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Washington, D.C. 20549

(Mark One)

Commission File Number: 0-7928

(Exact name of registrant as specified in its charter)

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

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.

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).

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.

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

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

☐ Yes              ☒ No

As of June 12, 2024, the number of outstanding shares of Common Stock, par value $0.10 per share, of the registrant was 28,493,147 shares.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

(Unaudited)

(Unaudited)

						Three months ended April 30,												Nine months ended April 30,
						2024						2023						2024						2023
Net sales						$	128,076,000					136,316,000						$	414,212,000					401,180,000
Cost of sales						89,122,000						93,170,000						284,178,000						265,307,000
Gross profit						38,954,000						43,146,000						130,034,000						135,873,000
Expenses:
Selling, general and administrative						28,697,000						31,397,000						91,699,000						89,649,000
Research and development						5,746,000						11,676,000						20,401,000						36,868,000
Amortization of intangibles						5,289,000						5,349,000						15,866,000						16,047,000
Loss (gain) on business divestiture, net						200,000						—						(2,013,000)						—
CEO transition costs						2,492,000						—						2,492,000						9,090,000
						42,424,000						48,422,000						128,445,000						151,654,000
Operating (loss) income						(3,470,000)						(5,276,000)						1,589,000						(15,781,000)
Other expenses (income):
Interest expense						5,146,000						4,386,000						15,343,000						10,412,000
Interest (income) and other						409,000						728,000						1,246,000						928,000
Change in fair value of warrants						(6,439,000)						—						(6,439,000)						—
Loss before (benefit from) provision for income taxes						(2,586,000)						(10,390,000)						(8,561,000)						(27,121,000)
(Benefit from) provision for income taxes						(5,381,000)						(2,932,000)						639,000						(3,762,000)
Net income (loss)						$	2,795,000					(7,458,000)						$	(9,200,000)					(23,359,000)
Loss on extinguishment of convertible preferred stock						—						—						(13,640,000)						—
Adjustments to reflect redemption value of convertible preferred stock:
Convertible preferred stock issuance costs						(76,000)						—						(4,349,000)						—
Dividend on convertible preferred stock						(3,759,000)						(1,766,000)						(7,643,000)						(5,213,000)
Net loss attributable to common stockholders						$	(1,040,000)					(9,224,000)						$	(34,832,000)					(28,572,000)
Net loss per common share (See Note 6):
Basic						$	(0.04)					(0.33)						$	(1.21)					(1.02)
Diluted						$	(0.04)					(0.33)						$	(1.21)					(1.02)
Weighted average number of common shares outstanding – basic						28,854,000						28,071,000						28,753,000						27,950,000
Weighted average number of common and common equivalent shares outstanding – diluted						28,854,000						28,071,000						28,753,000						27,950,000

 

(Unaudited)

(Unaudited)

(1)     General

The accompanying Condensed Consolidated Financial Statements of Comtech Telecommunications Corp. and its subsidiaries ("Comtech," "we," "us," or "our") as of and for the three and nine months ended April 30, 2024 and 2023 are unaudited. In the opinion of management, the information furnished reflects all material adjustments (which include normal recurring adjustments) necessary for a fair presentation of the results for the unaudited interim periods. Our results of operations for such periods are not necessarily indicative of the results of operations to be expected for the full fiscal year.

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

Our Condensed Consolidated Financial Statements should be read in conjunction with our audited consolidated financial statements, filed with the Securities and Exchange Commission ("SEC"), for the fiscal year ended July 31, 2023 and the notes thereto contained in our Annual Report on Form 10-K, and all of our other filings with the SEC.

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared assuming we will continue as a going concern. The going concern basis of presentation assumes that we will continue in operation one year after the date these unaudited Condensed Consolidated Financial Statements are issued and will be able to realize our assets and discharge our liabilities and commitments in the normal course of business.

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

As of the date these financial statements were issued (the "issuance date"), we evaluated whether the following conditions or events, considered in the aggregate, raise substantial doubt about the Company's 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 $14,660,000, $33,752,000, and $68,298,000 in fiscal 2023, 2022 and 2021, respectively. More recently, we recognized an operating loss of $3,470,000 in the three months ended April 30, 2024 and operating income of $1,589,000 in the nine months ended April 30, 2024. In addition, over the past three fiscal years, net cash used in operating activities was $4,433,000 and $40,638,000 in fiscal 2023 and 2021, respectively, and net cash provided by operating activities was $1,997,000 in fiscal 2022. More recently, net cash used in operating activities was $44,998,000 in the nine months ended April 30, 2024.

As of April 30, 2024, we were in compliance with all restrictive and financial covenants under our Prior Credit Facility (see Note (10) – “Credit Facility” for defined terms). As of April 30, 2024, our Secured Leverage Ratio was 2.89x TTM Adjusted EBITDA compared to the maximum allowable Secured Leverage Ratio of 3.50x TTM Adjusted EBITDA. Our Interest Expense Coverage Ratio as of April 30, 2024 was 3.36x TTM Adjusted EBITDA compared to the Minimum Interest Expense Coverage Ratio of 3.25x TTM Adjusted EBITDA. Our Minimum Liquidity as of April 30, 2024 was $26,800,000 compared to the Minimum Liquidity requirement of $25,000,000.

