to the U.S. government, we must comply with numerous regulations, including those governing security,
contracting practices and classified information. Failure to comply with these regulations and practices could result in
fines being imposed against us, civil or criminal penalties, termination of contracts, our suspension for a period of time
from eligibility for bidding on, or for award of, new government contracts, or other adverse consequences. If we are
disqualified as a supplier to government agencies, we would lose most, if not all, of our U.S. government customers
and revenues from sales of our products would decline significantly.
•
Our employees may not be able to obtain and maintain the required security clearances for the facilities in which we
perform sensitive government work - Certain of our U.S. government contracts require our employees to maintain
various levels of security clearances, and we are required to maintain certain facility security clearances. If we cannot
maintain or obtain the required security clearances for our facilities and our employees, or obtain these clearances in a
timely manner, we may be unable to perform certain U.S. government contracts. Further, loss of a facility clearance, or
an employee’s failure to obtain or maintain a security clearance, could result in a U.S. government customer
terminating an existing contract or choosing not to renew a contract. Lack of required clearances could also impede our
ability to bid on or win new U.S. government contracts. This could damage our reputation and adversely affect our
business, financial condition and results of operations.
In addition, all of our U.S. government contracts can be audited by the Defense Contract Audit Agency ("DCAA") and other
U.S. government agencies and we can be subject to penalties arising from post-award contract audits (sometimes referred to as
a Truth in Negotiations Act or "TINA" audit), cost audits in which the value of our contracts may be reduced or increased costs
to implement corrective actions. If costs are found to be improperly allocated to a specific contract, those costs will not be
reimbursed, and any such costs already reimbursed would be required to be refunded. Although we record contract revenues
based upon costs we expect to realize upon final audit, we cannot predict the outcome of any such future audits and
adjustments, and we may be required to materially reduce our revenues or profits upon completion and final negotiation of
audits. Negative audit findings could also result in termination of a contract, forfeiture of profits, suspension of payments, fines
and suspension or debarment from U.S. government contracting or subcontracting for a period of time.
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Our dependence on sales to international customers exposes us to unique business, commercial and export compliance
risks.
Sales for use by international customers (including sales to U.S. companies for inclusion in products that will be sold to
international customers) represented approximately 21.5%, 24.0% and 25.0% of our consolidated net sales for the fiscal years
ended July 31, 2024, 2023 and 2022, respectively, and we expect that international sales will continue to be a significant portion
of our consolidated net sales for the foreseeable future. These sales expose us to certain risks, including barriers to trade,
declining trade relations, fluctuations in foreign currency exchange rates (which may make our products less price-competitive),
political, legal, social and economic instability, exposure to public health epidemics, availability of suitable export financing,
tariff regulations, and other U.S. and foreign regulations that may apply to the export of our products. Some of our business
partners also have international operations and are subject to the risks described above. Even if we are able to successfully
manage the risks of international operations, our business may be adversely affected if our business partners are not able to
successfully manage these risks. Although we take steps to mitigate our risk with respect to international sales, we may not be
able to do so in every instance for any of the following reasons, among others:
•
We may not be able to continue to structure our international contracts to reduce risk - We attempt to reduce the risk of
doing business in foreign countries by seeking subcontracts with large systems suppliers, contracts denominated in
U.S. dollars, advance or milestone payments and irrevocable letters of credit in our favor. However, we may not be
able to reduce the economic risk of doing business in foreign countries in all instances. In such cases, billed and
unbilled receivables relating to international sales are subject to increased collectability risk and may result in
significant write-offs, which could have a material adverse effect on our business, results of operations and financial
condition. In addition, foreign defense contracts generally contain provisions relating to termination at the convenience
of the government.
•
We rely on a limited number of international sales agents - In some countries, we rely upon one or a small number of
sales agents, exposing us to risks relating to our contracts with, and related performance of, those agents. We attempt
to reduce our risk with respect to sales agents by establishing additional foreign sales offices where it is practical and
by engaging, where practicable, more than one independent sales representative in a territory. It is our policy to require
all sales agents to operate in compliance with applicable laws, rules and regulations. Violations of any of these laws,
rules or regulations, and other business practices that are regarded as unethical, could interrupt the sales of our
products and services, result in the cancellation of orders or the termination of customer relationships, and could
damage our reputation, any of which developments could have a material adverse effect on our business, results of
operations and financial condition.
•
We must comply with all applicable export control laws and regulations of the U.S., the U.K. and other countries -
Certain of our products and systems may require licenses from U.S. government agencies for export from the U.S., and
some of our products are not permitted to be exported. In addition, in certain cases, U.S. export controls also severely
limit unlicensed technical discussions, such as discussions with any persons who are foreign nationals. As a result, in
cases where we may need a license, our ability to compete against a non-U.S. domiciled foreign company that may not
be subject to the same U.S. laws may be materially adversely affected. U.S. laws and regulations applicable to us
include the Arms Export Control Act, the IEEPA, the ITAR, the EAR and the trade sanctions laws and regulations
administered by the U.S. Treasury Department's OFAC. We are also subject to similar restrictions in the U.K. and
other countries.
•
We must comply with the FCPA and similar laws elsewhere - We are subject to the FCPA and other foreign laws
prohibiting corrupt payments to government officials, which generally bar bribes or unreasonable gifts to foreign
governments or officials. Violations of these laws or regulations could result in significant sanctions, including
disgorgement of profits, fines, criminal sanctions against us, our officers, our directors, or our employees, more
onerous compliance requirements, more extensive debarments from export privileges or loss of authorizations needed
to conduct aspects of our international business. A violation of any of the regulations enumerated above could
materially adversely affect our business, financial condition and results of operations. These laws also require that we
keep accurate books and records and maintain internal controls and compliance procedures designed to prevent any
such actions. Although we have implemented policies and procedures designed to ensure compliance with these laws
and regulations, there can be no assurance that our employees, contractors, agents, or subsidiaries will not commit acts
that violate these laws for which we may be ultimately held responsible. Additionally, changes in regulatory
requirements which could restrict our ability to deliver services to our international customers, including the addition
of a country to the list of sanctioned countries under the IEEPA or similar legislation could negatively impact our
business. For the fiscal years ended July 31, 2024, 2023 and 2022, we conducted no business with states designated as
sponsors of terrorism.
32
•
We must maintain a company-wide Office of Trade Compliance - In the past, we have self-reported violations of
export control laws or regulations to the U.S. Department of State, Directorate of Defense Trade Controls ("DDTC"),
DoC, OFAC and similar regulatory authorities in the jurisdictions where we have operations, including His Majesty's
Revenue & Customs ("HMRC") in the United Kingdom. In addition, we have made various commitments to U.S.
government agencies that oversee trade and export matters and have committed that we will maintain certain policies
and procedures including maintaining a company-wide Chief Trade Compliance Officer and Office of Trade
Compliance and conducting ongoing internal assessments and reporting of any future violations to those agencies.
Even though we take precautions to avoid engaging in transactions that may violate U.S. export control laws or
regulations and their foreign counterparts, including trade sanctions, those measures may not be effective in every
instance. If it is determined that we have violated export control laws or regulations or trade regulations in any
jurisdictions, civil and criminal penalties could apply, and we may suffer reputational harm.
•
We are subject to future export compliance audits - We continue to implement policies and procedures to ensure that
we comply with all applicable export control laws and regulations. We may be subject to future compliance audits that
uncover improper or illegal activities that would subject us to material remediation costs, civil and criminal fines and/
or penalties and/or an injunction. In addition, we could suffer serious reputational harm if allegations of impropriety
were made against us. Each of these outcomes could, individually or in the aggregate, have a material adverse effect
on our business, results of operations and financial condition. The absence of comparable restrictions on competitors in
other countries may adversely affect our competitive position. In addition, in order to ship our products into and
implement our services in some countries, the products must satisfy the technical requirements of that particular
country. If we were unable to comply with such requirements with respect to a significant quantity of our products, our
sales in those countries could be restricted, which could have a material adverse effect on our business, results of
operations and financial condition.
•
We may be affected by the future imposition of tariffs and trade restrictions - The current U.S. administration has
generally not amended the trade policies and tariffs on imported products from the prior administration, and has
increased sanctions against Russia. Our inability to effectively manage the negative impacts of U.S. and foreign trade
policies, including, in connection with our business with customers outside of the United States or with newly
sanctioned entities could adversely affect our business and financial results.
A change in our relationship with our large wireless carrier customers could have a material adverse effect on our
business, results of operations and financial condition.
Although we have a long history of providing services to many of our wireless carrier partners, a change in purchasing or
procurement strategies by a wireless carrier partner could result in the loss of business from that partner. Additionally, from
time to time, we routinely perform services without a multi-period contract while we negotiate new and extended contract terms
and pricing. These negotiations are complex and may take long periods of time. Even when we successfully negotiate a multi-
period contract, our wireless carrier contracts provide for terminations with notice and provide a mechanism for the wireless
carrier to renegotiate lower fees and/or change services. Fee pressure from these carriers is constant and ongoing. Thus, even
when we obtain a multi-period contract term, our revenues could be suddenly and materially reduced.
From time to time, competitors offer technology that has functionality similar to ours for free, under different business models.
Competition from such free offerings may reduce our revenue and harm our business. If our wireless carrier partners or our
competition can offer such technology to their subscribers or customers for free, they may elect to cease their relationships with
us, alter or reduce the manner or extent to which they market or offer our services or require us to substantially reduce our
subscription fees or pursue other business strategies that may not prove successful for us and could have a material adverse
effect on our business, results of operations and financial condition.
33
If our wireless carrier partners change the pricing and other terms by which they offer our products to their end-
customers or do not continue to provide our services at all or renegotiate lower fees with us, our business, results of
operations, and financial condition could be suddenly and materially adversely affected.
We generate a significant portion of our revenue from customers that are wireless carriers. In addition, a portion of our revenue
is derived from subscription fees that we receive from our wireless carrier partners for end-users who subscribe to our service
on a standalone basis or in a bundle with other services. Future revenue will depend on the pricing and quality of those services
and subscriber demand for those services, which may vary by market, and the level of subscriber turnover experienced by our
wireless carrier partners. If subscriber turnover increases more than we anticipate, our financial results could be materially
adversely affected.
Poor performance in or disruptions of the services included in our advanced communication solutions could harm our
reputation, delay market acceptance of our services and subject us to liabilities (including breach of contract claims brought by
our customers and third-party damages claims brought by end-users). Our wireless carrier agreements and certain customers
require us to meet specific requirements including operational uptime requirements or be subject to penalties.
If we are unable to meet contractual requirements with our wireless carrier partners, they could terminate our agreements or we
may be required to refund a portion of monthly subscriptions fees they have paid us.
Disputes with our subcontractors or key suppliers or their inability to deliver on a timely basis, could cause delays in
our shipments.
Our subcontractors and key suppliers are essential members of our team. Nevertheless, we may occasionally have commercial
disputes with them (e.g., over the quality, timeliness or cost of their products or payment patterns in connection with rendered
goods and services). As suppliers evaluate our financial condition on an ongoing basis, they may also take steps to revise
payment terms (e.g., by requiring payment in advance of delivery or payment milestones) that may negatively impact the
anticipated timing of components required for the assembly of our products or services rendered in support of our programs.
Additionally, our subcontractors and suppliers may experience financial difficulties which may impact their ability to execute
against their contractual commitments and delay or otherwise disrupt deliveries. In such instances, we may not receive the
components or subsystems for which we have contracted. Taken together, each of the risks set forth herein may have a material
adverse effect on our results of operations and financial condition.
External events outside our control may disrupt our supply chain. Natural disasters, pandemics, extreme weather conditions,
legislative or regulatory changes may all impact the performance of our supplier base. Our subcontractors and suppliers may
also, in turn, be unable to maintain the quality of the materials they receive from their respective suppliers.
Our reliance on a single partner to source critical parts (i.e., where we are unable to develop a critical redundant source of
supply) may impair our ability to produce and deliver our products. This negative impact could be even greater where we are
required to comply with sourcing requirements within our U.S. government contracts regarding the purchase of counterfeit or
otherwise non-compliant parts or materials. In some instances, where we rely on supplier certifications of compliance with
these laws and regulations, an improper or incomplete certification may adversely impact our production capability.
Our estimates regarding future warranty obligations may change based on a variety of factors, impacting future cost of
revenue.
Our products are complex, and we cannot ensure that our extensive testing will detect all defects. Quality issues reported by our
customers for products covered under warranty could adversely impact our reputation and negatively affect our operating
results. If significant warranty obligations arise due to reliability or quality issues arising from such defects, our reputation and
operating results could be negatively impacted.
34
Strategic Growth Risks
We face a number of risks relating to the expected long-term growth of our business. Our business and operating results
may be negatively impacted if we are unable to manage this growth.
Our business is uniquely subject to certain risks related to its long term growth. These risks include:
•
We may not be ultimately successful in transformation activities - The pursuit of strategic alternatives and portfolio
reshaping is a complex undertaking. Managing the disposition of multiple production facilities and their attending
employee populations is difficult and may negatively impact business prospects in the short and long term.
Additionally, in the course of evaluating our portfolio, 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 noted in the “Impairment of long-lived assets, including goodwill" line item on our Consolidated
Statements of Operations.
•
The loss of key technical and/or management personnel in the course of our restructuring could adversely affect our
business - The pursuit of strategic alternatives and reshaping of our portfolio businesses will require the continued
contributions of key technical and management personnel. The management skills that have been appropriate for us in
the past may not continue to be appropriate if we grow and diversify. Filling new positions may be difficult in the
current competitive labor market. Moreover, many of our key and technical management personnel would be difficult
to replace and are not subject to employment or non-competition agreements. We currently have research and
development employees in areas that are located a great distance away from our U.S. headquarters and some work out
of their respective homes. Managing remote product development operations is difficult and we may not be able to
manage the employees in these remote centers successfully. Our expected growth and future success will depend, in
large part, upon our ability to attract and retain highly qualified engineering, sales and marketing personnel.
Competition for such personnel from other companies, academic institutions, government entities and other
organizations is intense. Although we believe that we have been successful to date in recruiting and retaining key
personnel, we may not be successful in attracting and retaining the personnel we will need to grow and operate
profitably, especially in the current competitive labor market.
•
We may not be able to improve our processes and systems to keep pace with anticipated growth - The future growth of
our business may place significant demands on our managerial, operational, production and financial resources. In
order to manage that growth, we must be prepared to improve and expand our management, operational and financial
systems and controls, as well as our production capabilities. We also need to continue to recruit and retain personnel
and train and manage our employee base. We must carefully manage research and development capabilities and
production and inventory levels to meet product demand, new product introductions and product and technology
transitions. If we are not able to timely and effectively manage our growth and maintain the quality standards required
by our existing and potential customers, it could have an adverse effect on our business, results of operations and
financial condition. Additionally, in light of various factors including but not limited to our announcement to pursue
strategic alternatives, we have postponed and or re-prioritized certain initiatives (e.g., our drive toward an common
company-wide ERP tool), which may result in certain inefficiencies and or increased costs in the future.
•
Our markets are highly competitive and there can be no assurance that we can continue to compete effectively - The
markets for our products are highly competitive. There can be no assurance that we will be able to continue to compete
successfully on price or other terms, or that our competitors will not develop new technologies and products that are
more effective than our own. We expect the DoD’s increased use of commercial off-the-shelf products and
components in military equipment will encourage new competitors to enter the market. Also, although the
implementation of advanced telecommunications services is in its early stages in many developing countries, we
believe competition will continue to intensify as businesses and foreign governments realize the market potential of
telecommunications services. Many of our competitors have financial, technical, marketing, sales and distribution
resources greater than ours. We continue to see requests for proposals from large wireless carriers for sole-source
solutions and have responded to several such requests. In order to induce retention of existing customer contracts and
obtain business on a sole-source basis, we may ultimately agree to adjust pricing on a retroactive basis. If our sole-
source proposals are rejected in favor of a competitor’s proposal, it could result in the termination of existing contracts,
which could have a material adverse effect on our business, results of operations and financial condition.
35
•
We may not be able to obtain sufficient components to meet expected demand - Our dependence on component
availability, government furnished equipment, subcontractors and key suppliers, including the core manufacturing
expertise of our high-volume technology manufacturing center located in Arizona exposes us to risk. Although we
obtain certain components and subsystems from a single source or a limited number of sources, we believe that most
components and subsystems are available from alternative suppliers and subcontractors. During the past several years,
as a result of overall increased industry-wide demand, lead times for many components have increased as well as
freight costs. In addition, threats of or actual tariffs, disruptions in shipping vessels having access to normal trade
routes and/or unexpected port closures could limit our ability to obtain certain parts on a cost-effective basis, or at all.
A significant interruption in the delivery of such items could have an adverse effect on our business, results of
operations and financial condition. Similarly, if our high-volume technology manufacturing center located in Arizona
is unable to produce sufficient product or maintain quality, it could have a material adverse effect on our business,
results of operations and financial condition.
•
Our ability to maintain affordable credit insurance may become more difficult - In the normal course of our business,
we purchase credit insurance to mitigate some of our domestic and international credit risk. Although credit insurance
remains generally available, upon renewal, it may become more expensive to obtain or may not be available for
existing or new customers in certain international markets and it might require higher deductibles than in the past. If
we acquire a company with a different customer base, we may not be able to obtain credit insurance for those sales. As
such, there can be no assurance that, in the future, we will be able to obtain credit insurance on a basis consistent with
our past practices.
Loss of our executive officers or other key personnel or other changes to our management team could disrupt our
operations and growth plans or harm our business.
We depend on the efforts of our executive officers and certain key personnel. Any unplanned turnover or our failure to develop
an adequate succession plan or business continuity plan for one or more of our executive officers, including our Chief
Executive Officer (“CEO”), or other key positions could deplete our institutional knowledge base and erode our competitive
advantage. In March 2024, we terminated our former President and CEO for cause due to conduct unrelated to Comtech’s
business strategy, financial results or previously filed financial statements and appointed John Ratigan, who was our Chief
Corporate Development Officer, as interim CEO. Mr. Ratigan was appointed as President and CEO on October 28, 2024,
following a lengthy search process during which internal and external candidates were evaluated by a retained search firm and
interviewed by our Board of Directors. Additionally, Maria Hedden, our Chief Operating Officer, resigned from the Company
on September 13, 2024. The loss or limited availability of the services of one or more of our executive officers or other key
personnel, or our inability to recruit and retain qualified executive officers or other key personnel in the future, could, at least
temporarily, have an adverse effect on our operating results and financial condition. Leadership transitions can be inherently
difficult to manage, and an inadequate transition may cause disruption to our business and growth plans, including to our
relationships with our customers and employees.
We have incurred indebtedness under a credit facility and an unsecured subordinated loan, and may incur substantial
additional indebtedness in the future, and may not be able to service that debt in the future and we must maintain
compliance with various covenants that impose restrictions on our business.
On June 17, 2024, we entered into a new $222.0 million credit facility with a syndicate of lenders (the "Credit Facility"). As of
July 31, 2024, total borrowings outstanding under the Credit Facility were $194.2 million, of which $190.1 million is reflected
in the non-current portion of long-term debt on our Consolidated Balance Sheet.
Subsequent to year end, to enhance our liquidity while we pursue strategic alternatives, other restructuring related activities and
the collection of our unbilled receivables, we amended our Credit Facility to, among other things, relax certain financial and
non-financial covenants. We also entered into a $25.0 million senior subordinated unsecured loan agreement with our existing
preferred shareholders. See "Notes to Consolidated Financial Statements" included in "Part II - Item 8. Financial Statements
and Supplementary Data" included in this Form 10-K, for further information.
On the Maturity Date of the Credit Facility, if we do not have sufficient funds to repay our debt when due, it may be necessary
to refinance our debt through additional debt or equity financings. If, at the time of any such refinancing, prevailing interest
rates or other factors result in higher interest rates on such refinancing, increases in interest expense could have a material
adverse effect on our business, results of operations and financial condition. In addition, if we are not able to obtain favorable
terms pursuant to any such refinancing, the size of our Credit Facility could be reduced, more restrictive covenants could be
imposed on our business and features of the Credit Facility could otherwise be altered or eliminated.
36
Our Credit Facility contains various affirmative and negative covenants that may restrict our ability to, among other things,
incur additional indebtedness, permit liens on our property, change the nature of our business, transact business with affiliates
and/or merge or consolidate with any other person or sell or convey certain of our assets to any one person. We anticipate
maintaining compliance with the terms and financial covenants in our Credit Facility for the foreseeable future, however, there
can be no assurance that we will be able to meet these covenants.
Further, our ability to comply with covenants, terms of and conditions on our Credit Facility may be affected by events beyond
our control. Failure to comply with covenants could result in an event of default, which, if not cured or waived, could accelerate
our repayment obligations and permit the agents under the Credit Facility to enforce on the collateral pledged to the secured
parties thereunder. Our substantial debt obligations could impede, restrict or delay the implementation of our business strategy
or prevent us from entering into transactions that would otherwise benefit our business. For example:
•
we may be required to dedicate a substantial portion of our cash flows from operations to payments on our
indebtedness, thereby reducing the availability of our cash flows for other purposes, including but not limited to
business development efforts, capital expenditures, dividends (to the extent applicable) or strategic acquisitions;
•
if we are not able to generate sufficient cash flows to meet our substantial debt service obligations or to fund our other
liquidity needs, we may have to take actions such as selling assets or raising additional equity or reducing or delaying
capital expenditures, strategic acquisitions, investments and joint ventures, restructuring our debt and other capital-
intensive activities;
•
we may not be able to fund future working capital, capital investments and other business activities;
•
we may not be able to make certain other distributions;
•
we may become more vulnerable in the event of a downturn in our business or a worsening of general economic or
industry-specific conditions; and
•
our flexibility in planning for, or reacting to, changes in our business and industry may be limited, thereby placing us
at a competitive disadvantage compared to our competitors that have less indebtedness.
Moreover, we may incur substantial additional indebtedness in the future to fund acquisitions or to fund other activities for
general business purposes. If additional new debt is added to the current or planned debt levels, or if we are unable to obtain
financing on favorable terms, the related risks that we now face could intensify. A substantial increase in our indebtedness
could also have a negative impact on our credit ratings. In this regard, failure to maintain our credit ratings could adversely
affect the interest rate available to us in future financings, as well as our liquidity, competitive position and access to capital
markets, including for bonding requirements. Any decision regarding future borrowings will be based on the facts and
circumstances existing at the time, including market conditions and our credit ratings.
Divestitures of portions of our business in the course of pursuing strategic alternatives and revisiting our portfolio could
prove difficult to carve out, disrupt our business, dilute stockholder value or adversely affect operating results or the
market price of our common stock.
We expect to pursue strategic alternatives for our Terrestrial and Wireless Networks segment while evaluating further portfolio
shaping opportunities.
Future divestitures may result in the use of significant amounts of cash, increases to amortization expense and future write-offs
of intangibles. Divestiture related activities also involve risks that include failing to:
•
obtain competitive bids for our assets;
•
accurately forecast the financial impact of the transaction, including accounting charges and transaction expenses;
•
support products and services, research and development, sales and marketing, support and other operations during the
pendency of disposition activity;
•
retain key management personnel and other key employees; and
•
retain customers
Divestiture activity could also:
37
•
divert management’s attention away from the operation of our businesses;
•
result in additional significant goodwill and intangibles write-offs in the event a disposition negatively impacts our
future results of operations and or cash flows; and
•
increase expenses, including transaction expenses associated with the disposition.
There can be no assurance that our pursuit of strategic alternatives will be successful within the anticipated time frame, or at all.
There can also be no assurance that such activity will not adversely affect our business, results of operations or financial
condition.
After completing restructuring activities and related expenses, our decision to cease operations of our steerable antenna product
line in Basingstoke, UK is expected to result in future annual cash savings relative to the past three fiscal years. If we are
unsuccessful in negotiating termination liabilities with our customers or vendors, however, our UK entity may become
insolvent and our assumptions with respect to the liquidity of our Basingstoke operations may not materialize.
Our investments in recorded goodwill and other intangible assets could be further impaired as a result of future
business conditions, a deterioration of the global economy or if we change our reporting unit structure as we pursue
strategic alternatives.
As of July 31, 2024, goodwill recorded on our Consolidated Balance Sheet aggregated $284.2 million. Additionally, as of
July 31, 2024, net intangibles recorded on our Consolidated Balance Sheet aggregated $194.8 million.
Goodwill
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. Reporting units are defined by how our CEO manages the business,
which includes resource allocation decisions. We may, in the future, change our management approach which in turn may
change the way we define our reporting units, as such term is defined by Financial Accounting Standards Board ("FASB")
Accounting Standards Codification ("ASC") 350 "Intangibles - Goodwill and Other." A change to our management approach
may require us to perform an interim goodwill impairment test and possibly record impairment charges in a future period.
In accordance with FASB ASC 350, "Intangibles - Goodwill and Other," we perform a goodwill impairment analysis at least
annually (in the first quarter of each fiscal year), unless indicators of impairment exist in interim periods. If we fail the
quantitative assessment of goodwill impairment ("quantitative assessment"), we would be required to recognize an impairment
loss equal to the amount that a reporting unit's carrying value exceeded its fair value; however, any loss recognized should not
exceed the total amount of goodwill allocated to that reporting unit.
During the fourth quarter of fiscal year 2024, our lower-than-expected financial performance, cured default on certain credit
facility covenants and sustained decrease in our stock price since August 1, 2023 were each considered triggering events
requiring an interim quantitative impairment test as of July 31, 2024. Based on our quantitative evaluation, we determined that
our Terrestrial and Wireless Networks reporting unit had an estimated fair value in excess of its carrying value of at least 24.7%
and concluded that our goodwill in this reporting unit was not impaired. However, 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 fourth quarter of fiscal 2024, we recognized a non-cash $48,925,000 goodwill
impairment charge in our Satellite and Space Communications reporting unit. Such loss is included in the “Impairment of long-
lived assets, including goodwill" line item on our Consolidated Statements of Operations. Due to their proximity, the
quantitative impairment test as of July 31, 2024 is deemed to satisfy our annual goodwill impairment test requirement as of
August 1, 2024 (the first day of fiscal 2025).
38
It is possible that, during fiscal 2025 or beyond, business conditions (both in the U.S. and internationally) could deteriorate
from the current state, our current or prospective customers could materially postpone, reduce or even forgo purchases of our
products and services to a greater extent than we currently anticipate, or our common stock price could further fluctuate. A
significant decline in our customers' spending that is greater than we anticipate or a shift in funding priorities may also have a
negative effect on future orders, sales, income and cash flows and we might be required to perform a quantitative assessment
during fiscal 2025 or beyond. If assumed net sales and cash flow projections are not achieved in future periods or our common
stock price significantly declines from current levels, our Satellite and Space Communications and Terrestrial and Wireless
Networks reporting units could be at risk of failing the quantitative assessment and goodwill and intangibles assigned to the
respective reporting units could be impaired.
Also, as announced on October 17, 2024, we are executing a strategy to transform Comtech into a pure-play satellite and space
communications company. Ongoing and future actions supporting our transformation strategy include: an exploration of
strategic alternatives for our Terrestrial and Wireless Networks segment, which is well underway; the pursuit of further
portfolio-shaping opportunities to enhance profitability, efficiency and focus; and the implementation of additional operational
initiatives to both achieve profitable results from operations as well as to align our go-forward cost structure with a pure-play
focus on satellite and space communications. Such activities could result in a material impairment of our goodwill and/or
intangible assets. See "Strategic Transformation" section above for more information.
In any event, we are required to perform the next annual goodwill impairment analysis on August 1, 2025 (the start of our fiscal
2026). If our assumptions and related estimates change in the future, or if we change our reporting unit structure or other events
and circumstances change (e.g., a sustained decrease in the price of our common stock (considered on both absolute terms and
relative to peers)), we may be required to record impairment charges when we perform these tests, or in other future periods.
Net Intangibles with Finite Lives
Similar to goodwill, we also review the recoverability of our net intangibles with finite lives whenever events or changes in
circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of an asset or asset group
to be held and used is measured by a comparison of the carrying amount of an asset or asset group to the estimated
undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of the asset or asset
group exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount
of the asset or asset group exceeds the fair value of the asset or asset group.
Accordingly, in addition to testing goodwill associated with our Satellite and Space Communications reporting unit for
impairment, during the fourth quarter of fiscal year 2024, we also assessed the recoverability of the carrying values of our other
long-lived assets, including identifiable intangible assets with finite useful lives. Such testing also considered our decision in
the fourth quarter of fiscal year 2024 to cease our steerable antenna operations located in the United Kingdom. Based on our
evaluation, we determined that the fair value of the asset group related to such operations was lower than its carrying value and
recorded a non-cash $15,600,000 long-lived asset impairment charge in our Satellite and Space Communications segment. Such
loss is included in the “Impairment of long-lived assets, including goodwill" line item on our Consolidated Statements of
Operations. Of the total amount, $9,925,000 relates to net intangible assets with finite lives, $1,151,000 relates to operating
lease right-of-use assets, $2,651,000 relates to property, plant and equipment and $1,873,000 relates to other assets. We
determined that the carrying values of our remaining net intangibles were recoverable as of July 31, 2024. Any impairment
charges that we may record in the future could be material to our results of operations and financial condition.
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Cybersecurity Risks
We could be negatively impacted by a system failure, lack of or failure of redundant system components, security
breach through cyber-attack, cyber intrusion or otherwise, by other significant disruption of our IT networks or those
we operate for certain customers, or third-party data center facilities, servers and related systems. If any such events
occur, we may have to reimburse our customers for damages that they may have incurred, pay contract penalties, or
provide refunds.
We face risk of Cybersecurity threats ranging from, ransomware and denial-of-service, to attacks from more advanced and
persistent, highly organized adversaries, including nation state actors, which target the defense industrial base and other critical
infrastructure sectors are persistent. Our corporate information security organization, led by our Chief Information Security
Officer ("CISO"), manages our overall information security strategy. The current CISO has extensive information technology
experience and partners closely with our Technology, Innovation & Cyber Committee of the Board of Directors. More broadly,
we routinely audit our systems and practices against the DFARS and proposed Cybersecurity Maturity Model Certification
("CMMC") program, DoD’s cybersecurity requirements for handling government contracts and Controlled Unclassified
Information ("CUI"), respectively. Nevertheless, similar to all companies in our industry, we are under constant cyber-attack
and are subject to an ongoing risk of security breaches and disruptions of our IT networks and related systems, including third-
party data center facilities, whether through actual breaches, cyber-attacks (including ransomware) or cyber intrusions via the
Internet, malware, computer viruses, attachments to e-mails, persons inside our organization or persons with access to systems
inside our organization. We also maintain databases with private information regarding our customers and our employees.
Actual security breaches or disruption, particularly through cyber-attack or cyber intrusion, including by computer hackers,
foreign governments and cyber terrorists, have increased in recent years and have become more complex. Our IT networks and
systems, as well as third-party data center facilities, have been and, we believe will continue to be under constant attack. We
face an added risk of a security breach or other significant disruption to certain of our equipment used on some of our
customers' IT networks and related systems which may involve managing and protecting information relating to public safety
agencies, wireless carriers as well as national security and other sensitive government functions. Many of our systems have, or
are required to have, system redundancies and back-up; in some cases, we may not have sufficient redundancy and/or
redundancy and/or back-ups may fail. We may incur significant costs to prevent and respond to system failures, failure of
redundant system components, actual breaches, cyber-attacks and other systems disruptions.
As a communications company, and particularly as a government contractor and a provider of public safety and location
technologies (including 911 hosted systems), we face a heightened risk of a security breach or disruption from actual breaches,
cyber-attacks and other threats to gain unauthorized access to our and our customers’ proprietary or classified information on
our IT networks, third-party data center facilities and related systems and to certain of our equipment used on some of our
customers' IT networks and related systems. These types of information, IT networks and related systems are critical to the
operation of our business and essential to our ability to perform day-to-day operations, and, in some cases, are critical to the
operations of certain of our customers. There can be no assurance that our security efforts and measures will be effective or that
actual security breaches or disruptions will not be successful or damaging. Techniques used in such breaches and cyber-attacks
are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to
be detected and, in fact, may not be detected. In some cases, the resources of foreign governments may be behind such attacks.
Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative
measures, and thus it is virtually impossible for us to entirely mitigate this risk.
A security breach or other significant disruption (including as a result of a lack of redundancy and/or failure of such
redundancy) involving these types of information, IT networks and related systems could:
•
Disrupt the proper functionality of these networks, data center facilities and systems and therefore our operations and/
or those of certain of our customers;
•
Result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary,
confidential, sensitive or otherwise valuable information of ours or our customers, including employee information,
trade secrets, which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes
and outcomes;
•
Compromise national security and other sensitive government functions;
•
Require significant management attention and resources to remedy the damage that results and delay progress on other
business objectives;
40
•
Require us to make payments to our customers to reimburse them for damages, pay them penalties or provide refunds;
and
•
Damage our reputation with our customers (particularly agencies of the U.S. government) and the public generally.
In addition, the cost of continually defending against cyber-attacks and actual breaches has increased in recent years and future
costs and any or all of the foregoing could have a material adverse effect on our business, results of operations and financial
condition. For example, as vulnerability standards evolve, our customers may attempt to pass along development and
certification costs to us even following the deployment of our products, which may negatively impact our financial
performance.
The measures we have implemented to secure information we collect and store or enable access to may be breached,
which could cause us to breach agreements with our partners and expose us to potential investigation and penalties by
authorities and potential claims for contract breach, product liability damages, credits, penalties or termination by
persons whose information was disclosed.
We take reasonable steps to protect the security, integrity and confidentiality of the information we collect and store and to
prevent unauthorized access to third-party data to which we enable access through our products, but there is no guarantee that
inadvertent or unauthorized disclosure will not occur or that third parties will not gain unauthorized access despite our efforts. If
such unauthorized disclosure or access does occur, we may be required to notify regulators, customers and persons whose
information was disclosed or accessed under existing and proposed laws. Because the techniques used to obtain unauthorized
access, disable or degrade service, or sabotage systems change frequently and are often not recognized until launched against a
target, we may be unable to anticipate these techniques or implement adequate preventative measures. In the event of such
disclosure, we also may be subject to claims of breach of contract, investigation and penalties by regulatory authorities and
potential claims by persons whose information was disclosed. If there is a security breach or if there is an inappropriate
disclosure of any of these types of information, we could be exposed to investigations, litigation, fines and penalties.
Remediation of and liability for loss or misappropriation of end user or employee personal information could have a material
adverse effect on our business, results of operations and financial condition. Even if we were not held liable for such event, a
security breach or inappropriate disclosure of personal, private or confidential information could harm our reputation and our
relationships with current and potential customers and end users. Even the perception of a security risk could inhibit market
acceptance of our products and services. We may be required to invest additional resources to protect against damage caused by
any actual or perceived disruptions of our services. We may also be required to provide information about the location of an end
user’s mobile device to government authorities, which could result in public perception that we are providing the government
with intelligence information and deter some end users from using our services. Any of these developments could have a
material adverse effect on our business, results of operations and financial condition.
Legal, Regulatory and Litigation Risks
Changes in U.S. federal, state and local and foreign tax law could adversely affect our business and financial condition.
The laws, rules, and regulations dealing with U.S. federal, state and local and foreign income taxation are constantly under
review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department.
Changes to tax laws (which changes may have immediate and/or retroactive application) could adversely affect us or holders of
our common stock. In recent years, many changes have been made to applicable tax laws and changes are likely to continue to
occur in the future. It cannot be predicted whether, when, in what form, or with what effective dates, new tax laws may be
enacted, or regulations and rulings may be enacted, promulgated or issued under existing or new tax laws, which could result in
an increase in our tax liability or require changes in the manner in which we operate in order to minimize or mitigate any
adverse effects of changes in tax law or in the interpretation thereof.
Our U.S. federal, state and local and foreign tax returns are subject to audit and a resulting tax assessment or settlement
could have a material adverse effect on our business, results of operations and financial condition. Significant judgment
is required in determining the provision for income taxes.
The final determination of tax examinations and any related litigation could be materially different than what is reflected in
historical income tax provisions and accruals.
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Our U.S. federal income tax returns for fiscal 2021 through 2023 are subject to potential future Internal Revenue Service
("IRS") audit. None of our state income tax returns prior to fiscal 2020 are subject to audit. Although adjustments relating to
past audits of our federal and state income tax returns were immaterial, a tax assessment or settlement for other periods or other
jurisdictions that may be selected for future audit could have a material adverse effect on our business, consolidated results of
operations and financial condition.
We may be subject to environmental liabilities.
We engage in manufacturing and are subject to a variety of local, state and federal laws and regulations relating to the storage,
discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances used to manufacture
our products. We are also subject to the Restriction of Hazardous Substance ("RoHS") directive which restricts the use of lead,
mercury and other substances in electrical and electronic products. The failure to comply with current or future environmental
requirements could result in the imposition of substantial fines, suspension of production, alteration of our manufacturing
processes, cessation of operations or reputational damage that could have a material adverse effect on our business, results of
operations and financial condition. In addition, the handling, treatment or disposal of hazardous substances by us or our
predecessors may have resulted, or could in the future result, in contamination requiring investigation or remediation, or lead to
other liabilities, any of which could have a material adverse effect on our business, results of operations and financial condition.
The success of our business is dependent on compliance with FCC rules and regulations and similar foreign, state and
local laws and regulations.
Many of our products are incorporated into wireless communications systems that must comply with various U.S. government
regulations, including those of the FCC, as well as similar state, local and international laws and regulations. As a result, our
business faces increased risks including the following:
•
We must obtain various licenses from the FCC - We operate FCC licensed teleports that are subject to the
Communications Act of 1934, as amended, or the FCC Act, and the rules and regulations of the FCC. We cannot
guarantee that the FCC will grant renewals when our existing licenses expire, nor are we assured that the FCC will not
adopt new or modified technical requirements that will require us to incur expenditures to modify or upgrade our
equipment as a condition of retaining our licenses. We may, in the future, be required to seek FCC or other
government approval if foreign ownership of our stock exceeds certain specified criteria. Failure to comply with these
policies could result in an order to divest the offending foreign ownership, fines, denial of license renewal and/or
license revocation proceedings against the licensee by the FCC, or denial of certain contracts from other U.S.
government agencies.
•
We are dependent on the allocation and availability of frequency spectrum - Adverse regulatory changes related to the
allocation and availability of frequency spectrum and in the military standards and specifications that define the
current satellite networking environment, could materially harm our business by: (i) restricting development efforts by
us and our customers, (ii) making our current products less attractive or obsolete, or (iii) increasing the opportunity for
additional competition. The increasing demand for wireless communications has exerted pressure on regulatory bodies
worldwide to adopt new standards and reassign bandwidth for these products and services. The reduced number of
available frequencies for other products and services and the time delays inherent in the government approval process
of new products and services have caused, and may continue to cause, our customers to cancel, postpone or reschedule
their installation of communications systems including their satellite, over-the-horizon microwave, or terrestrial line-
of-sight microwave communication systems. This, in turn, could have a material adverse effect on our sales of
products to our customers. Changes in, or our failure to comply with, applicable laws and regulations could materially
adversely harm our business, results of operations, and financial condition.
42
•
Our future growth is dependent, in part, on developing NG-911 compliant products - The FCC requires that certain
location information be provided to network operators for public safety answering points when a subscriber makes a
911 call. Technical failures, greater regulation by federal, state or foreign governments or regulatory authorities, time
delays or the significant costs associated with developing or installing improved location technology could slow down
or stop the deployment of our mobile location products. If deployment of improved location technology is delayed,
stopped or never occurs, market acceptance of our products and services may be materially adversely affected.
Because we rely on some third-party location technology instead of developing all of the technology ourselves, we
have little or no influence over its improvement. The technology employed with NG-911 services generally anticipates
a migration to internet-protocol ("IP") based communication. Since many companies are proficient in IP-based
communication protocols, the barriers to entry to providing NG-911 products and services are lower than for
traditional switch-based protocols. If we are unable to develop unique and proprietary solutions that are superior to
and/or more cost effective than other market offers, our 911 business could get replaced by new market entrants,
resulting in a material adverse effect on our business, results of operations and financial condition.
•
Under the FCC’s mandate, our 911 and emerging 988 businesses are dependent on state and local governments -
Under the FCC’s mandate, wireless carriers are required to provide 911 services only if state and local governments
request the service. As part of a state or local government’s decision to request 911, they have the authority to develop
cost recovery mechanisms. However, cost recovery is no longer a condition to wireless carriers’ obligation to deploy
the service. If state and local governments do not widely request that 911 services be provided or we become subject to
significant pressures from wireless carriers with respect to pricing of 911 services, our 911 business would be harmed
and future growth of our business would be reduced.
Over the past two years, the 988 Suicide & Crisis Lifeline has seen both growth and challenges as it continues to be
rolled out across the U.S. The U.S. federal government has allocated significant funding to this initiative, with over
$432.0 million earmarked for expanding services, including regional call centers and crisis intervention teams. This
funding is aimed at distributing emergency-type communications more efficiently, by providing a direct response for
mental health crises. Some states, like Michigan, have launched their own versions of 988 services with additional
state and federal support.
However, despite these efforts, the system is still far from fully optimized. Challenges include staffing shortages,
particularly for behavioral health professionals, and the need for technological improvements like georouting to better
connect callers with the appropriate local services. Some states are also exploring sustainable funding models, such as
implementing 988 surcharges similar to those used for 911 services, to ensure long-term viability.
At the federal level, the 988 Implementation Act introduced in 2023 seeks to expand access further by requiring health
insurance plans to cover crisis services and addressing gaps in care for populations like those on Medicare. This law is
expected to enhance the reach and effectiveness of the lifeline by building out a more comprehensive mental health
response infrastructure tailored to each community’s needs.
Despite these advancements, experts note that the system will take years to fully optimize as it contends with both
logistical and workforce challenges across the country. Some local initiatives, like those in Michigan, are already
seeing increased call volumes and struggling to keep pace with the demand, particularly for youth mental health
services.
Overall, the lifeline is seen as a critical step in improving mental health responses, but it faces significant hurdles in
achieving full efficacy in the coming years. If deployment of those funds is delayed, stopped or never occurs, our
results of operations or financial condition in future periods could be materially and adversely affected.
43
Regulation of the mobile communications industry and VoIP is evolving, and unfavorable changes or our failure to
comply with existing and potential new legislation or regulations could harm our business and operating results.
As the mobile communications industry continues to evolve, we believe greater regulation by federal, state or foreign
governments or regulatory authorities is likely and we face certain risks including:
•
We must adhere to existing and potentially new privacy rules - We believe increased regulation is likely in the area of
data privacy, and laws and regulations applying to the solicitation, collection, processing or use of personal or
consumer information could affect our customers’ ability to use and share data, potentially reducing our ability to
utilize this information in the resale of certain of our products. In order for mobile location products and services to
function properly, wireless carriers must locate their subscribers and store information on each subscriber’s location.
Although data regarding the location of the wireless user resides only on the wireless carrier’s systems, users may not
feel comfortable with the idea that the wireless carrier knows and can track their location. Carriers will need to obtain
subscribers’ permission to gather and use the subscribers’ personal information, or they may not be able to provide
customized mobile location services which those subscribers might otherwise desire. If subscribers view mobile
location services as an annoyance or a threat to their privacy, that could reduce demand for our products and services
and have a material adverse effect on our business, results of operations and financial condition.
Over the past several years, there have been a number of laws and regulations enacted that affect companies
conducting business on the Internet, including the European General Data Protection Regulation ("GDPR"). The
GDPR imposes certain privacy related requirements on companies that receive or process personal data of residents of
the European Union that are currently different than those in the United States and include significant penalties for
non-compliance. Similarly, there are a number of state privacy laws, as well as legislative proposals in the United
States, at both the federal and state level, that could impose new obligations in areas affecting our business, such as
liability for personal data protection. In addition, some countries are considering or have passed legislation
implementing data protection requirements or requiring local storage and processing of data or similar requirements
that could increase the cost and complexity of delivering our services. Our costs to comply with the GDPR as well any
other similar laws and regulations that emerge may negatively impact our business.
•
We may face increased compliance costs in connection with health and safety requirements for mobile devices - If
wireless handsets pose health and safety risks, we may be subject to new regulations and demand for our products and
services may decrease. Media reports have suggested that certain radio frequency emissions from wireless handsets
may be linked to various health concerns, including cancer, and may interfere with various electronic medical devices,
including hearing aids and pacemakers. Concerns over radio frequency emissions may have the effect of discouraging
the use of wireless handsets, which would decrease demand for our services. In recent years, the FCC and foreign
regulatory agencies have updated the guidelines and methods they use for evaluating radio frequency emissions from
radio equipment, including wireless handsets. In addition, interest groups have requested that the FCC investigate
claims that wireless technologies pose health concerns and cause interference with airbags, hearing aids and other
medical devices. There also are some safety risks associated with the use of wireless handsets while driving. Concerns
over these safety risks and the effect of any legislation that may be adopted in response to these risks could limit our
ability to market and sell our products and services, which could negatively impact our business, consolidated results
of operations and financial condition.
•
The regulatory environment for VoIP services is developing - The FCC has determined that VoIP services are not
subject to the same regulatory scheme as traditional wireline and wireless telephone services. If the regulatory
environment for VoIP services evolves in a manner other than the way we anticipate, our 911 business would be
significantly harmed and future growth of our business would be significantly reduced. For example, the regulatory
scheme for wireless and wireline service providers requires those carriers to allow service providers such as us to have
access to certain databases that make the delivery of a 911 call possible. No such requirements exist for VoIP service
providers, so carriers could prevent us from continuing to provide VoIP 911 service by denying us access to the
required databases.
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Ongoing compliance with the provisions of securities laws, related regulations and financial reporting standards could
unexpectedly materially increase our costs and compliance related expenses.
Because we are a publicly traded company, we are required to comply with provisions of securities laws, related regulations and
financial reporting standards. Because securities laws, related regulations and financial reporting standards pertaining to our
business are relatively complex, our business faces increased risks including the following:
•
Our costs will likely increase as a result of our identification of material weaknesses within our control environment -
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and related SEC rules, we are required to furnish a report
of management’s assessment of the effectiveness of our internal controls as part of our Form 10-K. Our independent
registered public accountants are required to attest to and provide a separate opinion. To issue our report, we document
our internal control design and the testing processes that support our evaluation and conclusion, and then we test and
evaluate the results. See "Part II - Item 9A Controls and Procedures" for information related to the material
weaknesses that we identified as of July 31, 2024. There can be no assurance that we will be able to remediate the
material weaknesses that we have identified, or maintain all of the controls necessary for continued compliance. There
likewise can be no assurance that we will be able to retain sufficient skilled finance and accounting personnel,
especially in light of the increased demand for such personnel among publicly traded companies.
•
Stock-based compensation accounting standards could negatively impact our stock - Since our inception, we have used
stock-based awards as a fundamental component of our employee compensation packages. We believe that stock-
based awards directly motivate our employees to maximize long-term stockholder value and, through the use of long-
term vesting, encourage employees to remain with us. We apply the provisions of ASC 718, "Compensation - Stock
Compensation," which requires us to record compensation expense in our statement of operations for employee and
director stock-based awards using a fair value method. In the first quarter of fiscal 2018, we adopted FASB ASU No.
2016-09 which modified certain aspects of ASC 718, including the requirement to recognize excess tax benefits and
shortfalls in the income statement. The ongoing application of this standard will have a significant effect on our
reported earnings, and could adversely impact our ability to provide accurate guidance on our future reported financial
results due to the variability of the factors used to estimate the value of stock-based awards (including long-term
performance shares which are subject to the achievement of three-year goals which are based on several performance
metrics). The ongoing application of this standard could impact the future value of our common stock and may result
in greater stock price volatility. To the extent that this accounting standard makes it less attractive to grant stock-based
awards to employees, we may incur increased compensation costs, change our equity compensation strategy or find it
difficult to attract, retain and motivate employees, each of which could have a material adverse effect on our business,
results of operations and financial condition.
Also, as further discussed in "Notes to Consolidated Financial Statements - Note (1) - Summary of Significant Accounting and
Reporting Policies" included in "Part II - Item 8. Financial Statements and Supplementary Data," included in this Form 10-K,
the accounting rules and regulations that we must comply with are complex and are continually changing in ways that could
materially impact our financial statements. We must comply with these new rules on a go-forward basis. Because of the
uncertainties of the estimates, judgments and assumptions associated with new accounting standards, as well as with any future
guidance or interpretations related to them, we may incur additional costs and cannot provide any assurances that we will be
able to comply with such complex rules.
Our costs to comply with the aforementioned and other regulations continue to increase and we may have to add additional
accounting staff, engage consultants or change our internal practices, standards and policies which could significantly increase
our costs to comply with ongoing or future requirements. In addition, the Nasdaq Stock Market LLC ("Nasdaq") routinely
changes its requirements for companies, such as us, that are listed on Nasdaq. These changes (and potential future changes)
have increased and may increase our legal and financial compliance costs, including making it more difficult and more
expensive for us to obtain director and officer liability insurance or maintain our current liability coverage. We believe that
these new and proposed laws and regulations could make it more difficult for us to attract and retain qualified members of our
Board of Directors, particularly to serve on our Audit Committee, and qualified executive officers.
45
Our management has concluded that our disclosure controls and procedures were not effective as of July 31, 2024 due to
material weaknesses in internal control over financial reporting. If we are unable to maintain an effective system of
disclosure controls and procedures and internal control over financial reporting, we may not be able to accurately
report our financial results in a timely manner, which may adversely affect investor confidence in us and materially and
adversely affect our business and financial results.
After consultation with our independent registered public accounting firm and our management team, our audit committee
concluded that we: (a) lacked a sufficient complement of resources with an appropriate level of knowledge and experience to
establish effective process and controls. As a result, we identified a material weakness in our internal control over financial
reporting. The control environment material weakness contributed to other material weaknesses within our system of internal
control over financial reporting at the control activity level, where we did not design and implement effective control activities,
including controls related to revenue, inventory and other assets. Deficiencies in control activities contributed to accounting
errors and the potential for there to have been material accounting errors within revenue, inventory and other assets.
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.
If we identify any new material weaknesses in the future, any such newly identified material weakness could limit our ability to
prevent or detect a misstatement of our accounts or disclosures that could result in a material misstatement of our annual or
interim financial statements. In such case, we may be unable to maintain compliance with securities law requirements regarding
timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in
our financial reporting and our stock price may decline as a result. We cannot assure you that the measures we have taken to
date, or any measures we may take in the future, will be sufficient to avoid potential future material weaknesses.
Indemnification provisions in our contracts could have a material adverse effect on our consolidated results of
operations, financial position, or cash flows.
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 losses suffered or incurred by
the indemnified party, including but not limited to losses related to third-party intellectual property claims. Some customers
seek indemnification under their contractual arrangements with us for claims and other costs associated with defending lawsuits
alleging infringement of patents through their use of our products and services, and the use of our products and services in
combination with products and services of other vendors.
In some cases, we have agreed to assume the defense of the case. In others, we will negotiate with these customers in good faith
because we believe our technology does not infringe the cited patents or due to specific clauses within the customer contractual
arrangements that may or may not give rise to an indemnification obligation. It is not possible to determine the maximum
potential amount we may spend under these agreements due to the unique facts and circumstances involved in each particular
agreement.
Our assessments related to indemnification provisions are based on estimates and assumptions that have been deemed
reasonable by management, but that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may
occur that might cause us to change those estimates and assumptions. Therefore, it is possible that an unfavorable resolution of
one or more of these matters could have a material adverse effect on our consolidated financial statements in a future period.
We are, from time to time, and could become a party to additional litigation or subject to claims, including product
liability claims, current and former employee claims, government investigations and other proceedings that could cause
us to incur unanticipated expenses and otherwise have a material adverse effect on our business, results of operations
and financial condition.
We are, from time to time, involved in commercial disputes and civil litigation relating to our businesses.
Our agreements with customers may require us to indemnify such customers. Direct claims against us or claims against our
customers may relate to defects in or non-conformance of our products, or our own acts of negligence and non-performance.
Occasionally, we are called upon also to provide information in connection with litigation involving other parties or
government investigations. Product liability and other forms of insurance are expensive and may not be available in the future.
46
We cannot be sure that we will be able to maintain or obtain insurance coverage at acceptable costs or in sufficient amounts or
that our insurer will not disclaim coverage as to a future claim. In many cases, we are unable to obtain insurance and are self-
insured. Any such claim, including any out of pocket payments we are required to make and the costs of the defense against
such claim, could result in material costs and have an adverse effect on our business, results of operations and financial
condition.
For additional information related to these lawsuits, see "Notes to Consolidated Financial Statements - Note (13)(a) -
Commitments and Contingencies - Legal Proceedings and Other Matters" included in "Part II - Item 8. Financial Statements
and Supplementary Data," included in this Form 10-K.
Protection of our intellectual property is limited and pursuing infringers of our patents and other intellectual property
rights can be costly.
Our businesses rely, in large part, upon our proprietary scientific and engineering know-how and production techniques. We
rely on a combination of patent, copyright, trademark, service mark, trade secret and unfair competition laws, restrictions in
licensing agreements, confidentiality provisions and various other contractual provisions to protect our intellectual property and
related proprietary rights, but these legal means provide only limited protection. We cannot guarantee that our issued and
acquired patents will be upheld if challenged by another party. Additionally, with respect to any patent applications which we
have filed, we cannot guarantee that any patents will be issued as a result of these applications.
The departure of any of our key management and technical personnel, the breach of their confidentiality and non-disclosure
obligations to us or the failure to achieve our intellectual property objectives could have an adverse effect on our business,
results of operations and financial condition. Our ability to compete successfully and achieve future revenue growth will
depend, in part, on our ability to protect our proprietary technology and operate without infringing upon the rights of others. We
may fail to do so. In addition, the laws of certain countries in which our products are or may be sold may not protect our
products or intellectual property rights to the same extent as the laws of the U.S.
Our ability to protect our intellectual property rights is also subject to the terms of future government contracts. We cannot
assure you that the federal government will not demand greater intellectual property rights or restrict our ability to disseminate
intellectual property. We are also a member of standards-setting organizations and have agreed to license some of our
intellectual property to other members on fair and reasonable terms to the extent that the license is required to develop non-
infringing products.
Pursuing infringers of our proprietary rights could result in significant litigation costs, and any failure to pursue infringers could
result in our competitors utilizing our technology and offering similar products, potentially resulting in loss of a competitive
advantage and decreased revenues. Despite our efforts to protect our proprietary rights, existing patent, copyright, trademark
and trade secret laws afford only limited protection. In addition, the laws of some foreign countries do not protect our
proprietary rights to the same extent as do the laws of the U.S. Protecting our know-how is difficult especially after our
employees or those of our third-party contract service providers end their employment or engagement. Attempts may be made
to copy or reverse-engineer aspects of our products or to obtain and use information that we regard as proprietary. Accordingly,
we may not be able to prevent the misappropriation of our technology or prevent others from developing similar technology.
Furthermore, policing the unauthorized use of our products is difficult and expensive. Litigation may be necessary in the future
to enforce our intellectual property rights or to determine the validity and scope of the proprietary rights of others. The costs
and diversion of resources could significantly harm our business. If we fail to protect our intellectual property, we may not
receive any return on the resources expended to create the intellectual property or generate any competitive advantage based on
it.
Third parties may claim we are infringing their intellectual property rights and we could be prevented from selling our
products, or suffer significant litigation expense, even if these claims have no merit.
Our competitive position is driven in part by our intellectual property and other proprietary rights. Third parties, however, may
claim that we, our products, operations or any products or technology we obtain from other parties are infringing their
intellectual property rights, and we may be unaware of intellectual property rights of others that may impact some of our assets,
technology and products.
47
From time to time our customers are parties to allegations of intellectual property infringement claims based on our customers’
incorporation and use of our products and services, which may lead to demands from our customers for us to indemnify them
for costs in defending those allegations. Any litigation regarding patents, trademarks, copyrights or intellectual property rights,
even those without merit, and the related indemnification demands of our customers, can be costly and time consuming, and
divert our management and key personnel from operating our business. The complexity of the technology involved, and
inherent uncertainty and cost of intellectual property litigation increases our risks. If any third party has a meritorious or
successful claim that we are infringing its intellectual property rights, we may be forced to change our products or enter into
licensing arrangements with third parties that may include payment of a reasonable royalty, which may be costly or impractical.
This also may require us to stop selling our products as currently engineered, which could harm our competitive position. We
also may be subject to significant damages or injunctions that prevent the further development and sale of certain of our
products or services and may result in a material loss of revenue.
From time to time, there have been claims challenging the ownership of open source software against companies that
incorporate open source software into their products. As a result, we could be subject to suits by parties claiming ownership of
what we believe to be open source software. Some open source licenses contain requirements that we make available source
code for modifications or derivative works under the terms of a particular open source license or other license granting third
parties certain rights of further use. If we combine our proprietary software products with open source software in a certain
manner, we could under certain of the open source licenses, be required to release our proprietary source code. Open source
license terms may be ambiguous and many of the risks associated with usage of open source software cannot be eliminated, and
could if not properly addressed, negatively affect our business. If we were found to have inappropriately used open source
software, we may be required to release our proprietary source code, re-engineer our products and client applications,
discontinue the sale of our products or services in the event re-engineering cannot be accomplished on a timely basis or take
other remedial action that may divert resources away from our development efforts, any of which could adversely affect our
business, results of operations, and financial condition.
Competitive Risks
All of our business activities are subject to rapid technological change, new entrants, the introduction of other
distribution models and long development and testing periods each of which may harm our competitive position, render
our product or service offerings obsolete and require us to continuously develop technology and/or obtain licensed
technology in order to compete successfully.
We are engaged in business activities characterized by rapid technological change, evolving industry standards, frequent new
product announcements and enhancements, and changing customer demands. The introduction of products and services or
future industry standards embodying new technologies and approaches could render any of our products and services obsolete
or non-competitive. New satellite operators such as Starlink have driven significant changes in the way communications
equipment is procured, and may further disrupt our markets. The introduction of optical communications technology, including
from satellite to satellite and satellite to ground, as well as potential offerings for satellite / cellular direct connectivity, may
impact our future business. The successful execution of our business strategy is contingent upon wireless network operators
launching and maintaining mobile location services, our ability to maintain a technically skilled development and engineering
team, our ability to create new network software products and adapt our existing products to rapidly changing technologies,
industry standards and customer needs. As a result of the complexities inherent in our product offerings, new technologies may
require long development and testing periods. Additionally, new products may not achieve market acceptance or our
competitors could develop alternative technologies that gain broader market acceptance than our products. If we are unable to
develop and introduce technologically advanced products that respond to evolving industry standards and customer needs, or if
we are unable to complete the development and introduction of these products on a timely and cost effective basis, it could have
a material adverse effect on our business, results of operations and financial condition or could result in our technology
becoming obsolete.
New entrants seeking to gain market share by introducing new technology and new products may make it more difficult for us
to sell our products and services and could create increased pricing pressure, reduced profit margins, increased sales and
marketing expenses, or the loss of market share or expected market share, any of which could have a material adverse effect on
our business, results of operations and financial condition. For example, many companies are developing new technologies and
the shift towards open standards will likely result in increased competition and some of our products may become
commoditized as a result.
48
Our Terrestrial and Wireless Networks segment provides various technologies that are utilized on mobile devices. Applications
from competitors for location-based or text-based messaging platforms may be preloaded on mobile devices by original
equipment manufacturers, or OEMs, or offered by OEMs directly. Increased competition from providers of location-based
services which do not rely on a wireless carrier may result in fewer wireless carrier subscribers electing to purchase their
wireless carrier’s branded location-based services, which could harm our business and revenue. In addition, these location-
based or text-based services may be offered for free or on a one-time fee basis, which could force us to reduce monthly
subscription fees or migrate to a one-time fee model to remain competitive. We may also lose end users or face erosion in our
average revenue per user if these competitors deliver their products without charge to the consumer by generating revenue from
advertising or as part of other applications or services.
Our expected growth and our financial position depends on, among other things, our ability to keep pace with such changes and
developments and to respond to the increasing variety of electronic equipment users and transmission technologies. We may not
have the financial or technological resources to keep pace with such changes and developments or be successful in our research
and development and we may not be able to identify and respond to technological improvements made by our competitors in a
timely or cost-effective fashion. Any delays could result in increased costs of development or redirect resources from other
projects. In addition, we cannot provide assurances that the markets for our products, systems, services or technologies will
develop as we currently anticipate. The failure of our products, systems, services or technologies to gain market acceptance
could significantly reduce our net sales and harm our business.
Our business is highly competitive, we are reliant upon the success of our partners, and some of our competitors have
significantly greater resources than we do, which could result in a loss of customers, market share and/or market
acceptance.
Our business is highly competitive. We will continue to invest in research and development for the introduction of new and
enhanced products and services designed to improve capacity, data processing rates and features. We must also continue to
develop new features and to improve functionality of our software. Research and development in our industry is complex,
expensive and uncertain. We believe that we must continue to dedicate a significant amount of resources to research and
development efforts to maintain our competitive position. If we continue to expend a significant amount of resources on
research and development, but our efforts do not lead to the successful introduction of product and service enhancements more
quickly than our competitors that are competitive in the marketplace, our business, results of operations and financial condition
could be materially adversely affected.
Several of our potential competitors are substantially larger than we are and have greater financial, technical and marketing
resources than we do. In particular, larger competitors have certain advantages over us which could cause us to lose customers
and impede our ability to attract new customers, including: larger bases of financial, technical, marketing, personnel and other
resources; more established relationships with wireless carriers and government customers; more funds to deploy products and
services; and the ability to lower prices of (or not charge any price for) competitive products and services because they are
selling larger volumes. Furthermore, we cannot be sure that our competitors will not develop competing products, systems,
services or technologies that gain market acceptance in advance of our products, systems, services or technologies, or that our
competitors will not develop new products, systems, services or technologies that cause our existing products, systems, services
or technologies to become non-competitive or obsolete, which could adversely affect our results of operations.
Our Terrestrial and Wireless Networks segment provides public safety and location technologies to various state and local
municipalities and to a large extent, we are reliant on the success of our wireless partners and distributors to meet our growth
objectives. In some cases, our wireless partners may have different objectives, or our distributors may not be successful. We
also began an evaluation and repositioning of certain of our location technology solutions within our Terrestrial and Wireless
Networks segment in order to focus on providing higher-margin solution offerings and increase our penetration into the public
safety space. To date, we have ceased offering certain location technology solutions, have worked with customers to wind-
down certain legacy contracts and have not renewed certain contracts. Going forward, we intend to continue to work with our
partners and expand our direct and indirect sales and distribution channels in this area. If we are not successful in doing so, we
may not be able to achieve our long-term business goals.
49
We rely upon various third-party companies and their technology to provide services to our customers and if we are
unable to obtain such services at reasonable prices, or at all, our gross margins and our ability to provide the services of
our wireless applications business could be materially adversely affected.
We rely on various third-party companies and their technology in our business. Risks from our reliance with these third parties
include:
•
The loss of mapping and third-party content - The wireless data services provided to our customers are dependent on
real-time, continuous feeds from map data, points of interest data, traffic information, gas prices, theater, event and
weather information from vendors and others. Any disruption of this third-party content from our satellite feeds or
backup landline feeds or other disruption could result in delays in our subscribers’ ability to receive information. We
obtain this data that we sell to our customers from companies owned by current and potential competitors, who may
act in a manner that is not in our best interest. If our suppliers of this data or content were to enter into exclusive
relationships with other providers of location-based services or were to discontinue providing such information and we
were unable to replace them cost effectively, or at all, our ability to provide the services of our wireless applications
business would be materially adversely affected. Our gross margins may also be materially adversely affected if the
cost of third-party data and content increases substantially.
•
Third-party data centers or third-party networks may fail - Many products and services of our advanced
communication solutions, in particular our public safety and location technology solutions, are provided through a
combination of our servers, which are hosted at third-party data centers, and on the networks, as well as within the data
centers of our wireless carrier partners. Our business relies to a significant degree on the efficient and uninterrupted
operation of the third-party data centers, customer data centers, and cloud providers we use. Network failures,
disruptions or capacity constraints in our third-party data center facilities or in our servers maintained at their location
could affect the performance of the products and services of our wireless applications and 911 business and harm our
reputation and our revenue. The ability of our subscribers (or those of our customers) to receive critical location and
business information requires timely and uninterrupted connections with our wireless network carriers. Any disruption
from our satellite feeds or backup landline feeds could also result in delays in our subscribers’ ability to receive
information.
•
We must integrate our technologies and routinely upgrade them - We may not be able to upgrade our location services
platform to support certain advanced features and functionality without obtaining technology licenses from third
parties. Obtaining these licenses may be costly and may delay the introduction of such features and functionality, and
these licenses may not be available on commercially favorable terms, or at all. Problems and delays in development or
delivery as a result of issues with respect to design, technology, licensing and patent rights, labor, learning curve
assumptions, or materials and components could prevent us from achieving contractual obligations. In addition, our
products cannot be tested and proven in all situations and are otherwise subject to unforeseen problems. The inability
to offer advanced features or functionality, or a delay in our ability to upgrade our location-based services platform,
may materially adversely affect demand for our products and services and, consequently, have a material adverse
effect on our business, results of operations and financial condition.
•
We rely upon "open-source" software - We have incorporated some types of open-source software into our products,
allowing us to enhance certain solutions without incurring substantial additional research and development costs. Thus
far, we have encountered no unanticipated material problems arising from our use of open-source software. However,
as the use of open-source software becomes more widespread, certain open-source technology could become
competitive with our proprietary technology, which could cause sales of our products to decline or force us to reduce
the fees we charge for our products, which could have a material adverse effect on our business, results of operations
and financial condition.
Because our software may contain defects or errors, and our hardware products may incorporate defective components,
our sales could decrease if these defects or errors adversely affect our reputation or delay shipments of our products.
Products as complex as ours are likely to contain undetected errors or defects, especially when first introduced or when new
versions are released. Software products, such as our 911 call handling software solutions, must meet stringent customer
technical requirements and we must satisfy our warranty obligations to our customers. Our hardware products are also subject
to warranty obligations and integrate a wide variety of components from different vendors.
50
Our products including software may not be error or defect free after delivery to customers, which could damage our reputation,
cause revenue losses, result in the rejection of our products or services, divert development resources and increase service and
warranty costs, each of which could have a material adverse effect on our business, results of operations and financial
condition.
Risks Related to our Common Stock
Our stock price is volatile.
The stock market in general and the stock prices of technology-based companies, in particular, experience extreme volatility
that often is unrelated to the operating performance of any specific public company. The market price of our common stock has
fluctuated significantly in the past and is likely to fluctuate significantly in the future as well. Factors that could have a
significant impact on the market price of our stock include, among others:
•
strategic transactions, such as acquisitions and divestitures by us and our competitors;
•
our ability to successfully integrate and manage acquisitions or unwind and manage divestitures;
•
our issuance of potentially dilutive equity or equity-type securities;
•
our issuance of debt or refinancing our debt;
•
our ability to successfully access equity and debt capital markets;
•
future announcements concerning us or our competitors;
•
shareholder activism involving our common stock, board of directors or corporate governance;
•
receipt or non-receipt of substantial orders for products and services;
•
quality deficiencies in services or products;
•
results of technological innovations and new commercial products;
•
changes in our own outlook or recommendations of securities analysts;
•
government regulations;
•
changes in the status or outcome of government audits;
•
proprietary rights or product or patent litigation;
•
changes in U.S. government policies;
•
changes in economic conditions generally, particularly in the terrestrial and wireless networks and satellite and
space communications markets;
•
changes in securities market conditions, generally;
•
changes in prevailing interest rates;
•
changes in the status of litigation and legal matters (including changes in the status of export matters);
•
cyber attacks;
•
energy blackouts;
•
acts of terrorism or war;
•
inflation or deflation;
•
rumors or allegations regarding our financial disclosures or practices;
•
our ability to timely file documents required by the SEC within prescribed time periods; and
•
global pandemics.
Shortfalls in our sales or earnings in any given period relative to the levels expected by securities analysts could immediately,
significantly and adversely affect the trading price of our common stock.
Future issuances of our shares of common stock could dilute a stockholder's ownership interest in Comtech and reduce
the market price of our shares of common stock.
In addition to potential issuances of our shares of common stock associated with acquisitions, in the future, we may issue
additional securities to raise capital. We may also acquire interests in other companies by using a combination of cash and our
common stock or just our common stock. We may also issue securities convertible into our common stock. Any of these events
may dilute a stockholder's ownership interest in Comtech and have an adverse impact on the price of our common stock.
51
Actions of activist stockholders could impact the pursuit of our business strategies and adversely affect our results of
operations, financial condition and/or share price.
Our Board of Directors and management team value constructive input from investors, regularly engage in dialogue with our
stockholders, and are committed to acting in the best interests of all of our stockholders. However, there is no assurance that the
actions taken by the Board of Directors and management team in seeking to maintain constructive engagement with certain
stockholders will be successful in preventing the occurrence of stockholder activist campaigns. Such campaigns may not align
with our business strategies or what the Board of Directors believes is in the best interest of all of our stockholders.
Campaigns by activist stockholders to effect changes at publicly traded companies can result in different types of demands,
such as that companies undertake or pursue financial restructuring, increase debt, issue special dividends, repurchase shares, or
undertake sales of assets or other transactions, including strategic transactions. Activist stockholders who disagree with the
composition of a company’s board of directors, or with its strategy or leadership often seek to involve themselves or their
designees in the governance and strategic direction of a company through various activities, including the nomination of
director candidates.
In September 2024, Michael Porcelain, a former Chief Executive Officer and President of the Company, nominated a group of
eight candidates to stand for election at our fiscal 2024 annual meeting of stockholders. During the course of our Board's
discussions with Mr. Porcelain and in public communications, Mr. Porcelain has made certain proposals for our Board’s
consideration regarding the composition of the Board and management team. We expect to continue to engage with Mr.
Porcelain and certain stockholders associated with him on these and related topics.
Responding to proxy contests and other actions by activist stockholders, including the current campaign by Mr. Porcelain, can
be costly and time-consuming, and could divert the attention of our Board of Directors, management team and employees from
the management of our operations and the pursuit of our business strategies. Further, actions of activist stockholders may cause
significant fluctuations in our stock price based on temporary or speculative market perceptions or other factors that do not
necessarily reflect the underlying fundamentals and prospects of our business. Also, we could be required to incur significant
expenses related to any activist stockholder matters, including the current campaign by Mr. Porcelain, or accompanying
litigation (including but not limited to legal fees, fees for financial advisors, fees for public relation advisors and proxy
solicitation expenses). As a result, activist stockholder campaigns could adversely affect our business, results of operations,
financial condition and/or share price in ways that can be difficult to predict.
Even if we are successful in any proxy contest or other activism campaign, any such proxy contest or activist stockholder
campaign could adversely affect our business due to:
•
perceived uncertainties as to future direction, strategy or leadership that may result in the loss of potential business
opportunities, acquisitions, collaborations or other strategic opportunities, and that may make it more difficult to attract
and retain qualified personnel, investors, customers, suppliers, and other business partners; and
•
the risk that individuals may be elected to our Board of Directors with a specific agenda or who do not agree with our
strategic plan, adversely affecting the ability of our Board of Directors to function effectively, which could in turn
adversely affect our ability to effectively and timely implement our strategic plan and create additional value for our
stockholders, and/or adversely affect our business, results of operations and financial condition.
We cannot predict, and no guarantees can be given, as to the outcome or timing of any matters relating to the foregoing actions
by activist stockholders and our responses thereto or the ultimate impact on our business, results of operations or financial
condition. Any of these matters or any further actions by activist stockholders and our responses thereto may impact the trading
value of our securities.
Provisions in our corporate documents and Delaware law could delay or prevent a change in control of Comtech.
We have taken a number of actions that could have the effect of discouraging, delaying or preventing a merger, acquisition or
divestiture involving Comtech that our stockholders may consider favorable.
For example, we currently have a classified board which will be fully declassified at our 2024 Annual Meeting of Stockholders
and the employment contract with our CEO and agreements with other of our executive officers provide for substantial
payments in certain circumstances or in the event of a change of control of Comtech. In the future, we may adopt a stockholder
rights plan which could cause substantial dilution to a stockholder, and substantially increase the cost paid by a stockholder who
attempts to acquire us on terms not approved by our Board of Directors.
52
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, an anti-takeover law. In
general, this statute provides that, except in certain limited circumstances, a corporation shall not engage in any "business
combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder.
Subject to certain exceptions, for purposes of Section 203 of the Delaware General Corporation Law, an "interested
stockholder" is a person who, together with affiliates, owns, or within three years did own, 15% or more of the corporation's
voting stock. This provision could have the effect of delaying or preventing a change in control of Comtech.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 1C. CYBERSECURITY
Cybersecurity Risk Management Strategy and Program
We identify and assess material risks from cybersecurity threats predominantly through the work of our Information Security
(“InfoSec”) team as part of our enterprise risk management (“ERM”) process. Our ERM process is designed to identify and
evaluate the full range of significant risks to Comtech. As part of our ERM program, our functional and operations departments
identify and manage enterprise risks on an annual cycle. The process consists of structured reviews, discussions, and mitigation
planning, and includes risks identified by our cybersecurity functions.
The cybersecurity ERM process is administered by InfoSec with input from each business segment and function, continually
monitors material cybersecurity risks facing Comtech, including cybersecurity threats and threats to our internal systems, our
products, services and programs for customers, and our supply chain. Our CISO has extensive experience leading information
technology for global organizations across communications, aerospace and defense, and works directly with our CEO, Chief
Financial Officer, Executive Vice President ("EVP") of Systems and IT Controls, and other members of senior management to
assess cybersecurity threats as part of our ERM process.
To manage and remediate cybersecurity risks identified as part of our ERM process and to manage emerging cybersecurity
threats in real time; we have implemented a Managed Detection and Response system that supports the Security Operations
Center. We are a member of the DoD Defense Industrial Base Collaborative Information Sharing Environment and the National
Defense Information Sharing and Analysis Center. These organizations share real-time cybersecurity threat information and
best practices in protecting, detecting, and recovering from cybersecurity threats.
As a government contractor, we must comply with extensive cybersecurity regulations, including the DFARS related to
adequately safeguarding controlled unclassified information and reporting cybersecurity incidents to the DoD. The policies and
controls we have implemented to date reflect our adherence to these requirements and have been assessed by external
organizations, including industry partners.
Enterprise Cybersecurity
Our enterprise cybersecurity program aligns with the National Institute of Standards and Technology (“NIST”) standards,
among others, and includes processes and controls for the deployment of new IT systems by the Company and controls over
new and existing systems operation. We monitor and conduct regular testing of these controls and systems, including
vulnerability management through active discovery and testing to regularly assess patching and configuration status. In
addition, we require our employees and contract workers to complete annual cybersecurity training, and we regularly conduct
simulated phishing and cyber-related communications.
Cybersecurity for U.S. Government Authorized Systems
Our information technology systems used in connection with programs for the U.S. government align with the NIST standard
and meet the requirements of 32 CFR Part 117 (National Industrial Security Program Operating Manual) and other applicable
U.S. government guidance. The program includes authorizations and assessments of new and existing IT systems by our
customers. We monitor use on these systems, including vulnerability management through patching and configuration. In
addition, we restrict user access and require authorized users to complete additional user and cybersecurity training.
53
Third Party Service Providers
We engage third party service providers to expand the capabilities and capacity of our cybersecurity program, including for
design, monitoring and testing of the program’s risk prevention and protection measures and process execution, including
incident detection, investigation, analysis and response, eradication and recovery.
Management of Third-Party Risks
Our suppliers, subcontractors and third-party service providers are subject to cybersecurity obligations and controls as aligned
with DFARS and U.S. Federal Acquisition Regulations (“FARS”) requirements. We are making strides to ensure suppliers,
subcontractors and third-party service providers are knowledgeable and aligned with DFARS and FARS requirements. We are
also developing an enhanced program for our suppliers, subcontractors, and third-party service providers to agree to
cybersecurity-related contractual terms and conditions of purchase to ensure their commitment to the mandates. Many of these
contractors, suppliers or third parties are also subject to regulatory requirements in mandatory government procurement clauses,
including those contained in the DFARS and FARS, which obligate adherence to a generally accepted cybersecurity
framework, such as NIST, and occasional assessment of their implementation of cybersecurity controls as a condition of
contract award or during contract performance. Finally, we require these third parties to notify us of cybersecurity incidents that
impact us.
Program Assessment
We continuously evaluate and seek to improve and mature our cybersecurity processes and controls. Our cybersecurity program
is regularly assessed through management self-evaluations and ongoing monitoring procedures to evaluate our program
effectiveness, including vulnerability management through active discovery, and testing to validate patching and configuration.
Additionally, our InfoSec function regularly assesses our program effectiveness through audits of our entities, systems, and
processes to help maintain compliance with policies. As cybersecurity threats are continuously evolving, we also periodically
engage with third parties to perform maturity assessments of our program to identify potential risk areas and improvement
opportunities. This includes assessment of our overall program, policies and processes, compliance with regulatory
requirements and an overall assessment of key vulnerabilities. We use these assessments to supplement our own evaluation of
the overall effectiveness of our program and target improvement areas. Several external organizations also evaluate our
enterprise cybersecurity program, including the U.S. Defense Contract Management Agency ("DCMA") and Cybersecurity
Maturity Model Certificate Third Party Assessment Organization. Moreover, some of our products are audited or reviewed for
regulatory compliance certification pursuant to the relevant DoD risk management framework.
Board Oversight and Management’s Role
Our Board of Directors has primary oversight responsibilities for enterprise cybersecurity risks. The Technology, Innovation,
and Cyber Committee of the Board of Directors also reviews enterprise cybersecurity risks in connection with its oversight of
cybersecurity and compliance risks. Our CISO leads our enterprise cybersecurity program and is responsible for assessing and
managing enterprise cybersecurity risks in coordination with the EVP of Systems and IT Controls.
Our CISO regularly updates the Technology, Innovation and Cyber Committee and Board of Directors on cybersecurity risks as
they relate to our information and operational technology systems and our suppliers and partners, as well as provides regular
updates on enterprise cybersecurity incidents and key defenses and mitigation strategies. Our CISO regularly reviews enterprise
cybersecurity risks, controls, program policy and processes, including training, oversees policy and program development,
implementation, and updates, and informs senior leadership on cybersecurity-related issues and activities affecting the
organization. Additionally, our CISO is regularly apprised of enterprise cybersecurity events, threats, and activities, including
with respect to incidents, protection vulnerabilities, software update needs and lifecycle status.
ITEM 2. PROPERTIES
We consider our facilities to be well maintained and adequate for current and planned production requirements. All of our
manufacturing facilities, including those that serve the military market, must comply with stringent customer specifications. We
employ formal quality management programs and other training programs, including the International Standard Organization’s
quality procedure registration programs.
Historically, we have not owned any material properties or facilities and have relied upon a strategy of leasing. We do not
currently own any material properties. The following table lists our primary leased facilities at July 31, 2024:
Location
Property Type
Square Footage Lease Expiration
Satellite and Space Communications
Chandler, Arizona
A
Manufacturing and Engineering and
Corporate Headquarters
146,000
July 2036
Orlando, Florida
B
Manufacturing and Engineering
99,000
April 2026
Hampshire, UK
C
Manufacturing and Engineering
77,000
November 2030
Santa Clara, California
D
Manufacturing and Engineering
47,000
April 2026
Cypress, California
E
Support, Engineering and Sales
28,000
July 2025
Tempe, Arizona
A
Manufacturing and Engineering
20,000
January 2027
Various facilities
F
Support, Engineering and Sales
19,000
Various
Plano, Texas
E
R&D and Engineering
12,000
August 2025
Saint-Laurent, Canada
G
Manufacturing, Engineering, Sales
and General Office
12,000
June 2029
460,000
Terrestrial and Wireless Networks
Seattle, Washington
H
Network Operations, R&D,
Engineering and Sales
30,000
October 2033
Stoughton, Massachusetts
I
Network Operations
26,000
March 2025
Annapolis, Maryland
J
Support, Engineering and Sales
17,000
July 2026
Gatineau, Canada
K
Network Operations, R&D,
Engineering, Sales and General
Office
16,000
April 2028
Chicago, Illinois
K
General Office
4,000
September 2024
93,000
Corporate
Melville, New York
L
General Office
9,600
August 2027
Annapolis, Maryland
J
General Office and Common Areas
2,000
July 2026
11,600
Total Square Footage
564,600
A.
To support our long-term business goals, we entered a 15-year lease for a new 146,000 square foot high-volume
technology manufacturing facility in Chandler, Arizona. In fiscal 2023, we completed the relocation of certain of our
satellite ground infrastructure production facility operations to this new facility, which reduced our Tempe, Arizona
footprint to 20,000 square feet through January 2027. The Chandler, Arizona facility utilizes state-of-the-art design
and production techniques, including analog, digital and RF microwave production, hardware assembly and full-
service engineering. In fiscal 2024, this location became our new corporate headquarters.
B.
Our Satellite and Space Communications segment engineers and manufactures our over-the-horizon microwave
troposcatter systems and mission-critical satellite equipment in a leased facility in Orlando, Florida.
C.
Our Satellite and Space Communications segment currently leases two manufacturing facilities in Hampshire
(Basingstoke), United Kingdom, where we previously manufactured high precision full motion fixed and mobile X/Y
satellite tracking antennas. As a result of our fourth quarter fiscal 2024 decision to exit this product line, we are
currently in discussions with each landlord regarding our exit and termination of such facility leases.
55
D.
Our Satellite and Space Communications segment manufactures certain amplifiers in a leased manufacturing facility
located in Santa Clara, California.
E.
Our Satellite and Space Communications segment maintains office space in Cypress, California and Plano, Texas used
primarily for R&D, engineering, sales and customer support.
F.
Our Satellite and Space Communications segment leases an additional five facilities, four of which aggregate 16,000
square feet and are located in the U.S. with the remaining facility aggregating 3,000 square feet located in India. All
are primarily utilized for engineering, sales, software development, customer support, and general office use.
G.
Our Satellite and Space Communications segment maintains office space in Saint-Laurent, Canada, used primarily for
sales, engineering, manufacturing and general office use.
H.
Our Terrestrial and Wireless Networks segment maintains office space in Seattle, Washington used primarily for
servicing and hosting our VoIP and VoWiFi E911 and NG-911 services, and related emerging technologies.
I.
Our Terrestrial and Wireless Networks segment maintains office space in Stoughton, Massachusetts used primarily for
servicing certain of our state and local municipality NG-911 customers.
J.
Our Terrestrial and Wireless Networks segment maintains office space in Annapolis, Maryland used primarily for the
design and development of our software-based systems and applications and network operations for our Terrestrial and
Wireless Networks segment.
K.
Our Terrestrial and Wireless Networks segment maintains office space in Gatineau, Canada and Chicago, Illinois that
are utilized for network operations, R&D, engineering, sales of our public safety and location technology solutions and
general office use. We exited our Chicago, Illinois office in September 2024. Our facility in Gatineau, Canada is
subject to expropriation by the City of Gatineau and we expect to exit this facility and enter into a new lease agreement
for an alternate facility in calendar 2025.
L.
Our Unallocated segment maintains general office space in a building complex located in Melville, New York for
certain company-wide functions.
The terms for all of our leased facilities are generally for multi-year periods and we believe that we will be able to renew these
leases or find comparable facilities elsewhere.
In fiscal 2024, as part of the divestiture of our solid-state RF microwave high power amplifiers and control components product
line, we no longer lease the 45,000 square foot engineering and manufacturing facility in Melville, New York or the 8,000
square foot facility in Topsfield, Massachusetts.
As part of our environmental related initiatives, we were able to reduce our total company-wide square footage of our various
facilities for a total three-year reduction of 288,000 sq. ft. or 33.8%.
56
ITEM 3. LEGAL PROCEEDINGS
Information regarding legal proceedings is incorporated herein by reference to the "Notes to Consolidated Financial Statements
– Note (13)(a) - Commitments and Contingencies – Legal Proceedings and Other Matters" included in "Part II - Item 8.
Financial Statements and Supplementary Data," of this Form 10-K.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Stock Performance Graph and Cumulative Total Return
The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the
S&P 500 Index and the Nasdaq Telecommunications Index for each of the last five fiscal years ended July 31, assuming an
investment of $100 at the beginning of such period and the reinvestment of any dividends (to the extent applicable). The
comparisons in the graphs below are based upon historical data and are not indicative of, nor intended to forecast, future
performance of our common stock.
Our common stock trades on the Nasdaq Stock Market LLC ("Nasdaq") under the symbol "CMTL."
57
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We did not repurchase any of our equity securities during the fiscal year ended July 31, 2024. 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. We had approximately
28.7 million shares of Common Stock outstanding as of July 31, 2024.
Approximate Number of Equity Security Holders
As of October 23, 2024, there were approximately 764 holders of our common stock. Such number of record owners was
determined from our stockholder records and does not include beneficial owners whose shares of our common stock are held in
the name of various security holders, dealers and clearing agencies.
ITEM 6. [RESERVED]
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview of Business
We are a leading global provider of next-generation 911 emergency systems ("NG-911") and secure wireless and satellite
communications technologies. This includes the critical communications infrastructure that people, businesses, and
governments rely on when durable, trusted connectivity is required, no matter where they are – on land, at sea, or in the air –
and no matter what the circumstances – from armed conflict to a natural disaster. Our solutions are designed to fulfill our
customers’ needs for secure wireless communications in the most demanding environments, including those where traditional
communications are unavailable or cost-prohibitive, and in mission-critical and other scenarios where performance is crucial.
We anticipate future growth in our business due to a trend of increasing demand for global voice, video and data usage in recent
years, 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 - is organized into four technology areas: satellite modem and amplifier
technologies, troposcatter technologies, government services and space components. This segment offers customers:
satellite ground infrastructure technologies, services and system integration that facilitate the transmission of voice,
video and data over GEO, MEO and LEO satellite constellations, including traveling wave tube power amplifiers,
modems, VSAT platforms and frequency converters; over-the-horizon microwave solutions that can transmit digitized
voice, video, and data over distances up to 200 miles using the troposphere and diffraction; professional engineering,
training and field support services, including cybersecurity, for multiple U.S. government agencies; and procurement
and supply chain management of high reliability Electrical, Electronic and Electromechanical ("EEE") parts for
satellite, launch vehicle and manned space applications.
•
Terrestrial and Wireless Networks - is organized into three service areas: next generation 911 and call delivery,
Solacom call handling solutions, and trusted location and messaging solutions. This segment offers customers: SMS
text to 911 services, providing alternate paths for individuals who need to request assistance (via text messaging) a
method to reach Public Safety Answering Points ("PSAPs"); next generation 911 solutions, providing emergency call
routing, location validation, policy-based routing rules, logging and security functionality; Emergency Services IP
Network transport infrastructure for emergency services communications and support of next generation 911 services;
call handling applications for PSAPs; wireless emergency alerts solutions for network operators; and software and
equipment for location-based and text messaging services for various applications, including for public safety,
commercial and government services.
Our Quarterly Financial Information
Quarterly and period-to-period sales and operating results may be significantly affected by either short-term or long-term
contracts with our customers. In addition, our gross profit is affected by a variety of factors, including the mix of products,
systems and services sold, production efficiencies, estimates of warranty expense, price competition and general economic
conditions. Our gross profit may also be affected by the impact of any cumulative adjustments to contracts that are accounted
for over time. In particular our contracts with the U.S. government can be terminated for convenience by it at any time and
orders are subject to unpredictable funding, deployment and technology decisions by the U.S. government. Some of these
contracts are indefinite delivery/indefinite quantity ("IDIQ") contracts and, as such, the U.S. government is not obligated to
purchase any equipment or services under these contracts. We have, in the past, experienced and we continue to expect
significant fluctuations in sales and operating results from quarter-to-quarter and period-to-period due to these factors. As such,
comparisons between periods and our current results may not be indicative of a trend or future performance.
Please see "Strategic Transformation" section discussed above, as well as Item 1A – “Risk Factors” under Part I of this Form
10-K for more information about risks pertaining to business and factors that can influence our future results.
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Critical Accounting Policies
We consider certain accounting policies to be critical due to the estimation process involved in each.
Revenue Recognition. In accordance with FASB ASC 606 - Revenue from Contracts with Customers ("ASC 606"), we record
revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services
promised to customers. See "Notes to Consolidated Financial Statements - Note (1)(d) - Revenue Recognition" included in
"Part II - Item 8. Financial Statements and Supplementary Data," (which discussion is incorporated herein by reference), and
"Part II - Item 9A. Controls and Procedures," included in this Form 10-K, for further information.
Impairment of Goodwill and Other Intangible Assets. As of July 31, 2024, total goodwill recorded on our Consolidated
Balance Sheet aggregated $284.2 million (of which $110.1 million relates to our Satellite and Space Communications segment
and $174.1 million relates to our Terrestrial and Wireless Networks segment). Additionally, as of July 31, 2024, net intangibles
recorded on our Consolidated Balance Sheet aggregated $194.8 million (of which $48.4 million relates to our Satellite and
Space Communications segment and $146.4 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 fourth quarter of fiscal 2024, we recorded a $64.5 million
non-cash impairment charge in our Satellite and Space Communications segment related to long-lived assets, including
goodwill. See "Notes to Consolidated Financial Statements - Note (14) - Goodwill" and "Note (15) - Intangible Assets"
included in "Part II - Item 8. Financial Statements and Supplementary Data" (which discussion is incorporated herein by
reference), included in this Form 10-K, for further information. Also, as announced on October 17, 2024, we are executing a
strategy to transform Comtech into a pure-play satellite and space communications company. Ongoing and future actions
supporting our transformation strategy include: an exploration of strategic alternatives for our Terrestrial and Wireless
Networks segment, which is well underway; the pursuit of further portfolio-shaping opportunities to enhance profitability,
efficiency and focus; and the implementation of additional operational initiatives to both achieve profitable results from
operations as well as to align our go-forward cost structure with a pure-play focus on satellite and space communications. Such
activities could result in a material impairment of our goodwill and/or intangible assets. See "Part I - Item 1. Business -
Strategic Transformation" for more information.
Provision for Warranty Obligations. We provide warranty coverage for most of our products, including products under long-
term contracts, for a period of at least one year from the date of shipment. We record a liability for estimated warranty expense
based on historical claims, product failure rates and other factors. Costs associated with some of our warranties that are
provided under long-term contracts are incorporated into our estimates of total contract costs. There exist inherent risks and
uncertainties in estimating warranty expenses, particularly on larger or longer-term contracts. If we do not accurately estimate
our warranty costs, any changes to our original estimates could be material to our results of operations and financial condition.
Accounting for Income Taxes. Our deferred tax assets and liabilities are determined based on temporary differences between
financial reporting and tax bases of assets and liabilities and applying enacted tax rates expected to be in effect for the year in
which we expect the differences to reverse. Our provision for income taxes is based on domestic (including federal, state and
local) and international statutory income tax rates in the tax jurisdictions where we operate, permanent differences between
financial reporting and tax reporting and available credits and incentives. The U.S. federal government is our most significant
income tax jurisdiction.
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.
60
In assessing the need for a valuation allowance for deferred tax assets, we consider all positive and negative evidence, including
past financial performance, timing and judgments about future taxable income and tax planning strategies. Valuation
allowances are established, when necessary, to reduce net deferred tax assets to the amount "more-likely-than-not" expected to
be realized. We continuously evaluate additional facts representing positive and negative evidence in determining our ability to
realize these deferred tax assets.
Significant judgment is required in determining income tax provisions and tax positions. The ultimate outcome of tax exposures
and risks involves significant uncertainties. If actual outcomes differ materially from these estimates, they could have a material
impact on our results of operations and financial condition.
Our U.S. federal income tax returns for fiscal 2021 through 2023 are subject to potential future Internal Revenue Service
("IRS") audit. None of our state income tax returns prior to fiscal 2020 are subject to audit. Future tax assessments or
settlements could have a material adverse effect on our consolidated results of operations and financial condition.
Capitalized Engineering Costs. We generally expense all research and development costs. Research and development expenses
include payroll, employee benefits, stock-based compensation expense, and other personnel-related expenses associated with
product development. Research and development expenses also include third-party development and programming costs. Costs
incurred internally in researching and developing software to be sold are charged to expense until technological feasibility has
been established for the software. Judgment is required in determining when technological feasibility of a product is
established. Technological feasibility for our advanced communication software solutions is generally reached after all high-
risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are
released to customers and when we are able to validate the marketability of such product. Once technological feasibility is
established, all software costs are capitalized until the product is available for general release to customers. To date, costs
capitalized related to internally developed software to be sold were not material, but could increase in the future.
We capitalize certain costs related to internal-use software (e.g., hosted "SaaS" applications within our Terrestrial and Wireless
Networks segment), primarily consisting 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. Once the software is placed in service, these costs are amortized on the straight-
line method over the estimated useful life of the software. During fiscal 2024, internal-use software costs capitalized were $3.8
million. 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. See "Notes to
Consolidated Financial Statements - Note (1)(f) - Inventories" included in "Part II - Item 8. Financial Statements and
Supplementary Data," (which discussion is incorporated herein by reference), and "Part II - Item 9A. Controls and
Procedures," included in this Form 10-K, for further information.
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.
61
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, in fiscal 2024,
we experienced a significant increase in the overall level of contract assets (i.e., unbilled receivables) related to large, long-term
contracts with certain U.S. government and international customers. We continue to monitor our accounts receivable credit
portfolio. To-date, there has been no material changes in our 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.
Results of Operations
The following table sets forth, for the periods indicated, certain income and expense items expressed as a percentage of our
consolidated net sales:
Fiscal Years Ended July 31,
2024
2023
2022
Gross margin
29.1 %
33.5 %
37.0 %
Selling, general and administrative expenses
22.8 %
21.8 %
23.6 %
Research and development expenses
4.5 %
8.8 %
10.8 %
Amortization of intangibles
3.9 %
3.9 %
4.4 %
Impairment of long-lived assets, including goodwill
11.9 %
— %
— %
CEO transition costs
0.5 %
1.7 %
2.8 %
Loss on business divestiture
0.2 %
— %
— %
Proxy solicitation costs
— %
— %
2.3 %
Operating loss
(14.8) %
(2.7) %
(6.9) %
Interest expense and other items
3.8 %
2.9 %
0.7 %
Loss before benefit from income taxes
(18.6) %
(5.6) %
(7.6) %
Net loss
(18.5) %
(4.9) %
(6.8) %
Net loss attributable to common stockholders
(25.1) %
(6.2) %
(8.9) %
Adjusted EBITDA (a Non-GAAP measure)
8.5 %
9.7 %
8.1 %
For a definition and explanation of Adjusted EBITDA, see "Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations - Comparison of Fiscal 2024 and 2023 - Adjusted EBITDA."
62
Fiscal 2024 Highlights and Business Outlook for Fiscal 2025
Our financial performance for the fiscal year ended July 31, 2024 includes:
•
Consolidated net sales of $540.4 million, compared to $550.0 million in fiscal 2023. The prior year included a full year
of operations related to our solid state, high power amplifier product line divested in November 2023 (the "PST
Divestiture"). Adjusted for the PST Divestiture and despite very challenging business conditions in fiscal 2024, our
consolidated net sales grew slightly from fiscal 2023;
•
Gross margin was 29.1%, compared to 33.5% in fiscal 2023;
•
GAAP net loss attributable to common stockholders was $135.4 million and included: a $64.5 million impairment
charge in our Satellite and Space Communications segment related to long-lived assets, including goodwill; $12.5
million of restructuring costs; $4.1 million of strategic emerging technology costs for next-generation satellite
technology; $2.9 million of CEO transition costs; and a $1.2 million loss associated with the PST Divestiture due to
the acquirer not achieving certain post-divestiture earn-out criteria;
•
GAAP EPS loss of $4.70 and Non-GAAP EPS of $0.10;
•
Adjusted EBITDA (a Non-GAAP financial measure discussed below) of $45.7 million, a decrease of 14.6% from
fiscal 2023, due in part to the PST Divestiture;
•
New bookings (also referred to as orders) of $700.6 million, resulting in an annual book-to-bill ratio of 1.30x (a
measure defined as bookings divided by net sales);
•
Backlog of $798.9 million as of July 31, 2024, compared to $662.2 million as of July 31, 2023 and $653.4 million as
of April 30, 2024. Backlog as of July 31, 2024 represents a new record for Comtech;
•
Revenue visibility of approximately $1.8 billion as of July 31, 2024, an increase from the $1.1 billion as of July 31,
2023. We measure this revenue visibility as the sum of our $798.9 million of funded backlog, plus the total unfunded
value of certain multi-year contracts that we have received and from which we expect future orders; and
•
Cash flows used in operating activities of $54.5 million, due primarily to a significant increase in the overall level of
contract assets (i.e., unbilled receivables) in fiscal 2024 related to our progress on large, long-term "over-time"
contracts awarded to us by certain U.S. government and international end customers, as well as the timing of payments
to our suppliers as we execute on our backlog. As experienced in the latter part of fiscal 2024, we expect the level of
our unbilled receivables to continue to decline throughout fiscal 2025, as we invoice our customers upon physical
delivery of products or the achievement of specified contractual milestones. Additionally, cash flows used in operating
activities includes $16.0 million in aggregate payments for restructuring costs, including severance, CEO transition
costs and strategic emerging technology costs for next-generation satellite technology.
Non-GAAP financial measures discussed above are reconciled to the most directly comparable GAAP financial measures in the
table included in the below section "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Comparison of Fiscal 2024 and 2023."
We operated most of fiscal 2024 under extremely difficult business conditions stemming from: a marked increase in working
capital requirements related to certain troposcatter related contracts; an unexpected change in our CEO more than halfway
through the fiscal year; the year-long protest by the incumbent of the large, multi-year Global Field Service Representative
("GFSR") contract awarded to us by the U.S. Army; supply chain and operational challenges that strained our liquidity at
various points in the fiscal year; a prolonged refinancing of our debt capital; and a shift during our fourth quarter in the timing
of our receipt and performance on a large COMET order anticipated for a certain international end country.
However, despite these challenges, the existing management team was successful in achieving many positive accomplishments
along the way, such as: attracting strong talent throughout our organization; winning new strategic business opportunities, as
well as competitive renewals; relocating our headquarters to be within close proximity to several key customers and suppliers;
restructuring operations that had been underperforming under legacy management; reducing the level of unbilled receivables;
and, importantly, emerging from fiscal 2024 with a clear vision for our company that we believe will contribute greatly toward
unlocking meaningful shareholder value.
63
Key Business Developments
Satellite and Space Communications
In September 2023, we were awarded a large, multi-year GFSR contract by the U.S. Army with a total potential value of $544.0
million. Through this program, we would provide ongoing communications and IT infrastructure support for the U.S. Army,
Air Force, Navy, Marine Corps and NATO, enabling U.S. and coalition forces to maintain robust, resilient and secure
connectivity for global all-domain operations. The incumbent protested (and lost) the award of the contract to Comtech several
times. Currently, the contract remains under protest and a stop work order. If we are successful in ultimately winning the
protest, we would expect the GFSR contract to contribute significantly to our net sales in future periods.
In September 2023, we won a highly competitive $48.6 million contract to deliver next-generation Enterprise Digital
Intermediate Frequency Multi-Carrier (“EDIM”) modems for the U.S. Army's satellite communications ("SATCOM")
digitization and modernization programs. The advanced, software defined EDIM modem is intended to: support multiple
satellite providers; become one of the primary modems used for U.S. military SATCOM, eventually replacing the Enhanced
Bandwidth Efficient Modem ("EBEM"); and provide the U.S. Army, Navy and Air Force with a digitized, hybrid satellite
network architecture. The EDIM modem would allow SATCOM users to easily roam across orbital regimes, blend capabilities
from traditionally disparate networks and maintain assured, resilient connectivity in the most demanding of environments. We
are progressing with our efforts on this contract and pleased to have recently secured incremental funding from the customer for
additional work.
In November 2023, following a careful review of our business and product lines at that time, we saw an opportunity to divest
our solid state, high power amplifier product line. The PST Divestiture generated $33.3 million of net cash proceeds prior to the
repayment of debt and provided timely liquidity as we progressed with our efforts to refinance our debt capital structure.
In July 2024, we made the decision to exit our subsidiary operations in Basingstoke, United Kingdom. The U.K. operations
were established in connection with the legacy management team’s 2020 acquisition of CGC Technology Limited, which
primarily served customers in Europe. Following the acquisition, we continued to invest in the Basingstoke facility to advance
LEO constellation-based antenna technologies in anticipation of significant production orders. Taking into consideration the
significant ongoing investment as well as unfavorable contract terms on prospective antenna sales, we concluded the U.K.
business would not generate an attractive return on invested capital and made the decision to exit these operations in order to
curtail our future expenses and cash outlays, after anticipated restructuring charges associated with such exit.
Shifting to our troposcatter product line, throughout most of fiscal 2024, we experienced elevated levels of unbilled receivables
due to the timing of our performance and billings related to certain large U.S. government and international customer contracts.
As we progressed through the fourth quarter of fiscal 2024, we were successful in ramping up deliveries of next-generation
troposcatter terminals related to our U.S. Marine Corps and Army contracts, contributing to a meaningful reduction of our
consolidated unbilled receivables from $141.3 million at April 30, 2024 to $123.7 million as of July 31, 2024. Based on our
anticipated performance over the next several months, we expect further material reductions in our unbilled receivables related
to these contracts, contributing significantly to our cash flows and liquidity in fiscal 2025.
Terrestrial and Wireless Networks
In October 2023, we extended enhanced 911 call routing services, valued in excess of $30.0 million, for one of the largest
wireless carriers in the U.S. Subsequent to year end, our new management team in this segment, led by Jeff Robertson, former
CEO for Intrado's Life and Safety business, secured another renewal of these critical services in October 2024.
During our second fiscal quarter of 2024, we amended and extended critical Next Generation 911 (“NG-911”) services for the
State of Washington. This extension is valued at $48.0 million over the next five years, with the option to extend further
through 2034. Also, we extended critical call handling services provided to PSAPs across Australia through our partnership
with Telstra. These services, valued at approximately $6.0 million over the next several years, support Australia's "000" (911
equivalent) emergency communications. Additionally, we were awarded several multi-year NG-911 call handling services
contracts, aggregating $6.5 million, for PSAPs located in Canada and the U.S. 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.
64
In May 2024, we were awarded a large multi-year NG-911 contract by the Commonwealth of Massachusetts, valued at over
$250.0 million. The new contract has an initial five-year term from August 1, 2024 through July 31, 2029, and includes one
option to renew for a five-year period through July 31, 2034. While a continuation of existing services within the state, the
procurement itself was competitive and Comtech was successful in securing the win, demonstrating the trust of our public
safety partners as well as our leadership in NG-911 systems and services.
In June 2024, we announced the North Central Texas Emergency Communications District (“NCT911”) awarded us a contract
to deliver NG-911 services that will further modernize NCT911’s infrastructure. The NCT911 contract includes a five-year base
award, as well as three additional two-year option periods, with a not to exceed value of approximately $30.0 million.
At the start of fiscal 2024, we helped Strathcona County in Alberta become Canada’s first PSAP to transition to NG-911
services. In July 2024, we announced completing the full migration and deployment of an NG-911 system in Saskatchewan,
Canada. With the Saskatchewan NG-911 deployment, we are now the first company, in partnership with leading ESInet
provider SaskTel, to deploy a province-wide NG-911 system in Canada.
Subsequent to year end, in September 2024, we were also pleased to have been awarded a large, multi-year location-based
services maintenance and support contract from one of the largest wireless carriers in the U.S.
Strategic Transformation
On October 17, 2024, we announced that we are executing a strategy to transform Comtech into a pure-play satellite and space
communications company. Ongoing and future actions supporting our transformation strategy include: an exploration of
strategic alternatives for our Terrestrial and Wireless Networks segment, which is well underway; the pursuit of further
portfolio-shaping opportunities to enhance profitability, efficiency and focus; and the implementation of additional operational
initiatives to both achieve profitable results from operations as well as to align our go-forward cost structure with a pure-play
focus on satellite and space communications. In connection with this transformation strategy, we have also undertaken a
detailed evaluation of our Satellite and Space Communications segment's product portfolio to identify opportunities to divest,
separate and/or rationalize businesses or facilities that are not core to our go-forward focus. In addition to assessing our
Basingstoke, UK operations, as discussed above, over the past several months, we have also conducted an intensive review of
our product portfolio to focus future investment on our most strategic, high-margin revenue opportunities within the Satellite
and Space Communications segment. There can be no assurance that the exploration of strategic alternatives will result in a
transaction or other strategic changes or outcomes. While anticipated to improve our profitability in future periods, such actions
may result in near-term restructuring charges.
Amended Credit Agreement and New Subordinated Term Loan Facility
In June 2024, we entered into a $222.0 million credit facility with a new syndicate of lenders (the “Credit Facility”), which
replaced our prior credit facility. On October 17, 2024, we amended the Credit Facility, which waived certain defaults or events
of default, including in connection with our Net Leverage Ratio and Fixed Charge Coverage Ratio covenants as of July 31,
2024. The amendment also provides for, among other things: (i) an increase to the interest rate margins applicable to the loans;
(ii) a modification of certain financial and collateral reporting requirements; (iii) a lender and agent consent right with respect to
$27.5 million of Revolver borrowings above $32.5 million; (iv) our ability to incur $25.0 million of senior unsecured
subordinated debt; (v) a maturity date based on the earlier of (x) July 31, 2028 or (y) 90 days prior to the earliest date that the
debt under the Subordinated Credit Agreement (as defined below) becomes due and payable; and (vi) a suspension of financial
covenant testing through the end of our fiscal quarter ending January 31, 2025. On October 17, 2024, we also entered into a
Subordinated Credit Agreement with the existing holders of our Convertible Preferred Stock (the “Subordinated Credit
Agreement”), which provides a subordinated unsecured term loan facility in the aggregate principal amount of $25.0 million
(the “Subordinated Credit Facility”). The proceeds of the Subordinated Credit Facility: (i) cured our default on certain financial
covenants under the Credit Facility, as discussed above; (ii) provides additional liquidity to us; and (iii) funds our general
working capital needs, including support of our transformation initiatives. See "Notes to Consolidated Financial Statements"
included in "Part II - Item 8. Financial Statements and Supplementary Data" included in this Form 10-K, for further
information.
CEO
Effective October 28, 2024, the Board of Directors appointed John Ratigan as our President and CEO and a member of the
Board. Mr. Ratigan had been serving as our interim CEO since March 2024.
65
Business Outlook
As we enter fiscal 2025, business conditions continue to be challenging, and the operating environment is largely unpredictable,
due to many factors including, but not limited to: uncertainties related to our recently announced transformation strategy and
associated actions we may take; uncertainties related to our ability to operate as going concern, fluctuations in interest rates;
inflation; continuing resolutions associated with the U.S. Federal budget; repercussions of military conflicts in Russia, Ukraine
and the Middle East; and a potential global recession. Order and production delays, contract protests, delayed cash collections
from customers, disruptions in component availability, increased pricing both for labor and parts, lower levels of factory
utilization and higher logistics and operational costs resulting from such conditions have or could impact our business 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.
We do not provide forward-looking guidance on a GAAP basis because we are unable to predict certain items contained in the
GAAP measure without unreasonable efforts. Because our consolidated Adjusted EBITDA, as a percentage of consolidated net
sales, depends on the volume of sales, sales mix and related gross profit for each segment as well as unallocated spending, it is
inherently difficult to forecast. Please refer to the discussion below under "Adjusted EBITDA" for more information.
Additional information related to our Business Outlook for Fiscal 2025 and a definition and explanation of Adjusted EBITDA
is included in the below section "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Comparison of Fiscal 2024 and 2023."
Comparison of Fiscal 2024 and 2023
Net Sales. Consolidated net sales were $540.4 million and $550.0 million for fiscal 2024 and 2023, respectively, representing a
decrease of $9.6 million, or 1.7%. The decrease reflects lower net sales in our Satellite and Space Communications segment
offset, in part, by an increase in net sales in our Terrestrial and Wireless Networks segment, as further discussed below. The
prior year included a full year of operations related to our solid state, high power amplifier product line divested in November
2023 (the "PST Divestiture"). Adjusted for the PST Divestiture and despite very challenging business conditions in fiscal 2024,
our consolidated net sales grew slightly from fiscal 2023.
Satellite and Space Communications
Net sales in our Satellite and Space Communications segment were $324.1 million for fiscal 2024 as compared to $337.8
million for fiscal 2023, a decrease of $13.7 million, or 4.1%. Fiscal 2024 primarily reflects significantly higher net sales of our
troposcatter and SATCOM solutions to U.S. government customers (including progress toward delivering next-generation
troposcatter terminals to the U.S. Marine Corps and U.S. Army), offset by lower net sales of satellite ground infrastructure
solutions (including X/Y steerable antennas), high power solid state amplifiers related to the PST Divestiture in November 2023
and COMET troposcatter terminals to international customers. Our Satellite and Space Communications segment represented
60.0% of consolidated net sales for fiscal 2024 as compared to 61.4% for fiscal 2023. Our book-to-bill ratio (a measure defined
as bookings divided by net sales) in this segment for fiscal 2024 was 1.03x.
Bookings, sales and profitability in our Satellite and Space Communications segment can fluctuate dramatically from period-to-
period due to many factors, including unpredictable funding, deployment and technology decisions by our U.S. and
international government customers, and changes in the general business environment. As such, period-to-period comparisons
of our results may not be indicative of a trend or future performance. Also, during the fourth quarter of fiscal 2024, as part of
our recently announced transformation strategy, we made the decision to cease operations located in the United Kingdom
related to our X/Y steerable antenna product line. As a result, we do not anticipate generating any meaningful sales from this
product line in fiscal 2025 and beyond.
Terrestrial and Wireless Networks
Net sales in our Terrestrial and Wireless Networks segment were $216.3 million for fiscal 2024, as compared to $212.2 million
for fiscal 2023, an increase of $4.1 million, or 1.9%, reflecting higher net sales of our NG-911 and call handling services, offset
in part by lower net sales of our location based solutions. Our Terrestrial and Wireless Networks segment represented 40.0% of
consolidated net sales for fiscal 2024 as compared to 38.6% for fiscal 2023. Our book-to-bill ratio (a measure defined as
bookings divided by net sales) in this segment for fiscal 2024 was 1.70x.
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Bookings, sales and profitability in our Terrestrial and Wireless Networks segment can fluctuate from period-to-period due to
many factors, including changes in the general business environment. Period-to-period fluctuations in bookings are normal for
this segment. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance. Also,
on October 17, 2024, we announced that we are exploring strategic alternatives for our Terrestrial and Wireless Networks
segment, which is in advanced stages. 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 fiscal years ended July 31, 2024 and 2023 are as
follows:
Fiscal Years Ended July 31,
2024
2023
2024
2023
2024
2023
Satellite and Space
Communications
Terrestrial and Wireless
Networks
Consolidated
U.S. government
55.4 %
49.9 %
1.1 %
1.7 %
33.7 %
31.3 %
Domestic
15.1 %
16.7 %
89.4 %
89.2 %
44.8 %
44.7 %
Total U.S.
70.5 %
66.6 %
90.5 %
90.9 %
78.5 %
76.0 %
International
29.5 %
33.4 %
9.5 %
9.1 %
21.5 %
24.0 %
Total
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
Sales to U.S. government customers include sales to the U.S. 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 fiscal 2024, except
for the U.S. government, there were no customers that represented more than 10% of consolidated net sales. For fiscal 2023,
included in domestic sales are sales to Verizon Communications Inc. ("Verizon"), which were 10.6% of consolidated net sales.
International sales for fiscal 2024 and 2023 (which include sales to U.S. domestic companies for inclusion in products that are
sold to international customers) were $115.9 million and $132.1 million, respectively. Except for the U.S., no individual
country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented
more than 10% of consolidated net sales for fiscal 2024 and 2023.
Gross Profit. Gross profit was $157.2 million and $184.5 million for fiscal 2024 and 2023, respectively. Gross profit, as a
percentage of consolidated net sales, for fiscal 2024 was 29.1% as compared to 33.5% for fiscal 2023. Our gross profit (both in
dollars and as a percentage of consolidated net sales) reflects overall product mix changes (including the impact of the PST
Divestiture, as discussed above. In addition, during fiscal 2023, we recorded a benefit of $2.3 million to cost of sales as we
reduced a warranty accrual due to lower than expected warranty claims in our NG-911 product line. Gross profit, as a
percentage of related segment net sales, is further discussed below.
Our Satellite and Space Communications segment's gross profit, as a percentage of related segment net sales, for fiscal 2024
decreased in comparison to fiscal 2023. The gross profit percentage in the more recent period reflects changes in products and
services mix, as discussed above, and 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. Also, fiscal 2024
gross profit in this segment reflects challenging business conditions related to our steerable antenna operations located in the
United Kingdom that we recently announced exiting.
Our Terrestrial and Wireless Networks segment's gross profit, as a percentage of related segment net sales, for fiscal 2024
decreased in comparison to fiscal 2023. The gross profit percentage in the more recent period reflects changes in products and
services mix, as discussed above.
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Included in consolidated cost of sales are provisions for excess and obsolete inventory of $2.8 million and $4.9 million, for
fiscal 2024 and 2023, respectively. As discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations - Critical Accounting Policies - Provisions for Excess and Obsolete Inventory," we regularly review our
inventory and record a provision for excess and obsolete inventory based on historical and projected usage trends. On October
17, 2024, we announced that we are executing a strategy to transform Comtech into a pure-play satellite and space
communications company. Ongoing and future actions supporting the transformation strategy include the pursuit of further
portfolio-shaping opportunities to enhance profitability, efficiency and focus and the implementation of additional
organizational, operational and cost-savings initiatives to both achieve profitable results from operations as well as to align our
go-forward cost structure with a pure-play focus on satellite and space communications. While anticipated to improve our
profitability in future periods, such actions may result in near term restructuring charges, including an increase in our provision
for excess and obsolete inventory.
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 initiatives.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $123.2 million and $120.0
million for fiscal 2024 and 2023, respectively. As a percentage of consolidated net sales, selling, general and administrative
expenses were 22.8% and 21.8% for fiscal 2024 and 2023, respectively.
During fiscal 2024 and 2023, we incurred $12.5 million and $10.9 million, respectively, of restructuring costs primarily related
to streamlining our operations and improving efficiency, including severance and costs associated with the relocation of certain
of our satellite ground infrastructure production facilities to our 146,000 square foot facility in Chandler, Arizona. Fiscal 2024
costs also include those activities supporting the PST Divestiture in November 2023 and, more recently, our announced pursuit
of strategic alternatives related to our Terrestrial and Wireless Networks segment. Excluding restructuring costs, selling, general
and administrative expenses for fiscal 2024 and 2023 would have been $110.9 million or 20.5% and $109.2 million or 19.9%,
respectively, of consolidated net sales.
Amortization of stock-based compensation expense recorded as selling, general and administrative expenses was $4.8 million
in fiscal 2024 as compared to $8.0 million in fiscal 2023. Although higher in the prior fiscal 2023 period, both fiscal 2024 and
2023 include fully vested stock-based awards granted to certain employees in lieu of annual non-equity incentive compensation.
Also, the more recent period reflects a benefit associated with the forfeitures of stock-based awards related to our former CEO.
Amortization of stock-based compensation is not allocated to our two reportable operating segments.
Research and Development Expenses. Research and development expenses were $24.1 million and $48.6 million for fiscal
2024 and 2023, respectively, representing a decrease of $24.5 million, or 50.4%. As a percentage of consolidated net sales,
research and development expenses were 4.5% and 8.8% for fiscal 2024 and 2023, respectively.
For fiscal 2024 and 2023, research and development expenses of $12.9 million and $22.4 million, respectively, related to our
Satellite and Space Communications segment, and $10.6 million and $25.2 million, respectively, related to our Terrestrial and
Wireless Networks segment. The remaining research and development expenses of $0.5 million and $1.0 million in fiscal 2024
and 2023, respectively, related to the amortization of stock-based compensation expense.
During fiscal 2024 and 2023, we incurred $4.1 million and $3.8 million, respectively, of strategic emerging technology costs in
our Satellite and Space Communications segment for next-generation satellite technology to advance our solutions offerings to
be used with new broadband satellite constellations. We expect strategic emerging technology costs to decrease in fiscal 2025
as a result of our fourth quarter fiscal 2024 decision to cease operations related to our steerable antenna product line in the
United Kingdom.
Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer
requirements. During fiscal 2024 and 2023, customers reimbursed us $18.9 million and $14.0 million, respectively, which is not
reflected in the reported research and development expenses but is included in net sales with the related costs included in cost of
sales.
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In addition to the recent increases in customer-funded research and development activities, in fiscal 2024, we also experienced
an increase in engineering efforts related to cost to fulfill contract assets and internal use software, for which we capitalized
$2.9 million and $3.8 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 significantly decreased in fiscal 2024 as compared to historical periods.
Amortization of Intangibles. Amortization relating to intangible assets with finite lives was $21.2 million for fiscal 2024 (of
which $6.7 million was for the Satellite and Space Communications segment and $14.5 million was for the Terrestrial and
Wireless Networks segment) and $21.4 million for fiscal 2023 (of which $7.3 million was for the Satellite and Space
Communications segment and $14.1 million was for the Terrestrial and Wireless Networks segment).
Impairment of Long-lived Assets, including Goodwill. During the fourth quarter of fiscal year 2024, our lower-than-expected
financial performance, cured default on certain credit facility covenants and sustained decrease in our stock price since August
1, 2023 were each considered triggering events requiring an interim quantitative goodwill impairment test as of July 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 fourth quarter of fiscal 2024, we recognized a non-cash $48.9 million goodwill impairment charge in our Satellite and Space
Communications reporting unit. In addition to testing goodwill associated with our Satellite and Space Communications
reporting unit for impairment, we also assessed the recoverability of the carrying values of our other long-lived assets, including
identifiable intangible assets with finite useful lives. Such testing also considered our decision in the fourth quarter of fiscal
2024 to cease our steerable antenna operations located in the United Kingdom. Based on our evaluation, we determined that the
fair value of the asset group related to such operations was lower than its carrying value and recorded a non-cash $15.6 million
long-lived asset impairment charge in our Satellite and Space Communications segment. See "Notes to Consolidated Financial
Statements" included in "Part II - Item 8. Financial Statements and Supplementary Data" included in this Form 10-K for
further information.
CEO Transition Costs. For the three fiscal years ended July 31, 2024, cumulative CEO transition costs aggregated $25.6
million. CEO transition costs were $2.9 million for fiscal 2024 and principally consisted of legal expenses related to the March
2024 termination of our former CEO, Mr. Peterman, for cause due to conduct unrelated to our business strategy, financial
results or previously filed financial statements. CEO transition costs were $9.1 million for fiscal 2023, of which $7.4 million
related to our former President and CEO, Mr. Porcelain, pursuant to his separation agreement with the Company, and $1.7
million related our other former CEO, Mr. Kornberg. CEO transition costs were $13.6 million for fiscal 2022 and entirely
related to our former CEO, Mr. Kornberg. CEO transition costs are expensed in our Unallocated segment.
Loss on Business Divestiture. In connection with the PST Divestiture, during fiscal 2024, we recorded a $1.2 million loss in
our Unallocated segment due to the acquirer not achieving certain post-divestiture earn-out criteria. Although a loss for GAAP
purposes, the PST Divestiture resulted in a gain for tax purposes. However, we completed the PST Divestiture in a tax efficient
manner as we utilized a portion of the capital loss carryforward (related to the failed 2020 Gilat acquisition) which was set to
expire in 2026.
Operating (Loss) Income. Operating loss for fiscal 2024 and 2023 was $79.9 million and $14.7 million, respectively. Operating
(loss) income by reportable segment is shown in the table below:
Fiscal Years Ended July 31,
2024
2023
2024
2023
2024
2023
2024
2023
($ in millions)
Satellite and Space
Communications
Terrestrial and
Wireless Networks
Unallocated
Consolidated
Operating (loss) income
$
(54.2) $ 15.0
$ 21.7
$ 12.3
$
(47.4) $
(42.0) $
(79.9) $
(14.7)
Percentage of related net sales
NA
4.5 %
10.0 %
5.8 %
NA
NA
NA
NA
Our GAAP operating loss of $79.9 million for fiscal 2024 reflects: (i) a $64.5 million non-cash charge related to the impairment
of certain long-lived assets, including goodwill, in our Satellite and Space Communications segment; (ii) $21.2 million of
amortization of intangibles; (iii) $12.5 million of restructuring costs (of which $3.8 million, $0.6 million and $8.1 million
related to our Satellite and Space Communications, Terrestrial and Wireless Networks and Unallocated segments, respectively);
(iv) $6.1 million of amortization of stock-based compensation; (v) $4.1 million of strategic emerging technology costs; (vi) $2.9
million of CEO transition costs; (vii) a $1.2 million loss on the PST Divestiture reported in our Unallocated segment; and (viii)
$1.0 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating
income for fiscal 2024 would have been $33.5 million.
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Our GAAP operating loss of $14.7 million for fiscal 2023 reflects: (i) $21.4 million of amortization of intangibles; (ii) $10.9
million of restructuring costs (of which $5.7 million, $1.3 million and $3.9 million related to our Satellite and Space
Communications, Terrestrial and Wireless Networks and Unallocated segments, respectively); (iii) $10.1 million of
amortization of stock-based compensation; (iv) $9.1 million of CEO transition costs; (v) $3.8 million of strategic emerging
technology costs; and (vi) $1.0 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our
consolidated operating income for fiscal 2023 would have been $41.6 million.
The decrease in operating income, excluding the above items, from $41.6 million for fiscal 2023 to $33.5 million for fiscal
2024 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 (due to increased headcount, legal and professional fees and cash
incentive compensation), offset in part by lower research and development expenses in both of our reportable operating
segments, as discussed above. Operating income (loss) by reportable segment is further discussed below.
The significant decrease in our Satellite and Space Communications segment operating income for fiscal 2024 primarily reflects
the non-cash impairment charge related to certain long-lived assets, including goodwill, and lower net sales and gross profit
(both in dollars and as a percentage of related segment net sales), offset in part by lower research and development expenses, as
discussed above.
The significant increase in our Terrestrial and Wireless Networks segment operating income, both in dollars and as a percentage
of the related segment net sales, for fiscal 2024 reflects lower research and development expenses, as discussed above.
Excluding the loss on the PST Divestiture, the impact of CEO transition costs and its respective portion of restructuring charges
in each period, Unallocated expenses for fiscal 2024 would have been $35.3 million, as compared to $29.0 million for fiscal
2023. The increase in Unallocated expenses, excluding such items, was primarily due to higher selling, general and
administrative expenses, as discussed above. Amortization of stock-based compensation was $6.1 million and $10.1 million,
respectively, for fiscal 2024 and 2023. Although higher in the prior fiscal 2023 period, both fiscal 2024 and 2023 include fully
vested stock-based awards granted to certain employees in lieu of annual non-equity incentive compensation. Also, stock-based
compensation for the more recent period reflects a benefit associated with the forfeitures of awards related to our former CEO.
Interest Expense and Other. Interest expense was $22.2 million and $15.0 million for fiscal 2024 and 2023, respectively. The
increase is due to a higher average debt balance outstanding during fiscal 2024, a general rise in interest rates compared to the
prior year and higher interest rates under our Credit Facility entered into in June 2024 (see "Notes to Consolidated Financial
Statements - Note (8) - Credit Facility" included in "Part II - Item 8. Financial Statements and Supplementary Data" for further
discussion of the Credit Facility). Our effective interest rate (including amortization of deferred financing costs) in fiscal 2024
was approximately 12.3% as compared to 8.9% in fiscal 2023. Our current cash borrowing rate (which excludes the
amortization of deferred financing costs) under our Credit Facility is approximately 14.8%.
Interest (Income) and Other. Interest (income) and other for both fiscal 2024 and 2023 was nominal. All of our available cash
and cash equivalents are currently invested in bank deposits and money market deposit accounts which, at this time, are
currently yielding an immaterial interest rate.
Write-off of Deferred Financing Costs. During the fourth quarter of fiscal 2024, in connection with the extinguishment and
refinancing of our Prior Credit Facility through a new syndicate of lenders, we fully expensed all $1.8 million of the remaining
deferred financing costs related to the Prior Credit Facility.
Change in Fair Value of Warrants. During fiscal 2024, we recorded a $4.3 million net benefit from the remeasurement of
warrants. The net benefit was driven by the impact of a lower market price of our common stock after the issuance of the
warrants to the holders of our Series B-1 Convertible Preferred Stock in January 2024, offset in part by a higher market price of
our common stock after the issuance of warrants to certain lenders under our Credit Facility in June 2024. See "Notes to
Consolidated Financial Statements - Note (16) - Convertible Preferred Stock" and "Note (8) - Credit Facility" included in "Part
II - Item 8. Financial Statements and Supplementary Data" for more information.
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Benefit from Income Taxes. For fiscal 2024 and 2023, we recorded tax benefits of $0.3 million and $3.9 million, respectively.
Our effective tax rate (excluding discrete tax items) for fiscal 2024 was 8.1%, as compared to 14.5% for fiscal 2023. The
decrease in the rate is primarily due to changes in expected product and geographical mix. For purposes of determining our
8.1% effective tax rate for fiscal 2024, the impairment of long-lived assets, including goodwill, the change in fair value of
warrants, CEO transition costs and the impact of the PST Divestiture are each considered significant, unusual or infrequently
occurring discrete tax items and excluded from the computation of our effective tax rate. For purposes of determining our
14.5% effective tax rate for fiscal 2023, CEO transition costs were considered significant, unusual or infrequently occurring
discrete tax items and excluded from the computation of our effective tax rate.
During fiscal 2024, we recorded a net discrete tax expense of $2.7 million, primarily related to stock-based awards and the
establishment of a valuation allowance on U.S. net deferred tax assets, partially offset by the reversal of tax contingencies no
longer required due to the expiration of applicable statute of limitations. During fiscal 2023, we recorded a net discrete tax
benefit of $0.8 million, primarily related to the reversal of tax contingencies no longer required due to the expiration of
applicable statute of limitations and the deductible portion of CEO transition costs, offset in part by the settlement of stock-
based awards and the finalization of certain tax accounts in connection with our fiscal 2022 federal and state income tax returns.
Our U.S federal income tax returns for fiscal 2021 through 2023 are subject to potential future IRS audit. None of our state
income tax returns prior to fiscal 2020 are subject to audit. Future tax assessments or settlements could have a material adverse
effect on our consolidated results of operations and financial condition.
Net Loss Attributable to Common Stockholders. During fiscal 2024 and 2023, consolidated net loss attributable to common
stockholders was $135.4 million and $33.9 million, respectively. In addition to those items discussed above, the more recent
period also includes: (i) $19.6 million of expenses related to the exchange of our Series A-1 Convertible Preferred Stock for
Series B Convertible Preferred Stock on January 22, 2024 (inclusive of the initial fair value of warrants issued to such holders)
and the exchange of our Series B Convertible Preferred Stock for Series B-1 Convertible Preferred Stock on June 17, 2024; (ii)
$11.6 million of dividends related to our Convertible Preferred Stock outstanding during fiscal 2024; and (iii) $4.3 million of
Series B Convertible Preferred Stock issuance costs (consisting of third party financial advisor, legal and professional fees).
Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both fiscal 2024 and 2023
are shown in the table below (numbers in the table may not foot due to rounding):
Fiscal Years Ended July 31,
2024
2023
2024
2023
2024
2023
2024
2023
($ in millions)
Satellite and
Space
Communications
Terrestrial and
Wireless
Networks
Unallocated
Consolidated
Net (loss) income
$ (55.5) 15.5
21.0
12.3
(65.4) (54.7) $ (100.0) (26.9)
Provision for (benefit from) income taxes
0.7
(1.7)
0.7
(0.2)
(1.6)
(2.0) (0.3)
(3.9)
Interest expense
—
—
—
—
22.1 15.0 22.2
15.0
Interest (income) and other
0.6
1.2
—
0.2
—
(0.2)
0.7
1.2
Write-off of deferred financing costs
—
—
—
—
1.8
—
1.8
—
Change in fair value of warrants and derivatives
—
—
—
—
(4.3)
— (4.3)
—
Amortization of stock-based compensation
—
—
—
—
6.1 10.1
6.1
10.1
Amortization of intangibles
6.7
7.3
14.5
14.1
—
— 21.2
21.4
Depreciation
3.9
4.1
7.9
7.6
0.4
0.2 12.2
11.9
Impairment of long-lived assets, including
goodwill
64.5
—
—
—
—
— 64.5
—
Amortization of cost to fulfill assets
1.0
1.0
—
—
—
—
1.0
1.0
CEO transition costs
—
—
—
—
2.9
9.1
2.9
9.1
Restructuring costs
3.8
5.7
0.6
1.3
8.1
3.9 12.5
10.9
Strategic emerging technology costs
4.1
3.8
—
—
—
—
4.1
3.8
Loss on business divestiture
—
—
—
—
1.2
—
1.2
—
Adjusted EBITDA
$ 29.8
37.0
44.7
35.3
(28.7) (18.8) $ 45.7
53.5
Percentage of related net sales
9.2 %
11.0 %
20.6 %
16.6 %
NA
NA
8.5 %
9.7 %
71
The decrease in consolidated Adjusted EBITDA, both in dollars and as a percentage of consolidated net sales, for fiscal 2024 as
compared to fiscal 2023 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 in both of our reportable operating segments, 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, 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 research and development expenses, as discussed above
The increase in our Terrestrial and Wireless Networks segment's Adjusted EBITDA, both in dollars and as a percentage of
related segment net sales, reflects lower research and development expenses, offset in part by a lower gross profit percentage on
related segment net sales, as discussed above.
Because our consolidated Adjusted EBITDA, as a percentage of consolidated net sales, depends on the volume of sales, sales
mix and related gross profit for each segment as well as unallocated spending, it is inherently difficult to forecast. Also, our
consolidated Adjusted EBITDA could be impacted by the timing and outcome of our recently announced strategy to transform
Comtech into a pure-play satellite and space communications company.
Reconciliations of our GAAP consolidated operating loss, net loss attributable to common stockholders and net loss per diluted
common share for fiscal 2024 and 2023 to the corresponding Non-GAAP measures are shown in the tables below (numbers and
per share amounts in the table may not foot due to rounding). Non-GAAP net income attributable to common stockholders and
net income per diluted common share reflect Non-GAAP provisions for income taxes based on full year results, as adjusted for
the Non-GAAP reconciling items included in the tables below. We evaluate our Non-GAAP effective income tax rate on an
ongoing basis, and it can change from time to time. Our Non-GAAP effective income tax rate can differ materially from our
GAAP effective income tax rate. In addition, due to the GAAP net loss for the period, Non-GAAP EPS for fiscal 2024 and
2023 was computed using weighted average diluted shares outstanding of 29,132,000 and 28,376,000, respectively.
Fiscal 2024
($ in millions, except for per share amounts)
Operating
(Loss)
Income
Net (Loss)
Income
Attributable
to Common
Stockholders
Net (Loss)
Income per
Diluted
Common Share
Reconciliation of GAAP to Non-GAAP Earnings:
GAAP measures, as reported
$ (79.9)
$ (135.4)
$
(4.70)
Loss on extinguishment of convertible preferred stock
—
19.6
0.68
Adjustments to reflect redemption value of convertible preferred stock
—
15.9
0.55
Change in fair value of warrants and derivatives
—
(4.3)
(0.15)
Impairment of long-lived assets, including goodwill
64.5
63.8
2.21
Amortization of intangibles
21.2
16.4
0.57
Restructuring costs
12.5
9.7
0.34
Amortization of stock-based compensation
6.1
4.8
0.17
Strategic emerging technology costs
4.1
3.8
0.13
CEO transition costs
2.9
2.2
0.08
Loss on business divestiture
1.2
1.2
0.04
Amortization of cost to fulfill assets
1.0
1.0
0.03
Net discrete tax expense
—
4.1
0.14
Non-GAAP measures
$ 33.5
$
2.8
$
0.10
72
Fiscal 2023
($ in millions, except for per share amounts)
Operating
(Loss)
Income
Net (Loss)
Income
Attributable
to Common
Stockholders
Net (Loss)
Income per
Diluted
Common Share
Reconciliation of GAAP to Non-GAAP Earnings:
GAAP measures, as reported
$ (14.7)
$ (33.9)
$
(1.21)
Adjustments to reflect redemption value of convertible preferred stock
—
7.0
0.25
Amortization of intangibles
21.4
16.6
0.59
Restructuring costs
10.9
8.3
0.30
Amortization of stock-based compensation
10.1
7.9
0.28
CEO transition costs
9.1
8.6
0.31
Strategic emerging technology costs
3.8
3.4
0.12
Amortization of cost to fulfill assets
1.0
1.0
0.03
Net discrete tax benefit
—
(0.3)
(0.01)
Non-GAAP measures
$ 41.6
$ 18.5
$
0.65
Our Adjusted EBITDA is a Non-GAAP measure that represents earnings (loss) before interest, income taxes, depreciation
expense, amortization of intangibles, amortization of stock-based compensation, amortization of cost to fulfill assets,
restructuring costs, strategic emerging technology costs (for next-generation satellite technology), change in fair value of
warrants and derivatives, write-off of deferred financing costs, CEO transition costs, impairment of long-lived assets, including
goodwill, loss on business divestiture and, in the past, acquisition plan expenses, change in fair value of convertible preferred
stock purchase option liability, COVID-19 related costs, facility exit costs, proxy solicitation costs and strategic alternatives
analysis expenses and other. Although closely aligned, our definition of Adjusted EBITDA is different than EBITDA (as such
term is defined in our Credit Facility) utilized for financial covenant calculations and also may differ from the definition of
EBITDA or Adjusted EBITDA used by other companies and therefore may not be comparable to similarly titled measures used
by other companies. Adjusted EBITDA is also a measure frequently requested by our investors and analysts. We believe that
investors and analysts may use Adjusted EBITDA, along with other information contained in our SEC filings, including GAAP
measures, in assessing our performance and comparability of our results with other companies. Our Non-GAAP measures
reflect the GAAP measures as reported, adjusted for certain items as described herein and also excludes the effects of our
outstanding convertible preferred stock.
These Non-GAAP financial measures have limitations as an analytical tool as they exclude the financial impact of transactions
necessary to conduct our business, such as the granting of equity compensation awards, and are not intended to be an alternative
to financial measures prepared in accordance with GAAP. These measures are adjusted as described in the reconciliation of
GAAP to Non-GAAP measures in the tables presented herein, but these adjustments should not be construed as an inference
that all of these adjustments or costs are unusual, infrequent or non-recurring. Non-GAAP financial measures should be
considered in addition to, and not as a substitute for or superior to, financial measures determined in accordance with GAAP.
Investors are advised to carefully review the GAAP financial results that are disclosed in our SEC filings. As we have not
provided targets for fiscal 2025, we have also not quantitatively reconciled our fiscal 2025 outlook to 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 are not available without unreasonable
effort and such unavailable reconciling items could significantly impact our financial results.
Comparison of Fiscal 2023 and 2022
A detailed discussion of fiscal 2023 items and year-over-year comparisons between 2023 and 2022 that are not included in this
Form 10-K can be found in "Part II - Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations - Comparison of Fiscal 2023 and 2022" in our Annual Report on Form 10-K for the year ended July 31, 2023.
73
Liquidity and Capital Resources
Our cash and cash equivalents were $32.4 million and $19.0 million at July 31, 2024 and 2023, respectively. For fiscal 2024,
our cash flows reflect the following:
•
Net cash used in operating activities was $54.5 million and $4.4 million for fiscal 2024 and 2023, respectively. Net
cash used in operating activities for fiscal 2024 and net cash provided by operating activities for fiscal 2023 would
have been $38.5 million and $9.6 million, respectively, when excluding $16.0 million and $14.0 million, respectively,
in aggregate cash payments for restructuring costs (including severance), CEO transition costs and strategic emerging
technology costs for next-generation satellite technology. The period-over-period decrease in cash flows from
operating activities reflects overall changes in net working capital requirements, principally the timing of: (i) payments
to vendors; and (ii) progress toward completion on contracts accounted for over time, including related shipments,
billings and collections. More specifically, in fiscal 2024, we experienced a significant increase in the overall level of
contract assets (i.e., unbilled receivables) related to large, long-term contracts with certain U.S. government and
international customers. While such contract assets are trending lower more recently due to shipments, billings and
collections from our customers, such contract activity did result in a material increase in working capital during our
fiscal 2024.
•
Net cash provided by investing activities in fiscal 2024 was $20.1 million compared to net cash used in investing
activities in fiscal 2023 of $18.3 million. Fiscal 2024 includes $33.2 million of net cash proceeds from the PST
Divestiture, offset in part by capital expenditures to build-out cloud-based computer networks to support our
previously announced NG-911 contract wins and capital investments and building improvements in connection with
our manufacturing facilities.
•
Net cash provided by financing activities was $47.8 million and $20.1 million for fiscal 2024 and 2023, respectively.
During fiscal 2024, we entered into a new Credit Facility and repaid in full the outstanding borrowings under our Prior
Credit Facility. During fiscal 2024, with respect to term loans, we received net proceeds of $157.1 million and made
$48.8 million in total repayments. During fiscal 2024, we had revolving loan net repayments of $85.3 million, as
compared to revolving loan net borrowings of $36.9 million in fiscal 2023. During fiscal 2024, we paid financing costs
of $10.3 million in connection with our credit facilities. During fiscal 2024, we received an aggregate of $43.2 million
in net proceeds related to the issuance of our Series B Convertible Preferred Stock, and also paid $4.3 million in
related issuance costs (consisting of third party financial advisor, legal and professional fees). During fiscal 2024 and
2023, we paid $0.3 million and $8.7 million, respectively, in cash dividends to our common stockholders. We also
made $3.8 million and $2.9 million of payments to remit employees' statutory tax withholding requirements related to
the net settlement of stock-based awards during fiscal 2024 and 2023, respectively.
Credit Facility
See "Notes to Consolidated Financial Statements - Note (8) - Credit Facility" included in "Part II - Item 8. Financial
Statements and Supplementary Data," included in this Form 10-K (which discussion is incorporated herein by reference), for
detailed information related to our Credit Facility entered into on June 17, 2024, which replaced the Prior Credit Facility
previously entered into on November 7, 2023. As of July 31, 2024, the amount outstanding under our Credit Facility was
$194.2 million, comprised of $32.5 million under the Revolving Loan and $161.7 million under the Term Loan. During fiscal
2024, we had outstanding balances under our credit facilities ranging from $156.2 million to $202.0 million. Capitalized terms
used but not defined herein have the meanings set forth for such terms in the Credit Facility, which have been documented and
filed with the SEC.
Convertible Preferred Stock
See "Notes to Consolidated Financial Statements - Note (16) - Convertible Preferred Stock" included in "Part II - Item 8.
Financial Statements and Supplementary Data," included in this Form 10-K (which discussion is incorporated herein by
reference), for additional information.
Subordinated Credit Agreement
See "Notes to Consolidated Financial Statements - Note (19) - Subsequent Event" included in "Part II - Item 8. Financial
Statements and Supplementary Data," included in this Form 10-K (which discussion is incorporated herein by reference), for
additional information on our Subordinated Credit Agreement, which we entered into on October 17, 2024.
74
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 audited
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 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 Consolidated Financial Statements are issued.
As of the date these financial statements were issued (the "issuance date"), we evaluated whether the following adverse
conditions, when 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. 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. 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 "Notes to Consolidated Financial Statements - Note (8) - Credit Facility" included in "Part II - Item 8.
Financial Statements and Supplementary Data," included in this Form 10-K (which discussion is incorporated herein by
reference), on June 17, 2024, we entered into a $222.0 million credit facility with a new syndicate of lenders, which replaced
our prior credit facility. As further discussed below, we subsequently amended the credit facility on October 17, 2024 (the
"Credit Facility"). The Credit Facility consists of a committed $162.0 million term loan (“Term Loan”) and $60.0 million
revolver loan (“Revolver Loan”). At July 31, 2024 and October 25, 2024 (the date closest to the issuance date), total
outstanding borrowings under the Credit Facility were $194.2 million and $199.1 million, respectively. At both July 31, 2024
and October 25, 2024, $32.5 million was drawn on the Revolver Loan. As of the issuance date, our available sources of
liquidity approximate $28.7 million, consisting solely of qualified cash and cash equivalents. That is, our available sources of
liquidity do not include the remaining portion of the committed Revolver Loan due to the lenders' consent right, discussed
below, to any borrowings that exceed $32.5 million.
The Credit Facility, among other things, requires compliance with new restrictive and financial covenants, including: a
maximum allowable Net Leverage Ratio of 3.25x for the fiscal quarter ending January 31, 2025; a minimum Fixed Charge
Coverage Ratio of 1.20x for the fiscal quarter ending January 31, 2025; a minimum Average Liquidity requirement at each
quarter end of $20.0 million; and a minimum EBITDA of $35.0 million for the fiscal quarter ending October 31, 2025. Such
ratios adjust under the Credit Facility in future periods.
The Credit Facility was amended on October 17, 2024 to waive certain defaults or events of default, including in connection
with our Net Leverage Ratio and Fixed Charge Coverage Ratio covenants as of July 31, 2024. The amendment also provides
for, among other things: (i) increases the interest rate margins applicable to the loans; (ii) modifies certain financial and
collateral reporting requirements; (iii) provides a lender consent right with respect to $27.5 million of Revolver Loan
borrowings above $32.5 million; (iv) permits the incurrence of $25.0 million of senior unsecured subordinated debt (as
described below); (v) amends the maturity date to the earlier of (x) July 31, 2028 or (y) 90 days prior to the earliest date that the
debt under the Subordinated Credit Agreement (as defined below) becomes due and payable; and (vi) suspends financial
covenant testing through the end of our fiscal quarter ending January 31, 2025.
In addition, we entered into a Subordinated Credit Agreement with the existing holders of our Convertible Preferred Stock (the
“Subordinated Credit Agreement”) on October 17, 2024, which provides a subordinated unsecured term loan facility in the
aggregate principal amount of $25.0 million (the “Subordinated Credit Facility”). The proceeds of the Subordinated Credit
Facility: (i) cured our default on certain financial covenants under the Credit Facility, as discussed above; (ii) provides
75
additional liquidity to us; and (iii) funds our general working capital needs, including support of our strategic transformation
initiatives, as discussed below.
Our ability to meet our current obligations as they become due may be impacted by our ability to remain compliant with the
financial covenants required by the Credit Facility, or to obtain future waivers or amendments from the lenders in the event
compliance is not maintained. While we believe we will be able to secure such waivers or amendments, as needed, there can be
no assurance such waivers or amendments will be secured or on terms that are acceptable to us. If we are unable to secure
waivers or amendments, the lenders may declare an event of default, which would cause an immediate acceleration and
repayment of all outstanding principal, interest and fees due under our Credit Facility. Absent our ability to repay the forgoing
amounts upon the declaration of an event of default, the lenders may exercise their rights and remedies under the Credit
Facility, which may include, among others, a seizure of substantially all of our assets and/or the liquidation of our operations. If
an event of default occurs that allows the lenders to exercise these rights and remedies over the next year beyond the issuance
date, we will be unable to continue as a going concern.
As of the issuance date, our plans to address our ability to continue as a going concern include, among other things:
•
executing a strategy to transform Comtech into a pure-play satellite and space communications company (ongoing
and future actions supporting our transformation strategy include: an exploration of strategic alternatives for our
Terrestrial and Wireless Networks segment, which is well underway; the pursuit of further portfolio-shaping
opportunities to enhance profitability, efficiency and focus; and the implementation of additional operational
initiatives to both achieve profitable results from operations as well as to align our go-forward cost structure with a
pure-play focus on satellite and space communications), as discussed further in Note (18) – “Cost Reduction
Activities;”
•
pursuing initiatives to reduce investments in working capital, namely accounts receivable and inventory;
•
improving process disciplines to attain and maintain profitable operations by entering into more favorable sales or
service contracts;
•
reevaluating our business plans to identify opportunities (e.g., within our Satellite and Space Communications
segment) to focus future investment on our most strategic, high-margin revenue opportunities;
•
reevaluating our business plans to identify opportunities to further reduce capital expenditures;
•
seeking opportunities to improve liquidity through any combination of debt and/or equity financing (including
possibly restructuring our Credit Facility, Convertible Preferred Stock and/or Subordinated Credit Agreement); and
•
seeking other strategic transactions and/or measures including, but not limited to, the potential sale or divestiture of
assets.
While we believe the implementation of some or all of the elements of our plans over the next year beyond the issuance date
will be successful, these plans are not all solely within management’s control and, as such, we can provide no assurance our
plans are probable of being effectively implemented as of the issuance date. Therefore, the adverse conditions and events
described above are uncertainties that raise substantial doubt about our ability to continue as a going concern. The
accompanying consolidated financial statements 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 consolidated financial statements do not include any
adjustments that may result from the outcome of these uncertainties.
Our material cash requirements are for working capital, debt service (including interest), 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 such as: (i) an inability to meet
our current obligations under our Credit Facility as they become, or to obtain future waivers or amendments from the lenders in
the event compliance is not maintained; (ii) general economic conditions; (iii) a change in government spending priorities and
or contracting decisions; (iv) larger than usual customer orders; (v) a future redemption by the holders of our Convertible
Preferred Stock; 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.
76
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 in fiscal 2025.
Our investment policy relating to our cash and cash equivalents is intended to minimize principal loss while at the same time
maximize the income we receive without significantly increasing risk. To minimize risk, we generally invest excess cash and
cash equivalents in money market mutual funds (both government and commercial), certificates of deposit, bank deposits, and
U.S. Treasury securities. Money market mutual funds we invest in are direct obligations of the U.S. government, bank securities
guaranteed by the Federal Deposit Insurance Corporation, certificates of deposit and commercial paper and other securities
issued by other companies. While we cannot predict future market conditions or market liquidity, we believe our investment
policies are appropriate in the current environment. Ultimately, the availability of our cash and cash equivalents is dependent on
a well-functioning liquid market.
On July 13, 2022, we filed a $200.0 million shelf registration statement with the SEC for the sale of various types of securities,
including debt. This new shelf registration statement was declared effective by the SEC as of July 25, 2022 and expires on July
25, 2025.
On September 29, 2020, our Board of Directors authorized a $100.0 million stock repurchase program, which replaced our prior
program. The $100.0 million stock repurchase program has no time restrictions and repurchases may be made from time to time
in open-market or privately negotiated transactions, or by other means in accordance with federal securities laws. There were no
repurchases of our common stock during fiscal 2024 and 2023.
In fiscal 2023, we adjusted the Company’s capital allocation plans and determined to forgo a common stock dividend. Future
common stock dividends, if any, remain subject to compliance with financial covenants under our Credit Facility, as well as
Board approval and certain voting rights of holders of our Convertible Preferred Stock.
At July 31, 2024, we had $247,000 of cash deposited as collateral in connection with outstanding standby letters of credit to
guarantee future performance on certain customer contracts and no commercial letters of credit outstanding.
Commitments
In the normal course of business, other than as discussed below, we routinely enter into binding and non-binding purchase
obligations primarily covering anticipated purchases of inventory and equipment. We do not expect that these commitments, as
of July 31, 2024, will materially adversely affect our liquidity. At July 31, 2024, cash payments due under contractual
obligations (including estimated interest expense on our Credit Facility), excluding purchase orders that we entered into in our
normal course of business, are as follows:
($ in thousands)
Total
Due Within
1 Year
Credit Facility - principal payments
$
194,163
4,050
Credit Facility - interest payments
92,800
28,985
Operating lease obligations
43,690
8,263
Contractual cash obligations
$
330,653
41,298
The commitments under our Credit Facility are described in detail above. See "Notes to Consolidated Financial Statements -
Note (1)(c) - Liquidity and Going Concern" included in "Part II - Item 8. Financial Statements and Supplementary Data,"
included in this Form 10-K (which discussion is incorporated herein by reference) for further important information.
See "Notes to Consolidated Financial Statements - Note (9) -"Leases" included in "Part II - Item 8. Financial Statements and
Supplementary Data," (which discussion is incorporated herein by reference), included in this Form 10-K, for additional
information on our lease commitments.
77
As discussed further in "Notes to Consolidated Financial Statements - Note (16) - Convertible Preferred Stock" included in
"Part II - Item 8. Financial Statements and Supplementary Data," (which discussion is incorporated herein by reference),
included in this Form 10-K, 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 trigger; (ii) 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.
As discussed further in "Notes to Consolidated Financial Statements - Note (19) - Subsequent Events - Subordinated Credit
Agreement" included in "Part II - Item 8. Financial Statements and Supplementary Data," (which discussion is incorporated
herein by reference), included in this Form 10-K, there are defined make-whole amounts with respect to certain repayments or
prepayment of such subordinated debt equal to: (i) from the October 17, 2024 through (but not including) July 17, 2025, $25.0
million multiplied by 33.0%; (ii) from July 17, 2025 through (but not including) October 17, 2026, $25.0 million multiplied by
50.0%; and (iii) from October 17, 2026 and thereafter, $25.0 million multiplied by 75.0% plus, in the case of clause (iii),
interest accrued on $25.0 million at the make-whole interest rate (as defined below) starting on October 17, 2026 and calculated
as of any such date of determination. The make-whole interest rate is a rate equal to 16.0% per annum, which is increased by
2.0% per annum upon the occurrence and during the continuation of an event of default under the Subordinated Credit
Agreement.
In the ordinary course of business, we include indemnification provisions in certain of our customer contracts. Pursuant to these
agreements, we have agreed to indemnify, hold harmless and reimburse the indemnified party for certain losses suffered or
incurred by the indemnified party, including but not limited to losses related to third-party intellectual property claims. It is not
possible to determine the maximum potential amount under these agreements due to a history of nominal claims and the unique
facts and circumstances involved in each particular agreement.
As discussed further in "Notes to Consolidated Financial Statements - Note (13) - Commitments and Contingencies," included
in "Part II - Item 8.- Financial Statements and Supplementary Data," included in this Form 10-K (which discussion is
incorporated herein by reference), we are subject to a number of indemnification demands and we are incurring ongoing legal
expenses in connection with these matters. Our insurance policies may not cover the cost of defending indemnification claims
or providing indemnification. As a result, pending or future claims asserted against us by a party that we have agreed to
indemnify could result in legal costs and damages that could have a material adverse effect on our consolidated results of
operations and financial condition.
We entered into employment and/or change of control agreements with certain of our executive officers and certain key
employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a
change in control of the Company or termination of the employee.
As further discussed in "Notes to Consolidated Financial Statements – Note (10) - "Income Taxes " included in "Part II - Item
8. Financial Statements and Supplementary Data," included in this Form 10-K (which discussion is incorporated herein by
reference), our Consolidated Balance Sheet at July 31, 2024 includes total liabilities of $8.6 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.
78
Recent Accounting Pronouncements
We are required to prepare our consolidated financial statements in accordance with the Financial Accounting Standards Board
("FASB") Accounting Standards Codification ("ASC") which is the source for all authoritative U.S. generally accepted
accounting principles, which is commonly referred to as "GAAP." The FASB ASC is subject to updates by the FASB, which
are known as Accounting Standards Updates ("ASUs").
As further discussed in "Notes to Consolidated Financial Statements – Note (1)(n) - Adoption of Accounting Standards and
Updates" included in "Part II - Item 8. Financial Statements and Supplementary Data," included in this Form 10-K, (which
discussion is incorporated herein by reference), during fiscal 2024 the following FASB ASUs have been issued and
incorporated into the FASB ASC and have not yet been adopted by us as of July 31, 2024:
•
FASB ASU No. 2023-07, which requires the disclosure of significant segment expenses, by reportable
segment, regularly provided to the chief operating decision maker (“CODM”) and included within each
reported measure of segment profit or loss. The disclosure of other segment items by reportable segment are
also required and would constitute the difference between segment revenues less these significant segment
expenses and reported segment profit or loss. On an annual basis, the update requires an entity to disclose the
CODM's title and position, as well as describe how the CODM uses the reported measures. Additionally, all
existing annual disclosures about segment profit or loss must be provided on an interim basis in addition to
the disclosure of significant segment expenses and other segment items. This ASU is effective for fiscal years
beginning after December 15, 2023 (our fiscal year beginning on August 1, 2024) and for interim periods
within fiscal years beginning after December 15, 2024 (our interim period beginning on August 1, 2025),
with early adoption permitted. The adoption of this guidance will impact our disclosures only and we do not
expect it to have a material impact on our consolidated financial statements.
•
FASB ASU No. 2023-09 enhances and establishes new income tax disclosure requirements in addition to
modifying and eliminating certain existing requirements. Most notably under the new requirements is greater
disaggregation of information in the effective tax rate reconciliation, including the inclusion of both
percentages and amounts, specific categories, and additional information for reconciling items meeting a
quantitative threshold defined by the guidance. Additionally, disclosures of income taxes paid and income tax
expense must be disaggregated by federal, state and foreign taxes, with income taxes paid further
disaggregated for individual jurisdictions that represent 5 percent or more of total income taxes paid. This
ASU is effective for fiscal years beginning after December 15, 2024 (our fiscal year beginning on August 1,
2025), with early adoption permitted. We are evaluating the impact of this ASU on our consolidated financial
statements and disclosures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from borrowings under our
Credit Facility. Based on the amount of outstanding debt under our Credit Facility, a hypothetical change in interest rates by
10% would change interest expense by approximately $2.7 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 July 31, 2024, we had cash and cash equivalents of $32.4 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 July 31, 2024, a hypothetical change in interest rates of 10% would
have a nominal impact on interest income over a one-year period. Ultimately, the availability of our cash and cash equivalents
is dependent on a well-functioning liquid market.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reports of Independent Registered Public Accounting Firm, Consolidated Financial Statements, Notes to Consolidated
Financial Statements and Related Financial Schedule are listed in the Index to Consolidated Financial Statements and Schedule
annexed hereto and are hereby incorporated by reference.
79
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Form 10-K, we conducted an evaluation of the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15(d)-15(e) under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act")), which have been designed to provide reasonable assurance that the information required to be
disclosed by us, in reports filed under the Exchange Act, is recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms and accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Based on this evaluation, carried out by us under the supervision of our Chief Executive Officer and Chief Financial Officer,
and with the participation of our management, we concluded that our disclosure controls and procedures were not effective, as
of July 31, 2024, as a result of the material weaknesses in our internal control over financial reporting discussed below.
Notwithstanding our material weaknesses, we have concluded that the consolidated financial statements and other financial
information included in this Form 10-K fairly present in all material respects our financial condition, results of operations and
cash flows for the periods presented in conformity with accounting principles generally accepted in the U.S. ("U.S. GAAP").
A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the
system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of
fraud, if any, within a company have been detected.
Management’s Report on Internal Control Over Financial Reporting
Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and
maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. All
internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to
be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
80
Our management assessed the effectiveness of our internal control over financial reporting as of July 31, 2024. In making this
assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission
("COSO") in Internal Control – Integrated Framework (2013) (the "COSO framework"). Based on our assessment, we
determined that, as of July 31, 2024, our internal control over financial reporting was not effective based on those criteria as a
result of material weaknesses described below.
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.
We did not design and maintain an effective control environment commensurate with our financial reporting requirements
based on the criteria in the COSO framework, as we lacked a sufficient complement of resources with an appropriate level of
knowledge and experience to establish effective process and controls. The control environment material weakness contributed
to other material weaknesses within our system of internal control over financial reporting at the control activity level, where
we did not design and implement effective control activities, including controls related to revenue, inventory and other assets.
Deficiencies in control activities contributed to accounting errors and the potential for there to have been material accounting
errors within revenue, inventory and other assets.
Deloitte and Touche LLP, our independent registered public accounting firm, has performed an audit of our internal control
over financial reporting as of July 31, 2024. Deloitte’s audit reports appear on pages F-2 and F-3 of this annual report.
Changes In Internal Control Over Financial Reporting
Other than for the material weaknesses described above, there have been no changes in our internal control over financial
reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during our fiscal quarter ended
July 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
Remediation Plan
Our remediation efforts are ongoing and we will continue our initiatives to hire additional skilled resources in program
management and accounting and finance related functions, and implement and document policies, procedures, and internal
controls. Remediation of the identified material weaknesses and strengthening of our internal control environment will require a
substantial effort throughout fiscal 2025 and beyond, as necessary. We will test the ongoing operating effectiveness of the new
and existing controls in future periods. The material weaknesses cannot be considered completely remediated until the
applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these
controls are operating effectively.
ITEM 9B. OTHER INFORMATION
Securities Trading Plans of Directors and Officers
During the three months ended July 31, 2024, none of our directors or officers adopted or terminated a Rule 10b5-1 trading plan
or adopted or terminated a non-Rule 10b5-1 trading arrangement (as each term is defined in Item 408(a) of Regulation S-K).
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
81
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Certain information concerning directors and officers is incorporated by reference to our Proxy Statement for the Annual
Meeting of Stockholders (the "Proxy Statement") which will be filed with the Securities and Exchange Commission no more
than 120 days after the close of our fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding executive compensation is incorporated by reference to the Proxy Statement, which will be filed with the
Securities and Exchange Commission no more than 120 days after the close of our fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding securities authorized for issuance under equity compensation plans and certain information regarding
security ownership of certain beneficial owners and management is incorporated by reference to the Proxy Statement, which
will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
Information regarding certain relationships and related transactions is incorporated by reference to the Proxy Statement, which
will be filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information regarding principal accountant fees and services is incorporated by reference to the Proxy Statement, which will be
filed with the Securities and Exchange Commission no more than 120 days after the close of our fiscal year.
82
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) The Registrant’s financial statements together with a separate index are annexed hereto.
(2) The Financial Statement Schedule listed in a separate index is annexed hereto.
(3) Exhibits required by Item 601 of Regulation S-K are listed below.
3(a)(i)
Restated Certificate of Incorporation of the Registrant, dated
August 18, 2006
Exhibit 3(a)(i) to the Registrant’s 2006
Form 10-K
3(a)(ii)
Certificate of Amendment to the Amended and Restated
Certificate of Incorporation of Comtech Telecommunications
Corp., dated December 28, 2021
Exhibit 3.1 to the Registrant's Form 8-K,
filed December 30, 2021
3(a)(iii)
Third Amended and Restated By-Laws of the Registrant, dated
September 26, 2017
Exhibit 3(a)(ii) to the Registrant’s 2017
Form 10-K
3(a)(iv)
Certificate of Designations of Series B-1 Convertible Preferred
Stock, dated June 17, 2024
Exhibit 3.1 to the Registrant's Form 8-K
filed June 18, 2024
3(a)(v)
Certificate of Elimination of Series B-1 Convertible Preferred
Stock, dated October 23, 2024
3(a)(vi)
Certificate of Designations of Series B-2 Convertible Preferred
Stock, dated October 17, 2024
Exhibit 3.1 to the Registrant’s Form 8-K,
filed October 18, 2024
4(a)(i)
Form of Warrant Agreement
Exhibit 4.1 to the Registrant’s Form 8-K,
filed October 18, 2024
4(a)(ii)
Description of Comtech Telecommunications Corp.'s Securities
Registered Pursuant to Section 12 of the Exchange Act
10(a)*
Third Amended and Restated 2001 Employee Stock Purchase
Plan
Appendix B to the Registrant’s Proxy
Statement, filed November 18, 2022
10(b)*
2000 Stock Incentive Plan, Amended and Restated, dated
December 15, 2022
Appendix A to the Registrant’s Proxy
Statement, filed November 18, 2022
10(c)(1)*
Form of Stock Option Agreement pursuant to the 2000 Stock
Incentive Plan
Exhibit 10(f)(7) to the Registrant’s 2005
Form 10-K
10(c)(2)*
Form of Stock Option Agreement for Non-employee Directors
pursuant to the 2000 Stock Incentive Plan - 2020
Exhibit 10(d)(3) to the Registrant's 2020
Form 10-K
10(d)(1)*
Form of Cash-Settled Performance Unit Agreement pursuant to
the 2000 Stock Incentive Plan
Exhibit 10(e)(2) to the Registrant's 2023
Form 10-K
10(e)(1)*
Form of Long-Term Performance Share Award Agreement
pursuant to the 2000 Stock Incentive Plan - 2018
Exhibit 10(f)(2) to the Registrant's 2019
Form 10-K
10(f)(1)*
Form of Restricted Stock Agreement (eligible for dividend
equivalents) for Non-employee Directors pursuant to the 2000
Stock Incentive Plan - 2019
Exhibit 10(g)(3) to the Registrant's 2019
Form 10-K
10(f)(2)*
Form of Restricted Stock Agreement (eligible for dividend
equivalents) for Non-employee Directors pursuant to the 2000
Stock Incentive Plan - 2022
Exhibit 10(g)(4) to the Registrant's 2022
Form 10-K
10(g)(1)*
Form of Restricted Stock Unit Agreement for Employees
pursuant to the 2000 Stock Incentive Plan - 2017
Exhibit 10(h)(1) to the Registrant’s 2017
Form 10-K
10(g)(2)*
Form of Restricted Stock Unit Agreement (eligible for dividend
equivalents) for Non-employee Directors pursuant to the 2000
Stock Incentive Plan
Exhibit 10(aa) to the Registrant’s 2016
Form 10-K
10(g)(3)*
Form of Restricted Stock Unit Agreement (eligible for dividend
equivalents) for Non-employee Directors pursuant to the 2000
Stock Incentive Plan - 2020
Exhibit 10.1 to the Registrant's Form 10-Q,
filed June 3, 2020
Exhibit
Number
Description of Exhibit
Incorporated By
Reference to Exhibit
83
10(g)(4)*
Form of Restricted Stock Unit Agreement (eligible for dividend
equivalents) for Non-employee Directors pursuant to the 2000
Stock Incentive Plan - 2022
Exhibit 10(h)(7) to the Registrant's 2022
Form 10-K
10(g)(5)*
Form of Restricted Stock Unit Agreement (eligible for dividend
equivalents) for Employees pursuant to the 2000 Stock Incentive
Plan - 2022
Exhibit 10(h)(8) to the Registrant's 2022
Form 10-K
10(h)(1)*
Form of Other Stock-Based Award Agreement pursuant to the
2000 Stock Incentive Plan
Exhibit 10(i)(3) to the Registrant's 2023
Form 10-K
10(i)(1)*
Form of Share Unit Agreement (eligible for dividend equivalents)
for Employees pursuant to the 2000 Stock Incentive Plan
Exhibit 10.2 to the Registrant's Form 10-Q,
filed December 9, 2013
10(i)(2)*
Form of Share Unit Agreement (eligible for dividend equivalents)
for Employees pursuant to the 2000 Stock Incentive Plan - 2018
Exhibit 10(j)(2) to the Registrant's 2018
Form 10-K
10(j)*
Form of Indemnification Agreement between the Registrant and
the Named Executive Officers and Certain Other Executive
Officers
Exhibit 10.1 to Registrant’s Form 8-K, filed
on March 8, 2007
10(k)(1)*
Form of Change-in-Control Agreement (Tier 1)
Exhibit 10(l)(1) to the Registrant's 2022
Form 10-K
10(k)(2)*
Form of Change-in-Control Agreement (Tier 2) between the
Registrant and Certain Named Executive Officers (other than the
CEO) and Certain Other Executive Officers
Exhibit 10(l)(2) to the Registrant's 2022
Form 10-K
10(k)(3)*
Form of Change-in-Control Agreement (Tier 2) between the
Registrant and Certain Named Executive Officers (other than the
CEO) and Certain Other Executive Officers (California
Employees)
Exhibit 10.3 to the Registrant’s Form 8-K,
filed June 7, 2017
10(k)(4)*
Form of Change-in-Control Agreement (Tier 2) between the
Registrant and Certain Named Executive Officers (other than the
CEO) and Certain Other Executive Officers (Divisional/
Subsidiary Presidents)
Exhibit 10.4 to the Registrant’s Form 8-K,
filed June 7, 2017
10(k)(5)*
Form of Change-in-Control Agreement (Tier 2) between the
Registrant and Certain Named Executive Officers (other than the
CEO) and Certain Other Executive Officers (California
Divisional/Subsidiary Presidents)
Exhibit 10.5 to the Registrant’s Form 8-K,
filed June 7, 2017
10(k)(6)*
Form of Change-in-Control Agreement (Tier 3) between the
Registrant and Certain Non-Executive Officers
Exhibit 10.6 to the Registrant’s Form 8-K,
filed June 7, 2017
10(l)*
Retirement and Transition Agreement, dated September 30 2019
Exhibit 10.1 to the Registrant's Form 10-Q,
filed December 4, 2019
10(m)(1)
Credit Agreement, dated as of June 17, 2024, among Comtech
Telecommunications Corp. and the lenders named therein
Exhibit 10.1 to the Registrant’s Form 8-K,
filed June 18, 2024
10(m)(2)
Waiver and Amendment No. 1 to Credit Agreement, dated as of
October 17, 2024, by and among Comtech Telecommunications
Corp., as borrower, the lenders named therein, TCW Asset
Management Company LLC, as term loan agent, and Wingspire
Capital LLC, as revolving agent
Exhibit 10.1 to the Registrant’s Form 8-K,
filed October 18, 2024
10(m)(3)
Subordinated Credit Agreement, dated as of October 17, 2024, by
and among Comtech Telecommunications Corp., as borrower,
the lenders named therein, and U.S. Bank Trust Company,
National Association, as agent
Exhibit 10.2 to the Registrant’s Form 8-K,
filed October 18, 2024
Exhibit
Number
Description of Exhibit
Incorporated By
Reference to Exhibit
84
10(n)(1)
Subscription and Exchange Agreement, dated as of October 17,
2024, by and among Comtech Telecommunications Corp. and
the Investors named therein
Exhibit 10.3 to the Registrant’s Form 8-K,
filed October 18, 2024
10(n)(2)
Registration Rights Agreement, dated October 17, 2024, by and
among Comtech Telecommunications Corp. and the Investors
named therein
Exhibit 10.5 to the Registrant’s Form 8-K,
filed October 18, 2024
10(n)(3)
Form of Voting Agreement
Exhibit 10.4 to the Registrant’s Form 8-K,
filed October 18, 2024
10(o)
Cooperation Agreement dated December 16, 2021, by and among
Comtech Telecommunications Corp., Outerbridge Partners, LP,
Outerbridge Capital Management, LLC, Outerbridge Partners
GP, LLC, Outerbridge Bartleby Fund, LP, Outerbridge Bartleby
GP, LLC, and Rory Wallace
Exhibit 10.1 to the Registrant's Form 8-K,
filed December 21, 2021
10(p)(1)*
Employment Agreement, dated December 31, 2021, between
Comtech and Michael Porcelain
Exhibit 10.1 to the Registrant's Form 8-K,
filed January 5, 2022
10(p)(2)*
Restricted Stock Unit Agreement with Michael Porcelain
Pursuant to the Comtech Telecommunications Corp. 2000 Stock
Incentive Plan
Exhibit 10.2 to the Registrant's Form 10-Q,
filed March 10, 2022
10(p)(3)*
Separation Agreement and General Release with Michael
Porcelain, dated August 9, 2022
Exhibit 10.1 to the Registrant's Form 8-K,
filed August 10, 2022
10(q)(1)*
CEO Employment Agreement with Ken Peterman, dated
September 12, 2022
Exhibit 10.1 to the Registrant’s Form 8-K,
filed September 13, 2022
10(q)(2)*
Restricted Stock Unit Agreement with Ken Peterman Pursuant to
the Comtech Telecommunications Corp. 2000 Stock Incentive
Plan
Exhibit 10.2 to the Registrant’s Form 8-K,
filed September 13, 2022
10(q)(3)*
Long-Term Performance Share Award Agreement with Ken
Peterman Pursuant to the Comtech Telecommunications Corp.
2000 Stock Incentive Plan
Exhibit 10.3 to the Registrant’s Form 8-K,
filed September 13, 2022
10(q)(4)*
Long-Term Performance Share Award (VWAP) Agreement with
Ken Peterman Pursuant to the Comtech Telecommunications
Corp. 2000 Stock Incentive Plan
Exhibit 10.4 to the Registrant’s Form 8-K,
filed September 13, 2022
10(r)
Form of Executive Employment Agreement
Exhibit 10.1 to the Registrant’s Form 8-K,
filed January 9, 2024
10(s)(1)
Employment Agreement between Comtech Telecommunications
Corp. and John Ratigan
Exhibit 10.1 to the Registrant’s Form 8-K,
filed April 1, 2024
10(s)(2)
Employment Agreement Amendment 1 between Comtech
Telecommunications Corp. and John Ratigan
Exhibit 10.2 to the Registrant’s Form 8-K,
filed April 1, 2024
10(t)
Form of Retention Bonus Agreement
Exhibit 10.1 to the Registrant’s Form 8-K,
filed May 2, 2024
10(u)
Comtech Telecommunications Corp. 2023 Equity and Incentive
Plan
Exhibit 10.4 to the Registrant’s Form 10-Q,
filed June 18, 2024
10(v)(1)
Form of Restricted Stock Unit Agreement pursuant to the
Comtech Telecommunications Corp. 2023 Equity and Incentive
Plan
Exhibit 10.5 to the Registrant’s Form 10-Q,
filed June 18, 2024
10(v)(2)
Form of Long Term Performance Award Agreement pursuant to
the Comtech Telecommunications Corp. 2023 Equity and
Incentive Plan
Exhibit 10.6 to the Registrant’s Form 10-Q,
filed June 18, 2024
Exhibit
Number
Description of Exhibit
Incorporated By
Reference to Exhibit
85
10(v)(3)
Form of Other Stock Award Agreement pursuant to the 2023
Equity and Incentive Plan
10(v)(4)
Form of Restricted Stock Unit Agreement to Non-employee
Directors pursuant to the Comtech Telecommunications Corp.
2023 Equity and Incentive Plan
10(v)(5)
Form of Restricted Stock Agreement to Non-employee Directors
pursuant to the Comtech Telecommunications Corp. 2023
Equity and Incentive Plan
19
Insider Trading Policies and Procedures of the Company
21
Subsidiaries of the Registrant
23.1
Consent of Independent Registered Public Accounting Firm
31.1
Certification of CEO and Chairman pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2
Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1
Certification of CEO and Chairman pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
97
Clawback Policy of the Company
101.INS
The following financial statements from the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 2024,
formatted in inline XBRL: (i) Consolidated Balance Sheets, (ii)
Consolidated Statements of Operations, (iii) Consolidated
Statements of Stockholders' Equity, (iv) Consolidated Statement
of Cash Flows, and (v) Notes to Consolidated Financial
Statements
101.SCH
Inline XBRL Taxonomy Extension Schema Document
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase
Document
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase Document
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase
Document
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase
Document
104
Cover Page Interactive Data File (embedded within the Inline
XBRL document and contained in Exhibit 101)
Exhibit
Number
Description of Exhibit
Incorporated By
Reference to Exhibit
* Management contract or compensatory plan or arrangement.
ITEM 16. FORM 10-K SUMMARY
None.
86
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
COMTECH TELECOMMUNICATIONS CORP.
October 30, 2024
By: /s/John Ratigan
(Date)
John Ratigan, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
October 30, 2024
/s/John Ratigan
Director, President and Chief Executive Officer
(Date)
John Ratigan
(Principal Executive Officer)
October 30, 2024
/s/Michael A. Bondi
Chief Financial Officer
(Date)
Michael A. Bondi
(Principal Financial and Accounting Officer)
October 30, 2024
/s/Wendi Carpenter
Director
(Date)
Wendi Carpenter
October 30, 2024
/s/Judy Chambers
Director
(Date)
Judy Chambers
October 30, 2024
/s/Bruce T. Crawford
Director
(Date)
Bruce T. Crawford
October 30, 2024
/s/Mark Quinlan
Chairman of the Board
(Date)
Mark Quinlan
October 30, 2024
/s/Dr. Yacov A. Shamash
Director
(Date)
Dr. Yacov A. Shamash
October 30, 2024
/s/Lawrence J. Waldman
Director
(Date)
Lawrence J. Waldman
87
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Schedule
Page
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 34)
F-2
Consolidated Financial Statements:
Balance Sheets as of July 31, 2024 and 2023
F-7
Statements of Operations for each of the years in the three-year period ended July 31,
2024
F-8
Statements of Convertible Preferred Stock and Stockholders' Equity for each of the years
in the three-year period ended July 31, 2024
F-9
Statements of Cash Flows for each of the years in the three-year period ended July 31,
2024
F-10
Notes to Consolidated Financial Statements
F-12
Additional Financial Information Pursuant to the Requirements of Form 10-K:
Schedule II – Valuation and Qualifying Accounts and Reserves
S-1
Schedules not listed above have been omitted because they are either not applicable or the required
information has been provided elsewhere in the consolidated financial statements or notes thereto.
F - 1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of
Comtech Telecommunications Corp.
Chandler, Arizona
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Comtech Telecommunications Corp. and subsidiaries (the
"Company") as of July 31, 2024 and 2023, the related consolidated statements of operations, convertible preferred stock and
stockholders’ equity, and cash flows, for each of the three years in the period ended July 31, 2024, and the related notes and the schedule
listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of July 31, 2024 and 2023, and the results of its operations and its
cash flows for each of the three years in the period ended July 31, 2024, in conformity with accounting principles generally accepted in
the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the Company’s internal control over financial reporting as of July 31, 2024, based on criteria established in Internal Control—Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 30,
2024, expressed an adverse opinion on the Company’s internal control over financial reporting because of material weaknesses.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses and negative cash outflows
from operations, and may be unable to maintain compliance with financial covenants required by its credit agreement that raise
substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in
Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and
significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our
audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to
the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical
audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the
critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they
relate.
F - 2
Net Sales – Over Time Accounting Using the Cost-to-Cost Measure for Specific Identified Material Contracts — Refer to Note 1 to
the financial statements
Critical Audit Matter Description
The Company’s determination of revenue recognition for specific identified material contracts accounted for over time involves
estimating the total costs needed to complete the specific identified contracts and updating those estimates throughout the life of those
specific identified contracts. This requires management to make significant estimates related to forecasts of future costs for the identified
specific contracts. Changes in these estimates for the identified specific contracts could have a significant impact on the Company’s
results of operations.
Given the significant judgment and estimates used in management’s projections, auditing the Company’s estimates at completion and
estimates to completion involved especially subjective judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the Company’s determination of revenue recognition for specific identified material contracts accounted
for over time included the following, among others:
•
We tested the effectiveness of the controls over the development of the initial contract cost to complete estimate and
monitoring of estimates at completion and estimates to completion.
•
For each specific identified material contract selected, we performed the following:
◦
Evaluated whether the contract was properly included in management’s calculation of overtime revenue based on the
terms and conditions of each contract, including whether continuous transfer of control to the customer occurred as
progress was made toward fulfilling the performance obligation.
◦
Compared the transaction prices to the consideration expected to be received based on current rights and obligations
under the contracts and any modifications that were agreed upon with the customers.
◦
Tested management’s identification of distinct performance obligations by evaluating whether the underlying goods,
services, or both were highly interdependent and interrelated.
◦
Evaluated the estimates of total cost and profit for the performance obligation by:
▪
Performing a retrospective review by comparing the estimated margins at contract inception to the
actual margins as of year-end in order to assess management’s ability to accurately estimate costs.
▪
Inquiring and corroborating the estimates to complete and the estimates at completion with the
Project Manager (i.e., someone outside of Finance/Accounting) to understand significant variances
in costs and completeness of the estimates at completion and estimates to completion.
▪
Testing the estimates to complete through a combination of tests of details, in which we selected
individual costs within the estimate to complete and obtained supporting documentation, and
where we developed an expectation of the estimate to complete and compared it to the recorded
balance.
◦
Tested the accuracy and completeness of costs incurred during the current fiscal year. This testing included agreeing
labor costs to employee timesheets and agreeing the labor rate to either rates agreed upon with the customer in the
contract or rates from the Company’s payroll records.
◦
Tested the mathematical accuracy of management’s calculation of revenue for the performance obligation.
F - 3
Goodwill - Refer to Note 14 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of each reporting unit to its carrying
value. The Company used a combination of a market approach and the income approach, also known as the discounted cash flow
("DCF") method, to determine the present value of cash flows to estimate fair value. In the DCF, the future cash flows for the
Company’s reporting units were projected based on their estimates, at that time, of future revenues, operating income and other factors
(such as working capital and capital expenditures). Changes in these assumptions could have a significant impact on either the fair value,
the amount of any goodwill impairment charge, or both. The goodwill balance was $284.2 million as of July 31, 2024, of which $174.1
million was allocated to the Terrestrial and Wireless Networks Reporting Unit (“Terrestrial and Wireless Networks”) and $110.1 million
was allocated to the Satellite and Space Communications Reporting Unit (“Satellite and Space Communications”). The fair value of
Terrestrial and Wireless Networks exceeded its carrying value by 24.7% as of the measurement date and, therefore, no impairment was
recognized. The carrying value of the Satellite and Space Communications reporting unit exceeded its fair value by 10.4% primarily due
to declines in financial performance. Consequently, the Company recognized an impairment loss for goodwill, net, related to the Satellite
and Space Communications reporting unit of $48,925,000 for the year ended July 31, 2024.
We identified goodwill for Terrestrial and Wireless Networks and Satellite and Space Communications as a critical audit matter because
of the significant judgments made by management to estimate the fair value of the reporting unit and the differences between their fair
value and carrying value. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve
our fair value specialists, when performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions
related to selection of the discount rate and forecasts of future revenue and operating margins.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the discount rate and forecasts of future revenue and operating margins used by management to estimate
the fair value of Terrestrial and Wireless Networks and Satellite and Space Communications included the following, among others:
•
We tested the effectiveness of controls over management’s goodwill impairment evaluation, including those over the
determination of the fair value of the reporting units, such as controls related to management’s selection of the discount rate
and forecasts of future revenue and operating margins.
•
We evaluated management’s ability to accurately forecast future revenues and operating margins by comparing actual results to
management’s historical forecasts.
•
We evaluated the reasonableness of management’s revenue forecasts and forecasts of operating margins by comparing the
forecasts to:
◦
Historical revenues and operating margins.
◦
Internal communications to management and the Board of Directors.
◦
Forecasted information included in Company press releases as well as in analyst and industry reports for the Company
and certain of its peer companies.
•
With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodology and (2)
discount rate by:
◦
Testing the source information underlying the determination of the discount rate and the mathematical accuracy of the
calculation.
◦
Developing a range of independent estimates and comparing those to the discount rate selected by management.
◦
Assessing the concluded fair value of the sum of the aggregate reporting units relative to the business enterprise as a
whole based on market prices as of the impairment assessment date.
/s/ DELOITTE & TOUCHE LLP
Jericho, New York
October 30, 2024
We have served as the Company’s auditor since 2015.
F - 4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of
Comtech Telecommunications Corp.
Chandler, Arizona
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Comtech Telecommunications Corp. and subsidiaries (the “Company”)
as of July 31, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, because of the effect of the material weaknesses
identified below on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control
over financial reporting as of July 31, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by
COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB),
the consolidated financial statements and financial statement schedule as of and for the year ended July 31, 2024, of the Company and
our report dated October 30, 2024, expressed an unqualified opinion on those financial statements and financial statement schedule and
included an explanatory paragraph regarding substantial doubt about the Company's ability to continue as a going concern.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based
on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of
any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
F - 5
Material Weaknesses
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 company’s annual or interim financial statements will not be prevented or
detected on a timely basis. The following material weaknesses have been identified and included in management's assessment: The
Company did not design and maintain an effective control environment commensurate with their financial reporting requirements based
on the criteria in the COSO framework, as the Company lacked a sufficient complement of resources with an appropriate level of
knowledge and experience to establish effective process and controls. The control environment material weakness contributed to other
material weaknesses within the Company’s system of internal control over financial reporting at the control activity level, where the
Company did not design and implement effective control activities, including controls related to revenue, inventory and other assets.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the
consolidated financial statements, and financial statement schedule, as of and for the year ended July 31, 2024, of the Company, and this
report does not affect our report on such financial statements.
/s/ DELOITTE & TOUCHE LLP
Jericho, New York
October 30, 2024
F - 6
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Balance Sheets
As of July 31, 2024 and 2023
Assets
2024
2023
Current assets:
Cash and cash equivalents
$
32,433,000
18,961,000
Accounts receivable, net
195,595,000
163,159,000
Inventories, net
93,136,000
105,845,000
Prepaid expenses and other current assets
15,387,000
17,521,000
Total current assets
336,551,000
305,486,000
Property, plant and equipment, net
47,328,000
53,029,000
Operating lease right-of-use assets, net
31,590,000
44,410,000
Goodwill
284,180,000
347,692,000
Intangibles with finite lives, net
194,828,000
225,907,000
Deferred financing costs, net
3,251,000
2,349,000
Other assets, net
14,706,000
17,364,000
Total assets
$
912,434,000
996,237,000
Liabilities, Convertible Preferred Stock and Stockholders’ Equity
Current liabilities:
Accounts payable
$
42,477,000
64,241,000
Accrued expenses and other current liabilities
62,245,000
66,990,000
Current portion of long-term debt
4,050,000
4,375,000
Operating lease liabilities, current
7,869,000
8,645,000
Contract liabilities
65,834,000
66,351,000
Interest payable
1,072,000
1,368,000
Total current liabilities
183,547,000
211,970,000
Non-current portion of long-term debt, net
170,486,000
160,029,000
Operating lease liabilities, non-current
30,258,000
41,763,000
Income taxes payable
2,231,000
2,208,000
Deferred tax liability, net
6,193,000
9,494,000
Long-term contract liabilities
21,035,000
18,419,000
Other liabilities
12,355,000
1,844,000
Total liabilities
426,105,000
445,727,000
Commitments and contingencies (See Note 13)
Convertible preferred stock, par value $0.10 per share; authorized and issued 171,827 shares at
July 31, 2024 (includes accrued dividends of $1,341,000) and authorized 125,000 shares; issued
100,000 at July 31, 2023 (includes accrued dividends of $604,000)
180,076,000
112,211,000
Stockholders’ equity:
Preferred stock, par value $0.10 per share; authorized and unissued 1,828,173 and 1,875,000
shares at July 31, 2024 and 2023, respectively
—
—
Common stock, par value $0.10 per share; authorized 100,000,000 shares; issued 43,766,109
shares and 43,096,271 shares at July 31, 2024 and 2023, respectively
4,377,000
4,310,000
Additional paid-in capital
640,145,000
636,925,000
Retained earnings
103,580,000
238,913,000
748,102,000
880,148,000
Less:
Treasury stock, at cost (15,033,317 shares at July 31, 2024 and 2023)
(441,849,000)
(441,849,000)
Total stockholders’ equity
306,253,000
438,299,000
Total liabilities, convertible preferred stock and stockholders’ equity
$
912,434,000
996,237,000
See accompanying notes to consolidated financial statements.
F - 7
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Operations
Fiscal Years Ended July 31, 2024, 2023 and 2022
2024
2023
2022
Net sales
$
540,403,000
549,994,000
486,239,000
Cost of sales
383,224,000
365,534,000
306,403,000
Gross profit
157,179,000
184,460,000
179,836,000
Expenses:
Selling, general and administrative
123,198,000
120,003,000
114,858,000
Research and development
24,077,000
48,631,000
52,532,000
Amortization of intangibles
21,154,000
21,396,000
21,396,000
Impairment of long-lived assets, including goodwill
64,525,000
—
—
CEO transition costs
2,916,000
9,090,000
13,554,000
Loss on business divestiture
1,199,000
—
—
Proxy solicitation costs
—
—
11,248,000
237,069,000
199,120,000
213,588,000
Operating loss
(79,890,000)
(14,660,000)
(33,752,000)
Other expenses (income):
Interest expense
22,153,000
14,961,000
5,031,000
Interest (income) and other
678,000
1,226,000
(703,000)
Write-off of deferred financing costs
1,832,000
—
—
Change in fair value of warrants and derivatives
(4,273,000)
—
—
Change in fair value of convertible preferred stock purchase option
liability
—
—
(1,005,000)
Loss before benefit from income taxes
(100,280,000)
(30,847,000)
(37,075,000)
Benefit from income taxes
(295,000)
(3,948,000)
(4,023,000)
Net loss
$
(99,985,000)
(26,899,000)
(33,052,000)
Loss on extinguishment of convertible preferred stock
(19,555,000)
—
—
Adjustments to reflect redemption value of convertible preferred stock:
Dividend on convertible preferred stock
(11,551,000)
(7,007,000)
(5,204,000)
Convertible preferred stock issuance costs
(4,349,000)
—
(4,007,000)
Establishment of initial convertible preferred stock purchase
option liability
—
—
(1,005,000)
Net loss attributable to common stockholders
$
(135,440,000) $
(33,906,000) $
(43,268,000)
Net loss per share:
Basic
$
(4.70)
(1.21)
(1.63)
Diluted
$
(4.70)
(1.21)
(1.63)
Weighted average number of common shares outstanding – basic
28,799,000
28,002,000
26,506,000
Weighted average number of common and common equivalent shares
outstanding – diluted
28,799,000
28,002,000
26,506,000
See accompanying notes to consolidated financial statements.
F - 8
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Convertible Preferred Stock and Stockholders’ Equity
Fiscal Years Ended July 31, 2024, 2023 and 2022
Convertible Preferred Stock
Common Stock
Additional
Paid-in Capital
Retained
Earnings
Treasury Stock
Stockholders'
Equity
Shares
Amount
Shares
Amount
Shares
Amount
Balance as of July 31, 2021
—
$
—
41,281,812
$ 4,128,000
$ 605,439,000
$ 333,001,000
15,033,317
$ (441,849,000) $ 500,719,000
Equity-classified stock award compensation
—
—
—
—
7,767,000
—
—
—
7,767,000
CEO transition costs related to equity-classified stock-based awards
(See Note 11)
—
—
—
—
7,388,000
—
—
—
7,388,000
Issuance of employee stock purchase plan shares
—
—
49,138
5,000
725,000
—
—
—
730,000
Issuance of restricted stock, net of forfeiture
—
—
132,854
13,000
(13,000)
—
—
—
—
Net settlement of stock-based awards
—
—
247,721
25,000
(4,640,000)
—
—
—
(4,615,000)
Common stock issued for settlement of UHP Networks Inc. earn-out liability
—
—
961,302
96,000
8,818,000
—
—
—
8,914,000
Issuance of convertible preferred stock
100,000
100,000,000
—
—
—
—
—
—
—
Convertible preferred stock issuance costs
—
(4,007,000)
—
—
—
—
—
—
—
Establishment of initial convertible preferred stock purchase option liability
—
(1,005,000)
—
—
—
—
—
—
—
Adjustment to reflect redemption value of convertible preferred stock
(including accrued dividends)
—
10,216,000
—
—
—
(10,216,000)
—
—
(10,216,000)
Cash dividends declared ($0.40 per share)
—
—
—
—
—
(10,661,000)
—
—
(10,661,000)
Accrual of dividend equivalents, net of reversal ($0.40 per share)
—
—
—
—
—
(389,000)
—
—
(389,000)
Net loss
—
—
—
—
—
(33,052,000)
—
—
(33,052,000)
Balance as of July 31, 2022
100,000
105,204,000
42,672,827
4,267,000
625,484,000
278,683,000
15,033,317
(441,849,000) 466,585,000
Equity-classified stock award compensation
—
—
—
—
10,257,000
—
—
—
10,257,000
CEO transition costs related to equity-classified stock-based awards
(See Note 11)
—
—
—
—
3,764,000
—
—
—
3,764,000
Issuance of employee stock purchase plan shares
—
—
54,617
5,000
429,000
—
—
—
434,000
Issuance of restricted stock, net of forfeiture
—
—
93,091
9,000
(9,000)
—
—
—
—
Net settlement of stock-based awards
—
—
275,736
29,000
(3,000,000)
—
—
—
(2,971,000)
Adjustment to reflect redemption value of convertible preferred stock
(including accrued dividends)
—
7,007,000
—
—
—
(7,007,000)
—
—
(7,007,000)
Cash dividends declared ($0.20 per share)
—
—
—
—
—
(5,549,000)
—
—
(5,549,000)
Accrual of dividend equivalents, net of reversal ($0.20 per share)
—
—
—
—
—
(315,000)
—
—
(315,000)
Net loss
—
—
—
—
—
(26,899,000)
—
—
(26,899,000)
Balance as of July 31, 2023
100,000
112,211,000
43,096,271
4,310,000
636,925,000
238,913,000
15,033,317
(441,849,000) 438,299,000
Equity-classified stock award compensation
—
—
—
—
6,096,000
—
—
—
6,096,000
Issuance of employee stock purchase plan shares
—
—
52,604
5,000
249,000
—
—
—
254,000
Issuance of restricted stock, net of forfeiture
—
—
(2,686)
—
—
—
—
—
—
Net settlement of stock-based awards
—
—
619,920
62,000
(3,125,000)
—
—
—
(3,063,000)
Loss on extinguishment of convertible preferred stock
(100,000) (115,721,000)
—
—
—
(19,555,000)
—
—
(19,555,000)
Issuance of convertible preferred stock
171,827
172,035,000
—
—
—
—
—
—
—
Convertible preferred stock issuance costs
—
(4,349,000)
—
—
—
—
—
—
—
Adjustment to reflect redemption value of convertible preferred stock
(including accrued dividends)
—
15,900,000
—
—
—
(15,900,000)
—
—
(15,900,000)
Reversal of dividend equivalents
—
—
—
—
—
107,000
—
—
107,000
Net loss
—
—
—
—
—
(99,985,000)
—
—
(99,985,000)
Balance as of July 31, 2024
171,827
$ 180,076,000
43,766,109
$ 4,377,000
$ 640,145,000
$ 103,580,000
15,033,317
$ (441,849,000) $ 306,253,000
See accompanying notes to consolidated financial statements.
F - 9
Cash flows from operating activities:
Net loss
$
(99,985,000)
(26,899,000)
(33,052,000)
Adjustments to reconcile net loss to net cash (used in) provided by operating
activities:
Depreciation and amortization of property, plant and equipment
12,159,000
11,922,000
10,314,000
Amortization of intangible assets with finite lives
21,154,000
21,396,000
21,396,000
Amortization of stock-based compensation
6,096,000
10,107,000
7,767,000
Amortization of deferred financing costs
3,985,000
1,852,000
811,000
Amortization of cost to fulfill assets
960,000
959,000
469,000
Write-off of deferred financing costs
1,832,000
—
—
CEO transition costs related to equity-classified stock-based awards
—
3,764,000
7,388,000
Change in fair value of warrants and derivatives
(4,273,000)
—
—
Change in fair value of convertible preferred stock purchase option liability
—
—
(1,005,000)
Paid-in-kind interest under Term Loan
337,000
—
—
Loss on business divestiture
1,199,000
—
—
Changes in other liabilities
(4,110,000)
(4,133,000)
(4,132,000)
Loss (gain) on disposal of property, plant and equipment
889,000
48,000
(310,000)
Provision for allowance for doubtful accounts
1,422,000
261,000
838,000
Provision for excess and obsolete inventory
2,801,000
4,871,000
4,447,000
Deferred income tax benefit
(2,990,000)
(6,060,000)
(5,856,000)
Impairment of long-lived assets, including goodwill
64,525,000
—
—
Changes in assets and liabilities, net of effects of divestitures:
Accounts receivable
(38,305,000)
(39,709,000)
33,567,000
Inventories
(7,763,000)
(14,885,000)
(20,406,000)
Prepaid expenses and other current assets
4,282,000
1,656,000
(3,190,000)
Other assets
(717,000)
(3,356,000)
(6,656,000)
Accounts payable
(18,930,000)
20,362,000
6,833,000
Accrued expenses and other current liabilities
755,000
671,000
(11,081,000)
Contract liabilities
2,755,000
10,194,000
(1,362,000)
Other liabilities, non-current
14,000
(324,000)
(3,690,000)
Interest payable
(296,000)
1,197,000
(22,000)
Income taxes payable
(2,291,000)
1,673,000
(1,071,000)
Net cash (used in) provided by operating activities
(54,495,000)
(4,433,000)
1,997,000
Cash flows from investing activities:
Proceeds from business divestiture, net
33,225,000
—
—
Purchases of property, plant and equipment
(13,083,000)
(18,311,000)
(19,619,000)
Net cash provided by (used in) investing activities
20,142,000
(18,311,000)
(19,619,000)
Cash flows from financing activities:
Proceeds from term loan facilities
157,140,000
—
—
Repayment of term loan facilities
(48,800,000)
(1,875,000)
—
Net (payments) borrowings under revolving loans
(85,300,000)
36,900,000
(71,000,000)
Payment of deferred financing costs
(10,294,000)
(3,809,000)
(140,000)
Proceeds from issuance of convertible preferred stock
43,200,000
—
100,000,000
Payment of convertible preferred stock issuance costs
(4,272,000)
—
(4,007,000)
Cash dividends paid on common stock
(268,000)
(8,661,000)
(11,048,000)
Remittance of employees' statutory tax withholding for stock awards
(3,815,000)
(2,869,000)
(6,109,000)
Proceeds from issuance of employee stock purchase plan shares
254,000
470,000
734,000
Payment of shelf registration costs
(20,000)
(101,000)
—
Repayment of principal amounts under finance lease and other obligations
—
(4,000)
(15,000)
Net cash provided by financing activities
47,825,000
20,051,000
8,415,000
(Continued)
2024
2023
2022
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Fiscal Years Ended July 31, 2024, 2023 and 2022
F - 10
2024
2023
2022
Net increase (decrease) in cash and cash equivalents
$
13,472,000
(2,693,000)
(9,207,000)
Cash and cash equivalents at beginning of year
18,961,000
21,654,000
30,861,000
Cash and cash equivalents at end of year
$
32,433,000
18,961,000
21,654,000
Supplemental cash flow disclosure
Cash paid during the year for:
Interest
$
18,097,000
11,914,000
4,094,000
Income taxes, net
$
4,877,000
361,000
2,913,000
Non-cash investing and financing activities:
Adjustment to reflect redemption value of convertible preferred stock
$
15,900,000
7,007,000
10,216,000
Accrued deferred financing costs
$
1,114,000
—
—
Accrued additions to property, plant and equipment
$
961,000
993,000
5,586,000
Accrued remittance of employees' statutory tax withholdings for fully-vested
share units
$
424,000
1,204,000
1,102,000
Accrued shelf registration costs
$
170,000
—
—
Unpaid convertible preferred stock issuance costs
$
77,000
—
—
Cash dividends declared on common stock but unpaid, including (reversal)
accrual of dividend equivalents
$
(107,000)
315,000
3,135,000
Issuance of restricted stock
$
—
9,000
13,000
Common stock issued for acquisitions
$
—
—
9,000,000
Establishment of initial convertible preferred stock purchase option liability
$
—
—
1,005,000
See accompanying notes to consolidated financial statements.
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Fiscal Years Ended July 31, 2024, 2023 and 2022
F - 11
(1) Summary of Significant Accounting and Reporting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Comtech Telecommunications Corp. and
its subsidiaries ("Comtech," "we," "us," or "our"), all of which are wholly-owned. All significant intercompany
balances and transactions have been eliminated in consolidation.
(b) Nature of Business
We design, produce and market innovative products, systems and services for advanced communications solutions. We
conduct our business through two reportable operating segments: Satellite and Space Communications and Terrestrial
and Wireless Networks.
Our business is highly competitive and characterized by rapid technological change. Our growth and financial position
depends on our ability to keep pace with such changes and developments and to respond to the sophisticated
requirements of an increasing variety of secure wireless communications technology users, among other things. Many
of our competitors are substantially larger, and have significantly greater financial, marketing and operating resources
and broader product lines than our own. A significant technological or sales breakthrough by others, including smaller
competitors or new companies, could have a material adverse effect on our business. In addition, certain of our
customers have technological capabilities in our product areas and could choose to replace our products with their
own.
International sales expose us to certain risks, including barriers to trade, fluctuations in foreign currency exchange
rates (which may make our products less price competitive), political and economic instability, availability of suitable
export financing, export license requirements, tariff regulations, and other United States ("U.S.") and foreign
regulations that may apply to the export of our products, as well as the generally greater difficulties of doing business
abroad. We attempt to reduce the risk of doing business in foreign countries by seeking contracts denominated in U.S.
dollars, advance or milestone payments, credit insurance and irrevocable letters of credit in our favor.
(c) 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 audited 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 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 Consolidated Financial Statements are issued.
As of the date these financial statements were issued (the "issuance date"), we evaluated whether the following adverse
conditions, when 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.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
F - 12
Over the past three fiscal years, we incurred operating losses of $79,890,000, $14,660,000 and $33,752,000 in fiscal
2024, 2023 and 2022, respectively. In addition, over the past three fiscal years, net cash used in operating activities
was $54,495,000 and $4,433,000 in fiscal 2024 and 2023, respectively, and net cash provided by operating activities
was $1,997,000 in fiscal 2022. 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 Note (8) – “Credit Facility,” on June 17, 2024, we entered into a $222,000,000 credit facility
with a new syndicate of lenders, which replaced our prior credit facility. As further discussed below, we subsequently
amended the credit facility on October 17, 2024 (the "Credit Facility"). The Credit Facility consists of a committed
$162,000,000 term loan (“Term Loan”) and $60,000,000 revolving loan (“Revolver Loan”). At July 31, 2024 and
October 25, 2024 (the date closest to the issuance date), total outstanding borrowings under the Credit Facility were
$194,163,000 and $199,067,000, respectively. At both July 31, 2024 and October 25, 2024, $32,500,000 was drawn on
the Revolver Loan. As of the issuance date, our available sources of liquidity approximate $28,700,000, consisting
solely of qualified cash and cash equivalents. That is, our available sources of liquidity do not include the remaining
portion of the committed Revolver Loan due to the lenders' consent right, discussed below, to any borrowings that
exceed $32,500,000.
The Credit Facility, among other things, requires compliance with new restrictive and financial covenants, including: a
maximum allowable Net Leverage Ratio of 3.25x for the fiscal quarter ending January 31, 2025; a minimum Fixed
Charge Coverage Ratio of 1.20x for the fiscal quarter ending January 31, 2025; a minimum Average Liquidity
requirement at each quarter end of $20,000,000; and a minimum EBITDA of $35,000,000 for the fiscal quarter ending
October 31, 2025. Such ratios adjust under the Credit Facility in future periods.
The Credit Facility was amended on October 17, 2024 to waive certain defaults or events of default, including in
connection with our Net Leverage Ratio and Fixed Charge Coverage Ratio covenants as of July 31, 2024. The
amendment also provides for, among other things: (i) increases the interest rate margins applicable to the loans; (ii)
modifies certain financial and collateral reporting requirements; (iii) provides a lender consent right with respect to
$27,500,000 of Revolver Loan borrowings above $32,500,000; (iv) permits the incurrence of $25,000,000 of senior
unsecured subordinated debt (as described below); (v) amends the maturity date to the earlier of (x) July 31, 2028 or
(y) 90 days prior to the earliest date that the debt under the Subordinated Credit Agreement (as defined below)
becomes due and payable; and (vi) suspends financial covenant testing through the end of our fiscal quarter ending
January 31, 2025.
In addition, we entered into a Subordinated Credit Agreement with the existing holders of our Convertible Preferred
Stock (the “Subordinated Credit Agreement”) on October 17, 2024, which provides a subordinated unsecured term
loan facility in the aggregate principal amount of $25,000,000 (the “Subordinated Credit Facility”). The proceeds of
the Subordinated Credit Facility: (i) cured our default on certain financial covenants under the Credit Facility, as
discussed above; (ii) provides additional liquidity to us; and (iii) funds our general working capital needs, including
support of our strategic transformation initiatives, as discussed below.
Our ability to meet our current obligations as they become due may be impacted by our ability to remain compliant
with the financial covenants required by the Credit Facility, or to obtain future waivers or amendments from the
lenders in the event compliance is not maintained. While we believe we will be able to secure such waivers or
amendments, as needed, there can be no assurance such waivers or amendments will be secured or on terms that are
acceptable to us. If we are unable to secure waivers or amendments, the lenders may declare an event of default, which
would cause an immediate acceleration and repayment of all outstanding principal, interest and fees due under our
Credit Facility. Absent our ability to repay the forgoing amounts upon the declaration of an event of default, the
lenders may exercise their rights and remedies under the Credit Facility, which may include, among others, a seizure of
substantially all of our assets and/or the liquidation of our operations. If an event of default occurs that allows the
lenders to exercise these rights and remedies over the next year beyond the issuance date, we will be unable to
continue as a going concern.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 13
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 into a pure-play satellite and space communications company
(ongoing and future actions supporting our transformation strategy include: an exploration of strategic
alternatives for our Terrestrial and Wireless Networks segment, which is well underway; the pursuit of further
portfolio-shaping opportunities to enhance profitability, efficiency and focus; and the implementation of
additional operational initiatives to both achieve profitable results from operations as well as to align our go-
forward cost structure with a pure-play focus on satellite and space communications), as discussed further in
Note (18) – “Cost Reduction Activities;”
•
pursuing initiatives to reduce investments in working capital, namely accounts receivable and inventory;
•
improving process disciplines to attain and maintain profitable operations by entering into more favorable
sales or service contracts;
•
reevaluating our business plans to identify opportunities (e.g., within our Satellite and Space Communications
segment) to focus future investment on our most strategic, high-margin revenue opportunities;
•
reevaluating our business plans to identify opportunities to further reduce capital expenditures;
•
seeking opportunities to improve liquidity through any combination of debt and/or equity financing (including
possibly restructuring our Credit Facility, Convertible Preferred Stock and/or Subordinated Credit
Agreement); and
•
seeking other strategic transactions and/or measures including, but not limited to, the potential sale or
divestiture of assets.
While we believe the implementation of some or all of the elements of our plans over the next year beyond the
issuance date will be successful, these plans are not all solely within management’s control and, as such, we can
provide no assurance our plans are probable of being effectively implemented as of the issuance date. Therefore, the
adverse conditions and events described above are uncertainties that raise substantial doubt about our ability to
continue as a going concern. The accompanying consolidated financial statements 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 consolidated financial statements do not include any adjustments that may result from the outcome of
these uncertainties.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 14
(d) Revenue Recognition
In accordance with FASB ASC 606 - Revenue from Contracts with Customers ("ASC 606"), we record revenue in an
amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to
customers. Under ASC 606, we follow a five-step model to: (1) identify the contract with our customer; (2) identify
our performance obligations in our contract; (3) determine the transaction price for our contract; (4) allocate the
transaction price to our performance obligations; and (5) recognize revenue using one of the following two methods:
•
Over time - We recognize revenue using the over time method when there is a continuous transfer of control
to the customer over the contractual period of performance. This generally occurs when we enter into a long-
term contract relating to the design, development or manufacture of complex equipment or technology
platforms to a buyer’s specification (or to provide services related to the performance of such contracts) for
which we have determined there is no alternative use, as defined in ASC 606. Continuous transfer of control
is typically supported by contract clauses which allow our customers to unilaterally terminate a contract for
convenience, pay for costs incurred plus a reasonable profit and take control of work-in-process. Revenue
recognized over time is generally based on the extent of progress toward completion of the related
performance obligations. The selection of the method to measure progress requires judgment and is based on
the nature of the products or services provided. In certain instances, typically for firm fixed-price contracts,
we use the cost-to-cost measure because it best depicts the transfer of control to the customer which occurs as
we incur costs on our contracts. Under the cost-to-cost measure, the extent of progress toward completion is
measured based on the ratio of costs incurred to date to the total estimated costs at completion, including
warranty costs. Revenues, including estimated fees or profits, are recorded proportionally as costs are
incurred. Costs to fulfill generally include direct labor, materials, subcontractor costs, other direct costs and
an allocation of indirect costs. When these contracts are modified, the additional goods or services are
generally not distinct from those already provided. As a result, these modifications form part of an existing
contract and we must update the transaction price and our measure of progress for the single performance
obligation and recognize a cumulative catch-up to revenue and gross profits.
For over time contracts using a cost-to-cost measure of progress, we have an estimate at completion ("EAC")
process in which management reviews the progress and execution of our performance obligations. This EAC
process requires management judgment relative to assessing risks, estimating contract revenue and costs, and
making assumptions for schedule and technical issues. Since certain contracts extend over a long period of
time, the impact of revisions in revenue and/or cost estimates during the progress of work may impact current
period earnings through a cumulative adjustment. Additionally, if the EAC process indicates a loss, a
provision is made for the total anticipated loss in the period that it becomes evident. Contract revenue and
cost estimates for significant contracts are generally reviewed and reassessed at least quarterly.
The cost-to-cost method is principally used to account for contracts in our 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 service-based contracts in our Terrestrial and Wireless Networks segment, we also
recognize revenue over time. These services are typically recognized as a series of services performed over
the contract term using the straight-line method, or based on our customers’ actual usage of the networks and
platforms which we provide.
•
Point in time - When a performance obligation is not satisfied over time, we must record revenue using the
point in time accounting method which generally results in revenue being recognized upon shipment or
delivery of a promised good or service to a customer. This generally occurs when we enter into short term
contracts or purchase orders where items are provided to customers with relatively quick turn-around times.
Modifications to such contracts and/or purchase orders, which typically provide for additional quantities or
services, are accounted for as a new contract because the pricing for these additional quantities or services are
based on standalone selling prices.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 15
Point in time accounting is principally applied to contracts in our satellite ground station technologies product
line (which includes satellite modem and traveling wave tube amplifiers). The contracts related to these
product lines do not meet the requirements for over time revenue recognition because our customers cannot
utilize the equipment for its intended purpose during any phase of our manufacturing process; customers do
not simultaneously receive and/or consume the benefits provided by our performance; customers do not
control the asset (i.e., prior to delivery, customers cannot direct the use of the asset, sell or exchange the
equipment, etc.); and, although many of our contracts have termination for convenience clauses and/or an
enforceable right to payment for performance completed to date, our performance creates an asset with an
alternative use through the point of delivery.
In determining that our equipment has alternative use, we considered the underlying manufacturing process
for our products. In the early phases of manufacturing, raw materials and work in process (including
subassemblies) consist of common parts that are highly fungible among many different types of products and
customer applications. Finished products are either configured to our standard configuration or based on our
customers’ specifications. Finished products, whether built to our standard specification or to a customers’
specification, can be sold to a variety of customers and across many different end use applications with
minimal rework, if needed, and without incurring a significant economic loss.
When identifying a contract with our customer, we consider when it has approval and commitment from both parties,
if the rights of the parties are identified, if the payment terms are identified, if it has commercial substance and if
collectability is probable.
When identifying performance obligations, we consider whether there are multiple promises and how to account for
them. In our contracts, multiple promises are separated if they are distinct, both individually and in the context of the
contract. If multiple promises in a contract are highly interrelated or comprise a series of distinct services performed
over time, they are combined into a single performance obligation. In some cases, we may also provide the customer
with an additional service-type warranty, which we recognize as a separate performance obligation. Service-type
warranties do not represent a significant portion of our consolidated net sales. When service-type warranties represent
a separate performance obligation, the revenue is deferred and recognized ratably over the extended warranty period.
Our contracts, from time-to-time, may also include options for additional goods and services. To date, these options
have not represented material rights to the customer as the pricing for them reflects standalone selling prices. As a
result, we do not consider options we offer to be performance obligations for which we must allocate a portion of the
transaction price. In many cases, we provide assurance-type warranty coverage for some of our products for a period
of at least one year from the date of delivery.
When identifying the transaction price, we typically utilize the contract's stated price as a starting point. The
transaction price in certain arrangements may include estimated amounts of variable consideration, including award
fees, incentive fees or other provisions that can either increase or decrease the transaction price. We estimate variable
consideration as the amount to which we expect to be entitled, and we include estimated amounts in the transaction
price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the
estimation uncertainty is resolved. The estimation of this variable consideration and determination of whether to
include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance
and all information (e.g., historical, current and forecasted) that is reasonably available to us.
When allocating the contract’s transaction price, we consider each distinct performance obligation. For contracts with
multiple performance obligations, we allocate the contract’s transaction price to each performance obligation using our
best estimate of the standalone selling price of each distinct good or service in the contract. We determine standalone
selling price based on the price at which the performance obligation is sold separately. If the standalone selling price is
not observable through past transactions, we estimate the standalone selling price taking into account available
information such as market conditions, including geographic or regional specific factors, competitive positioning,
internal costs, profit objectives and internally approved pricing guidelines related to the performance obligations.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 16
Most of our contracts with customers are denominated in U.S. dollars and typically are either firm fixed-price or cost
reimbursable type contracts (including fixed-fee, incentive-fee and time-and-material type contracts). In almost all of
our contracts with customers, we are the principal in the arrangement and report revenue on a gross basis. Transaction
prices for contracts with U.S. domestic and international customers are usually based on specific negotiations with
each customer and in the case of the U.S. government, sometimes based on estimated or actual costs of providing the
goods or services in accordance with applicable regulations. Sales by geography and customer type, as a percentage of
consolidated net sales, are as follows:
Fiscal Years Ended July 31,
2024
2023
2022
United States
U.S. government
33.7 %
31.3 %
27.2 %
Domestic
44.8 %
44.7 %
47.8 %
Total United States
78.5 %
76.0 %
75.0 %
International
21.5 %
24.0 %
25.0 %
Total
100.0 %
100.0 %
100.0 %
Sales to U.S. government customers include sales to the U.S. Department of Defense ("DoD"), intelligence and
civilian agencies, as well as sales directly to or through prime contractors. Domestic sales include sales to commercial
customers, as well as to U.S. state and local governments. For fiscal 2024, except for the U.S. government, there were
no customers that represented more than 10% of consolidated net sales. For fiscal 2023 and 2022, included in domestic
sales are sales to Verizon Communications Inc. ("Verizon"), which were 10.6% and 11.1% of consolidated net sales,
respectively. International sales for fiscal 2024, 2023 and 2022 (which include sales to U.S. domestic companies for
inclusion in products that are sold to international customers) were $115,924,000, $132,117,000 and $121,392,000,
respectively. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in
products that are sold to a foreign country) represented more than 10.0% of consolidated net sales for fiscal 2024, 2023
and 2022.
The following tables summarize our disaggregation of revenue consistent with information reviewed by our Chief
Operating Decision Maker ("CODM") for the fiscal years ended July 31, 2024, 2023 and 2022. We believe these
categories best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by
economic factors which impact our business. See Note (12) - "Segment Information" for more information related to
our segments.
Fiscal Year Ended July 31, 2024
Satellite and Space
Communications
Terrestrial and
Wireless Networks
Total
Geographical region and customer type
U.S. government
$
179,816,000
2,504,000 $
182,320,000
Domestic
48,793,000
193,366,000
242,159,000
Total United States
228,609,000
195,870,000
424,479,000
International
95,460,000
20,464,000
115,924,000
Total
$
324,069,000
216,334,000 $
540,403,000
Contract type
Firm fixed-price
$
275,428,000
216,334,000 $
491,762,000
Cost reimbursable
48,641,000
—
48,641,000
Total
$
324,069,000
216,334,000 $
540,403,000
Transfer of control
Point in time
$
135,070,000
1,578,000 $
136,648,000
Over time
188,999,000
214,756,000
403,755,000
Total
$
324,069,000
216,334,000 $
540,403,000
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 17
Fiscal Year Ended July 31, 2023
Satellite and Space
Communications
Terrestrial and
Wireless Networks
Total
Geographical region and customer type
U.S. government
$
168,411,000
3,567,000 $
171,978,000
Domestic
56,568,000
189,331,000
245,899,000
Total United States
224,979,000
192,898,000
417,877,000
International
112,777,000
19,340,000
132,117,000
Total
$
337,756,000
212,238,000 $
549,994,000
Contract type
Firm fixed-price
$
288,482,000
212,238,000 $
500,720,000
Cost reimbursable
49,274,000
—
49,274,000
Total
$
337,756,000
212,238,000 $
549,994,000
Transfer of control
Point in time
$
197,808,000
2,968,000 $
200,776,000
Over time
139,948,000
209,270,000
349,218,000
Total
$
337,756,000
212,238,000 $
549,994,000
Fiscal Year Ended July 31, 2022
Satellite and Space
Communications
Terrestrial and
Wireless Networks
Total
Geographical region and customer type
U.S. government
$
127,536,000
5,061,000
$
132,597,000
Domestic
50,274,000
181,976,000
232,250,000
Total United States
177,810,000
187,037,000
364,847,000
International
101,868,000
19,524,000
121,392,000
Total
$
279,678,000
206,561,000
$
486,239,000
Contract type
Firm fixed-price
$
249,497,000
206,561,000
$
456,058,000
Cost reimbursable
30,181,000
—
30,181,000
Total
$
279,678,000
206,561,000
$
486,239,000
Transfer of control
Point in time
$
186,052,000
2,633,000
$
188,685,000
Over time
93,626,000
203,928,000
297,554,000
Total
$
279,678,000
206,561,000
$
486,239,000
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 18
The timing of revenue recognition, billings and collections results in receivables, unbilled receivables and contract
liabilities on our Consolidated Balance Sheets. Under typical payment terms for our contracts accounted for over time,
amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals
(e.g., monthly) or upon achievement of contractual milestones. For certain contracts with provisions that are intended
to protect customers in the event we do not satisfy our performance obligations, billings occur subsequent to revenue
recognition, resulting in unbilled receivables. Under ASC 606, unbilled receivables constitute contract assets. There
were no material impairment losses recognized on contract assets during the fiscal years ended July 31, 2024, 2023
and 2022. On large long-term contracts, and for contracts with international customers that do not do business with us
regularly, payment terms typically require advanced payments and deposits. Under ASC 606, payments received from
customers in excess of revenue recognized to-date results in a contract liability. These contract liabilities are not
considered to represent a significant financing component of the contract because we believe these cash advances and
deposits are generally used to meet working capital demands which can be higher in the earlier stages of a contract.
Also, advanced payments and deposits provide us with some measure of assurance that the customer will perform on
its obligations under the contract. Under the typical payment terms for our contracts accounted for at a point in time,
costs are accumulated in inventory until the time of billing, which generally coincides with revenue recognition. Of the
current contract liability balance of $66,351,000 at July 31, 2023 and $64,601,000 at July 31, 2022, $48,902,000 and
$53,079,000 was recognized as revenue during fiscal years 2024 and 2023, respectively.
We recognize the incremental costs to obtain or fulfill a contract as an expense when incurred if the amortization
period of the asset is one year or less; otherwise, such costs are capitalized and amortized over the estimated life of the
contract. During fiscal year 2024, incremental costs to obtain or fulfill contracts with an amortization period greater
than one year were $2,863,000. During fiscal year 2023, incremental costs to obtain or fulfill contracts with an
amortization period greater than one year were not material.
Commissions payable to our internal sales and marketing employees or contractors that are incremental to the
acquisition of long-term customer contracts are capitalized and amortized consistent with the pattern of revenue
recognition through cost of sales on our Consolidated Statements of Operations. Commissions payable that are not
incremental to the acquisition of long-term contracts are expensed as incurred in selling, general and administrative
expenses on our Consolidated Statements of Operations. As for commissions payable to our third-party sales
representatives related to large long-term contracts, we consider these types of commissions both direct and
incremental costs to obtain and fulfill such contracts. Therefore, such commissions are included in total estimated costs
at completion for such contracts and expensed over time through cost of sales on our Consolidated Statements of
Operations.
Remaining performance obligations represent the transaction price of firm orders for which work has not been
performed as of the end of a fiscal period. Remaining performance obligations, which we refer to as backlog, exclude
unexercised contract options and potential orders under indefinite delivery / indefinite quantity ("IDIQ") contracts. As
of July 31, 2024, the aggregate amount of the transaction price allocated to remaining performance obligations was
$798,915,000 (which represents the amount of our consolidated funded backlog). We estimate that a substantial
portion of our remaining performance obligations at July 31, 2024 will be completed and recognized as revenue during
the next twenty-four month period, with the rest thereafter. During fiscal 2024, revenue recognized from performance
obligations satisfied, or partially satisfied, in previous periods (for example due to changes in the transaction price)
was not material.
(e) Cash and Cash Equivalents
Our cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of
cash and have insignificant risk of change in value as a result of changes in interest rates. Our cash and cash
equivalents, as of July 31, 2024 and 2023, amounted to $32,433,000 and $18,961,000, respectively, and primarily
consist of bank deposits and money market deposit accounts insured by the Federal Deposit Insurance Corporation.
Cash equivalents are carried at cost, which approximates fair value.
At July 31, 2024, cash and cash equivalents includes $247,000 of cash deposited as collateral in connection with
outstanding standby letters of credit to guarantee future performance on certain customer contracts.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 19
(f)
Inventories
Our inventories are stated at the lower of cost and net realizable value, the latter of which is defined as the estimated
selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and
transportation. Our inventories are reduced to their estimated net realizable value by a charge to cost of sales in the
period such excess costs are determined. Our inventories are principally recorded using either average or standard
costing methods.
Work-in-process (including our contracts-in-progress) and finished goods inventory reflect all accumulated production
costs, which are comprised of direct production costs and overhead, and is reduced by amounts recorded in cost of
sales as the related revenue is recognized. Indirect costs relating to long-term contracts, which include expenses such
as general and administrative, are charged to expense as incurred and are not included in our cost of sales or work-in-
process (including our contracts-in-progress) and finished goods inventory.
(g) Long-Lived Assets
Our machinery and equipment, which are recorded at cost, are depreciated or amortized over their estimated useful
lives (three to eight years) under the straight-line method. Capitalized internal use software costs are amortized once
the software is placed in service under the straight-line method over the estimated useful life of the software, which is
generally three years. Capitalized values of properties and leasehold improvements under leases are amortized over the
life of the lease or the estimated life of the asset, whichever is less.
Goodwill represents the excess cost of a business acquisition over the fair value of the net assets acquired. In
accordance with FASB ASC 350 "Intangibles - Goodwill and Other" goodwill is not amortized. We periodically, at
least on an annual basis in the first quarter of each fiscal year, review goodwill, considering factors such as projected
cash flows and revenue and earnings multiples, to determine whether the carrying value of the goodwill is impaired. If
we fail the quantitative assessment of goodwill impairment ("quantitative assessment"), we would be required to
recognize an impairment loss equal to the amount that a reporting unit's carrying value exceeded its fair value;
however, any loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. We
define our reporting units to be the same as our operating segments.
We perform our annual goodwill impairment test as of the first day of the fiscal year (August 1). Due to triggering
events that occurred in the fourth quarter of fiscal year 2024, we performed a quantitative impairment test for each of
our reporting units as of July 31, 2024. See Note (14) - "Long-lived Assets, including Goodwill" for additional
information. The quantitative impairment test as of July 31, 2024 satisfies the Company’s annual goodwill impairment
testing requirement as of August 1, 2024 due to the proximity of the testing dates.
We assess the recoverability of the carrying value of our other long-lived assets, including identifiable intangible assets
with finite useful lives, whenever events or changes in circumstances indicate that the carrying amount of the assets
may not be recoverable. We evaluate the recoverability of such assets based upon the expectations of undiscounted
cash flows from such assets. If the sum of the expected future undiscounted cash flows were less than the carrying
amount of the asset, a loss would be recognized for the difference between the fair value and the carrying amount. Due
to a triggering event relating to our subsidiary operations in Basingstoke, United Kingdom, we assessed the
recoverability of the carrying value of our other long-lived assets related to these operations. See Note (14) - "Long-
lived Assets, including Goodwill" for additional information.
(h) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the enactment date.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 20
We measure and account for uncertain tax positions taken or expected to be taken in income tax returns in accordance
with the provisions of FASB ASC 740-10-25 "Income Taxes," which prescribes a two-step evaluation process for tax
positions. The first step is recognition based on a determination of whether it is more-likely-than-not that a tax position
will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the
technical merits of the position. The second step is to measure a tax position that meets the more-likely-than-not
threshold. The tax position is measured as the largest amount of benefit that is greater than 50% likely of being
realized upon ultimate settlement. If a tax position does not meet the more-likely-than-not recognition threshold, the
benefit of that position is not recognized in the financial statements. Our policy is to recognize potential interest and
penalties related to uncertain tax positions in income tax expense.
(i)
Earnings Per Share
Our basic earnings per share ("EPS") is computed based on the weighted average number of common shares (including
vested but unissued stock units, share units, performance shares and restricted stock units ("RSUs")) outstanding
during each respective period. Our diluted EPS reflects the dilution from potential common stock issuable pursuant to
the exercise of equity-classified stock-based awards, warrants issued to our lenders in connection with entering the
Credit Facility, settlement of escrow arrangements related to our acquisition of UHP Networks Inc. ("UHP") and the
assumed conversion of Convertible Preferred Stock, if dilutive, outstanding during each respective period. The
warrants contingently issuable to our preferred shareholders upon a repurchase of the Series B-1 Convertible Preferred
Stock are not reflected in diluted EPS. Pursuant to FASB ASC 260 "Earnings Per Share," shares whose issuance is
contingent upon the satisfaction of certain conditions are included in diluted EPS based on the number of shares, if
any, that would be issuable if the end of the reporting period were the end of the contingency period. When calculating
our diluted earnings per share, we consider the amount an employee must pay upon assumed exercise of stock-based
awards and the amount of stock-based compensation cost attributed to future services and not yet recognized.
There were no repurchases of our common stock during the fiscal years ended July 31, 2024, 2023 and 2022. See Note
(17) - "Stockholders’ Equity" for more information.
Weighted average stock options, RSUs and restricted stock outstanding of 1,050,000, 972,000 and 1,656,000 shares
for fiscal 2024, 2023 and 2022, respectively, were not included in our diluted EPS calculation because their effect
would have been anti-dilutive.
Our EPS calculations exclude 534,000, 385,000 and 293,000 weighted average performance shares outstanding for
fiscal 2024, 2023 and 2022, respectively, as the performance conditions have not yet been satisfied. However, the
numerator for EPS calculations for each respective period is reduced by the compensation expense related to these
awards.
Weighted average common shares of 174,000 related to warrants issued in connection with entering the Credit Facility
on June 17, 2024 were not included in our diluted EPS calculation for fiscal 2024 because their effect would have been
anti-dilutive.
Weighted average common shares of 98,000, 260,000 and 591,000 related to our acquisition of UHP in March 2021
were not included in our diluted EPS calculation for fiscal 2024, 2023 and 2022, respectively, because their effect
would have been anti-dilutive. As of July 31, 2024, all of the shares held in escrow related to the UHP acquisition were
settled.
Weighted average common shares of 13,581,000, 4,570,000 and 3,342,000 underlying the assumed conversion of
Convertible Preferred Stock, on an if-converted basis, were not included in our diluted EPS calculation for fiscal 2024,
2023 and 2022, respectively, because their effect would have been anti-dilutive. As a result, the numerator for our
basic and diluted EPS calculation for fiscal 2024, 2023 and 2022 is the respective net loss attributable to common
stockholders.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 21
The following table reconciles the numerators and denominators used in the basic and diluted EPS calculations:
Fiscal Years Ended July 31,
2024
2023
2022
Numerator:
Net loss
$ (99,985,000)
(26,899,000)
(33,052,000)
Loss on extinguishment of convertible
preferred stock
(19,555,000)
—
—
Convertible preferred stock issuance costs
(4,349,000)
—
(4,007,000)
Establishment of initial convertible preferred
stock purchase option liability
—
—
(1,005,000)
Dividend on convertible preferred stock
(11,551,000)
(7,007,000)
(5,204,000)
Net loss attributable to common stockholders
$ (135,440,000)
(33,906,000)
(43,268,000)
Denominator:
Denominator for basic and diluted calculation
28,799,000
28,002,000
26,506,000
As discussed further in Note (16) - "Convertible Preferred Stock," such shares of preferred stock represent a
"participating security" as defined in ASC 260. As a result, our EPS calculations for fiscal 2024, 2023 and 2022 were
based on the two-class method. Given the net loss attributable to common stockholders for fiscal 2024, 2023 and 2022,
there was no impact of applying the two-class method to our reported basic or diluted earnings per common share.
(j)
Fair Value Measurements and Financial Instruments
Using the fair value hierarchy described in FASB ASC 820 "Fair Value Measurements and Disclosures," we valued
our cash and cash equivalents using Level 1 inputs that were based on quoted market prices. We believe that the
carrying amounts of our other current financial assets (such as accounts receivable) and other current liabilities
(including accounts payable, accrued expenses and the current portion of long-term debt) approximate their fair values
due to their short-term maturities. The fair value of the non-current portion of our long-term debt approximates its
carrying amount due to its variable interest rate and pricing grid that is dependent upon our leverage ratio as of such
date.
Level 3 inputs 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.
As further discussed in Note (8) - "Credit Facility," we used Level 3 inputs to value the warrants issued to lenders in
connection with our Credit Facility. As of July 31, 2024, we determined the fair value of such warrants based on the
Black-Scholes option pricing model using the following estimates: exercise price of $0.10, risk free rate of 4.0%,
volatility of 55.0%, and expected life of seven years. We also used Level 3 inputs to value the embedded derivative
liability associated with our Credit Facility. As of July 31, 2024, we determined the fair value of the embedded
derivative liability using a with-and-without scenario-based discounted cash flow method, which reflected our
estimates regarding the probability and timing of events that could result in additional payments of interest and/or fees
to such lenders as stated in our Credit Facility.
As further discussed in Note (16) - "Convertible Preferred Stock," we used Level 3 inputs to value warrants
contingently issuable under the terms of our Convertible Preferred Stock. As of July 31, 2024, we determined the fair
value of Convertible Preferred Stock warrants using the Monte Carlo simulation model with the following
assumptions: expected life of five months; risk free rate of 3.9%; expected volatility of 60.0%; and dividend yield of
0%.
As of July 31, 2024 and 2023, other than the financial instruments discussed above, we had no other significant assets
or liabilities included in our Consolidated Balance Sheets recorded at fair value, as such term is defined by FASB ASC
820.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 22
(k) Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect the reported amount
of assets and liabilities, and disclosure of contingent assets and liabilities, at the date of the consolidated financial
statements and the reported amounts of net sales and expenses during the reported period. We make significant
estimates in many areas of our accounting, including but not limited to the following: liquidity and going concern
assessments, revenue recognition related to contracts accounted for over time, stock-based compensation, intangible
assets (including goodwill) and liabilities, provision for excess and obsolete inventory, allowance for doubtful
accounts, warranty obligations and income taxes. Actual results may differ from those estimates.
(l)
Comprehensive Income
In accordance with FASB ASC 220 "Comprehensive Income," we report all changes in equity during a period, except
those resulting from investment by owners and distribution to owners, for the period in which they are recognized.
Comprehensive income is the total of net income and all other non-owner changes in equity (or other comprehensive
income) such as unrealized gains/losses on securities classified as available-for-sale, foreign currency translation
adjustments and minimum pension liability adjustments. Comprehensive income (loss) was the same as our net income
(loss) in fiscal 2024, 2023 and 2022.
(m) Reclassifications
Certain reclassifications have been made to previously reported consolidated financial statements to conform to the
fiscal 2024 presentation.
(n) Adoption of Accounting Standards and Updates
We are required to prepare our consolidated financial statements in accordance with the Financial Accounting
Standards Board ("FASB") Accounting Standards Codification ("ASC") which is the source for all authoritative U.S.
generally accepted accounting principles, which are commonly referred to as "GAAP." The FASB ASC is subject to
updates by the FASB, which are known as Accounting Standards Updates ("ASUs"). During fiscal 2024 the following
FASB ASUs have been issued and incorporated into the FASB ASC and have not yet been adopted by us as of
July 31, 2024:
•
FASB ASU No. 2023-07, which requires the disclosure of significant segment expenses, by reportable
segment, regularly provided to the chief operating decision maker (“CODM”) and included within each
reported measure of segment profit or loss. The disclosure of other segment items by reportable segment are
also required and would constitute the difference between segment revenues less these significant segment
expenses and reported segment profit or loss. On an annual basis, the update requires an entity to disclose the
CODM's title and position, as well as describe how the CODM uses the reported measures. Additionally, all
existing annual disclosures about segment profit or loss must be provided on an interim basis in addition to
the disclosure of significant segment expenses and other segment items. This ASU is effective for fiscal years
beginning after December 15, 2023 (our fiscal year beginning on August 1, 2024) and for interim periods
within fiscal years beginning after December 15, 2024 (our interim period beginning on August 1, 2025),
with early adoption permitted. The adoption of this guidance will impact our disclosures only and we do not
expect it to have a material impact on our consolidated financial statements.
•
FASB ASU No. 2023-09 enhances and establishes new income tax disclosure requirements in addition to
modifying and eliminating certain existing requirements. Most notably under the new requirements is greater
disaggregation of information in the effective tax rate reconciliation, including the inclusion of both
percentages and amounts, specific categories, and additional information for reconciling items meeting a
quantitative threshold defined by the guidance. Additionally, disclosures of income taxes paid and income tax
expense must be disaggregated by federal, state and foreign taxes, with income taxes paid further
disaggregated for individual jurisdictions that represent 5 percent or more of total income taxes paid. This
ASU is effective for fiscal years beginning after December 15, 2024 (our fiscal year beginning on August 1,
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 23
2025), with early adoption permitted. We are evaluating the impact of this ASU on our consolidated financial
statements and disclosures.
(2) CEO Transition Costs
For the three fiscal years ended July 31, 2024, cumulative CEO transition costs aggregated $25,560,000.
Fiscal 2024 - On March 12, 2024, Ken Peterman, our former Chairman of the Board, President and CEO, was
terminated for cause and the Board of Directors appointed John Ratigan as interim Chief Executive Officer ("CEO")
and Mark Quinlan as Chairman of the Board of Directors. Prior to the changes, Mr. Ratigan served as our Chief
Corporate Development Officer and Mr. Quinlan served as a member of our Board of Directors. Upon termination of
his employment, Mr. Peterman was deemed to have resigned from his position as Chairman of the Board of Directors
and as a director pursuant to his employment contract. CEO transition costs of $2,916,000 incurred during fiscal 2024
primarily consisted of legal expenses and were expensed in our Unallocated segment.
Fiscal 2023 - On August 9, 2022, our Board of Directors appointed Ken Peterman as our Chairman of the Board,
President and CEO. Transition costs related to his predecessor, our former President and CEO, Michael D. Porcelain,
pursuant to his separation agreement with the Company, were $7,424,000, of which $3,764,000 related to the
acceleration of unamortized stock based compensation, with the remaining $3,660,000 related to his severance
payments and benefits upon termination of employment. The cash portion of the transition costs of $3,660,000 was
paid to Mr. Porcelain in October 2022. Also, in connection with Mr. Peterman entering into an employment agreement
with the Company, effective as of August 9, 2022, we incurred a $1,000,000 expense related to a cash sign-on bonus,
which was paid to Mr. Peterman in January 2023. CEO transition costs related to Mr. Porcelain and Mr. Peterman
were expensed in our Unallocated segment during the first quarter of fiscal 2023.
Fiscal 2022 - During fiscal 2022, we expensed $13,554,000 of transition costs related to former CEO, Fred Kornberg.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 24
(3) Business Divestiture
On November 7, 2023, we completed the divestiture of our solid-state RF microwave high power amplifiers and
control components product line, which was included in our Satellite and Space Communications segment, pursuant to
a stock sale agreement entered into on October 11, 2023 (the "PST Divestiture"). The final sales price for this
divestiture was $35,459,000. As of July 31, 2024, we received net cash proceeds of $33,277,000, which reflects
$2,182,000 of transaction costs. Based on the carrying amount of net assets related to the PST Divestiture (see below
table), we recognized a GAAP pre-tax loss of $1,199,000. Such loss is presented in the "Loss on Business Divestiture"
line item in our Consolidated Statements of Operations.
The carrying amount of the major classes of assets and liabilities related to the PST Divestiture ("PST Disposal
Group") as of November 7, 2023 are as follows:
Cash and cash equivalents
$
(71,000)
Accounts receivable, net
4,168,000
Inventories, net
17,822,000
Prepaid expenses and other current assets
201,000
Property, plant and equipment, net
2,790,000
Operating lease right-of-use assets, net
5,379,000
Goodwill
14,587,000
Other assets, net
35,000
Total assets of disposal group held for sale
$
44,911,000
Accounts payable
$
3,081,000
Accrued expenses and other current liabilities
1,622,000
Operating lease liabilities, current
545,000
Contract liabilities
656,000
Operating lease liabilities, non-current
4,894,000
Deferred tax liability, net
(363,000)
Total liabilities of disposal group held for sale
$
10,435,000
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 25
(4) Accounts Receivable
Accounts receivable consists of the following at July 31, 2024 and 2023:
2024
2023
Receivables from commercial and international customers
$
53,108,000
52,438,000
Unbilled receivables from commercial and international customers
72,540,000
54,469,000
Receivables from the U.S. government and its agencies
20,682,000
31,149,000
Unbilled receivables from the U.S. government and its agencies
51,197,000
27,192,000
Total accounts receivable
197,527,000
165,248,000
Less allowance for doubtful accounts
1,932,000
2,089,000
Accounts receivable, net
$ 195,595,000
163,159,000
Unbilled receivables as of July 31, 2024 relate to contracts-in-progress for which revenue has been recognized, but we
have not yet earned the right to bill the customer for work performed to-date. Under ASC 606, unbilled receivables
constitute contract assets. Management estimates that a substantial portion of the amounts not yet billed at July 31,
2024 will be billed and collected within one year. Accounts receivable in the table above excludes $824,000 and
$2,993,000 of long-term unbilled receivables presented within "Other Assets, Net" in the Consolidated Balance Sheets
as of July 31, 2024 and July 31, 2023, respectively.
As of July 31, 2024, the U.S. government (and its agencies), one U.K. based international customer of troposcatter
related technologies and AT&T represented 36.4%, 11.3% and 10.9% of total accounts receivable, respectively. There
were no other customers which accounted for greater than 10.0% of total accounts receivable.
As of July 31, 2023, except for the U.S. government (and its agencies) and AT&T, which represented 35.3% and
11.0% of total accounts receivable, respectively, there were no other customers which accounted for greater than
10.0% of total accounts receivable.
(5) Inventories
Inventories consist of the following at July 31, 2024 and 2023:
2024
2023
Raw materials and components
$
72,820,000
87,139,000
Work-in-process and finished goods
38,587,000
43,365,000
Total inventories
111,407,000
130,504,000
Less reserve for excess and obsolete inventories
18,271,000
24,659,000
Inventories, net
$
93,136,000
105,845,000
As of July 31, 2024 and 2023, the amount of inventory directly related to long-term contracts (including contracts-in-
progress) was $2,869,000 and $5,911,000, respectively, and the amount of inventory related to contracts from third-
party commercial customers who outsource their manufacturing to us was $2,204,000 and $3,277,000, respectively.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 26
(6) Property, Plant and Equipment
Property, plant and equipment consist of the following at July 31, 2024 and 2023:
2024
2023
Machinery and equipment
$ 142,405,000
168,618,000
Internal-use software
28,869,000
25,214,000
Leasehold improvements
17,175,000
9,680,000
188,449,000
203,512,000
Less accumulated depreciation and amortization
141,121,000
150,483,000
Property, plant and equipment, net
$
47,328,000
53,029,000
Depreciation and amortization expense on property, plant and equipment amounted to $12,159,000, $11,917,000 and
$10,303,000 for the fiscal years ended July 31, 2024, 2023 and 2022, respectively.
(7) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at July 31, 2024 and 2023:
2024
2023
Accrued wages and benefits
$
22,131,000
21,994,000
Accrued contract costs
17,267,000
19,041,000
Accrued warranty obligations
7,049,000
8,285,000
Accrued commissions and royalties
5,396,000
4,659,000
Accrued legal costs
3,092,000
688,000
Other
7,310,000
12,323,000
Accrued expenses and other current liabilities
$
62,245,000
66,990,000
Accrued contract costs represent direct and indirect costs on contracts as well as estimates of amounts owed for
invoices not yet received from vendors or reflected in accounts payable.
Accrued warranty obligations as of July 31, 2024 relate to estimated liabilities for assurance type warranty coverage
that we provide to our customers. We generally provide warranty coverage for some of our products for a period of at
least one year from the date of delivery. We record a liability for estimated warranty expense based on historical
claims, product failure rates, consideration of contractual obligations, future costs to resolve software issues and other
factors. Some of our product warranties are provided under long-term contracts, the costs of which are incorporated
into our estimates of total contract costs.
Changes in our accrued warranty obligations during the fiscal years ended July 31, 2024 and 2023 were as follows:
2024
2023
Balance at beginning of year
$
8,285,000
9,420,000
Provision for warranty obligations
1,213,000
3,158,000
Adjustments for changes in estimates
(493,000)
(2,300,000)
Charges incurred
(1,538,000)
(1,993,000)
PST Divestiture
(418,000)
—
Balance at end of year
$
7,049,000
8,285,000
During fiscal 2023, we recorded benefits of $2,300,000 to cost of sales in our Terrestrial and Wireless Networks
segment due to lower than expected warranty claims associated with previously acquired NG-911 technologies.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 27
(8) Credit Facility
On November 30, 2022, we entered into a Second Amended and Restated Credit Agreement which provided a senior
secured loan facility up to $300,000,000, consisting of (i) a revolving loan facility with a borrowing limit up to
$150,000,000; and (ii) a $50,000,000 term loan. At July 31, 2023, the amount outstanding under the credit facility was
$164,404,000, of which $160,029,000, net of deferred financing fees of $621,000, is reflected in the non-current
portion of long-term debt on our Consolidated Balance Sheets.
On November 7, 2023, we entered into a Third Amended and Restated Credit Agreement (the "Prior Credit Facility"),
which provided for a senior secured loan facility of up to $200,000,000 consisting of: (i) a revolving loan facility with
an initial borrowing limit of $150,000,000; and (ii) a $50,000,000 term loan. The Prior Credit Facility also provided
for the following, among other things: effective January 31, 2024 and April 30, 2024, (a) our borrowing limit under the
revolving loan facility reduced to $140,000,000 and $135,000,000, respectively; (b) the term loan amortization
increased from $1,250,000 to $1,875,000 per quarter, with the remaining balance due upon maturity; and (c) the
Applicable Rate increased 0.25%. In connection with entering the Prior Credit Facility, we capitalized $5,941,000 of
total financing costs and accounted for the amendments as debt modifications.
On June 17, 2024, we entered into a $222,000,000 senior secured loan facility with a new syndicate of lenders (the
“Credit Facility”), which replaced our Prior Credit Facility. The Credit Facility consists of: (i) a $162,000,000 term
loan (the "Term Loan" facility) and an asset-based revolving credit facility with revolving commitments in an
aggregate principal amount of $60,000,000, subject to borrowing base limitations as described below (the "Revolving
Loan" facility). At closing, $25,000,000 of the Revolving Loan was funded and, together with the Term Loan, the
proceeds were used to repay the Prior Credit Facility in full and for working capital and other general corporate
purposes. The obligations under the Credit Facility are guaranteed by certain of our domestic and foreign subsidiaries
(the “Guarantors), who have granted for the benefit of the lenders, a lien on, and first priority security interest in,
substantially all of our tangible and intangible assets. The Credit Facility, which was amended October 17, 2024, has a
maturity date which is the earlier of (x) July 31, 2028 or (y) 90 days prior to the earliest date that the debt under the
Subordinated Credit Facility becomes due and payable (the "Maturity Date"), as discussed further below.
In connection with entering the Credit Facility, the Term Loan lenders received 1,435,884 detachable warrants
("Lender warrants") granted at an exercise price of $0.10 per common share which entitles the Term Loan lenders to
purchase 1,435,884 shares of our common stock from us at any time and from time to time after the Closing Date and
on or prior to June 17, 2031, subject to certain adjustments. If the Term Loan is refinanced, the Term Loan lenders
have the right to sell up to 50.0% of the warrants back to us for cash, at a 10.0% discount to the 30-day volume
weighted average price of our common stock, subject to certain adjustments. We determined that the Lender warrants
met the definition of a freestanding financial instrument that should be accounted for as a liability. We established an
initial Lender warrant liability of $3,011,000 which was allocated as a discount against the Term Loan proceeds. The
Lender warrant liability is classified in "Other Liabilities" on the Consolidated Balance Sheets and is remeasured to its
estimated fair value each reporting period, using Level 3 fair value inputs, until the Lender warrants are exercised or
expire. Changes in the estimated fair value of the Lender warrant liability are recognized in our Consolidated
Statement of Operations as a non-cash expense or benefit. As of July 31, 2024, the Lender warrant liability was
remeasured to $4,544,000, resulting in a non-cash expense of $1,533,000 recorded in "Other expenses (income)" on
the Consolidated Statements of Operations.
Additionally, we identified several embedded derivatives that require bifurcation from the Credit Facility under ASC
815-40 "Derivatives and Hedging - Contracts in Entity's Own Equity." Certain of these embedded features include
events of default and contingent fee and interest rate increases and were determined to qualify as embedded
derivatives, accounted for as one compound embedded derivative liability. We established an initial embedded
derivative liability of $3,116,000, which was allocated as a discount against the Term Loan proceeds. The embedded
derivative liability is classified in "Other Liabilities" on the Consolidated Balance Sheets and is remeasured to its
estimated fair value each reporting period, using Level 3 fair value inputs, until the embedded derivative features have
zero probability of occurring or expire. Changes in the estimated fair value of the embedded derivative liability are
recognized in our Consolidated Statement of Operations as a non-cash expense or benefit. As of July 31, 2024, the
embedded derivative liability was remeasured to $3,041,000, resulting in $75,000 of income recorded in "Other
expenses (income)" on the Consolidated Statements of Operations.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 28
In connection with entering the Credit Facility, we paid fees of $15,035,000, including: (i) $9,979,000 of financing
fees, of which $6,626,000 is attributable to the Term Loan and $3,353,000 is attributable to the Revolving Loan; and
(ii) $5,056,000 of closing fees, representing approximately 3.0% of the Term Loan commitment plus certain other
reimbursable expenses paid directly to the Term Loan lenders and accounted for as a discount against the Term Loan
proceeds. Additionally, a $2,430,000 Term Loan exit fee, which was earned on the closing date and is payable directly
to the Term Loan lenders at maturity or earlier, as defined, was accounted for as a discount against the Term Loan
proceeds. The financing fees and discounts attributable to the Term Loan are amortized as interest expense over the
life of the debt and are presented as a deduction to the borrowings outstanding under the Term Loan. The financing
fees attributable to the Revolving Loan are capitalized on the Consolidated Balance Sheets and amortized as interest
expense over the life of the debt.
As of July 31, 2024, the amount outstanding under our Credit Facility was as follows:
July 31, 2024
Term Loan
$
161,663,000
Less unamortized deferred financing costs related to Term Loan
6,425,000
Less unamortized discount related to Term Loan
13,202,000
Term Loan, net
142,036,000
Revolving Loan
32,500,000
Amount outstanding under Credit Facility, net
174,536,000
Less current portion of long-term debt
4,050,000
Non-current portion of long-term debt
$
170,486,000
During the fiscal year ended July 31, 2024, we had outstanding balances under our credit facilities ranging from
$156,241,000 to $202,000,000.
As of July 31, 2024, total net deferred financing costs related to the Credit Facility were $9,676,000 and are being
amortized over the term of the Credit Facility through the Maturity Date. The refinancing of our Prior Credit Facility is
considered a debt extinguishment and, as such, $1,832,000 of net deferred financing costs primarily related to the Prior
Credit Facility were expensed in fiscal 2024 and included in interest expense reported on our Consolidated Statement
of Operations.
Interest expense related to our Credit Facility and Prior Credit Facility, including amortization of deferred financing
costs and discounts, recorded during the fiscal years ended July 31, 2024, 2023 and 2022 was $22,058,000,
$14,931,000 and $4,933,000, respectively. Our blended interest rate approximated 12.26%, 8.89% and 3.41% for fiscal
2024, 2023 and 2022, respectively.
Availability under the Revolving Loan is subject to eligibility criteria set forth in the Credit Facility, and equal to a
borrowing base in an amount equal to, from time to time: (a) 85% of the net book value of billed and invoiced
accounts receivables of the Borrowing Base Parties, as defined; plus (b) 85% of the net book value of accounts
receivables that the Borrowing Base Parties have the right to bill but have not yet billed up to the lesser of (i) 12.5% of
the amount calculated pursuant to the sum of clauses (a) and (b) and (ii) $15.0 million of such accounts; plus (c) 60%
of the net book value of all inventory of the Borrowing Base Parties, less (d) customary reserves.
The Credit Facility provides that (a) Revolving Loans comprised of (i) Base Rate Loans shall bear interest at the Base
Rate plus an additional margin ranging from 3.75% to 4.25%, depending on the average quarterly revolving loan usage
during the applicable determination period and (ii) SOFR Loans shall bear interest at the Term SOFR rate plus an
additional margin ranging from 4.75% to 5.25%, depending on the average quarterly revolving loan usage during the
applicable determination period and (b) Term Loans comprised of (i) Base Rate Loans shall bear interest at the Base
Rate plus an additional margin ranging from 7.50% to 9.00%, depending on our net leverage ratio during the
applicable determination period and (ii) SOFR Loans shall bear interest at the Term SOFR rate plus an additional
margin ranging from 8.50% to 10.00%, depending on our net leverage ratio during the applicable determination
period. The Term Loans bear both cash interest and interest paid-in-kind ("PIK"). PIK interest is fixed at 2.50% and is
to be capitalized and added to the outstanding principal on each interest payment date.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 29
The Term Loan is subject to 2.50% amortization per annum, payable on the last day of each fiscal quarter. The first
Term Loan repayment of $675,000 was paid on July 31, 2024 and quarterly Term Loan repayments thereafter are
$1,012,500, with the remaining Term Loan balance due on the Maturity Date.
The Credit Facility contains (a) customary representations, warranties and affirmative covenants; (b) customary
conditions to drawing the Revolver; (c) customary negative covenants, subject to negotiated exceptions, including but
not limited to: (i) liens, (ii) investments, (iii) indebtedness, (iv) significant corporate changes, including mergers and
acquisitions, (v) dispositions, including the disposition of assets by any Loan Party to any Subsidiary that is not a
Subsidiary Loan Party, (vi) restricted payments, including stockholder dividends, (vii) distributions, including the
repayment of subordinated intercompany and third party indebtedness, and (viii) certain other restrictive agreements;
(d) certain financial covenants, including a maximum Net Leverage Ratio, minimum Fixed Charge Coverage Ratio,
Minimum Average Liquidity and Minimum EBITDA; (e) customary optional and mandatory prepayment events; and
(f) customary events of default (subject to grace periods, as appropriate), such as payment defaults, cross-defaults to
other material indebtedness, bankruptcy and insolvency, the occurrence of a defined change in control and the failure
to observe the negative covenants and other covenants related to the operation of our business. In addition, under
certain circumstances, we may be required to enter into amendments to the Credit Facility in connection with any
further syndication of the Credit Facility.
Under the Credit Facility, for the trailing twelve months ("TTM") ended July 31, 2024, we were required to maintain a
maximum Net Leverage Ratio of 3.25x TTM Adjusted EBITDA, a minimum Fixed Charge Coverage Ratio of 1.20x
TTM Adjusted EBITDA and Minimum Average Liquidity of $20,000,000. As discussed below, on October 17, 2024,
we entered into an amendment to the Credit Facility to waive a Net Leverage Ratio and Fixed Charge Coverage Ratio
event of default as of July 31, 2024.
Subsequent Event
On October 17, 2024, we entered into an amendment to the Credit Facility (the “Amended Credit Facility”) in order to
(i) waive certain events of default that occurred under the Credit Facility, including in connection with our Net
Leverage Ratio and Fixed Charge Coverage Ratio for the 4 quarter period ended July 31, 2024. and (ii) amend the
Credit Facility. As a result the Amended Credit Facility, there are no ongoing events of default under the Credit
Facility.
The Amended Credit Facility also amends the Credit Agreement to, amongst other things; (i) increase the interest rate
margins applicable to the loans (as described in further detail below); (ii) modify certain financial and collateral
reporting requirements; (iii) provide the lenders a consent right with respect to $27,500,000 of revolver borrowings
above $32,500,000 (i.e., the current amount of revolver borrowings outstanding); (iv) permit the incurrence of
$25,000,000 of senior unsecured subordinated debt (the "Subordinated Credit Agreement") (as described in further
Note (19) – “Subsequent Event - Subordinated Credit Agreement”); (v) amend the Maturity Date; and (vi) suspend
financial covenant testing through the end of our fiscal quarter ending January 31, 2025.
Under the Amended Credit Facility, the interest rate margins that are applicable to the Revolving Loan are increased
by 1.00% at each level. Accordingly, the Amended Credit Facility provides that Revolving Loans comprised of (i)
Base Rate Loans shall bear interest at the Base Rate plus an additional margin ranging from 4.75% to 5.25%; and (ii)
SOFR Loans shall bear interest at the Term SOFR rate plus an additional margin ranging from 5.75% to 6.25%, each
depending on the average quarterly revolving loan usage during the applicable determination period. The Amended
Credit Facility provides that the interest rate margins on the Term Loans are 12.00% per annum for Base Rate Loans
and 13.00% per annum for SOFR Loans until the first business day of the month following January 31, 2025, when the
Company has delivered financial statements demonstrating compliance with the financial covenants under the
Amended Credit Facility. If demonstrated, the interest rate margins revert to the margins provided under the Existing
Credit Facility with respect to Term Loans, specifically, (i) Base Rate Loans shall bear interest at the Base Rate plus an
additional margin ranging from 7.50% to 9.00%; and (ii) SOFR Loans shall bear interest at the Term SOFR rate plus
an additional margin ranging from 8.50% to 10.00%, each depending on our Net Leverage Ratio during the applicable
determination period.
Capitalized terms used but not defined herein have the meanings set forth for such terms in the Prior Credit Facility,
the Credit Facility and the Amended Credit Facility, all of which have been documented and filed with the SEC.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 30
(9) Leases
Our leases historically relate to the leasing of facilities and equipment. In accordance with FASB ASC 842 -
"Leases" ("ASC 842"), we determine at inception whether an arrangement is, or contains, a lease and whether the lease
should be classified as an operating or a financing lease. At lease commencement, we recognize a right-of-use
("ROU") asset and lease liability based on the present value of the future lease payments over the estimated lease term.
We have elected to not recognize a ROU asset or lease liability for any leases with terms of twelve months or less.
Instead, for such short-term leases, we recognize lease expense on a straight-line basis over the lease term. Certain of
our leases include options to extend the term of the lease or to terminate the lease early. When it is reasonably certain
that we will exercise a renewal option or will not exercise a termination option, we include the impact of exercising or
not exercising such option, respectively, in the estimate of the lease term. As our lease agreements do not explicitly
state the discount rate implicit in the lease, we use our incremental borrowing rate ("IBR") on the commencement date
to calculate the present value of future lease payments. Such IBR represents our estimated rate of interest to borrow on
a collateralized basis over a term commensurate with the expected lease term.
Some of our leases include payments that are based on the Consumer Price Index ("CPI") or other similar indices.
These variable lease payments are included in the calculation of the ROU asset and lease liability using the index as of
the lease commencement date. Other variable lease payments, such as common area maintenance, property taxes, and
usage-based amounts, are required by ASC 842 to be excluded from the ROU asset and lease liability and expensed as
incurred. In addition to the present value of the future lease payments, the calculation of the ROU asset would also
consider, to the extent applicable, any deferred rent upon adoption, lease pre-payments or initial direct costs of
obtaining the lease (e.g., such as commissions).
For all classes of leased assets, we elected the practical expedient to not separate lease components (i.e., the actual item
being leased, such as the facility or piece of equipment) from non-lease components (i.e., the distinct elements of a
contract not related to securing the use of the leased asset, such as common area maintenance and consumable
supplies).
Certain of our facility lease agreements (which are classified as operating leases) contain rent holidays or rent
escalation clauses. For rent holidays and rent escalation clauses during the lease term, we record rental expense on a
straight-line basis over the term of the lease. As of July 31, 2024, none of our leases contained a residual value
guarantee and covenants included in our lease agreements are customary for the types of facilities and equipment being
leased.
The components of lease expense are as follows:
Fiscal years ended July 31,
2024
2023
2022
Finance lease expense:
Amortization of ROU assets
$
—
5,000
13,000
Interest on lease liabilities
—
—
1,000
Operating lease expense
8,414,000
10,439,000
11,658,000
Short-term lease expense
293,000
435,000
402,000
Variable lease expense
4,381,000
4,031,000
4,619,000
Sublease income
(67,000)
(67,000)
(67,000)
Total lease expense
$
13,021,000
14,843,000
16,626,000
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 31
Additional information related to leases is as follows:
Fiscal years ended July 31,
2024
2023
2022
Cash paid for amounts included in the measurement of lease
liabilities:
Operating leases - Operating cash outflows
$
8,983,000
10,604,000
11,864,000
Finance leases - Operating cash outflows
—
—
1,000
Finance leases - Financing cash outflows
—
4,000
15,000
ROU assets obtained in the exchange for lease liabilities
(non-cash):
Operating leases
$
677,000
3,211,000
15,233,000
The following table is a reconciliation of future cash flows relating to operating lease liabilities presented on our
Consolidated Balance Sheets as of July 31, 2024:
Operating
Fiscal 2025
$ 8,263,000
Fiscal 2026
6,857,000
Fiscal 2027
4,756,000
Fiscal 2028
4,019,000
Fiscal 2029
3,367,000
Thereafter
16,428,000
Total future undiscounted cash flows
43,690,000
Less: Present value discount
5,563,000
Lease liabilities
$ 38,127,000
Weighted-average remaining lease terms (in years)
7.97
Weighted-average discount rate
3.54 %
As of July 31, 2024, we do not have any material rental commitments that have not commenced.
(10) Income Taxes
Loss before benefit from income taxes consists of the following:
Fiscal Years Ended July 31,
2024
2023
2022
U.S.
$
(65,374,000)
(21,327,000)
(31,772,000)
Foreign
(34,906,000)
(9,520,000)
(5,303,000)
$ (100,280,000)
(30,847,000)
(37,075,000)
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 32
The benefit from income taxes included in the accompanying Consolidated Statements of Operations consists of the
following:
Fiscal Years Ended July 31,
2024
2023
2022
Federal – current
$
377,000
(258,000)
287,000
Federal – deferred
(2,345,000)
(4,623,000)
(4,888,000)
State and local – current
1,181,000
1,412,000
348,000
State and local – deferred
(834,000)
(815,000)
(442,000)
Foreign – current
1,137,000
958,000
1,197,000
Foreign – deferred
189,000
(622,000)
(525,000)
Benefit from income taxes
$
(295,000)
(3,948,000)
(4,023,000)
The benefit from income taxes differed from the amounts computed by applying the U.S. Federal income tax rate as a
result of the following:
Fiscal Years Ended July 31,
2024
2023
2022
Amount
Rate
Amount
Rate
Amount
Rate
Computed "expected" tax benefit
$ (21,059,000)
21.0 % (6,478,000)
21.0 % (7,786,000) 21.0 %
Increase (reduction) in income taxes resulting
from:
State and local income taxes, net of federal
benefit
(127,000)
0.1
440,000
(1.4)
227,000
(0.6)
Stock-based compensation
1,891,000
(1.9)
692,000
(2.2)
1,049,000
(2.8)
Research and experimentation credits
(1,251,000)
1.2
(2,576,000)
8.4
(1,484,000)
4.0
Foreign-derived intangible income deduction
43,000
—
(517,000)
1.7
—
—
Revaluation of convertible preferred stock
option liability
—
—
—
—
(211,000)
0.6
Revaluation of warrants
(897,000)
0.9
—
—
—
—
Nondeductible executive compensation
—
—
1,484,000
(4.8)
2,801,000
(7.6)
PST Divestiture
1,384,000
(1.4)
—
—
—
—
Change in valuation allowance
10,177,000
(10.0)
2,834,000
(9.2)
2,009,000
(5.4)
Remeasurement of deferred taxes
—
—
—
—
(396,000)
1.1
Foreign income taxes
(389,000)
0.4
(269,000)
0.9
(478,000)
1.3
Goodwill impairment
9,549,000
(9.5)
—
—
—
—
Other, net
384,000
(0.5)
442,000
(1.6)
246,000
(0.7)
Benefit from income taxes
$ (295,000)
0.3 % (3,948,000)
12.8 % (4,023,000) 10.9 %
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 33
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at
July 31, 2024 and 2023 are presented below:
2024
2023
Deferred tax assets:
Inventory and warranty reserves
$
4,685,000
6,147,000
Compensation and commissions
3,401,000
3,221,000
Federal, state and foreign research and experimentation credits
17,559,000
19,308,000
Capitalized U.S. research and experimental expenditures
12,177,000
8,784,000
Stock-based compensation
2,409,000
4,774,000
Foreign scientific research and experimental development expenditures
1,720,000
2,118,000
Federal, state and foreign net operating losses
18,289,000
13,011,000
Federal and state capital losses
14,473,000
15,582,000
Lease liabilities
8,999,000
11,986,000
Deferred revenue, non-current
4,664,000
4,463,000
163(j) Interest Expense Limitation
3,423,000
549,000
Other
1,278,000
1,868,000
Less: valuation allowance
(44,888,000)
(34,478,000)
Total deferred tax assets
48,189,000
57,333,000
Deferred tax liabilities:
Plant and equipment
(4,781,000)
(4,883,000)
Lease right-of-use assets
(7,116,000)
(10,510,000)
Intangibles
(42,563,000)
(50,843,000)
Total deferred tax liabilities
(54,460,000)
(66,236,000)
Net deferred tax liabilities
$
(6,271,000)
(8,903,000)
At July 31, 2024, our net deferred tax liability of $6,271,000 includes $78,000 of foreign net deferred tax liabilities
that were recorded as other liabilities, net in our Consolidated Balance Sheets. At July 31, 2023, our net deferred tax
liability of $8,903,000 includes $591,000 of foreign net deferred tax assets that were recorded as other assets, net in
our Consolidated Balance Sheets.
We account for income taxes pursuant to ASC 740, which requires an asset and liability based approach in accounting
for income taxes. In assessing the realizability of deferred tax assets, management considers whether it is more-likely-
than-not that some portion or all of them will not be realized. If management determines that it is more-likely-than-not
that some or all of its deferred tax assets will not be realized, a valuation allowance will be recorded against such
deferred tax assets.
At July 31, 2024, we have federal research and experimentation credits carryforwards of $7,991,000 which begin to
expire in 2033. We have state research and experimentation credit carryforwards of $9,234,000 which begin to expire
in 2025. We believe that it is more-likely-than-not that the benefit from certain state research and experimentation
credits will not be realized. In recognition of this risk, we have provided a valuation allowance of $8,502,000 on the
deferred tax assets relating to these state credits.
At July 31, 2024, we have a nominal amount of federal net operating loss carryforwards which begin to expire in 2038.
We have state net operating loss carryforwards of $3,652,000 which begin to expire in 2025. We believe it to be more-
likely-than-not that the benefit from certain state net operating loss carryforwards will not be realized. In recognition
of this risk, we have provided a valuation allowance of $3,448,000 on the deferred tax assets relating to these state net
operating loss carryforwards.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 34
At July 31, 2024, we have federal and state capital loss carryforwards of $14,473,000 which mostly expire in 2026.
We believe it to be more-likely-than-not that the benefit from these federal and state capital loss carryforwards will not
be realized. In recognition of this risk, we have provided a full valuation allowance on the deferred tax assets relating
to these federal and state capital loss carryforwards.
With respect to our remaining U.S. federal and state net deferred tax assets as of July 31, 2024, we believe it to be
more-likely-than-not that the benefit from such assets will not be realized. In recognition of this risk, we have provided
a valuation allowance of $2,799,000 on these net deferred tax assets.
At July 31, 2024, we have foreign deferred tax assets relating to research and experimentation credits of $335,000
which begin to expire in 2039. We have foreign deferred tax assets relating to net operating loss carryforwards of
$14,624,000 which begin to expire in 2032. We believe that it is more-likely-than-not that certain foreign deferred tax
assets, which include these net operating loss carryforwards, may not be realized. In recognition of this risk, we have
provided a valuation allowance of $15,666,000 on these deferred tax assets. Our foreign earnings and profits are not
material and, as such, we have not recorded any deferred tax liability on unremitted foreign earnings.
At July 31, 2024 and 2023, total unrecognized tax benefits were $8,605,000 and $9,166,000, respectively, including
interest of $224,000 and $210,000, respectively. At July 31, 2024 and 2023, $2,231,000 and $2,208,000, respectively,
of our unrecognized tax benefits were recorded as non-current income taxes payable on our Consolidated Balance
Sheets. The remaining unrecognized tax benefits of $6,374,000 and $6,958,000 at July 31, 2024 and 2023,
respectively, were presented as an offset to the associated non-current deferred tax assets on our Consolidated Balance
Sheets. Of the total unrecognized tax benefits, $7,679,000 and $8,286,000 at July 31, 2024 and 2023, respectively, net
of the reversal of the federal benefit recognized as a deferred tax asset relating to state reserves, would favorably
impact our effective tax rate, if recognized. We believe it is reasonably possible that the gross unrecognized tax
benefits could decrease by as much as $512,000 in the next 12 months due to the expiration of statute of limitations
related to federal, state and foreign tax positions.
Our policy is to recognize potential interest and penalties relating to uncertain tax positions in income tax expense. The
following table summarizes the activity related to our unrecognized tax benefits for fiscal years 2024, 2023 and 2022
(excluding interest):
2024
2023
2022
Balance at beginning of period
$
8,956,000
9,675,000
9,009,000
Increase related to current period
181,000
681,000
598,000
Increase related to prior periods
130,000
51,000
153,000
Expiration of statute of limitations
(622,000)
(1,406,000)
(83,000)
Decrease related to prior periods
(264,000)
(45,000)
(2,000)
Balance at end of period
$
8,381,000
8,956,000
9,675,000
Our U.S. federal income tax returns for fiscal 2021 through 2023 are subject to potential future Internal Revenue
Service ("IRS") audit. None of our state income tax returns prior to fiscal 2020 are subject to audit. Future tax
assessments or settlements could have a material adverse effect on our consolidated results of operations and financial
condition.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 35
11) Stock-Based Compensation
Overview
In December 2023, our stockholders approved the Comtech Telecommunications Corp. 2023 Equity and Incentive
Plan (the “2023 Plan”). The 2023 Plan replaced the Comtech Telecommunications Corp. Amended and Restated 2000
Stock Incentive Plan (the "Prior Plan" and collectively, the "Plans"). Under the 2023 Plan, the number of shares of
common stock initially available for all awards, other than substitute awards granted in connection with a corporate
transaction, will be (i) 1,600,000 shares plus (ii) 69,683 shares of common stock that were available for awards under
the Prior Plan, as of the effective date of the 2023 Plan and (iii) certain expired or cancelled awards recycled back into
the 2023 Plan.
We issue stock-based awards to certain of our employees and our Board of Directors pursuant to the 2023 Plan, as
amended and/or restated from time to time and our 2001 Employee Stock Purchase Plan, as amended and/or restated
from time to time (the "ESPP"), and recognize related stock-based compensation in our consolidated financial
statements. The 2023 Plan provides for the granting to employees and consultants of Comtech (including prospective
employees and consultants): (i) incentive and non-qualified stock options, (ii) restricted stock units ("RSUs"), (iii)
RSUs with performance measures (which we refer to as "performance shares"), (iv) restricted stock, (v) stock units
(reserved for issuance to non-employee directors) and share units (reserved for issuance to employees) (collectively,
"share units") and (vi) stock appreciation rights ("SARs"), among other types of awards. Our non-employee directors
are eligible to receive non-discretionary grants of stock-based awards, subject to certain limitations.
As of July 31, 2024, the aggregate number of shares of common stock which may be issued, pursuant to the Plan, may
not exceed 13,562,500. Stock options granted may not have a term exceeding ten years or, in the case of an incentive
stock award granted to a stockholder who owns stock representing more than 10.0% of the voting power, no more than
five years. We expect to settle all outstanding awards under the Plan and employee purchases under the ESPP with the
issuance of new shares of our common stock.
As of July 31, 2024, we had granted stock-based awards pursuant to the Plan representing the right to purchase and/or
acquire an aggregate of 11,468,463 shares (net of 6,679,364 expired and canceled awards), of which an aggregate of
9,526,985 have been exercised or settled.
As of July 31, 2024, the following stock-based awards, by award type, were outstanding:
July 31, 2024
Stock options
141,190
Performance shares
380,680
RSUs, restricted stock, share units and other stock-based awards
1,419,608
Total
1,941,478
Our ESPP provides for the issuance of up to 1,300,000 shares of our common stock. Our ESPP is intended to provide
our eligible employees the opportunity to acquire our common stock at 85% of fair market value on the first or last day
of each calendar quarter, whichever is lower. Through July 31, 2024, we have cumulatively issued 1,051,110 shares of
our common stock to participating employees in connection with our ESPP.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 36
Stock-based compensation for awards issued is reflected in the following line items in our Consolidated Statements of
Operations:
Fiscal Years Ended July 31,
2024
2023
2022
Cost of sales
$
778,000
1,110,000
692,000
Selling, general and administrative expenses
4,777,000
7,960,000
6,312,000
Research and development expenses
541,000
1,037,000
763,000
Stock-based compensation expense before CEO transition
costs
6,096,000
10,107,000
7,767,000
CEO transition costs related to equity-classified stock-based
awards
—
3,764,000
7,388,000
Total stock-based compensation expense before income tax
benefit
6,096,000
13,871,000
15,155,000
Estimated income tax benefit
(1,298,000)
(2,552,000)
(2,260,000)
Net stock-based compensation expense
$
4,798,000
11,319,000
12,895,000
Stock-based compensation for equity-classified awards is measured at the date of grant, based on an estimate of the
fair value of the award and is generally expensed over the vesting period of the award. At July 31, 2024, unrecognized
stock-based compensation of $6,183,000, net of estimated forfeitures of $687,000, is expected to be recognized over a
weighted average period of 1.9 years. Total stock-based compensation capitalized and included in ending inventory at
both July 31, 2024 and 2023 was $198,000. There are no liability-classified stock-based awards outstanding as of
July 31, 2024 or 2023.
Selling, general and administrative expenses included in the table above, for fiscal 2022, includes $827,000 of
amortization of stock-based compensation related to three, long-standing members of our Board of Directors who
retired in December 2021.
Stock-based compensation expense, by award type, is summarized as follows:
Fiscal Years Ended July 31,
2024
2023
2022
Stock options
$
60,000
87,000
519,000
Performance shares
480,000
973,000
1,136,000
RSUs, restricted stock, share units and other stock-based
awards
5,477,000
8,926,000
5,912,000
ESPP
79,000
121,000
200,000
Stock based compensation expense before CEO transition costs
6,096,000
10,107,000
7,767,000
CEO transition costs related to equity-classified stock-based
awards
—
3,764,000
7,388,000
Total stock-based compensation expense before income tax
benefit
6,096,000
13,871,000
15,155,000
Estimated income tax benefit
(1,298,000)
(2,552,000)
(2,260,000)
Net stock-based compensation expense
$
4,798,000
11,319,000
12,895,000
In connection with the March 12, 2024 termination of our former CEO for cause, a combined total of 581,021
performance shares and RSUs were cancelled.
ESPP stock-based compensation expense primarily relates to the 15% discount offered to participants in the ESPP.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 37
The estimated income tax benefit as shown in the above table was computed using income tax rates expected to apply
when the awards are settled. Such deferred tax asset was recorded net as part of our non-current deferred tax liability
on our Consolidated Balance Sheet as of July 31, 2024 and 2023. The actual income tax benefit recognized for tax
reporting is based on the fair market value of our common stock at the time of settlement and can significantly differ
from the estimated income tax benefit recorded for financial reporting.
Stock Options
The following table summarizes the Plan's activity:
Awards
(in Shares)
Weighted
Average
Exercise Price
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic Value
Outstanding at July 31, 2021
1,073,435 $
25.76
Expired/canceled
(588,735)
26.86
Exercised
(1,220)
17.88
Outstanding at July 31, 2022
483,480
24.43
Expired/canceled
(242,970)
24.89
Outstanding at July 31, 2023
240,510
23.96
Expired/canceled
(99,320)
28.72
Outstanding at July 31, 2024
141,190 $
20.61
4.51
$
—
Exercisable at July 31, 2024
129,840 $
20.84
4.39
$
—
Vested and expected to vest at July 31, 2024
139,975 $
20.63
4.50
$
—
Stock options outstanding as of July 31, 2024 have exercise prices ranging from $17.88 - $28.35, representing the fair
market value of our common stock on the date of grant, a contractual term of ten years and a vesting period of five
years. The total intrinsic value relating to stock options exercised during the fiscal year ended July 31 2022 was
$7,000. There were no stock options exercised during the fiscal years ended July 31, 2024 and 2023.
During fiscal 2022, at the election of certain holders of vested stock options, 1,220 stock options were net settled upon
exercise. As a result, 220 shares of our common stock were issued during the fiscal year ended July 31, 2022, net of
shares retained to satisfy the exercise price and minimum statutory tax withholding requirements.
There were no stock options granted during fiscal years ended July 31, 2024, 2023 or 2022.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 38
Performance Shares, RSUs, Restricted Stock, Share Unit Awards and Other Stock-based Awards
The following table summarizes the Plan's activity relating to performance shares, RSUs, restricted stock, share units
and other stock-based awards:
Awards
(in Shares)
Weighted
Average
Grant Date
Fair Value
Aggregate
Intrinsic Value
Outstanding at July 31, 2021
1,068,370
$
21.93
Granted
797,771
18.77
Settled
(641,747)
22.83
Canceled/Forfeited
(113,644)
22.78
Outstanding at July 31, 2022
1,110,750
19.05
Granted
1,550,951
10.79
Settled
(632,267)
16.69
Canceled/Forfeited
(153,204)
16.67
Outstanding at July 31, 2023
1,876,230
13.21
Granted
1,731,760
6.71
Settled
(1,042,860)
9.77
Canceled/Forfeited
(764,842)
9.28
Outstanding at July 31, 2024
1,800,288
$
10.61
$
5,833,000
Vested at July 31, 2024
583,209
$
12.30
$
1,890,000
Vested and expected to vest at July 31, 2024
1,739,662
$
10.61
$
5,637,000
The total intrinsic value relating to fully-vested awards settled during the fiscal years ended July 31, 2024, 2023 and
2022 was $7,844,000, $6,782,000 and $12,560,000, respectively.
The performance shares granted to employees principally vest over a three-year performance period, if pre-established
performance goals are attained, or as specified pursuant to the Plan and related agreements. As of July 31, 2024, the
number of outstanding performance shares included in the above table, and the related compensation expense prior to
consideration of estimated pre-vesting forfeitures, assume achievement of the pre-established goals at a target level,
except for two of our former CEO's, whose achievement was based on maximum performance pursuant to their pre-
existing change-in-control agreements.
RSUs and restricted stock granted to non-employee directors prior to August 2022 had a vesting period of five years
and were convertible into shares of our common stock generally at the time of termination, on a one-for-one basis for
no cash consideration, or earlier under certain circumstances. Commencing in August 2022, such awards have a
vesting period of one year.
RSUs granted to employees prior to August 2022 have a vesting period of five years and are convertible into shares of
our common stock generally at the time of vesting, on a one-for-one basis for no cash consideration. Commencing in
August 2022, such RSUs have a vesting period of three years.
Share units granted prior to July 31, 2017 were vested when issued and are convertible into shares of our common
stock, generally at the time of termination, on a one-for-one basis for no cash consideration, or earlier under certain
circumstances. Share units granted on or after July 31, 2017 were granted to certain employees in lieu of non-equity
incentive compensation and are convertible into shares of our common stock on the one-year anniversary of the
respective grant date. In July 2024 and 2023, we granted shares of our common stock to certain employees in lieu of
non-equity incentive compensation.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 39
On July 31, 2024, 479,257 other stock-based awards were granted to certain employees in lieu of fiscal 2024 non-
equity incentive compensation. Also, on July 27, 2024, 243,098 fully vested share units (previously granted in lieu of
fiscal 2023 non-equity incentive compensation) were settled by delivery of 158,941 shares of our common stock after
reduction of share units retained to satisfy employees’ statutory tax withholding requirements. Cumulatively, through
July 31, 2024, 2,147,701 share units and other stock-based awards granted have been settled.
The fair value of performance shares, RSUs, restricted stock, share units and other stock-based awards is determined
using the closing market price of our common stock on the date of grant, less the present value of any estimated future
dividend equivalents such awards are not entitled to receive and an applicable estimated discount for any post-vesting
transfer restrictions. RSUs, performance shares and restricted stock are entitled to dividend equivalents, as applicable,
unless forfeited before vesting occurs. Share units and other stock-based awards would be entitled to dividend
equivalents while the underlying shares are unissued.
Dividend equivalents are subject to forfeiture, similar to the terms of the underlying stock-based awards, and are
payable in cash generally at the time of settlement of the underlying award. During fiscal 2024, we reversed $107,000
of previously accrued dividend equivalents due to forfeitures and paid out $268,000. During fiscal 2023 and 2022, we
accrued $315,000 and $389,000, respectively, of dividend equivalents (net of forfeitures) and paid out $366,000 and
$531,000, respectively. Accrued dividend equivalents were recorded as a reduction to retained earnings. As of July 31,
2024 and 2023, accrued dividend equivalents were $316,000 and $691,000, respectively.
With respect to the actual settlement of stock-based awards for income tax reporting, during the fiscal years ended
July 31, 2024, 2023 and 2022, we recorded an income tax expense of $723,000, $591,000 and $924,000, respectively.
Subsequent Events
In the first quarter of fiscal 2025, our Board of Directors authorized the issuance of stock-based awards with a total
unrecognized compensation expense, net of estimated forfeitures, of approximately $6,700,000.
(12) Segment Information
Reportable operating segments are determined based on Comtech’s management approach. The management
approach, as defined by FASB ASC 280 "Segment Reporting" is based on the way that the CODM organizes the
segments within an enterprise for making decisions about resources to be allocated and assessing their performance.
Our CODM, for purposes of FASB ASC 280, is our Chief Executive Officer.
Satellite and Space Communications is organized into is organized into four technology areas: satellite modem and
amplifier technologies, troposcatter technologies, government services and space components. This segment offers
customers: satellite ground station technologies, services and system integration that facilitate the transmission of
voice, video and data over GEO, MEO and LEO satellite constellations, including traveling wave tube power
amplifiers, modems, VSAT platforms and frequency converters; over-the-horizon microwave solutions that can
transmit digitized voice, video, and data over distances up to 200 miles using the troposphere and diffraction;
professional engineering, training and field support services, including cybersecurity, for multiple U.S. government
agencies; and procurement and supply chain management of high reliability Electrical, Electronic and
Electromechanical ("EEE") parts for satellite, launch vehicle and manned space applications.
Terrestrial and Wireless Networks is organized into three service areas: next generation 911 and call delivery, Solacom
call handling solutions, and trusted location and messaging solutions. This segment offers customers: Wireless/VolP
911 location and routing services to connect emergency calls to Public Safety Answering Points ("PSAPs"); SMS text
to 911 services, providing alternate paths for individuals who need to request assistance (via text messaging) a method
to reach PSAPs; next generation 911 solutions, providing emergency call routing, location validation, policy-based
routing rules, logging and security functionality; Emergency Services IP Network transport infrastructure for
emergency services communications and support of next generation 911 services; call handling applications for
PSAPs; wireless emergency alerts solutions for network operators; and software and equipment for location-based and
text messaging services for various applications, including for public safety, commercial and government services.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 40
Our CODM primarily uses a metric that we refer to as Adjusted EBITDA to measure an operating segment’s
performance and to make decisions about resources to be allocated. Our Adjusted EBITDA metric for the Satellite and
Space Communications and Terrestrial and Wireless Networks segments do not consider allocation of any indirect
expenses that are unrelated to the segment's operations, or any of the following: income taxes, interest, change in fair
value of the convertible preferred stock purchase option liability, change in fair value of warrants, write-off of deferred
financing costs, amortization of stock-based compensation, amortization of intangibles, depreciation expense,
amortization of cost to fulfill assets, acquisition plan expenses, restructuring costs, COVID-19 related costs, strategic
emerging technology costs (for next-generation satellite technology), facility exit costs, CEO transition costs, proxy
solicitation costs, strategic alternatives expenses and other. These items, while periodically affecting our results, may
vary significantly from period to period and may have a disproportionate effect in a given period, thereby affecting the
comparability of results. Any amounts shown in the Adjusted EBITDA calculation for our Satellite and Space
Communications and Terrestrial and Wireless Networks segments are directly attributable to those segments. Our
Adjusted EBITDA is also used by our management in assessing the Company's operating results. Although closely
aligned, the Company's definition of Adjusted EBITDA is different than the Consolidated EBITDA or EBITDA (as
such terms are defined in our Prior Credit Facility and 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.
Operating segment information, along with a reconciliation of segment net income (loss) and consolidated net income
(loss) to Adjusted EBITDA is presented in the tables below:
Fiscal Year Ended July 31, 2024
Satellite and Space
Communications
Terrestrial and
Wireless Networks
Unallocated
Total
Net sales
$
324,069,000
216,334,000
—
$ 540,403,000
Operating (loss) income
$
(54,202,000)
21,670,000
(47,358,000) $ (79,890,000)
Net (loss) income
$
(55,491,000)
20,955,000
(65,449,000) $ (99,985,000)
Provision for (benefit from) income taxes
666,000
669,000
(1,630,000)
(295,000)
Interest expense
25,000
—
22,128,000
22,153,000
Interest (income) and other
598,000
46,000
34,000
678,000
Write-off of deferred financing costs
—
—
1,832,000
1,832,000
Change in fair value of warrants and
derivatives
—
—
(4,273,000)
(4,273,000)
Amortization of stock-based compensation
—
—
6,096,000
6,096,000
Amortization of intangibles
6,685,000
14,469,000
—
21,154,000
Depreciation
3,867,000
7,927,000
365,000
12,159,000
Impairment of long-lived assets, including
goodwill
64,525,000
—
—
64,525,000
Amortization of cost to fulfill assets
960,000
—
—
960,000
CEO transition costs
—
—
2,916,000
2,916,000
Restructuring costs
3,822,000
605,000
8,043,000
12,470,000
Strategic emerging technology costs
4,110,000
—
—
4,110,000
Loss on business divestiture
—
—
1,199,000
1,199,000
Adjusted EBITDA
$
29,767,000
44,671,000
(28,739,000) $ 45,699,000
Purchases of property, plant and equipment
$
2,890,000
8,569,000
1,624,000
$ 13,083,000
Total assets at July 31, 2024
$
421,780,000
456,425,000
34,229,000
$ 912,434,000
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 41
Fiscal Year Ended July 31, 2023
Satellite and Space
Communications
Terrestrial and
Wireless Networks
Unallocated
Total
Net sales
$
337,756,000
212,238,000
—
$ 549,994,000
Operating income (loss)
$
15,041,000
12,323,000
(42,024,000) $ (14,660,000)
Net income (loss)
$
15,539,000
12,297,000
(54,735,000) $ (26,899,000)
Benefit from income taxes
(1,724,000)
(193,000)
(2,031,000)
(3,948,000)
Interest expense
2,000
—
14,959,000
14,961,000
Interest (income) and other
1,224,000
219,000
(217,000)
1,226,000
Amortization of stock-based compensation
—
—
10,107,000
10,107,000
Amortization of intangibles
7,312,000
14,084,000
—
21,396,000
Depreciation
4,121,000
7,637,000
164,000
11,922,000
Amortization of cost to fulfill assets
959,000
—
—
959,000
Restructuring costs
5,725,000
1,220,000
3,907,000
10,852,000
Strategic emerging technology costs
3,833,000
—
—
3,833,000
CEO transition costs
—
—
9,090,000
9,090,000
Adjusted EBITDA
$
36,991,000
35,264,000
(18,756,000) $ 53,499,000
Purchases of property, plant and equipment
$
7,244,000
10,075,000
992,000
$ 18,311,000
Total assets at July 31, 2023
$
515,449,000
460,034,000
20,754,000
$ 996,237,000
Fiscal Year Ended July 31, 2022
Satellite and Space
Communications
Terrestrial and
Wireless Networks
Unallocated
Total
Net sales
$
279,678,000
206,561,000
— $ 486,239,000
Operating (loss) income
$
(5,671,000)
18,925,000
(47,006,000) $ (33,752,000)
Net (loss) income
$
(3,852,000)
18,796,000
(47,996,000) $ (33,052,000)
(Benefit from) provision for income taxes
(1,120,000)
19,000
(2,922,000)
(4,023,000)
Interest expense
98,000
—
4,933,000
5,031,000
Interest (income) and other
(797,000)
110,000
(16,000)
(703,000)
Change in fair value of convertible
preferred stock purchase option liability
—
—
(1,005,000)
(1,005,000)
Amortization of stock-based compensation
—
—
7,767,000
7,767,000
Amortization of intangibles
7,312,000
14,084,000
—
21,396,000
Depreciation
4,049,000
6,069,000
196,000
10,314,000
Amortization of cost to fulfill assets
469,000
—
—
469,000
Restructuring costs
5,666,000
—
299,000
5,965,000
COVID-19 related costs
1,105,000
—
— $
1,105,000
Strategic emerging technology costs
1,197,000
—
— $
1,197,000
CEO transition costs
—
—
13,554,000
13,554,000
Proxy solicitation costs
—
—
11,248,000
11,248,000
Adjusted EBITDA
$
14,127,000
39,078,000
(13,942,000) $ 39,263,000
Purchases of property, plant and equipment
$
8,915,000
10,704,000
— $ 19,619,000
Total assets at July 31, 2022
$
487,235,000
461,443,000
25,619,000 $ 974,297,000
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 42
Unallocated expenses result from corporate expenses such as executive compensation, accounting, legal and other
regulatory compliance related costs and also includes all of our amortization of stock-based compensation. See Note
(2) - "CEO Transition Costs" for information related to such costs. During fiscal 2024, our Unallocated segment
incurred $8,043,000 of restructuring costs focused on: (i) streamlining our operations and supply chain, (ii) legal and
other expenses primarily related to divestiture activities, and (iii) efforts to refinance our Prior Credit Facility and
improve liquidity. During fiscal 2023, we incurred $3,907,000 of restructuring costs focused on streamlining our
operations. During fiscal 2022, we incurred $11,248,000 of proxy solicitation costs (including legal and advisory fees
and costs associated with a related lawsuit) as a result of a now-settled proxy contest and expensed $13,554,000 of
transition costs related to the former CEO, Fred Kornberg.
During fiscal 2024, 2023 and 2022, our Satellite and Space Communications segment recorded $3,822,000,
$5,725,000 and $5,666,000, respectively, of restructuring costs primarily incurred to streamline our operations and
improve efficiency, including costs related to the relocation of certain of our satellite ground station production
facilities to our new 146,000 square foot facility in Chandler, Arizona. In addition, during fiscal 2024, 2023 and 2022,
we incurred $4,110,000, $3,833,000 and $1,197,000, respectively, of strategic emerging technology costs for next-
generation satellite technology to advance our solutions offerings to be used with new broadband satellite
constellations. Furthermore, during fiscal 2022, this segment recorded $1,105,000 of incremental operating costs
related to our antenna facility located in the United Kingdom due to the impact of the COVID-19 pandemic. There
were no similar incremental operating costs recorded in fiscal 2024 or 2023.
Interest expense in the tables above primarily relates to our Credit Facility, and includes the amortization of deferred
financing costs. See Note (8) - "Credit Facility" for further discussion.
Intersegment sales in fiscal 2024, 2023 and 2022 between the Satellite and Space Communications segment and the
Terrestrial and Wireless Networks segment were nominal. All intersegment sales are eliminated in consolidation and
are excluded from the tables above.
Unallocated assets at July 31, 2024 consist principally of cash and cash equivalents, income taxes receivable, corporate
property, plant and equipment and deferred financing costs. The large majority of our long-lived assets are located in
the U.S.
(13) Commitments and Contingencies
(a) Legal Proceedings and Other Matters
Other Matters
In the ordinary course of business, we include indemnification provisions in certain of our customer contracts to
indemnify, hold harmless and reimburse such customers for certain losses, including but not limited to losses related to
third-party claims of intellectual property infringement arising from the customer’s use of our products or services. We
may also, from time to time, receive indemnification requests from customers related to third-party claims that 911
calls were improperly routed during an emergency. We evaluate such claims as and when they arise. We do not always
agree with customers that they are entitled to indemnification and in such cases reject their claims. Despite maintaining
that we have properly carried out our duties, we may seek coverage under our various insurance policies; however, we
cannot be sure that we will be able to maintain or obtain insurance coverage at acceptable costs or in sufficient
amounts or that our insurer will not disclaim coverage as to such claims. Accordingly, pending or future claims
asserted against us by a party that we are obligated to indemnify could result in legal costs and damages that could
have a material adverse effect on our consolidated results of operations and financial condition.
There are certain other pending and threatened legal actions which arise in the normal course of business, in addition
to certain matters related to the termination of our former CEO for cause in March 2024. Although the ultimate
outcome of these matters is difficult to accurately predict, we believe that the outcome of these other matters will not
have a material adverse effect on our consolidated financial condition or results of operations.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 43
(b) Employment Change of Control and Indemnification Agreements
As of July 31, 2023, we had an employment agreement with Ken Peterman, our former Chairman of the Board,
President and CEO, which was entered into on August 9, 2022. The employment agreement generally provided for an
annual salary, bonus award, sign-on bonus, equity incentive awards and, under certain termination of employment,
severance payment. On March 12, 2024, we announced the termination of Mr. Peterman for cause and upon
termination of his employment, Mr. Peterman was deemed to have resigned from his position as Chairman of the
Board of Directors and as a director pursuant to his employment contract.
As of July 31, 2022, we had an employment agreement with Michael Porcelain, our former President and CEO. The
employment agreement generally provided for an annual salary and bonus award. On August 10, 2022, we announced
the mutually agreed separation between the Company and Mr. Porcelain as President and CEO and member of the
Board of Directors. The Company entered into a separation agreement with Mr. Porcelain.
Fiscal 2024 transition costs of $2,916,000 primarily consisted of legal expenses associated with the termination of Mr.
Peterman. In fiscal 2023 transition costs related to Mr. Porcelain, pursuant to his separation agreement with the
Company, were approximately $7,424,000, of which $3,764,000 related to the acceleration of unamortized stock-
based compensation, with the remaining $3,660,000 related to his severance payments and benefits upon termination
of employment. The cash portion of the transition costs of $3,660,000 was paid to Mr. Porcelain in October 2022. Also
in fiscal 2023, in connection with Mr. Peterman entering into an employment agreement with the Company, effective
as of August 9, 2022, we incurred a $1,000,000 expense related to a cash sign-on bonus. CEO transition costs related
to Mr. Porcelain and Mr. Peterman were expensed in our Unallocated segment.
We have also entered into employment and/or change of control agreements with certain of our executive officers and
certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but
not limited to, a change in control of the Company or termination of the employee.
(14) Long-lived Assets, including Goodwill
The following table represents goodwill by reportable operating segment as of July 31, 2024 and July 31, 2023:
Satellite and Space
Communications
Terrestrial and
Wireless Networks
Total
Balance as of July 31, 2023
$
173,602,000
174,090,000 $ 347,692,000
PST Divestiture
(14,587,000)
—
(14,587,000)
Goodwill impairment
(48,925,000)
—
(48,925,000)
Balance as of July 31, 2024
$
110,090,000
174,090,000 $ 284,180,000
During the first quarter of fiscal 2024, we determined that the PST Disposal Group met the criteria to be classified as
held for sale. Because the PST Disposal Group represented the disposal of a portion of the Satellite and Space
Communications reporting unit, we assigned $14,587,000 of goodwill to the PST Disposal Group on a relative fair
value basis. For purposes of allocating goodwill to the PST Disposal Group, we determined the fair value of the PST
Disposal Group (based on consideration received from the sale transaction) and the fair value of the retained
businesses of the Satellite and Space Communications reporting unit (based on a combination of the income and
market approach). In conjunction with the relative fair value allocation, we tested goodwill assigned to the PST
Disposal Group and retained businesses of the Satellite and Space Communications reporting unit for impairment and
concluded that no impairment existed at the time the held for sale criteria were met. As discussed further in Note (3) -
"Business Divestiture," we completed the PST Divestiture in the second quarter of fiscal 2024 and reduced goodwill
by $14,587,000 as part of determining the loss on business divestiture.
In accordance with FASB ASC 350, we perform a goodwill impairment analysis at least annually (in the first quarter
of each fiscal year), unless indicators of impairment exist in interim periods. If we fail the quantitative assessment of
goodwill impairment ("quantitative assessment"), we would be required to recognize an impairment loss equal to the
amount that a reporting unit's carrying value exceeded its fair value; however, any loss recognized should not exceed
the total amount of goodwill allocated to that reporting unit.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 44
During the fourth quarter of fiscal year 2024, our lower than expected financial performance, default on certain credit
facility covenants and the sustained decrease in stock price since August 1, 2023 were considered triggering events
which required a quantitative impairment test as of July 31, 2024. We performed a quantitative assessment using
market participant assumptions to determine if the fair value of each of our reporting units with goodwill exceeded its
carrying value. In making this assessment, we considered, among other things, expectations of projected net sales and
cash flows, assumptions impacting the weighted average cost of capital, trends in trading multiples of comparable
companies, changes in our stock price and changes in the carrying values of our reporting units with goodwill. We also
considered overall business conditions.
In performing the quantitative assessment, we estimated the fair value of each of our reporting units using a
combination of the income and market approaches. The income approach, also known as the discounted cash flow
("DCF") method, utilizes the present value of cash flows to estimate fair value. The future cash flows for our reporting
units were projected based on our estimates, at that time, of future revenues, operating income and other factors (such
as working capital and capital expenditures). For purposes of conducting our impairment analysis, we assumed
revenue growth rates and cash flow projections that are below our actual long-term expectations. The discount rates
used in our DCF method were based on a weighted-average cost of capital ("WACC") determined from relevant
market comparisons, adjusted upward for specific reporting unit risks (primarily the uncertainty of achieving projected
operating cash flows). A terminal value growth rate was applied to the final year of the projected period, which reflects
our estimate of stable, perpetual growth. We then calculated a present value of the respective cash flows for each
reporting unit to arrive at an estimate of fair value under the income approach. Under the market approach, we
estimated a fair value based on comparable companies' market multiples of revenues and earnings before interest,
taxes, depreciation and amortization and factored in a control premium. Finally, we compared our estimates of fair
values to our total public market capitalization and assessed implied control premiums based on our common stock
price of $3.17 as of the date of testing.
Ultimately, based on our quantitative evaluation, we determined that the carrying value of our Satellite and Space
Communications reporting unit exceeded its fair value and recognized a goodwill impairment loss of $48,925,000 in
fiscal 2024 in our Consolidated Statements of Operations. We also determined that our Terrestrial and Wireless
Networks reporting unit had an estimated fair value in excess of its carrying value of at least 24.7% and concluded that
our goodwill for this reporting unit was not impaired.
In connection with our decision in July 2024 to exit our subsidiary operations in Basingstoke, United Kingdom, such
operations became a separate asset group (the “U.K. Asset Group”) and we assessed the recoverability of the carrying
value of the U.K. Asset Group under the accounting standards for assets held and used as of July 31, 2024. The
undiscounted future cash flows to complete the exit of our Basingstoke operations indicated that the carrying amount
of the asset group is not recoverable. The fair value of the U.K. Asset Group was estimated using an income approach
and was lower than the U.K Asset Group’s carrying amount. As a result, we recorded a long-lived asset impairment
charge of $15,600,000 within the Satellite and Space Communications segment in our fiscal 2024 Consolidated
Statements of Operations. We allocated $9,925,000 of this impairment to the carrying value of Intangibles with Finite
Lives, net, $2,651,000 to Property, Plant & Equipment, net, $1,873,000 to Other Assets, net and $1,151,000 to
Operating Lease Right-of-Use Assets, net.
In addition, as disclosed in Note (1) Summary of Significant Accounting and Reporting Policies, Liquidity and Going
Concern, the Credit Facility was amended on October 17, 2024 to waive certain defaults or events of default, including
in connection with our Net Leverage Ratio and a Fixed Charge Coverage Ratio covenants as of July 31, 2024.
Although we have cured our defaults under the Credit Facility, a sustained significant decline in our actual operating
performance, as compared to our forecast, and/or a continued sustained decline in our common stock price, may
require us to perform another interim quantitative impairment test, which may result in an impairment of the goodwill
assigned to both of our reporting units by an amount that could be material if we conclude our forecasted operating
results will be adversely impacted for the foreseeable future.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 45
In any event, we are required to perform the next annual goodwill impairment analysis on August 1, 2025 (the start of
our fiscal 2026). If our assumptions and related estimates change in the future, or if we change our reporting unit
structure or other events and circumstances change (e.g., a sustained decrease in the price of our common stock
(considered on both absolute terms and relative to peers)), we may be required to record impairment charges when we
perform these tests, or in other future periods. Any impairment charges that we may record in the future could be
material to our results of operations and financial condition.
(15) Intangible Assets
Intangible assets with finite lives as of July 31, 2024 and 2023 are as follows:
July 31, 2024
Weighted Average
Amortization Period
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Customer relationships
20.2
$
302,058,000
141,601,000
$ 160,457,000
Technologies
14.8
113,149,000
87,809,000
25,340,000
Trademarks and other
16.7
32,926,000
23,895,000
9,031,000
Total
$
448,133,000
253,305,000
$ 194,828,000
July 31, 2023
Weighted Average
Amortization Period
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Customer relationships
20.2
$
302,058,000
121,786,000
$ 180,272,000
Technologies
14.8
114,949,000
80,672,000
34,277,000
Trademarks and other
16.7
32,926,000
21,568,000
11,358,000
Total
$
449,933,000
224,026,000
$ 225,907,000
The weighted average amortization period in the above table excludes fully amortized intangible assets.
Amortization expense for the fiscal years ended July 31, 2024, 2023 and 2022 was $21,154,000, $21,396,000 and
$21,396,000, respectively.
The estimated amortization expense consists of the following for the fiscal years ending July 31:
2025
$ 21,722,000
2026
19,128,000
2027
17,774,000
2028
17,774,000
2029
16,353,000
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 46
We review net intangible assets with finite lives for impairment when an event occurs indicating the potential for
impairment. Based on our last assessment, we performed an impairment assessment of our Satellite and Space
Communications segment’s long-lived assets in response to triggering events indicating potential impairment, namely
the overall decline in financial performance of the segment and the Company’s decision to either complete a sale or
wind-down our steerable antenna operations in the United Kingdom by the end of the first quarter of fiscal 2025. As
such, we recognized an impairment loss of $9,925,000, related to net intangible assets with definite lives, which is
included within intangible asset accumulated amortization in the table above. See Note (1)(h) - "Summary of
Significant Accounting and Reporting Policies, Long-Lived Assets" for more information We believe that the carrying
values of our remaining net intangible assets were recoverable as of July 31, 2024. However, if business conditions
deteriorate, we may be required to record impairment losses, and/or increase the amortization of intangibles in the
future. Any impairment charges that we may record in the future could be material to our results of operations and
financial condition.
(16) Convertible Preferred Stock
On October 18, 2021, we entered into a Subscription Agreement (the “Subscription Agreement”) with certain affiliates
and related funds of White Hat Capital Partners LP and Magnetar Capital LLC (collectively, the “Investors”), relating
to the issuance and sale of up to 125,000 shares of our Series A Convertible Preferred Stock, par value $0.10 per share
(the “Series A Convertible Preferred Stock”), for an aggregate purchase price of up to $125,000,000, or $1,000 per
share. On October 19, 2021, pursuant to the terms of the Subscription Agreement, the Investors purchased an
aggregate of 100,000 shares of Series A Convertible Preferred Stock for an aggregate purchase price of $100,000,000.
White Hat Capital Partners LP is affiliated with Mark Quinlan, who serves as Chairman of our Board of Directors.
On December 13, 2023, we and the Investors agreed to change certain terms of the Series A Convertible Preferred
Stock, effected through an Exchange Agreement (the “Exchange Agreement”), pursuant to which the Investors
exchanged (the “Series A Exchange”) all 100,000 shares of Series A Convertible Preferred Stock outstanding for
100,000 shares of our newly issued Series A-1 Convertible Preferred Stock, par value $0.10 per share (the “Series A-1
Convertible Preferred Stock”), with an initial liquidation preference of $1,134.20 per share. As a result of the Series A
Exchange, no shares of Series A Convertible Preferred Stock remain outstanding.
On January 22, 2024, we entered into a Subscription and Exchange Agreement (the “Subscription and Exchange
Agreement”) with the Investors, relating to: (i) the issuance and sale of 45,000 shares of Series B Convertible
Preferred Stock, par value $0.10 per share (the “Series B Convertible Preferred Stock”), for an aggregate purchase
price of $45,000,000, or $1,000 per share (the “Primary Issuance”), (ii) the exchange of 100,000 shares of our Series
A-1 Convertible Preferred Stock for 115,721.22 shares of Series B Convertible Preferred Stock (the “Series B
Exchange”) and (iii) the issuance to the Investors of 5,400 shares of Series B Convertible Preferred Stock in lieu of
cash for certain expense reimbursements (the “Additional Issuance” and, together with the Primary Issuance and the
Series B Exchange, the “Series B Issuance”). As a result of the Series B Exchange, no shares of Series A-1 Convertible
Preferred Stock remain outstanding. We received $43,200,000 of cash proceeds from the Primary Issuance, net of
$1,800,000 for certain expense reimbursements.
On June 17, 2024, in connection with entering into the Credit Facility discussed in Note (8) - "Credit Facility," we and
the Investors agreed to change certain terms of the Series B Convertible Preferred Stock. The changes altered the
preferred holders’ existing consent rights and existing put rights alongside payments upon a change of control
following specified asset sales, in each case consistent with the Credit Facility. To effect these changes, we and the
Investors entered into a Subscription and Exchange Agreement (the “Series B-1 Exchange”), pursuant to which the
Investors: (i) exchanged, in a transaction exempt from registration under the Securities Act of 1933, all of the
166,121.22 shares of Series B Convertible Preferred Stock outstanding for 166,121.22 shares of our newly issued
Series B-1 Convertible Preferred Stock, par value $0.10 per share, with an initial liquidation preference of $1,036.58
per share, and (ii) received 5,705.83 additional shares of Series B-1 Convertible Preferred Stock. Also, on June 17,
2024, we and the Investors entered into a Voting Agreement and Registration Rights Agreement and filed a Series B-1
Certificate of Designations with the Secretary of State of Delaware, complete copies of which are documented and
filed with the SEC. Except for the changes described above, the powers, preferences and rights of the Series B-1
Convertible Preferred Stock are substantially the same as those of the Series B Convertible Preferred Stock, including,
without limitation, that the shares of Series B-1 Convertible Preferred Stock are convertible into shares of common
stock at a conversion price of $7.99 per share (the same as the current conversion price of the Series B Convertible
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 47
Preferred Stock, and subject to the same adjustments). We did not receive any cash proceeds from the Series B-1
Exchange.
The Series B-1 Convertible Preferred Stock ranks senior to the shares of our common stock, with respect to the
payment of dividends and the distribution of assets upon a liquidation, dissolution or winding up of the Company. The
Series B-1 Convertible Preferred Stock has an initial liquidation preference of $1,036.58 per share with each share
entitled to a cumulative dividend (the “Dividend”) at the rate of 9.00% per annum, compounding quarterly, paid-in-
kind, or 7.75% per annum, compounding quarterly, paid in cash, at our election, or 6.50% per annum, in respect of any
shares of Series B-1 Convertible Preferred Stock that remain outstanding following the redemption of at least fifty
percent (50%) of the Series B-1 Preferred Stock pursuant to the exercise of an asset sale put right and/or an asset sale
call right as described below. For any quarter in which we elect not to pay the Dividend in cash, such Dividend
becomes part of the liquidation preference of the Series B-1 Convertible Preferred Stock. In addition, no dividend or
other distribution on our common stock will be declared or paid on our common stock unless, at the time of such
declaration and payment, an equivalent dividend or distribution is declared and paid on the Series B-1 Convertible
Preferred Stock (the “Participating Dividend”), provided that in the case of any such dividend in the form of cash, in
lieu of a cash payment, such Participating Dividend will become part of the liquidation preference of the Series B-1
Convertible Preferred Stock. Such Participating Dividend results in the Series B-1 Convertible Preferred Stock
meeting the definition of a "participating security" for purposes of our earnings per share calculations.
The shares of Series B-1 Convertible Preferred Stock are convertible into shares of common stock at the option of the
holder thereof at any time. At any time after July 22, 2027, we have the right to mandate conversion of the Series B-1
Convertible Preferred Stock, subject to certain restrictions based on the price of our common stock in the preceding
thirty (30) trading days. The conversion price for the Series B-1 Convertible Preferred Stock is $7.99, subject to certain
adjustments set forth in the certificate of designations governing the Series B-1 Convertible Preferred Stock (the
"Series B-1 Certificate of Designations").
Holders of the Series B-1 Convertible Preferred Stock are entitled to vote with the holders of our common stock on an
as-converted basis, and are entitled to a separate class vote with respect to, among other things, amendments to our
organizational documents that have an adverse effect on the Series B-1 Convertible Preferred Stock, authorizations or
issuances of securities of the Company (other than the issuance of up $50,000,000 of shares of common stock), the
payment of dividends, related party transactions, repurchases or redemptions of securities of the Company,
dispositions of businesses or assets involving consideration having a fair value in excess of $75,000,000, the
incurrence of certain indebtedness and certain amendments or extensions of our Credit Facility on terms and
conditions that, taken as a whole, (A) are materially different from the existing Credit Facility or (B) adversely affect
our ability to perform our obligations in connection with an optional repurchase of the Series B-1 Convertible
Preferred Stock, in each case, subject to the exceptions and qualifications set forth in the Series B-1 Certificate of
Designations.
Holders have the right to require us to repurchase their Series B-1 Convertible Preferred Stock (at 1.0x the liquidation
preference, plus accrued and unpaid dividends) on a date occurring either: (a) on or after October 31, 2028 or (b) upon
the consummation of an asset sale meeting certain criteria. We have the right to repurchase all, or less than all, of the
Series B-1 Convertible Preferred Stock upon the consummation of an asset sale meeting the same criteria, other than
an asset sale that would result in a change of control. In addition, each holder will have the right to cause us to
repurchase its Series B-1 Convertible Preferred Stock in connection with a Change of Ccontrol (as defined in the
Series B-1 Certificate of Designations) at 1.5x (or 1.0x in the case of Series B-1 Convertible Preferred Stock issued in
the Additional Issuance) the liquidation preference, plus accrued and unpaid dividends. Any repurchase described
above would be subject to the terms set forth in the Series B-1 Certificate of Designations.
Upon a repurchase of the Series B-1 Convertible Preferred Stock occurring as a result of an asset sale described above,
we will issue each respective holder a warrant (a “Warrant”). A Warrant will represent the right to acquire our
common stock, as further described in the Subscription and Exchange Agreement, for a term of five years and six
months from the issuance of such Warrant, at an initial exercise price equal to the conversion price on the date of
issuance of such Warrant, subject to certain adjustments. We determined that our obligation to issue a Warrant met the
definition of a freestanding financial instrument that should be accounted for as a liability. We established an initial
Warrant liability of $6,440,000, which was included in the consideration given to the Investors for purposes of
determining the loss on extinguishment of the Series A-1 Convertible Preferred Stock as of January 31, 2024. The
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 48
Warrant liability is classified in "Other Liabilities" on the Consolidated Balance Sheets and is remeasured to its
estimated fair value each reporting period, using Level 3 fair value inputs, until the Warrant is exercised or expires.
Changes in the estimated fair value of the Warrant will be recognized in our Consolidated Statement of Operations as a
non-cash expense or benefit. As of July 31, 2024, the Warrant liability was remeasured, resulting in a $5,730,000
reduction to its estimated fair value.
We accounted for the cancellation of our Series A-1 Convertible Preferred Stock and Series B Convertible Preferred
Stock as extinguishments based on a qualitative assessment of the terms of the preferred shares exchanged. We
recognized a $19,555,000 loss on extinguishment, representing the aggregate value of the Warrant and additional
issuances related to certain expense reimbursements. As the Series A-1 Convertible Preferred Stock and Series B
Convertible Preferred Stock were each classified as temporary equity, the loss on extinguishment was accounted for as
a dividend to the holders and charged against retained earnings, and included in net loss attributable to common
shareholders.
In accordance with ASC 480, "Distinguishing Liabilities from Equity," specifically ASC 480-10-S99-3A(2), SEC Staff
Announcement: Classification and Measurement of Redeemable Securities, we classified the Series B-1 Convertible
Preferred Stock outside of permanent equity as temporary equity since the redemption of such shares is not solely
within our control and we could be required by the holder to redeem the shares for cash or other assets, at their option.
Upon the Series B-1 Exchange, the initial redemption value (and estimated fair value) of the Series B-1 Convertible
Preferred Stock was $178,112,000. We have elected to adjust the carrying value of the Series B-1 Convertible
Preferred Stock to its current redemption value of $180,076,000, which includes $623,000 of cumulative dividends
paid-in-kind and $1,341,000 of accumulated and unpaid dividends. During fiscal 2024, the adjustments charged
against retained earnings to increase the carrying value of outstanding convertible preferred stock to their respective
redemption values totaled $15,900,000, of which $12,390,000 related to the Series B and B-1 Convertible Preferred
Stock and $3,510,000 related to the Series A and A-1 Convertible Preferred Stock (while outstanding).
Subsequent Event
On October 17, 2024, we and the Investors agreed to change certain terms of the Series B-1 Convertible Preferred
Stock. The changes (i) altered the date on which preferred holders can opt to have us repurchase their Series B-2
Convertible Preferred Shares (as defined below) in certain circumstances, (ii) provided for increases to the dividend
rate in certain circumstances and provided for an option for the preferred holders to elect to receive dividends in cash
(to the extent permitted by law), and (iii) clarified the preferred holders’ existing consent rights, among other things.
To effect the changes described above, we and the Investors entered into a Subscription and Exchange Agreement,
pursuant to which the Investors (i) exchanged (the “Series B-2 Exchange”) all of the 171,827.05 shares of Series B-1
Convertible Preferred Stock outstanding for 171,827.05 shares of our newly issued Series B-2 Convertible Preferred
Stock, par value $0.10 per share, with an initial liquidation preference of $1,067.87 per share (the per share liquidation
preference of the Series B-1 Convertible Preferred Stock as of the date of issuance), and (ii) received 3,436.53
additional shares of Series B-2 Convertible Preferred Stock (collectively, the “Series B-2 Convertible Preferred
Stock”). We did not receive any cash proceeds from the exchange and issuance of Series B-2 Convertible Preferred
Stock. As a result of the Series B-2 Exchange, no shares of Series B-1 Convertible Preferred Stock remain outstanding
as of October 17, 2024.
(17) Stockholders’ Equity
Shelf Registration
On July 13, 2022, we filed a $200,000,000 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 $200,000,000 shelf
registration statement.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 49
Common Stock Repurchase Program
On September 29, 2020, our Board of Directors authorized a $100,000,000 stock repurchase program, which replaced
our prior program. The $100,000,000 stock repurchase program has no time restrictions and repurchases may be made
from time to time in open-market or privately negotiated transactions, or by other means in accordance with federal
securities laws. There were no repurchases made during the fiscal years ended July 31, 2024 or 2023.
(18) Cost Reduction Activities
In fiscal 2023, we transformed and integrated our individual businesses into two segments to improve operational
performance. This transformation has provided insight into opportunities to manage costs, streamline operations,
improve efficiency, and accelerate decision-making by eliminating management layers and other redundancies. In
doing so, during fiscal 2023, we recorded $3,872,000 of severance costs in selling, general and administrative
expenses in our Consolidated Statements of Operations, of which $1,989,000, $1,220,000 and $663,000 related to our
Satellite and Space Communications, Terrestrial and Wireless Networks and Unallocated segments, respectively. We
paid $2,320,000 of severance costs during fiscal 2023 and our severance liability as of July 31, 2023 was $1,552,000.
In fiscal 2024, we continued to transform and integrate our businesses, and in July 2024 made a decision to exit our
subsidiary operations in Basingstoke U.K. and recorded total severance costs of $2,616,000 in selling, general and
administrative expenses in our Consolidated Statements of Operations, of which a substantial portion was related to
our Satellite and Space Communications segment. After net payments of $3,139,000 during fiscal 2024, our severance
liability as of July 31, 2024 was $1,029,000.
(19) Subsequent Event
Subordinated Credit Agreement
On October 17, 2024 (the "closing date"), we entered into a subordinated credit agreement with the existing holders of
our convertible preferred stock and U.S. Bank Trust Company, National Association, as agent (the “Subordinated
Credit Agreement”) which provides a subordinated unsecured term loan facility in the aggregate principal amount of
$25,000,000 (the “Subordinated Credit Facility”). The proceeds of the Subordinated Credit Facility (i) cured our
default on certain financial covenants under the Amended Credit Agreement with respect to the fourth quarter of fiscal
2024, (ii) provide us with additional liquidity and (iii) will fund our general working capital needs, including support
of our transformation initiatives.
The Subordinated Credit Facility is subject to a Make-Whole Amount with respect to certain repayments or
prepayments. The Make-Whole Amount is an amount equal to (i) from the closing date through (but not including) the
date that is nine months thereafter, $25,000,000 multiplied by 33.0%, (ii) from the date that is nine months after the
closing date through (but not including) the date that is the second anniversary of the closing date, $25,000,000
multiplied by 50.0%, (iii) from the second anniversary of the closing date and thereafter, $25,000,000 multiplied by
75.0% plus, in the case of clause (iii), interest accrued on $25,000,000 at the Make-Whole Interest Rate (as defined
below) starting on the second anniversary of the closing date and calculated as of any such date of determination. The
Make-Whole Interest Rate is a rate equal to 16.0% per annum, which is increased by 2.0% per annum upon the
occurrence and during the continuation of an event of default under the Subordinated Credit Facility.
The obligations under the Subordinated Credit Facility are guaranteed by the same guarantors under the Amended
Credit Facility and matures 90 days after the Maturity Date under the Amended Credit Facility as discussed in Note (8)
– “Credit Facility.” The Subordinated Credit Facility contains customary representations, warranties and affirmative
covenants, in each case substantially consistent with the representations and warranties and affirmative covenants
under the Amended Credit Agreement. The Subordinated Credit Facility contains customary negative covenants,
subject to negotiated exceptions, including but not limited to: (i) liens, (ii) investments, (iii) indebtedness, (iv)
significant corporate changes, including mergers and acquisitions, (v) dispositions, (vi) restricted payments, including
stockholder dividends, and (vii) certain other restrictive agreements.
The outstanding Subordinated Credit Facility will not be considered debt for purposes of our financial covenant testing
under the Credit Facility. Capitalized terms used but not defined herein have the meanings set forth for such terms in
the Subordinated Credit Facility, which has been documented and filed with the SEC.
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
Notes to Consolidated Financial Statements, Continued
F - 50
Schedule II
COMTECH TELECOMMUNICATIONS CORP.
AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Fiscal Years Ended July 31, 2024, 2023 and 2022
Column A
Column B
Column C
Additions
Column D
Column E
Description
Balance at
beginning of
period
Charged to
cost and
expenses
Transfers
(deductions)
- describe
Balance at
end of
period
Allowance for doubtful accounts receivable:
Year ended July 31,
2024
$ 2,089,000
1,422,000
(A)
(1,579,000) (B)
$ 1,932,000
2023
2,337,000
261,000
(A)
(509,000) (B)
2,089,000
2022
1,648,000
838,000
(A)
(149,000) (B)
2,337,000
Inventory reserves:
Year ended July 31,
2024
$ 24,659,000
2,801,000
(C)
(9,189,000) (D)
$ 18,271,000
2023
23,121,000
4,871,000
(C)
(3,333,000) (D)
24,659,000
2022
20,229,000
4,447,000
(C)
(1,555,000) (D)
23,121,000
Valuation allowance for deferred tax assets:
Year ended July 31,
2024
$ 34,478,000 12,343,000
(E)
(1,933,000) (E)
$ 44,888,000
2023
31,227,000
4,617,000
(E)
(1,366,000) (E)
34,478,000
2022
28,384,000
2,947,000
(E)
(104,000) (E)
31,227,000
(A)
Provision for doubtful accounts.
(B)
Write-off of uncollectible receivables and allowance for doubtful account receivables relating to the PST Divestiture.
(C)
Provision for excess and obsolete inventory.
(D)
Write-off of inventory and PST inventory reserve relating to the PST Divestiture.
(E)
Change in valuation allowance. See Note (10) - "Income Taxes" for further discussion.
S - 1
Annual Report 2024
5
Board of Directors
Executive Chairman:
Kenneth H. Traub
Lead Independent Director:
Bruce T. Crawford
Lieutenant General (Retired)
Board Member (Public/Private)
C Suite Advisor
(Listed Below Alphabetically)
Wendi Bryan Carpenter
Rear Admiral U.S. Navy (Retired)
Principal/Founder Gold Star Strategies LLC
Judy Chambers
Managing Principal and Member of the Board
of Meketa Investment Group
Michael J. Hildebrandt
Senior Investment Professional
Freshford Capital
Mark Quinlan
Co-Founder and Managing Partner
White Hat Capital Partners
John Ratigan
President and Chief Executive Officer
Yacov A. Shamash
Professor of Electrical and Computer
Engineering at Stony Brook University
Lawrence J. Waldman
Non-Executive Chairman of the Board at
CVD Equipment Corporation
Corporate Management
Kenneth H. Traub
Executive Chairman
John Ratigan
President and Chief Executive Officer
Michael A. Bondi
Chief Financial Officer
Donald E. Walther
Chief Legal Officer and Corporate Secretary
Jennie Kerr
Chief People Officer
Nancy Stallone
Executive VP Treasurer and Assistant Corporate
Secretary
Daniel Gizinski
President, Satellite & Space Communications
Segment
Jeff Robertson
President, Terrestrial & Wireless Networks
Segment
Independent Registered Public
Accountants
Deloitte & Touche LLP
Market for Common Stock
Common Stock is traded on the NASDAQ Stock
Market LLC under the stock symbol CMTL
Registrar and Transfer Agent
Equiniti Trust Company, LLC
6201 15th Avenue
Brooklyn, New York 11219
Investor Relations and Shareholder
Information
Visit us at www.comtech.com or call (480) 333-
2200. A copy of the Form 10-K Annual Report,
exhibits and other reports as filed with the
Securities
and
Exchange
Commission
are
available
to
shareholders.
Requests
for
information should be made by submitting an
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Corporate Information
Annual Report 2024
6
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Chandler, Arizona 85226
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