As discussed in Note (10) – “Credit Facility,” on June 17, 2024, we entered into a $222,000,000 credit facility with a new syndicate of lenders (the “New Credit Facility”), which replaces our Prior Credit Facility and which is expected to fund on or around June 18, 2024. The New Credit Facility matures on July 31, 2028, consists of a committed $162,000,000 term loan (“Term Loan”) and $60,000,000 revolver loan facility (“Revolver”) and is expected to have outstanding borrowings at close of $187,000,000, reflecting $25,000,000 drawn on the Revolver. The New Credit Facility, among other things, requires compliance with new restrictive and financial covenants. Considering the New Credit Facility entered into subsequent to quarter end and our forecasted results over the next twelve months beyond the issuance date, we anticipate in the future that we will be in compliance with all restrictive and financial covenants under our New Credit Facility. As of the issuance date and closing of the New Credit Facility, our available sources of liquidity will approximate $63,000,000, consisting of qualified cash and cash equivalents of approximately $28,000,000 and $35,000,000 of excess availability under the Revolver, both as defined in the New Credit Facility.

Our ability to meet our current obligations as they come due may be impacted by our ability to remain compliant with the financial covenants under our New Credit Facility or to obtain waivers or amendments that impact the related financial covenants. If we are unable to satisfy certain covenants and not able to obtain waivers or amendments, such event would constitute an Event of Default and could cause an immediate acceleration and repayment of all outstanding principal, interest and fees due under our New Credit Facility. If there is an Event of Default, there can be no assurances that we will be able to continue as a going concern, which could force us to delay, reduce or discontinue certain aspects of our business strategy. Additionally, our ability to meet future anticipated liquidity needs will largely depend on our ability to generate positive cash inflows from operations and/or secure other sources of outside capital. As it relates to sources of outside capital, we can raise up to $50,000,000 through the issuance of common shares without the consent of the holders of Convertible Preferred Stock.

•implementing certain cost savings and restructuring activities to reduce cash used in operations, as discussed further in Note (20) – “Cost Reduction;”

•pursuing initiatives to reduce investments in working capital, namely accounts receivable and inventory;

•improving process disciplines to attain and maintain profitable operations by entering into more favorable sales or service contracts;

•reevaluating our business plans to identify opportunities to further reduce capital expenditures;

•seeking opportunities to improve liquidity through any combination of debt and/or equity financing (including possibly restructuring our existing Convertible Preferred Stock); and

•seeking other strategic transactions and/or measures including, but not limited to, the potential sale or divestiture of assets.

On August 9, 2022, our Board of Directors appointed Ken Peterman as our Chairman of the Board, President and Chief Executive Officer ("CEO"). Transition costs related to 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.

On March 12, 2024, Mr. Peterman's employment with the Company was terminated for cause and the Board of Directors appointed John Ratigan as interim 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 $2,492,000 incurred during three and nine months ended April 30, 2024 primarily consisted of legal expenses and were expensed in our Unallocated segment.

(2)     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 sales price for this divestiture was $35,459,000 in cash (including adjustments for closing date net working capital and cash on hand), plus contingent consideration of up to $5,000,000 based on the achievement of a revenue target or the receipt of an anticipated contract award as specified in the stock sale agreement. As of April 30, 2024, we received net cash proceeds of $33,277,000, which includes $800,000 of the $1,000,000 previously held in escrow and is net of $2,182,000 of transaction costs. For the three and nine months ended April 30, 2024, we recognized a reduction to the estimated pre-tax gain of $200,000 (to reflect the final settlement of the closing date net working capital) and an estimated pre-tax gain of $2,013,000, respectively, which is presented as "Loss (gain) on business divestiture, net" in our Condensed Consolidated Statements of Operations. The estimated pre-tax loss (gain) reflects the recognition of a $3,300,000 receivable for the estimated fair value of the contingent consideration. The receivable for the estimated fair value of the contingent consideration is presented within “Prepaid expenses and other current assets” on the Condensed Consolidated Balance Sheet as of April 30, 2024. We will subsequently measure the contingent consideration receivable as a gain contingency in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 450, "Contingencies," and subsequent changes in the carrying value of the contingent consideration receivable will be recorded as an adjustment to “Loss (gain) on business divestiture, net.”

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:

(3)     Adoption of Accounting Standards and Updates

We are required to prepare our Condensed Consolidated Financial Statements in accordance with the FASB ASC, which is the source for all authoritative U.S. generally accepted accounting principles, which are commonly referred to as "GAAP." The FASB ASC is subject to updates by the FASB, which are known as Accounting Standards Updates ("ASUs"). During the nine months ended April 30, 2024, the following FASB ASUs have been issued and incorporated into the FASB ASC and have not yet been adopted by us as of April 30, 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.

•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 Condensed Consolidated Financial Statements and disclosures.

(4)     Revenue Recognition

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

•Over time - We recognize revenue using the over time method when there is a continuous transfer of control to the customer over the contractual period of performance. This generally occurs when we enter into a long-term contract relating to the design, development or manufacture of complex equipment or technology platforms to a buyer’s specification (or to provide services related to the performance of such contracts) 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.

Point in time accounting is principally applied to contracts in our satellite ground station technologies product line (which includes satellite modems 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.

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:

Sales to U.S. government customers include sales to the U.S. Department of Defense ("DoD"), intelligence and civilian agencies, as well as sales directly to or through prime contractors. Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. For the three and nine months ended April 30, 2024 and three months ended April 30, 2023, except for the U.S. government, there were no customers that represented 10.0% or more of consolidated net sales. For the nine months ended April 30, 2023, included in domestic sales are sales to Verizon Communications Inc. ("Verizon"), which accounted for 11.2% of consolidated net sales. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented 10.0% or more of consolidated net sales for the three and nine months ended April 30, 2024 and 2023.

The following tables summarize our disaggregation of revenue consistent with information reviewed by our CODM for the three and nine months ended April 30, 2024 and 2023. 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: