Comtech Telecommunications Corp 10-Q for FY2025 Q1
Comtech Telecommunications Corp (CMTL)
10-Q
2025-01-13
For: 2024-10-31
View Original
Added on
April 06, 2026
About this 10-Q
Comtech Telecommunications Corp filed this 10-Q on January 13, 2025, covering the quarter ended October 31, 2024 (FY2025 Q1).
Headline figures
Quarter ended October 31, 2024, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $115.8M
- down 23.8% from $151.91M a year earlier
- Net loss
- $148.41M
- compared with a net loss of $1.44M a year earlier
- Diluted EPS
- -$5.29
- compared with -$0.11 a year earlier
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| FORM | |||||
(Mark One)
| Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 | |||||
For the quarterly period ended October 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)
| (State or other jurisdiction of incorporation /organization) | (I.R.S. Employer Identification Number) | |||||||
| 85226 | ||||||||
| (Address of principal executive offices) | (Zip Code) | |||||||
| (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 | ||||||||||||
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 | ☐ | ☒ | Emerging growth company | ||||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting 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. ☐
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
As of January 9, 2025, the number of outstanding shares of Common Stock, par value $0.10 per share, of the registrant was 29,170,883 shares.
| COMTECH TELECOMMUNICATIONS CORP. INDEX | |||||||||||
| Page | |||||||||||
| PART I. FINANCIAL INFORMATION | |||||||||||
| Item 1. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| PART II. OTHER INFORMATION | |||||||||||
| Item 1. | |||||||||||
| Item 1A. | |||||||||||
| Item 2. | |||||||||||
| Item 4. | |||||||||||
| Item 5. | |||||||||||
| Item 6. | |||||||||||
1
PART I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| Assets | October 31, 2024 | July 31, 2024 | ||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | |||||||||||||
| Accounts receivable, net | ||||||||||||||
| Inventories, net | ||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Property, plant and equipment, net | ||||||||||||||
| Operating lease right-of-use assets, net | ||||||||||||||
| Goodwill | ||||||||||||||
| Intangibles with finite lives, net | ||||||||||||||
| Deferred financing costs, net | ||||||||||||||
| Other assets, net | ||||||||||||||
| Total assets | $ | |||||||||||||
| Liabilities, Convertible Preferred Stock and Stockholders’ Equity | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | |||||||||||||
| Accrued expenses and other current liabilities | ||||||||||||||
| Current portion of credit facility, net | ||||||||||||||
| Current portion of subordinated credit facility, net | ||||||||||||||
| Operating lease liabilities, current | ||||||||||||||
| Contract liabilities | ||||||||||||||
| Interest payable | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Non-current portion of credit facility, net | ||||||||||||||
| Operating lease liabilities, non-current | ||||||||||||||
| Income taxes payable, non-current | ||||||||||||||
| Deferred tax liability, net | ||||||||||||||
| Long-term contract liabilities | ||||||||||||||
| Other liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Commitments and contingencies (See Note 20) | ||||||||||||||
Convertible preferred stock, par value $ | ||||||||||||||
| Stockholders' equity: | ||||||||||||||
Preferred stock, par value $ | ||||||||||||||
Common stock, par value $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Retained earnings | ||||||||||||||
| Less: | ||||||||||||||
Treasury stock, at cost ( | ( | ( | ||||||||||||
| Total stockholders’ equity | ||||||||||||||
| Total liabilities, convertible preferred stock and stockholders’ equity | $ | |||||||||||||
See accompanying notes to condensed consolidated financial statements.
2
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three months ended October 31, | ||||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||||
| Net sales | $ | |||||||||||||||||||||||||
| Cost of sales | ||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||
| Expenses: | ||||||||||||||||||||||||||
| Selling, general and administrative | ||||||||||||||||||||||||||
| Research and development | ||||||||||||||||||||||||||
| Amortization of intangibles | ||||||||||||||||||||||||||
| Impairment of long-lived assets, including goodwill | ||||||||||||||||||||||||||
| Proxy solicitation costs | ||||||||||||||||||||||||||
| CEO transition costs | ||||||||||||||||||||||||||
| Operating (loss) income | ( | |||||||||||||||||||||||||
| Other expenses (income): | ||||||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||
| Interest (income) and other | ( | |||||||||||||||||||||||||
| Write-off of deferred financing costs | ||||||||||||||||||||||||||
| Change in fair value of warrants and derivatives | ||||||||||||||||||||||||||
| Loss before provision for (benefit from) income taxes | ( | ( | ||||||||||||||||||||||||
| Provision for (benefit from) income taxes | ( | |||||||||||||||||||||||||
| Net loss | $ | ( | ( | |||||||||||||||||||||||
| Gain on extinguishment of convertible preferred stock | ||||||||||||||||||||||||||
| Adjustments to reflect redemption value of convertible preferred stock: | ||||||||||||||||||||||||||
| Dividend on convertible preferred stock | ( | ( | ||||||||||||||||||||||||
| Net loss attributable to common stockholders | $ | ( | ( | |||||||||||||||||||||||
| Net loss per common share (See Note 6): | ||||||||||||||||||||||||||
| Basic | $ | ( | ( | |||||||||||||||||||||||
| Diluted | $ | ( | ( | |||||||||||||||||||||||
| Weighted average number of common shares outstanding – basic | ||||||||||||||||||||||||||
| Weighted average number of common and common equivalent shares outstanding – diluted | ||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
3
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(Unaudited)
| Three months ended October 31, 2024 and 2023 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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, 2023 | $ | $ | $ | $ | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity-classified stock award compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of employee stock purchase plan shares | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeiture | — | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net settlement of stock-based awards | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends) | — | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reversal of dividend equivalents | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of October 31, 2023 | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of July 31, 2024 | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity-classified stock award compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of employee stock purchase plan shares | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of restricted stock, net of forfeiture | — | — | ( | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net settlement of stock-based awards | — | — | ( | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Extinguishment of convertible preferred stock | ( | ( | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of convertible preferred stock (at fair value), excluding embedded derivatives reported in Other liabilities | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Adjustment to reflect redemption value of convertible preferred stock (including accrued dividends) | — | — | — | ( | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Reversal of dividend equivalents | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of October 31, 2024 | $ | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
4
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three months ended October 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||||||||
| Net loss | $ | ( | ( | ||||||||||||||||||||
| Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||||||||||||||||
| Depreciation and amortization of property, plant and equipment | |||||||||||||||||||||||
| Amortization of intangible assets with finite lives | |||||||||||||||||||||||
| Amortization of stock-based compensation | |||||||||||||||||||||||
| Amortization of cost to fulfill assets | |||||||||||||||||||||||
| Paid-in-kind interest under term loan | |||||||||||||||||||||||
| Accretion of interest on subordinated credit facility | |||||||||||||||||||||||
| Amortization of deferred financing costs | |||||||||||||||||||||||
| Write-off of deferred financing costs | |||||||||||||||||||||||
| Change in fair value of warrants and derivatives | |||||||||||||||||||||||
| Changes in other liabilities | ( | ||||||||||||||||||||||
| Loss on disposal of property, plant and equipment | |||||||||||||||||||||||
| Provision for allowance for doubtful accounts and contract assets | |||||||||||||||||||||||
| Provision for excess and obsolete inventory | |||||||||||||||||||||||
| Deferred income tax (benefit) expense | ( | ||||||||||||||||||||||
| Impairment of long-lived assets, including goodwill | |||||||||||||||||||||||
| Changes in assets and liabilities, net of effects of divestiture: | |||||||||||||||||||||||
| Accounts receivable | ( | ( | |||||||||||||||||||||
| Inventories | ( | ||||||||||||||||||||||
| Prepaid expenses and other current assets | ( | ||||||||||||||||||||||
| Other assets | ( | ||||||||||||||||||||||
| Accounts payable | |||||||||||||||||||||||
| Accrued expenses and other current liabilities | ( | ( | |||||||||||||||||||||
| Contract liabilities | ( | ||||||||||||||||||||||
| Other liabilities, non-current | |||||||||||||||||||||||
| Interest payable | ( | ||||||||||||||||||||||
| Income taxes payable | ( | ||||||||||||||||||||||
| Net cash used in operating activities | ( | ( | |||||||||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||||||||
| Purchases of property, plant and equipment | ( | ( | |||||||||||||||||||||
| Net cash used in investing activities | ( | ( | |||||||||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||||||||
| Proceeds from subordinated credit facility | |||||||||||||||||||||||
| Net borrowings under revolving loan | |||||||||||||||||||||||
| Repayment of term loan | ( | ||||||||||||||||||||||
| Proceeds from issuance of employee stock purchase plan shares | |||||||||||||||||||||||
| Payment of deferred financing costs | ( | ( | |||||||||||||||||||||
| Remittance of employees’ statutory tax withholding for stock awards | ( | ( | |||||||||||||||||||||
| Payment of shelf registration costs | ( | ||||||||||||||||||||||
| Payment of convertible preferred stock issuance costs | ( | ||||||||||||||||||||||
| Cash dividends paid on common stock | ( | ( | |||||||||||||||||||||
| Net cash provided by financing activities | |||||||||||||||||||||||
| Net decrease in cash and cash equivalents, including cash classified within assets of disposal group held for sale | ( | ( | |||||||||||||||||||||
| Less: net increase in cash classified within assets of disposal group held for sale | ( | ||||||||||||||||||||||
| Net decrease in cash and cash equivalents | ( | ( | |||||||||||||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||||||||||||||
| Cash and cash equivalents at end of period | $ | ||||||||||||||||||||||
See accompanying notes to condensed consolidated financial statements. | (Continued) | ||||||||||||||||||||||
5
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited)
| Three months ended October 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Supplemental cash flow disclosures: | ||||||||||||||
| Cash paid during the period for: | ||||||||||||||
| Interest | $ | |||||||||||||
| Income taxes, net | $ | |||||||||||||
| Non-cash investing and financing activities: | ||||||||||||||
| Adjustment to reflect redemption value of convertible preferred stock | $ | |||||||||||||
| Term loan amendment fee paid-in-kind | $ | |||||||||||||
| Accrued additions to property, plant and equipment | $ | |||||||||||||
| Accrued deferred financing costs | $ | |||||||||||||
| Accrued shelf registration costs | $ | |||||||||||||
| Unpaid convertible preferred stock issuance costs | $ | |||||||||||||
| Issuance of restricted stock | $ | |||||||||||||
| Accrued remittance of employees' statutory tax withholdings | $ | |||||||||||||
| Cash dividends declared on common stock but unpaid, including (reversal) accrual of dividend equivalents | $ | ( | ( | |||||||||||
See accompanying notes to condensed consolidated financial statements.
6
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) General
The accompanying Condensed Consolidated Financial Statements of Comtech Telecommunications Corp. and its subsidiaries ("Comtech," "we," "us," or "our") as of and for the three months ended October 31, 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, 2024 and the notes thereto contained in our Annual Report on Form 10-K, and all of our other filings with the SEC.
Liquidity and Going Concern
Pursuant to the requirements of ASC Topic 205-40, "Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern," we are required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern. This evaluation does not take into consideration the potential mitigating effect of our plans that have not been fully implemented or are not within our control as of the date the unaudited Condensed Consolidated Financial Statements are issued. When substantial doubt exists, we are required to evaluate whether the mitigating effect of our plans sufficiently alleviates substantial doubt about our ability to continue as a going concern. The mitigating effect of our plans, however, is only considered if both (i) it is probable that the plans will be effectively implemented within one year after the date that the unaudited Condensed Consolidated Financial Statements are issued, and (ii) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about our ability to continue as a going concern within one year after the date that the unaudited Condensed Consolidated Financial Statements are issued.
As of the date these financial statements were issued (the "issuance date"), we evaluated whether the following conditions or events, considered in the aggregate, raise substantial doubt about our ability to continue as a going concern over the next twelve months beyond the issuance date.
Over the past three fiscal years, we incurred operating losses of $79,890,000 , $14,660,000 and $33,752,000 in fiscal 2024, 2023 and 2022, respectively. More recently, we recognized an operating loss of $129,170,000 in the three months ended October 31, 2024. 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. More recently, net cash used in operating activities was $21,806,000 in the three months ended October 31, 2024. Our ability to meet future anticipated liquidity needs over the next year beyond the issuance date will largely depend on our ability to generate positive cash inflows from operations, maximize our borrowing capacity under our Credit Facility, as discussed further below, and/or secure other sources of outside capital. While we believe we will be able to generate sufficient positive cash inflows, maximize our borrowing capacity and secure outside capital, there can be no assurance our plans will be successfully implemented and, as such, we may be unable to continue as a going concern over the next year beyond the issuance date.
7
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As discussed further in Note (10) – 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 October 31, 2024 and January 10, 2025 (the date closest to the issuance date), total outstanding borrowings under the Credit Facility were $199,495,000 . At both October 31, 2024 and January 10, 2025, $32,500,000 was drawn on the Revolver Loan. As of the issuance date, our available sources of liquidity approximate $28,500,000 , 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 revolving lender's and Agent's 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 Net Leverage Ratio of 3.25 x commencing with the fiscal quarter ending January 31, 2025; a minimum Fixed Charge Coverage Ratio of 1.20 x commencing with the four fiscal quarter period 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 four fiscal quarter period ending October 31, 2025. Such ratios and minimum EBITDA adjust under the Credit Facility in future periods. Over the next twelve months beyond the issuance date, commencing with our fiscal quarter ending January 31, 2025, we believe that we will not be able to comply with one or more of these covenants.
The Credit Facility was amended on October 17, 2024 to waive certain defaults or events of default, including in connection with our Net Leverage Ratio and Fixed Charge Coverage Ratio covenants as of July 31, 2024. The amendment also, among other things: (i) increased the interest rate margins applicable to the loans; (ii) modified certain financial and collateral reporting requirements; (iii) provided a consent right to the revolving lender and Agent with respect to $27,500,000 of Revolver Loan borrowings above $32,500,000 ; (iv) permitted the incurrence of $25,000,000 of senior unsecured subordinated debt (as described below); (v) amended the maturity date to the earlier of (x) July 31, 2028 or (y) 90 days prior to the earliest date that the debt under the Subordinated Credit Agreement (as defined below) becomes due and payable; and (vi) suspended certain financial covenant testing through the end of our fiscal quarter ending January 31, 2025.
In addition, we entered into a Subordinated Credit Agreement with the existing holders of our Convertible Preferred Stock (the “Subordinated Credit Agreement”) on October 17, 2024, which provides a subordinated unsecured term loan facility in the aggregate principal amount of $25,000,000 (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) provided additional liquidity to us; and (iii) funded our general working capital needs.
Our ability to meet our current obligations as they become due may be impacted by our ability to remain compliant with the financial covenants required by the Credit Facility, or to obtain future waivers or amendments from the lenders in the event compliance is not maintained. While we believe we will be able to secure such waivers or amendments, as needed, there can be no assurance such waivers or amendments will be secured or on terms that are acceptable to us. If we are unable to secure waivers or amendments, the lenders may declare an event of default, which would cause an immediate acceleration and repayment of all outstanding principal, interest and fees due under our Credit Facility. Absent our ability to repay the forgoing amounts upon the declaration of an event of default, the lenders may exercise their rights and remedies under the Credit Facility, which may include, among others, a seizure of substantially all of our assets and/or the liquidation of our operations. If an event of default occurs that allows the lenders to exercise these rights and remedies over the next year beyond the issuance date, we will be unable to continue as a going concern.
8
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of the issuance date, our plans to address our ability to continue as a going concern include, among other things:
•executing a strategy to transform Comtech (ongoing and future actions supporting our transformation strategy include: an exploration of strategic alternatives for our various businesses and product lines; the pursuit of further portfolio-shaping opportunities to enhance profitability, efficiency and focus; and the implementation of additional operational initiatives to both achieve profitable results from operations as well as to align our go-forward cost structure with our future state business), as discussed further in Note (21) – Cost Reduction and Restructuring Related Activities;
•pursuing initiatives to reduce investments in working capital, namely accounts receivable and inventory;
•improving process disciplines to attain and maintain profitable operations by entering into more favorable sales or service contracts;
•reevaluating our business plans to identify opportunities (e.g., within each of our segments) to focus future investment on our most strategic, high-margin revenue opportunities;
•reevaluating our business plans to identify opportunities to further reduce capital expenditures;
•seeking opportunities to improve liquidity through any combination of debt and/or equity financing (including possibly restructuring our Credit Facility, Convertible Preferred Stock and/or Subordinated Credit Facility); and
•seeking other strategic transactions and/or measures including, but not limited to, the potential sale or divestiture of assets in addition to the wind down of our steerable antenna product line in Basingstoke, U.K.
While we believe the implementation of some or all of the elements of our plans over the next year beyond the issuance date will be successful, these plans are not all solely within management’s control and, as such, we can provide no assurance our plans are probable of being effectively implemented as of the issuance date. Therefore, the adverse conditions and events described above are uncertainties that raise substantial doubt about our ability to continue as a going concern. The accompanying Condensed Consolidated Financial Statements have been prepared on the basis that we will continue to operate as a going concern, which contemplates we will be able to realize assets and settle liabilities and commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying Condensed Consolidated Financial Statements do not include any adjustments that may result from the outcome of these uncertainties.
CEO Transition Costs and Related
On March 12, 2024, Ken Peterman's employment with the Company was terminated for cause and the Board of Directors (the "Board") appointed John Ratigan as interim CEO and Mark Quinlan as Chairman of the Board ("Chairman"). Prior to the changes, John Ratigan served as our Chief Corporate Development Officer and Mark Quinlan served as a member of our Board. Upon termination of his employment, Ken Peterman was deemed to have resigned from his position as Chairman and as a director pursuant to his employment contract. On October 28, 2024, John Ratigan became our President and CEO. Also, on November 26, 2024, existing Board members, Kenneth H. Traub and Lieutenant General (Retired) Bruce T. Crawford, were appointed Executive Chairman and Lead Independent Director, respectively, and Mark Quinlan resigned from his position as Chairman. During the three months ended October 31, 2024, CEO transition costs were $598,000 and consisted primarily of legal and related expenses in our Unallocated segment. There were no similar costs in the corresponding period of the prior year.
Subsequent to quarter end, the Board has named Mr. Traub as President and CEO, effective as of January 13, 2025, in addition to his current role as Chairman, replacing Mr. Ratigan effective immediately. Pursuant to his separation agreement and release, Mr. Ratigan resigned from his position as President and CEO and as a director.
9
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Proxy Solicitation Costs
On November 17, 2024, we entered into a cooperation agreement (the “Cooperation Agreement”) with Fred Kornberg, Michael Porcelain and Oleg Timoshenko (collectively the “Investor Group”). Pursuant to the Cooperation Agreement, our Board appointed Michael J. Hildebrandt to serve on the Board and agreed to nominate, support and recommend Mr. Hildebrandt for election at our Fiscal 2024 Annual Meeting of Stockholders (the "2024 Annual Meeting"). Also, we agreed not to renominate two incumbent directors for election at the 2024 Annual Meeting and the Investor Group agreed to withdraw its nomination of candidates for election to the Board at the 2024 Annual Meeting to, instead, support our slate of directors for election. Pursuant to the Cooperation Agreement, we and the Investor Group will cooperate to identify an additional candidate to be appointed to the Board at a later date as an independent director. During the three months ended October 31, 2024, we incurred $1,583,000 in proxy solicitation costs, consisting principally of legal and advisory fees. In connection with the Cooperation Agreement and Investor Group’s nomination of candidates to the Board and related matters, the Investor Group is entitled to the reimbursement of its documented out-of-pocket fees and expenses, subject to certain limitations, in an amount not to exceed $350,000 . Such amount was expensed and paid in the second quarter of fiscal 2025.
(2) Business Divestitures
PST 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 , of which we received $33,277,000 in cash proceeds, net of transaction costs. Based on the carrying amount of net assets related to the PST Divestiture, we recognized a GAAP pre-tax loss of $1,199,000 in fiscal 2024.
CGC Divestiture - In fiscal 2024, we performed a detailed evaluation of our Satellite and Space Communications segment's product portfolio to identify opportunities to further divest, separate and/or rationalize non-core businesses or facilities. 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 our 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. Net sales for this product line in fiscal 2024, 2023 and 2022 were $4,001,000 , $9,969,000 and $11,188,000 , respectively. Operating losses for this product line in fiscal 2024, 2023 and 2022 were $32,331,000 , $8,203,000 and $9,897,000 , respectively. 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 (the "CGC Divestiture"). During the three months ended October 31, 2024, we reversed $4,157,000 of net sales and $1,403,000 of related accrued contract costs to account for the termination of various revenue contracts with customers, and expensed $4,925,000 in restructuring charges related to the wind-down of such operations, including a $2,948,000 write-down related to inventory no longer considered salable. While anticipated to improve our future profitability, actions related to the CGC Divestiture may result in additional near-term restructuring charges.
10
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(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 three months ended October 31, 2024, the following FASB ASUs have been issued and incorporated into the FASB ASC and have not yet been adopted by us as of October 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 Condensed 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 Condensed Consolidated Financial Statements and disclosures.
•FASB ASU No. 2024-03, which requires more detailed disclosures of certain categories of expenses (including purchases of inventory, employee compensation, depreciation, and amortization) that are components of existing expense captions presented on the face of the income statement. All entities are required to apply the guidance prospectively with an option for retrospective application. This ASU is effective for fiscal years beginning after December 15, 2026 (our fiscal year beginning on August 1, 2027), and interim periods within fiscal years beginning after December 15, 2027 (our interim period beginning on August 1, 2028), with early adoption permitted. We are evaluating the impact of this ASU on our Condensed Consolidated Financial Statements and disclosures.
11
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(4) Revenue Recognition
In accordance with FASB ASC 606, "Revenue from Contracts with Customers" ("ASC 606"), we record revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to customers. Under ASC 606, we follow a five-step model to: (1) identify the contract with our customer; (2) identify our performance obligations in our contract; (3) determine the transaction price for our contract; (4) allocate the transaction price to our performance obligations; and (5) recognize revenue using one of the following two methods:
•Over time - We recognize revenue using the over time method when there is a continuous transfer of control to the customer over the contractual period of performance. This generally occurs when we enter into a long-term contract relating to the design, development or manufacture of complex equipment or technology platforms to a buyer’s specification (or to provide services related to the performance of such contracts) 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.
12
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Point in time accounting is principally applied to contracts in our satellite ground infrastructure 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, at inception, we consider approvals and commitments from both parties, if the rights of the parties are identified, if the payment terms are identified, if it has commercial substance, the transaction price to which we are entitled 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.
13
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Three months ended October 31, | ||||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||||
| United States | ||||||||||||||||||||||||||
| U.S. government | % | % | ||||||||||||||||||||||||
| Domestic | % | % | ||||||||||||||||||||||||
| Total United States | % | % | ||||||||||||||||||||||||
| International | % | % | ||||||||||||||||||||||||
| Total | % | % | ||||||||||||||||||||||||
The following tables summarize our disaggregation of revenue consistent with information reviewed by our CODM for the three months ended October 31, 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:
| Three months ended October 31, 2024 | ||||||||||||||||||||||||||||||||||||||
| Satellite and Space Communications | Terrestrial and Wireless Networks | Total | ||||||||||||||||||||||||||||||||||||
| Geographical region and customer type | ||||||||||||||||||||||||||||||||||||||
| U.S. government | $ | $ | ||||||||||||||||||||||||||||||||||||
| Domestic | ||||||||||||||||||||||||||||||||||||||
| Total United States | ||||||||||||||||||||||||||||||||||||||
| International | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||||||||||||||
| Contract type | ||||||||||||||||||||||||||||||||||||||
| Firm fixed-price | $ | $ | ||||||||||||||||||||||||||||||||||||
| Cost reimbursable | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||||||||||||||
| Transfer of control | ||||||||||||||||||||||||||||||||||||||
| Point in time | $ | $ | ||||||||||||||||||||||||||||||||||||
| Over time | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||||||||||||||
14
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Three months ended October 31, 2023 | ||||||||||||||||||||||||||||||||||||||
| Satellite and Space Communications | Terrestrial and Wireless Networks | Total | ||||||||||||||||||||||||||||||||||||
| Geographical region and customer type | ||||||||||||||||||||||||||||||||||||||
| U.S. government | $ | $ | ||||||||||||||||||||||||||||||||||||
| Domestic | ||||||||||||||||||||||||||||||||||||||
| Total United States | ||||||||||||||||||||||||||||||||||||||
| International | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||||||||||||||
| Contract type | ||||||||||||||||||||||||||||||||||||||
| Firm fixed-price | $ | $ | ||||||||||||||||||||||||||||||||||||
| Cost reimbursable | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||||||||||||||
| Transfer of control | ||||||||||||||||||||||||||||||||||||||
| Point in time | $ | $ | ||||||||||||||||||||||||||||||||||||
| Over time | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||||||||||||||
The timing of revenue recognition, billings and collections results in receivables, unbilled receivables and contract liabilities on our Condensed 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. Except for certain unbilled receivables (see Note (7) - Accounts Receivable) and work in process inventory (see Note (8) - Inventories), there were no 65,834,000 at July 31, 2024 and $66,351,000 at July 31, 2023, $28,764,000 and $20,737,000 was recognized as revenue during the three months ended October 31, 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 the three months ended October 31, 2024 and 2023, incremental costs to obtain or fulfill contracts with an amortization period greater than one year were $1,165,000 and $483,000 , respectively.
15
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 Condensed 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 Condensed 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 Condensed Consolidated Statements of Operations.
(5) Fair Value Measurements and Financial Instruments
Using the fair value hierarchy described in FASB ASC 820 "Fair Value Measurements and Disclosures," we valued our cash and cash equivalents using Level 1 inputs that were based on quoted market prices. We believe that the carrying amounts of our other current financial assets (such as accounts receivable) and other current liabilities (including accounts payable, accrued expenses and the current portion of long-term debt) approximate their fair values due to their short-term maturities. Additionally, the carrying amounts of our debt approximate their fair values due to variable interest rates and pricing grids related to such debt, as amended or first entered into on October 17, 2024.
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 (10) - Credit Facility, we used Level 3 inputs to value the warrants issued to lenders in connection with our Credit Facility. As of October 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 4.2 %, volatility of 60.0 %, and expected life of 6.6 years. We also used Level 3 inputs to value the combined embedded derivative liability associated with our Credit Facility. As of October 31, 2024, we determined the fair value of the combined 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 (11) - Subordinated Credit Facility, we used Level 3 inputs to value the make-whole amount and combined embedded derivative liability associated with our Subordinated Credit Facility. As of October 31, 2024, we determined the fair value of the combined 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 Subordinated Credit Facility.
16
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As further discussed in Note (18) - Convertible Preferred Stock, we used Level 3 inputs to value the warrants contingently issuable and combined embedded derivative liability associated with our Convertible Preferred Stock. As of October 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 6.2 years; risk free rate of 4.2 %; expected volatility of 60.0 %; and dividend yield of 0 %. As of October 31, 2024, we determined the fair value of the combined 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 and/or accelerated payments to our preferred shareholders, or the conversion of the Convertible Preferred Stock into common stock, pursuant to the terms of our Convertible Preferred Stock.
As of October 31, 2024 and July 31, 2024, other than the financial instruments discussed above, we had no other significant assets or liabilities included in our Condensed Consolidated Balance Sheets recorded at fair value, as such term is defined by FASB ASC 820.
(6) Earnings Per Share
There were no
Weighted average stock options, RSUs and restricted stock outstanding of 986,000 and 1,168,000 shares for the three months ended October 31, 2024 and 2023, respectively, were not included in our diluted EPS calculation because their effect would have been anti-dilutive.
Our EPS calculations exclude 349,000 and 680,000 weighted average performance shares outstanding for the three months ended October 31, 2024 and 2023, 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 1,414,000 related to warrants issued in connection with entering the Credit Facility on June 17, 2024 were not included in our diluted EPS calculation for the three months ended October 31, 2024 because their effect would have been anti-dilutive.
Weighted average common shares of 162,000 for the three months ended October 31, 2023 related to our acquisition of UHP in March 2021 were not included in our diluted EPS calculation 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 23,053,000 and 4,757,000 underlying the assumed conversion of convertible preferred stock, on an if-converted basis, were not included in our diluted EPS calculation for the three months ended October 31, 2024 and 2023, respectively, because their effect would have been anti-dilutive. As a result, the numerator for our basic and diluted EPS calculation for the three months ended October 31, 2024 and 2023 is the respective net loss attributable to common stockholders.
17
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table reconciles the numerators and denominators used in the basic and diluted EPS calculations:
| Three months ended October 31, | |||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net loss | $ | ( | ( | ||||||||||||||||||||
| Gain on extinguishment of convertible preferred stock | |||||||||||||||||||||||
| Dividend on convertible preferred stock | ( | ( | |||||||||||||||||||||
| Net loss attributable to common stockholders | $ | ( | ( | ||||||||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Denominator for basic and diluted calculation | |||||||||||||||||||||||
As discussed further in Note (18) - Convertible Preferred Stock, such shares of preferred stock represent a "participating security" as defined in ASC 260. As a result, our EPS calculations for the three months ended October 31, 2024 and 2023 were based on the two-class method. Given the net loss attributable to common stockholders for the three months ended October 31, 2024 and 2023, there was no impact of applying the two-class method to our reported basic or diluted earnings per common share.
(7) Accounts Receivable
Accounts receivable consist of the following at:
| October 31, 2024 | July 31, 2024 | |||||||||||||
| Receivables from commercial and international customers | $ | |||||||||||||
| Unbilled receivables from commercial and international customers | ||||||||||||||
| Receivables from the U.S. government and its agencies | ||||||||||||||
| Unbilled receivables from the U.S. government and its agencies | ||||||||||||||
| Total accounts receivable | ||||||||||||||
| Less allowance for doubtful accounts | ||||||||||||||
| Accounts receivable, net | $ | |||||||||||||
Unbilled receivables as of October 31, 2024 relate to contracts-in-progress for which revenue has been recognized, but for which we have not yet earned the right to bill the customer for work performed to-date. Under ASC 606, unbilled receivables constitute contract assets.
In the first quarter of fiscal 2025, we reversed cumulative revenues and associated contract receivables due to changes in estimates of revenue and costs for certain contracts. With respect to such changes in estimates, we:
•determined that an unbilled receivable contract asset in the amount of $18,993,000 , related to an international customer and reseller of our troposcatter technologies, was at risk of not being invoiced or collected, principally due to our customer's near-term ability to secure certain opportunities in its pipeline. As a result, and considering that we offered a price concession (i.e., variable consideration) to our customer in the first quarter of fiscal 2025, we reversed $1,551,000 of cumulative revenue and associated unbilled receivable contract assets related to this transaction, and recorded a non-cash charge to fully reserve for the remaining $17,442,000 unbilled receivable contract asset within our allowance for doubtful accounts;
•reversed $1,004,000 of cumulative revenue and associated unbilled receivable contract assets as a result of being assessed late delivery penalties during the quarter on a separate contract to deliver Modular Transportable Transmission Systems (or "MTTS" troposcatter solutions) to the same international customer referenced above;
18
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
•reversed $4,157,000 of cumulative revenue and $3,003,000 of associated unbilled receivable contract assets as a result of terminating certain customer contracts during the quarter in connection with the CGC Divestiture; and
•reversed $1,360,000 of cumulative revenue and $1,281,000 of associated unbilled receivable contract assets due to higher expected costs at completion identified during the quarter, as we advanced certain nonrecurring engineering related projects in our satellite ground infrastructure product line through development and toward production.
After adjusting for those amounts identified above, management estimates that a substantial portion of the remaining contract assets not yet billed at October 31, 2024 will be billed and collected within one year. Accounts receivable in the table above excludes $824,000 of long-term unbilled receivables presented within "Other assets, net" on the Condensed Consolidated Balance Sheets as of July 31, 2024.
As of October 31, 2024, the U.S. government (and its agencies), an international customer and reseller of our troposcatter technologies and AT&T, represented 34.7 %, 11.6 % and 11.4 % of total accounts receivable, respectively. There were no other customers which accounted for greater than 10% of total accounts receivable.
(8) Inventories
Inventories consist of the following at:
| October 31, 2024 | July 31, 2024 | |||||||||||||
| Raw materials and components | $ | |||||||||||||
| Work-in-process and finished goods | ||||||||||||||
| Total inventories | ||||||||||||||
| Less reserve for excess and obsolete inventories | ||||||||||||||
| Inventories, net | $ | |||||||||||||
As of October 31, 2024 and July 31, 2024, the amount of inventory directly related to long-term contracts (including contracts-in-progress) was $3,021,000 and $2,869,000 , respectively, and the amount of inventory related to contracts from third-party commercial customers who outsource their manufacturing to us was $2,098,000 and $2,204,000 , respectively.
As discussed in Note (1) – General – Liquidity and Going Concern, in connection with our initiatives to transform our Company (e.g., reevaluating our business plans to identify opportunities to focus future investment on our most strategic, high-margin revenue opportunities), during the three months ended October 31, 2024, we recorded a non-cash charge of $11,369,000 within Cost of Sales on our Condensed Consolidated Statement of Operations. Such non-cash charge primarily related to the write down of inventory associated with approximately 70 products within our satellite ground infrastructure product line that were either discontinued or being de-emphasized going forward. As discussed in Note (2) – Business Divestitures, such non-cash charge also included the write down of inventory associated with the CGC Divestiture, which was determined during the first quarter of fiscal 2025 to no longer be salable.
19
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(9) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following at:
| October 31, 2024 | July 31, 2024 | |||||||||||||
| Accrued wages and benefits | $ | |||||||||||||
| Accrued contract costs | ||||||||||||||
| Accrued warranty obligations | ||||||||||||||
| Accrued commissions and royalties | ||||||||||||||
| Accrued legal costs | ||||||||||||||
| Other | ||||||||||||||
| Accrued expenses and other current liabilities | $ | |||||||||||||
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 October 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 three months ended October 31, 2024 and 2023 were as follows:
| Three months ended October 31, | ||||||||||||||
| 2024 | 2023 | |||||||||||||
| Balance at beginning of period | $ | |||||||||||||
| Provision for warranty obligations | ||||||||||||||
| Charges incurred | ( | ( | ||||||||||||
| PST Divestiture | ( | |||||||||||||
| Balance at end of period | $ | |||||||||||||
(10) Credit Facility
On June 17, 2024, we entered into a $222,000,000 senior secured loan facility with a syndicate of lenders which replaced our prior credit facility and, as further discussed below, we subsequently amended the credit facility on October 17, 2024 (the “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.
20
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On October 17, 2024, we entered into an amendment in order to waive certain defaults or events of default that occurred, including in connection with our Net Leverage Ratio and Fixed Charge Coverage Ratio covenants for our fourth quarter of fiscal 2024. The amendment also, among other things: (i) increased the interest rate margins applicable to the loans (as described in further detail below); (ii) modified certain financial and collateral reporting requirements; (iii) provided a consent right to the revolving lender and Agent with respect to $27,500,000 of revolver borrowings above $32,500,000 , (iv) permitted the incurrence of $25,000,000 of senior unsecured subordinated debt (as described further in Note (11) – Subordinated Credit Facility), (v) amended the maturity date to the earlier of (x) July 31, 2028 or (y) 90 days prior to the earliest date that the debt under the Subordinated Credit Agreement becomes due and payable (the “Senior Credit Facility Maturity Date”) and (vi) suspended certain financial covenant testing through the end of the fiscal quarter ending January 31, 2025. We accounted for the amendment to our Credit Facility as a modification.
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 Condensed 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 Condensed Consolidated Statements of Operations as a non-cash expense or benefit. As of October 31, 2024 and July 31, 2024, the Lender warrant liability was remeasured to $5,234,000 and $4,544,000 , respectively, resulting in a non-cash expense for the three months ended October 31, 2024 of $690,000 recorded in "Other expenses (income) - Change in fair value of warrants and derivatives" on the Condensed Consolidated Statements of Operations.
Additionally, we identified several embedded derivatives that require bifurcation from the Credit Facility under ASC 815-15 "Embedded Derivatives" ("ASC 815"). Certain of these embedded features include contingent event of default and going concern interest rate increases and/or fees, which qualify for accounting as one combined 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 combined embedded derivative liability is presented with the host instrument as part of the amount outstanding under the Credit Facility on the Condensed 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 combined embedded derivative liability are recognized in our Condensed Consolidated Statements of Operations as a non-cash expense or benefit. As of October 31, 2024 and July 31, 2024, the combined embedded derivative liability was remeasured to $4,992,000 and $3,041,000 , respectively, resulting in non-cash expense for the three months ended October 31, 2024 of $1,951,000 recorded in "Other expenses (income) - Change in fair value of warrants and derivatives" on the Condensed Consolidated Statements of Operations.
In connection with entering the Credit Facility, we paid fees of $15,035,000 , including: (i) $9,979,000 of deferred financing fees (of which $6,626,000 and $3,353,000 was attributable to the Term Loan and Revolving Loan, respectively); 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 was accounted for as a discount against the Term Loan proceeds. In connection with amending the Credit Facility on October 17, 2024, the borrowing capacity of the Revolver Loan was limited by the consent right of the revolving lender and Agent, thus a pro-rata amount of deferred financing fees totaling $1,412,000 were immediately expensed during three months ended October 31, 2024. Also, a $3,250,000 amendment fee was paid in kind and added to the outstanding Term Loan amount and accounted for as a discount against the Term Loan during the three months ended October 31, 2024.
21
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of October 31, 2024, total net deferred financing costs related to the Credit Facility were $8,117,000 . Deferred financing fees and discounts attributable to the Term Loan are amortized as interest expense over the life of the debt through the Senior Credit Facility Maturity Date and are presented as a deduction to the borrowings outstanding under the Term Loan. Deferred financing fees attributable to the Revolving Loan are capitalized on the Condensed Consolidated Balance Sheets and amortized as interest expense over the life of the debt.
The amount outstanding under our Credit Facility was as follows:
| October 31, 2024 | July 31, 2024 | |||||||||||||
| Term Loan | $ | $ | ||||||||||||
| Less unamortized deferred financing costs related to Term Loan | ||||||||||||||
| Less unamortized discount related to Term Loan | ||||||||||||||
| Term Loan, net | ||||||||||||||
| Revolving Loan | ||||||||||||||
| Embedded derivative related to Credit Facility | ||||||||||||||
| Amount outstanding under Credit Facility, net | $ | |||||||||||||
| Less current portion of credit facility, net | ||||||||||||||
| Non-current portion of credit facility, net | $ | $ | ||||||||||||
During the three months ended October 31, 2024, we reclassified the combined embedded derivative liability balance as of July 31, 2024 from "Other liabilities" on the Condensed Consolidated Balance Sheets to conform to the current period presentation. During the three months ended October 31, 2024, we had outstanding balances under our Credit Facility ranging from $194,163,000 to $199,495,000 .
Interest expense related to our Credit Facility, including amortization of deferred financing costs recorded during the three months ended October 31, 2024, was $9,252,000 . Interest expense related to our prior credit facility, including amortization of deferred financing costs recorded during the three months ended October 31, 2023, was $4,910,000 . Our blended interest rate approximated 19.0 % and 10.5 %, respectively, for the three months ended October 31, 2024 and 2023.
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; 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. As of October 31, 2024 and July 31, 2024, our eligible Borrowing Base collateral, as defined under the Revolving Loan, was $122,999,000 and $114,661,000 , respectively.
Under the Credit Facility, the interest rate margins that are applicable to the Revolving Loan increased by 1.00 % at each level. Accordingly, the Credit Facility, as amended, 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 Credit Facility, as amended, 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 Credit Facility. If demonstrated, the interest rate margins revert to the margins provided under the Credit Facility prior to the amendment 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. The Credit Facility provides for an unused line fee of 0.50 % per annum on the average unused Revolving Loan commitment, with no fee payable on the $27,500,000 commitment subject to the consent right of the revolving lender and Agent.
22
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Term Loan is subject to 2.50 % amortization per annum. The first Term Loan repayment of $675,000 was paid on July 31, 2024. Under the amended Credit Facility, the next Term Loan repayment in the amount of $4,050,000 is due July 31, 2025 with quarterly Term Loan repayments of $1,012,500 payable on the last business day of each fiscal quarter thereafter, with the remaining Term Loan balance due on the Senior Credit Facility 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 (see below); (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, we are required to comply with certain financial covenants, including: a maximum Net Leverage Ratio of 3.25 x, commencing with the fiscal quarter ending January 31, 2025; a minimum Fixed Charge Coverage Ratio of 1.20 x, commencing with the four fiscal quarter period ending January 31, 2025; a minimum Average Liquidity requirement at each fiscal quarter end of $20,000,000 ; and a minimum EBITDA of $35,000,000 for the four fiscal quarter period ending October 31, 2025. Over the next twelve months beyond the issuance date, commencing with our fiscal quarter ending January 31, 2025, we believe that we will not be able to comply with one or more of these covenants. As a result, all amounts outstanding under our Credit Facility have been presented as "Current portion of credit facility, net" on our Condensed Consolidated Balance Sheets as of October 31, 2024.
Capitalized terms used but not defined herein have the meanings set forth for such terms in the Credit Facility, which have been or will be documented and filed with the SEC.
(11) Subordinated Credit Facility
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 provided 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 with respect to the fourth quarter of fiscal 2024; (ii) provided us with additional liquidity; and (iii) funded our general working capital needs.
The obligations under the Subordinated Credit Facility mature 90 days after the Senior Credit Facility Maturity Date, as discussed in Note (10) – Credit Facility. 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, the principal repayment amount 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, the principal repayment amount multiplied by 50.0 %; (iii) from the second anniversary of the closing date and thereafter, the principal repayment amount multiplied by 75.0 % plus, in the case of clause (iii), interest accrued on the principal amount outstanding 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.
23
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We identified an embedded derivative related to redemption features that requires bifurcation from the Subordinated Credit Facility under ASC 815. We established an initial embedded derivative liability of $3,318,000 , which was allocated as a discount against the Subordinated Credit Facility proceeds. The embedded derivative liability is presented with the "Current portion of subordinated credit facility, net" on the Condensed Consolidated Balance Sheets and is remeasured to its estimated fair value each reporting period, using Level 3 fair value inputs. Changes in the estimated fair value of the embedded derivative liability are recognized in our Condensed Consolidated Statements of Operations as a non-cash expense or benefit. As of October 31, 2024, the embedded derivative liability was remeasured to $3,566,000 , resulting in non-cash expense of $248,000 for the three months ended October 31, 2024, recorded in "Other expenses (income) - Change in fair value of warrants and derivatives" on the Condensed Consolidated Statements of Operations.
In connection with entering the Subordinated Credit Facility, we paid financing fees of $1,761,000 , which were accounted for as deferred financing costs. Deferred financing costs, discounts and the Make-Whole Amount are amortized as interest expense through the Subordinated Credit Facility maturity date, and are presented as adjustments to the borrowings outstanding under such debt. Interest expense related to our Subordinated Credit Facility for the three months ended October 31, 2024 was $248,000 .
The following table presents a reconciliation of the amount understanding under the Subordinated Credit Facility to its net carrying value:
| October 31, 2024 | ||||||||||||||||||||||||||
| Subordinated Credit Facility | $ | |||||||||||||||||||||||||
| Less: Unamortized deferred financing costs | ||||||||||||||||||||||||||
| Less: Unamortized discount | ||||||||||||||||||||||||||
| Accretion of Make-Whole Amount | ||||||||||||||||||||||||||
| Subordinated Credit Facility, net - subtotal | ||||||||||||||||||||||||||
| Plus: Embedded derivative related to redemption features | ||||||||||||||||||||||||||
| Amount outstanding under the Subordinated Credit Facility | ||||||||||||||||||||||||||
| Less: Current portion of Subordinated Credit Facility, net | ( | |||||||||||||||||||||||||
| Non-current portion of Subordinated Credit Facility, net | $ | |||||||||||||||||||||||||
The obligations under the Subordinated Credit Facility are guaranteed by the same guarantors under the 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, (vii) customary optional and mandatory prepayment events and (viii) 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. However, the Subordinated Credit Facility includes a cross-default provision, whereby a default under the Credit Facility constitutes a default under the Subordinated Credit Facility. Accordingly, consistent with the presentation of our Credit Facility as a current liability, the amount of debt outstanding under the Subordinated Credit Facility has also been presented as a current liability on our Condensed Consolidated Balance Sheet as of October 31, 2024.
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.
24
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(12) 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 October 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:
| Three months ended October 31, | |||||||||||||||||||||||||||||
| 2024 | 2023 | ||||||||||||||||||||||||||||
| Operating lease expense | |||||||||||||||||||||||||||||
| Short-term lease expense | |||||||||||||||||||||||||||||
| Variable lease expense | |||||||||||||||||||||||||||||
| Sublease income | ( | ( | |||||||||||||||||||||||||||
| Total lease expense | $ | ||||||||||||||||||||||||||||
Additional information related to leases is as follows:
| Three months ended October 31, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating leases - Operating cash outflows | $ | $ | |||||||||
| ROU assets obtained in the exchange for lease liabilities (non-cash): | |||||||||||
| Operating leases | $ | $ | |||||||||
25
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table is a reconciliation of future cash flows relating to operating lease liabilities presented on our Condensed Consolidated Balance Sheet as of October 31, 2024:
| Remainder of fiscal 2025 | $ | ||||||||||||||||
| Fiscal 2026 | |||||||||||||||||
| Fiscal 2027 | |||||||||||||||||
| Fiscal 2028 | |||||||||||||||||
| Fiscal 2029 | |||||||||||||||||
| Thereafter | |||||||||||||||||
| Total future undiscounted cash flows | |||||||||||||||||
| Less: Present value discount | |||||||||||||||||
| Lease liabilities | $ | ||||||||||||||||
| Weighted-average remaining lease terms (in years) | |||||||||||||||||
| Weighted-average discount rate | |||||||||||||||||
As of October 31, 2024, we do not have any material rental commitments that have not already commenced.
As of October 31, 2024, our Satellite and Space Communications segment leased two facilities in Hampshire (Basingstoke), United Kingdom, where we previously manufactured high precision full motion fixed and mobile X/Y satellite tracking antennas. In connection with the CGC Divestiture discussed in Note (2) – Business Divestitures, we are addressing with each landlord our exit and termination of such facility leases. As these efforts are ongoing, further adjustments to the right of use assets and/or lease liabilities for such facilities may be required in the future.
(13) Income Taxes
Our effective tax rate for the three months ended October 31, 2024 was (1.5 )%, which includes a net discrete tax benefit of $108,000 primarily related to proxy solicitation and CEO transition costs.
Our effective tax rate for the three months ended October 31, 2023 was 48.3 %, which includes a net discrete tax expense of $2,049,000 primarily related to our decision to sell our Power Systems Technology product line (the "PST Divestiture") in a taxable transaction and settlement of stock-based awards.
Excluding discrete items, our effective tax rate for the three months ended October 31, 2024 and 2023 was (3.8 )% and 122.0 %, respectively. For purposes of determining our estimated annual effective tax rate for fiscal 2025, the impairment of long-lived assets, including goodwill, the change in fair value of warrants and derivatives, proxy solicitation costs and CEO transition costs are considered significant, unusual or infrequently occurring discrete tax items and are excluded from the computation of our effective tax rate.The change in rate from 122.0 % to (3.8 )% is primarily due to changes in expected product and geographic mix and not providing for tax benefits on U.S. deferred tax assets.
At October 31, 2024 and July 31, 2024, total unrecognized tax benefits were $8,681,000 and $8,605,000 , respectively, including interest of $264,000 and $224,000 , respectively. Unrecognized tax benefits result from income tax positions taken or expected to be taken on our income tax returns for which a tax benefit has not been recorded in our condensed consolidated financial statements. We believe it is reasonably possible that the gross unrecognized tax benefits could decrease by as much as $512,000 in the next twelve months due to the expiration of a statute of limitations related to federal, state and foreign tax positions.
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.
26
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(14) Stock-Based Compensation
Overview
In December 2023, our stockholders approved the Comtech Telecommunications Corp. 2023 Equity and Incentive Plan (the “2023 Plan”), which replaced the Amended and Restated 2000 Stock Incentive Plan. Under the 2023 Plan, the number of shares of common stock available for all awards, other than substitute awards granted in connection with a corporate transaction, is 1,669,683 shares of common stock plus certain expired or cancelled awards recycled back into the 2023 Plan. Also, on November 25, 2024, our Board of Directors approved an amendment to the 2023 Plan to increase the number of available shares of common stock authorized for issuance under the 2023 Plan by 2,195,000 shares. Stockholders will be asked to approve the amendment to the 2023 Plan at the 2024 Annual Meeting on January 13, 2025.
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 condensed 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 October 31, 2024, the aggregate number of shares of common stock which may be issued 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 October 31, 2024, we had granted stock-based awards representing the right to purchase and/or acquire an aggregate of 12,494,430 shares (net of 6,808,256 expired and canceled awards), of which an aggregate of 9,731,277 have been exercised or settled.
As of October 31, 2024, the following stock-based awards, by award type, were outstanding:
| October 31, 2024 | |||||
| Stock options | |||||
| Performance shares | |||||
| RSUs, restricted stock, share units and other stock-based awards | |||||
| Total | |||||
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 October 31, 2024, we have cumulatively issued 1,065,585 shares of our common stock to participating employees in connection with our ESPP.
27
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Stock-based compensation for awards issued is reflected in the following line items in our Condensed Consolidated Statements of Operations:
| Three months ended October 31, | ||||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||||
| Cost of sales | $ | |||||||||||||||||||||||||
| Selling, general and administrative expenses | ( | |||||||||||||||||||||||||
| Research and development expenses | ||||||||||||||||||||||||||
| Stock-based compensation expense before income tax benefit | ||||||||||||||||||||||||||
| Estimated income tax benefit | ( | ( | ||||||||||||||||||||||||
| Net stock-based compensation expense | $ | |||||||||||||||||||||||||
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 October 31, 2024, unrecognized stock-based compensation of $9,923,000 , net of estimated forfeitures of $708,000 , is expected to be recognized over a weighted average period of 2.1 years. Total stock-based compensation capitalized and included in ending inventory at both October 31, 2024 and July 31, 2024 was $198,000
Stock-based compensation expense, by award type, is summarized as follows:
| Three months ended October 31, | ||||||||||||||||||||||||||
| 2024 | 2023 | |||||||||||||||||||||||||
| Stock options | $ | |||||||||||||||||||||||||
| Performance shares | ( | |||||||||||||||||||||||||
| RSUs, restricted stock and share units | ||||||||||||||||||||||||||
| ESPP | ||||||||||||||||||||||||||
| Stock-based compensation expense before income tax benefit | ||||||||||||||||||||||||||
| Estimated income tax benefit | ( | ( | ||||||||||||||||||||||||
| Net stock-based compensation expense | $ | |||||||||||||||||||||||||
During the three months ended October 31, 2024, we reversed a portion of our stock-based compensation expense related to performance shares due to lower-than-estimated achievement of fiscal 2022 performance share goals. Stock-based compensation expense for the more recent period also reflects the forfeiture of awards related to our former Chief Operating Officer, whose employment was terminated during our first quarter of fiscal 2025. With respect to stock-based compensation expense reported in the prior year period, we had determined to settle fiscal 2024 non-equity annual incentive awards accrued during such period with stock-based awards in lieu of cash. Also, contributing to the higher stock-based compensation expense in the prior year period was our annual grant of stock-based awards to non-executive employees. Due to the number of shares available for grant under the 2023 Plan, such grants of stock-based awards did not occur in our first quarter of fiscal 2025.
ESPP stock-based compensation expense includes the 15 % discount offered to participants in the ESPP.
The estimated income tax benefit as shown in the above table was computed using income tax rates expected to apply when the awards are settled. Such deferred tax asset was recorded net as part of our non-current deferred tax liability on our Condensed Consolidated Balance Sheets as of October 31, 2024 and July 31, 2024. 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.
28
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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, 2024 | $ | |||||||||||||||||||||||||
| Outstanding at October 31, 2024 | $ | $ | ||||||||||||||||||||||||
| Exercisable at October 31, 2024 | $ | $ | ||||||||||||||||||||||||
| Vested and expected to vest at October 31, 2024 | $ | $ | ||||||||||||||||||||||||
Stock options outstanding as of October 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 .
Performance Shares, RSUs, Restricted Stock, Share Units 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, 2024 | $ | |||||||||||||||||||
| Granted | ||||||||||||||||||||
| Settled | ( | |||||||||||||||||||
| Canceled/Forfeited | ( | |||||||||||||||||||
| Outstanding at October 31, 2024 | $ | $ | ||||||||||||||||||
| Vested at October 31, 2024 | $ | $ | ||||||||||||||||||
| Vested and expected to vest at October 31, 2024 | $ | $ | ||||||||||||||||||
During the three months ended October 31, 2024, 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 . Through the issuance date, approximately $2,000,000 of such authorization remains subject to grant pending approval by our stockholders of an amendment to our 2023 Plan to increase the number of available shares of common stock authorized for issuance by 2,195,000 shares.
The total intrinsic value relating to fully-vested awards settled during the three months ended October 31, 2024 and 2023 was $636,000 and $2,656,000 , 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 October 31, 2024, the number of outstanding performance shares included in the above table, and the related compensation expense generally assume achievement of the pre-established goals at a target level, except for two of our former CEOs whose achievement was based on maximum performance pursuant to their then pre-existing change-in-control agreements.
29
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
RSUs and restricted stock granted to non-employee directors prior to August 2022 had a vesting period of five years 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. 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.
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 the three months ended October 31, 2024 and 2023, we reversed $27,000 and $23,000 , respectively, of previously accrued dividend equivalents due to forfeitures and paid out $39,000 and $114,000 , respectively. Accrued dividend equivalents were recorded as a reduction to retained earnings. As of October 31, 2024 and July 31, 2024, accrued dividend equivalents were $250,000 and $316,000 , respectively.
(15) 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. As of the issuance date, our CODM, for purposes of FASB ASC 280, is our Chairman, President and Chief Executive Officer, Kenneth H. Traub.
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.
30
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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: interest, income taxes, depreciation, amortization of intangibles, impairment of long-lived assets, including goodwill, amortization of cost to fulfill assets, amortization of stock-based compensation, CEO transition costs, change in fair value of warrants and derivatives, proxy solicitation costs, restructuring costs, strategic emerging technology costs (for next-generation satellite technology) and write-off of deferred financing costs, and in the recent past, acquisition plan expenses, change in fair value of the convertible preferred stock purchase option liability, COVID-19 related costs, facility exit costs, strategic alternatives expenses and other and loss on business divestiture. These items, while periodically affecting our results, may vary significantly from period to period and may have a disproportionate effect in a given period, thereby affecting the comparability of results. 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 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.
31
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Operating segment information, along with a reconciliation of segment net income (loss) and consolidated net loss to Adjusted EBITDA is presented in the tables below:
| Three months ended October 31, 2024 | ||||||||||||||||||||||||||
| Satellite and Space Communications | Terrestrial and Wireless Networks | Unallocated | Total | |||||||||||||||||||||||
| Net sales | $ | $ | ||||||||||||||||||||||||
| Operating income (loss) | $ | ( | ( | $ | ( | |||||||||||||||||||||
| Net income (loss) | $ | ( | ( | $ | ( | |||||||||||||||||||||
| (Benefit from ) provision for income taxes | ( | ( | ||||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||
| Interest (income) and other | ( | |||||||||||||||||||||||||
| Write-off of deferred financing costs | ||||||||||||||||||||||||||
| Change in fair value of warrants and derivatives | ||||||||||||||||||||||||||
| Amortization of stock-based compensation | ||||||||||||||||||||||||||
| Amortization of intangibles | ||||||||||||||||||||||||||
| Depreciation | ||||||||||||||||||||||||||
| Impairment of long-lived assets, including goodwill | ||||||||||||||||||||||||||
| Amortization of cost to fulfill assets | ||||||||||||||||||||||||||
| Proxy solicitation costs | ||||||||||||||||||||||||||
| CEO transition costs | ||||||||||||||||||||||||||
| Restructuring costs | ||||||||||||||||||||||||||
| Strategic emerging technology costs | ||||||||||||||||||||||||||
| Adjusted EBITDA | $ | ( | $ | $ | ( | $ | ( | |||||||||||||||||||
| Purchases of property, plant and equipment | $ | $ | ||||||||||||||||||||||||
Total assets at October 31, 2024 | $ | $ | ||||||||||||||||||||||||
| Three months ended October 31, 2023 | ||||||||||||||||||||||||||
| Satellite and Space Communications | Terrestrial and Wireless Networks | Unallocated | Total | |||||||||||||||||||||||
| Net sales | $ | $ | ||||||||||||||||||||||||
| Operating income (loss) | $ | ( | $ | |||||||||||||||||||||||
| Net income (loss) | $ | ( | $ | ( | ||||||||||||||||||||||
| Provision for (benefit from) income taxes | ( | ( | ( | |||||||||||||||||||||||
| Interest expense | ||||||||||||||||||||||||||
| Interest (income) and other | ( | ( | ||||||||||||||||||||||||
| Amortization of stock-based compensation | ||||||||||||||||||||||||||
| Amortization of intangibles | ||||||||||||||||||||||||||
| Depreciation | ||||||||||||||||||||||||||
| Amortization of cost to fulfill assets | ||||||||||||||||||||||||||
| Restructuring costs | ||||||||||||||||||||||||||
| Strategic emerging technology costs | ||||||||||||||||||||||||||
| Adjusted EBITDA | $ | ( | $ | |||||||||||||||||||||||
| Purchases of property, plant and equipment | $ | $ | ||||||||||||||||||||||||
Total assets at October 31, 2023 | $ | $ | ||||||||||||||||||||||||
32
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Unallocated expenses result from corporate expenses such as executive compensation, accounting, legal and other regulatory compliance related costs and also includes all of our amortization of stock-based compensation. See Note (1) - General for information related to CEO transition and proxy solicitation related costs. During the three months ended October 31, 2024, our Unallocated segment also incurred $4,023,000 of restructuring costs focused on: (i) legal and advisory fees associated with our previously announced transformation strategy to explore strategic alternatives and operational initiatives to align our cost structure with our future anticipated business, and (ii) legal and advisory fees related to our Credit Facility and to improve liquidity. During the three months ended October 31, 2023, our Unallocated segment incurred $2,919,000 of restructuring costs focused on streamlining our operations and legal and other related expenses for the PST Divestiture.
During the three months ended October 31, 2024, our Satellite and Space Communications segment recorded a $79,555,000 non-cash goodwill impairment charge (see Note (16) - Long-lived Assets, including Goodwill for additional information). During the three months ended October 31, 2024, our Satellite and Space Communications segment also recorded $13,740,000 of restructuring costs, which included: (i) $11,369,000 of non-cash inventory write downs included in Cost of Sales in our Condensed Consolidated Statements of Operations (see Note (8) - Inventories for additional information); and (ii) $2,371,000 of costs included in Selling, General and Administrative expenses in our Condensed Consolidated Statements of Operations related to our transformation strategy (principally, the CGC Divestiture). During the three months ended October 31, 2023, our Satellite and Space Communications segment recorded $790,000 of restructuring costs to streamline our operations and improve efficiency, including costs related to the relocation of certain of our satellite ground infrastructure production facilities to our 146,000 square foot facility in Chandler, Arizona. In addition, during the three months ended October 31, 2024, we incurred $280,000 of strategic emerging technology costs for next-generation satellite technology. Similar strategic emerging technology costs of $1,370,000 were incurred during the three months ended October 31, 2023.
During the three months ended October 31, 2024 and 2023, our Terrestrial and Wireless Networks segment recorded $90,000 and $7,000 , respectively, of restructuring costs primarily incurred to streamline our operations and improve efficiency.
Interest expense in the tables above primarily relates to our credit facilities, and includes the amortization of deferred financing costs. See Note (10) - Credit Facility and Note (11) - Subordinated Credit Facility for further discussion.
Intersegment sales for the three months ended October 31, 2024 and 2023 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 October 31, 2024 consist principally of cash and cash equivalents, corporate property, plant and equipment, operating lease right of use assets and deferred financing costs. The large majority of our long-lived assets are located in the U.S.
(16) Long-lived Assets, including Goodwill
The following table represents goodwill by reportable operating segment as of October 31, 2024 and July 31, 2024.
| Satellite and Space Communications | Terrestrial and Wireless Networks | Total | ||||||||||||||||||
Balance as of July 31, 2024 | $ | $ | ||||||||||||||||||
| Goodwill impairment | ( | ( | ||||||||||||||||||
Balance as of October 31, 2024 | $ | $ | ||||||||||||||||||
At October 31, 2024 and July 31, 2024, accumulated goodwill impairment losses related to our Satellite and Space Communications segment totaled $128,480,000 and $48,925,000 , respectively. There are no accumulated impairments for our Terrestrial and Wireless Network segment.
33
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In accordance with FASB ASC 350, we perform a goodwill impairment analysis at least annually (on the first day of the first quarter of each fiscal year, or August 1st), 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 in our Satellite and Space Communications segment, 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. Ultimately, based on our quantitative evaluations, 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. 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.
Given our Satellite and Space Communications segment's financial performance in the first quarter of fiscal 2025, and considering triggering events within this segment through the issuance date, we determined that we were required to perform another quantitative impairment test on an interim basis as of October 31, 2024. Following the same approach as outlined above, ultimately, based on our quantitative evaluations, 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 $79,555,000 during the three months ended October 31, 2024.
In performing the quantitative assessments, 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 $3.72 and $3.17 as of the dates of testing (October 31, 2024 and July 31, 2024, respectively).
In tandem with our quantitative impairment test as of July 31, 2024 and decision in July 2024 to exit our operations in Basingstoke, United Kingdom (which became a separate asset group, the “U.K. Asset Group”), 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 and determined that the undiscounted future cash flows to complete the exit of our Basingstoke operations indicated that the carrying amount of the U.K. Asset Group was not recoverable. As a result, we recorded a $15,600,000 non-cash long-lived asset impairment charge within the Satellite and Space Communications segment in fiscal 2024. 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 light of our quantitative interim impairment tests as of October 31, 2024 and July 31, 2024, we assessed the recoverability of the remaining carrying values of long-lived assets within the Satellite and Space Communications segment. The undiscounted future cash flows of the asset group indicated that the carrying amount of the asset group was recoverable.
34
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
It is possible that, during the remainder of 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 fluctuate. 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 during fiscal 2025, which may result in an impairment of our long-lived assets (including goodwill) assigned to one or both of our reporting units.
In any event, we are required to perform our 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, 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.
(17) Intangible Assets
Intangible assets with finite lives are as follows:
| October 31, 2024 | ||||||||||||||||||||||||||
| Weighted Average Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||
| Customer relationships | $ | $ | ||||||||||||||||||||||||
| Technologies | ||||||||||||||||||||||||||
| Trademarks and other | ||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||
| July 31, 2024 | ||||||||||||||||||||||||||
| Weighted Average Amortization Period | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||
| Customer relationships | $ | $ | ||||||||||||||||||||||||
| Technologies | ||||||||||||||||||||||||||
| Trademarks and other | ||||||||||||||||||||||||||
| Total | $ | $ | ||||||||||||||||||||||||
The weighted average amortization period in the above table excludes fully amortized intangible assets.
Amortization expense for the three months ended October 31, 2024 and 2023 was $6,593,000 and $5,289,000 , respectively. Amortization expense for the three months ended October 31, 2024 includes $1,343,000 of accelerated amortization due to the impact of the CGC Divestiture. During the most recent fiscal quarter, we also wrote-off $15,900,000 of fully amortized intangible assets related to the CGC Divestiture.
The estimated amortization expense consists of the following for the fiscal years ending July 31:
| 2025 | $ | ||||
| 2026 | |||||
| 2027 | |||||
| 2028 | |||||
| 2029 | |||||
35
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
We review net intangible assets with finite lives for impairment when an event occurs indicating the potential for impairment. Based on our assessment in the fourth quarter of fiscal 2024, we recognized an impairment loss of $9,925,000 in fiscal 2024 within our Satellite and Space Communications segment. See Note (16) - Long-Lived Assets, Including Goodwill for more information. We believe that the carrying values of our remaining net intangible assets were recoverable as of October 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.
(18) Convertible Preferred Stock
Fiscal 2024 and Prior Activity
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”). 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, with a par value of $0.10 per share, for an aggregate purchase price of $100,000,000 . White Hat Capital Partners LP is affiliated with Mark Quinlan, who serves as a member 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, 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 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 “Series B Reimbursement” 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 (10) - 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, 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 (the “Series B-1 Exchange”), 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 as a consent fee (the "Series B-1 Fee"). As a result of the Series B-1 Exchange, no shares of Series B Convertible Preferred Stock remain outstanding. We did not receive any cash proceeds from the Series B-1 Exchange.
36
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fiscal 2025 Activity
On October 17, 2024, in connection with amending the Credit Facility discussed in Note (10) - Credit Facility, we and the Investors agreed to change certain terms of the Series B-1 Convertible Preferred Stock. The changes: 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; 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 clarified the preferred holders’ existing consent rights, among other things. To effect the changes described above, we and the Investors entered into a new Subscription and Exchange Agreement (the "Subscription and Exchange Agreement"), pursuant to which the Investors: (i) exchanged 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 (the “Series B-2 Exchange”), with an initial liquidation preference of $1,067.87 per share; and (ii) received 3,436.53 additional shares of Series B-2 Convertible Preferred Stock as a consent fee (the "Series B-2 Fee" and, together with the Series B Reimbursement and the Series B-1 Fee, the “Additional Issuances”). As a result of the Series B-2 Exchange, no shares of Series B-1 Convertible Preferred Stock remain outstanding. We did not receive any cash proceeds from the Series B-2 Exchange.
The Series B-2 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. Each share of Series B-2 Convertible Preferred Stock is 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 (except as described below), or 6.50 % per annum, in respect of any shares of Series B-2 Convertible Preferred Stock that remain outstanding following the redemption of at least fifty percent (50 %) of the Series B-2 Convertible Preferred Stock pursuant to the exercise of an asset sale or change in control put right or an asset sale call right, as described below. The Dividend rate may also increase following certain events, including certain asset sales that constitute a change in control, as set forth in the certificate of designations governing the Series B-2 Convertible Preferred Stock (the "Series B-2 Certificate of Designations"). For any quarter in which the Dividend is not paid in cash, such Dividend becomes part of the liquidation preference of the Series B-2 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-2 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-2 Convertible Preferred Stock. Such Participating Dividend results in the Series B-2 Convertible Preferred Stock meeting the definition of a "participating security" for purposes of our earnings per share calculations. Following the satisfaction of all obligations under the Credit Facility in full and the termination of all of commitments under the Credit Facility (a “CA Satisfaction”), and (i) our failure to fully satisfy an exercised put right (other than a put right exercised in connection with an Asset Sale that constitutes a change in control) or (ii) beginning on or after April 30, 2027 (or later in certain circumstances), holders of the Series B-2 Convertible Preferred Stock will be entitled to elect to have us pay the Dividend in cash (to the extent permitted by law).
The shares of Series B-2 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-2 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-2 Convertible Preferred Stock is $7.99 , subject to certain adjustments set forth in the Series B-2 Certificate of Designations.
Holders of the Series B-2 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-2 Convertible Preferred Stock, authorizations or issuances of securities of the Company (other than the issuance of up to $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 (or $20,000,000 following a CA Satisfaction), 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-2 Convertible Preferred Stock, in each case, subject to the exceptions and qualifications set forth in the Series B-2 Certificate of Designations.
37
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Holders have the right to require us to repurchase their Series B-2 Convertible Preferred Stock (at 1.0 x the liquidation preference, plus accrued and unpaid dividends) on a date occurring either: (a) on or after October 31, 2028, (b) upon the consummation of an asset sale meeting certain criteria, or (c) on or after April 30, 2027 following a CA Satisfaction. We have the right to repurchase all, or less than all, of the Series B-2 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-2 Convertible Preferred Stock in connection with a Change of Control (as defined in the Series B-2 Certificate of Designations) at 1.5 x (or 1.0x in the case of Series B-2 Convertible Preferred Stock issued in the Additional Issuances) the liquidation preference, plus accrued and unpaid dividends. Any repurchase described above would be subject to the terms set forth in the Series B-2 Certificate of Designations.
Upon a repurchase of the Series B-2 Convertible Preferred Stock at 1.0x the liquidation preference, 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. The Warrant liability is classified in "Other liabilities" on the Condensed 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 are recognized in our Condensed Consolidated Statements of Operations as a non-cash expense or benefit. As of October 31, 2024 and July 31, 2024, the Warrant liability was remeasured to $3,063,000 and $710,000 , respectively, resulting in non-cash expense for the three months ended October 31, 2024 of $2,353,000 recorded in "Other expenses (income) - Change in fair value of warrants and derivatives" on the Condensed Consolidated Statements of Operations.
We accounted for the cancellation of our Series B-1 Convertible Preferred Stock as an extinguishment based on a qualitative and quantitative assessment of the terms of the preferred shares exchanged. We recognized a $51,179,000 gain on extinguishment, representing the difference between the carrying value of the Series B-1 Convertible Preferred Stock and the issuance date fair value of the Series B-2 Convertible Preferred Stock. As the Series B-1 Convertible Preferred Stock was classified as temporary equity, the gain on extinguishment was included as an offset in determining net loss attributable to common stockholders and credited to retained earnings as a return from the holders.
We identified several embedded derivatives that require bifurcation from the Series B-2 Convertible Preferred Stock under ASC 815, including the holders' right to: (i) require us to repurchase Series B-2 Convertible Preferred Stock upon the consummation of an asset sale meeting certain criteria, or in connection with a change in control; (ii) convert Series B-2 Convertible Preferred Shares into shares of our common stock; (iii) increase the dividend rate in certain circumstances; and (iv) elect to receive cash dividends in certain circumstances. When evaluating such embedded derivatives, we determined that the Series B-2 Convertible Preferred Stock was more akin to a debt-like host than an equity-like host. We also determined that such features qualify for accounting as one combined embedded derivative liability. We established an initial embedded derivative liability of $38,832,000 , which was recorded as a reduction to the initial fair value of the Series B-2 Convertible Preferred Stock and presented with "Other liabilities" on the Condensed Consolidated Balance Sheets. The combined embedded derivative liability is remeasured to its estimated fair value each reporting period, using Level 3 fair value inputs. Changes in the estimated fair value of the combined embedded derivative liability are recognized in our Condensed Consolidated Statements of Operations as a non-cash expense or benefit. As of October 31, 2024, the embedded derivative liability was remeasured to $39,114,000 , resulting in a non-cash expense for the three months ended October 31, 2024 of $282,000 recorded in "Other expenses (income) - Change in fair value of warrants and derivatives" on the Condensed Consolidated Statements of Operations.
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COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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-2 Convertible Preferred Stock outside of permanent equity, as temporary equity, since the redemption of such shares is at the option of the holder on a fixed date or upon the occurrence of certain events that are not solely within our control. Upon the Series B-2 Exchange, the initial estimated fair value of the Series B-2 Convertible Preferred Stock was $132,310,000 . We reduced the initial estimated fair value of the Series B-2 Convertible Preferred Stock to establish the initial combined embedded derivative liability, as discussed above. We also adjusted the carrying value of the Series B-2 Convertible Preferred Stock at October 31, 2024 based on its redemption value of $187,814,000 , which includes $655,000 of accumulated and unpaid dividends. During the three months ended October 31, 2024, the adjustments charged against retained earnings and additional paid in capital to increase the carrying values of Convertible Preferred Stock, while outstanding, to their respective redemption values totaled $58,634,000 .
The following table presents the allocation of the initial estimated fair value of the Series B-2 Convertible Preferred Stock to its host instrument and combined embedded derivatives on October 17, 2024:
| Initial estimated fair value of Series B-2 Convertible Preferred Stock | $ | |||||||||||||||||||||||||
| Initial estimated fair value and carrying value of combined embedded derivatives | ||||||||||||||||||||||||||
| Initial carrying value of Series B-2 Convertible Preferred Stock | $ | |||||||||||||||||||||||||
The following table presents a reconciliation of the adjustments to increase the carrying values of the Convertible Preferred Stock to their redemption values while outstanding:
| Three months ended October 31, 2024 | ||||||||||||||||||||||||||
| Redemption value of Series B-2 Convertible Preferred Stock at October 31, 2024 | $ | |||||||||||||||||||||||||
| Less: Carrying value of combined embedded derivatives at October 31, 2024 | ||||||||||||||||||||||||||
| Carrying value of Series B-2 Convertible Preferred Stock at October 31, 2024 | ||||||||||||||||||||||||||
Less: Initial carrying value of Series B-2 Convertible Preferred Stock at October 17, 2024 | ||||||||||||||||||||||||||
| Adjustment to increase carrying value of Series B-2 Convertible Preferred Stock to its redemption value at October 31, 2024 | ||||||||||||||||||||||||||
| Adjustment to increase carrying value of Series B-1 Convertible Preferred Stock to its redemption value (while outstanding) | ||||||||||||||||||||||||||
| Total adjustments to redemption values charged to Stockholder's Equity | $ | |||||||||||||||||||||||||
(19) 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. Because of delinquencies in our Exchange Act reporting, we cannot issue securities under the shelf registration statement without first filing a post-effective amendment to such shelf registration statement with the
SEC.
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
Additional Paid in Capital
During the three months ended October 31, 2024, $52,255,000 of the adjustments to the carrying values of outstanding Convertible Preferred Stock to their respective redemption values, while outstanding, was charged to additional paid in capital so as not to exceed the available amount of retained earnings as of October 31, 2024.
39
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(20) Legal Proceedings and Other Matters
Former CEO Related Matters
On March 12, 2024, the Company terminated Ken Peterman, its President and CEO at the time, for Cause pursuant to the terms of his employment agreement dated September 12, 2022 (the “Employment Agreement”). On November 21, 2024 (as amended on December 31, 2024), Mr. Peterman filed a claim with the American Arbitration Association, alleging that Comtech materially breached the Employment Agreement in the termination for Cause and that the termination was a retaliation for whistleblowing by Mr. Peterman in connection with certain of the Company’s prior financial and accounting practices. The Company independently investigated, with the assistance of an outside advisor, Mr. Peterman's allegations that he was a whistleblower and determined that such allegations were not substantiated. Mr. Peterman claims he is owed direct contractual damages in an amount in excess of $6,000,000 and consequential damages for injury to his professional reputation in excess of $35,000,000 . The Company believes Mr. Peterman's claims are entirely without merit and will defend itself vigorously in the matter. On December 11, 2024, Mr. Peterman was indicted by the United States Attorney for the Eastern District of New York and arrested on charges of insider trading and securities fraud. He was also charged with similar allegations by the SEC in a civil lawsuit filed in the Eastern District of New York the same day. The Company is not named as a defendant in either proceeding.
CGC Divestiture Export Matters
As discussed further in Note (2) – Divestitures, during our fourth quarter of fiscal 2024, we ceased operations of our steerable antenna product line in Basingstoke, United Kingdom, which incurred cumulative operating losses since our acquisition of this business in fiscal 2020. In November 2024, as part of the wind down of such operations, we completed a disclosure to His Majesty’s Revenue and Customs agency in the United Kingdom (“HMRC”) related to potential violations of export compliance laws in the United Kingdom. Such disclosure was precipitated by the United Kingdom customs agency’s halting, in March 2024, an antenna shipment destined for end use by a customer in Azerbaijan and for which we did not have an appropriate export license at the time. Due to our commitment to comply with global export regulations, we immediately and voluntarily initiated a historical review of exports from our Basingstoke location since our acquisition of such business in fiscal 2020. Based on such review, we voluntarily disclosed to the HMRC a misclassification of specially designed, configured or modified antenna systems for military end users and build-to-print aircraft parts. Based on HMRC guidelines and with the assistance of outside local counsel, we estimated that monetary fines and penalties related to potential violations as outlined in our disclosure could range from zero to approximately $9,000,000 , with no single amount within that range being a best estimate. Through the issuance date, based on such review and disclosure to HMRC, we determined that a financial loss related to this matter is more than remote, but less than probable given the multiple factors that could influence the ultimate outcome, including but not limited to: the voluntary nature of our disclosure; our Basingstoke operation’s historical compliance record; the number of exports involved; and the nature of the potential violation(s). Based on such determination, we have not accrued for any contingent loss related to these matters as of October 31, 2024.
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 also certain other pending and threatened legal actions which arise in the normal course of business. 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.
40
COMTECH TELECOMMUNICATIONS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Employment, Change of Control and Indemnification Agreements
We have entered into employment and/or change of control agreements, as well as indemnification agreements with certain of our executive officers and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of the Company or termination of the employee.
(21) Cost Reduction and Restructuring Related Activities
As of July 31, 2024, our severance liability was $1,029,000 . During the three months ended October 31, 2024, in connection with our transformation strategy, we actioned a reduction in force principally within our Satellite and Space Communications and Unallocated segments. Such reduction approximated 6 % of our workforce as of July 31, 2024, or approximately $8,000,000 in annualized labor costs. During the three months ended October 31, 2024, we recorded $1,227,000 of severance costs within Selling, general and administrative expenses in our Condensed Consolidated Statements of Operations. After net payments of $1,620,000 during the three months ended October 31, 2024, our severance liability was $636,000 as of October 31, 2024.
Subsequent Event
Subsequent to quarter-end, we further reduced our workforce as of July 31, 2024 by another 7 %, or approximately $18,000,000 in annualized labor costs. Such reductions were made within our Satellite and Space Communications and Unallocated segments. Severance associated with such actions of approximately $1,100,000 will be expensed in the second quarter of fiscal 2025. As of the issuance date, we had approximately 1,500 employees, compared to 1,676 employees as of July 31, 2024.
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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain information in this Quarterly Report on Form 10-Q contains, and oral statements made by our representatives from time to time may contain, forward-looking statements. Forward-looking statements can be identified by words such as: "anticipate," "believe," "continue," "could," "estimate," "expect," "future," "goal," "outlook," "intend," "likely," "may," "plan," "potential," "predict," "project," "seek," "should," "strategy," "target," "will," "would," and similar references to future periods. Forward-looking statements include, among others, statements regarding our expectations for our strategic alternatives process, our expectations for further portfolio-shaping opportunities, our expectations for other operational initiatives, the intended use of proceeds from the Credit Facility and Subordinated Credit Facility, our expectations for completing further financing initiatives, our future performance and financial condition, our plans to address our ability to continue as a going concern, the plans and objectives of our management and our assumptions regarding such future performance, financial condition, and plans and objectives that involve certain significant known and unknown risks and uncertainties and other factors not under our control which may cause our actual results, future performance and financial condition, and achievement of our plans and objectives of our management to be materially different from the results, performance or other expectations implied by these forward-looking statements. Factors that could cause actual results to differ materially from current expectations include, among other things: the outcome and effectiveness of the aforementioned strategic alternatives process, further portfolio-shaping opportunities, other operational initiatives, and the completion of further financing activities; our ability to access capital and liquidity so that we are able to continue as a going concern; our ability to implement changes in our executive leadership; the possibility that the expected synergies and benefits from our strategic activities will not be fully realized, or will not be realized within the anticipated time periods; the risk that acquired businesses will not be integrated successfully; impacts from, and uncertainties regarding, future actions that may be taken by activist stockholders; the possibility of disruption from acquisitions or dispositions, making it more difficult to maintain business and operational relationships or retain key personnel; the risk that we will be unsuccessful in implementing a tactical shift in our Satellite and Space Communications segment away from bidding on large commodity service contracts and toward pursuing contracts for our niche products and solutions with higher margins; the nature and timing of our receipt of, and our performance on, new or existing orders that can cause significant fluctuations in net sales and operating results; the timing and funding of government contracts; adjustments to gross profits on long-term contracts; risks associated with international sales; rapid technological change; evolving industry standards; new product announcements and enhancements; changing customer demands and/or procurement strategies and our ability to scale opportunities and deliver solutions to current and prospective customers; changes in prevailing economic and political conditions, including as a result of Russia's military incursion into Ukraine, the Israel-Hamas war and attacks in the Red Sea region; changes in the price of oil in global markets; changes in prevailing interest rates and foreign currency exchange rates; risks associated with our legal proceedings, customer claims for indemnification, and other similar matters; risks associated with our obligations under our credit facilities; risks associated with our large contracts; risks associated with supply chain disruptions; and other factors described in this and our other filings with the Securities and Exchange Commission ("SEC"). However, these risks are not the only risks that we face. Additional risks and uncertainties, not currently known to us or that do not currently appear to be material, may also materially adversely affect our business, financial condition and/or operating results in the future. We describe risks and uncertainties that could cause actual results and events to differ materially in the "Risk Factors" (Part I, Item 1A), "Management’s Discussion and Analysis of Financial Condition and Results of Operations" (Part II, Item 7) and "Quantitative and Qualitative Disclosures about Market Risk" (Part II, Item 7A) in our Annual Report on Form 10-K filed with the SEC on October 30, 2024. We do not intend to update or revise publicly any forward-looking statements, whether because of new information, future events, or otherwise, except as required by law.
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OVERVIEW
We are a leading provider of satellite and space communications technologies, terrestrial and wireless network solutions, Next Generation 911 ("NG-911") and emergency services and cloud native capabilities. This includes the critical communications infrastructure that people, businesses, and governments rely on when durable, trusted connectivity is required, no matter where they are – on land, at sea, or in the air – and no matter what the circumstances – from armed conflict to a natural disaster. Our solutions are designed to fulfill our customers’ needs for secure wireless communications in the most demanding environments, including those where traditional communications are unavailable or cost-prohibitive, and in mission-critical and other scenarios where performance is crucial. Over the long-term, we anticipate future growth in our end markets due to a trend of increasing demand for global voice, video and data usage in recent years, in addition to the growth of emergency communication networks and related applications. We provide our solutions to both commercial and governmental customers.
We manage our business through two reportable operating segments: Satellite and Space Communications and Terrestrial and Wireless Networks. See Part I. - Financial Information - Item 1. Notes to Condensed Consolidated Financial Statements - Note (15) - Segment Information for further description and information related our segments.
Our Quarterly Financial Information
Quarterly and period-to-period sales and operating results may be significantly affected by, among other things, short-term or long-term contracts with our customers, allowances for bad debt, impairments of long-lived assets (including goodwill) and changes in the estimated fair value of derivative instruments and warrants. In addition, our gross profit is affected by a variety of factors, including, among other things, the mix of products, systems and services sold, production efficiencies, provisions for excess and obsolete inventories, estimates of warranty expense, price competition and general economic conditions. Our gross profit may also be affected by the impact of any cumulative adjustments to contracts that are accounted for over time. In particular, our contracts with the U.S. government (or prime contractors to the U.S. government) can be terminated for convenience at any time and orders are subject to unpredictable funding, deployment and technology decisions by our customers. Some of these contracts are indefinite delivery/indefinite quantity ("IDIQ") contracts and, as such, the U.S. government is not obligated to purchase any equipment or services under these contracts. We have, in the past, experienced and we continue to expect significant fluctuations in sales and operating results from quarter-to-quarter and period-to-period due to these factors. As such, comparisons between periods and our current results may not be indicative of a trend or future performance.
CRITICAL ACCOUNTING POLICIES
We consider certain accounting policies to be critical due to the estimation process involved in each.
Revenue Recognition. In accordance with FASB ASC 606 - Revenue from Contracts with Customers ("ASC 606"), we record revenue in an amount that reflects the consideration to which we expect to be entitled in exchange for goods or services promised to customers. See Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (4) - Revenue Recognition for further information.
Impairment of Long-Lived Assets, Including Goodwill. As of October 31, 2024, total goodwill recorded on our Condensed Consolidated Balance Sheet aggregated $204.6 million (of which $30.5 million relates to our Satellite and Space Communications segment and $174.1 million relates to our Terrestrial and Wireless Networks segment). Additionally, as of October 31, 2024, net intangibles recorded on our Condensed Consolidated Balance Sheet aggregated $188.2 million (of which $45.5 million relates to our Satellite and Space Communications segment and $142.7 million relates to our Terrestrial and Wireless Networks segment). For purposes of reviewing impairment and the recoverability of goodwill and other intangible assets, our Satellite and Space Communications and Terrestrial and Wireless Networks segments each constitute a reporting unit and we must make various assumptions in determining their estimated fair values. During our first quarter of fiscal 2025, we recorded a $79.6 million non-cash impairment charge in our Satellite and Space Communications segment related to long-lived assets, including goodwill. See Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (16) - Long-lived Assets, including Goodwill for further information. Ongoing and future actions supporting our transformation strategy could result in a material impairment of our goodwill and/or intangible assets.
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Provision for Warranty Obligations. We provide warranty coverage for most of our products, including products under long-term contracts, for a period of at least one year from the date of shipment. We record a liability for estimated warranty expense based on historical claims, product failure rates and other factors. Costs associated with some of our warranties that are provided under long-term contracts are incorporated into our estimates of total contract costs. There exist inherent risks and uncertainties in estimating warranty expenses, particularly on larger or longer-term contracts. If we do not accurately estimate our warranty costs, any changes to our original estimates could be material to our results of operations and financial condition.
Accounting for Income Taxes. Our deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities and applying enacted tax rates expected to be in effect for the year in which we expect the differences to reverse. Our provision for income taxes is based on domestic (including federal, state and local) and international statutory income tax rates in the tax jurisdictions where we operate, permanent differences between financial reporting and tax reporting and available credits and incentives. The U.S. federal government is our most significant income tax jurisdictions.
For tax positions taken or expected to be taken in a tax return, we account for unrecognized tax benefits using a “more-likely-than-not” threshold for financial statement recognition and measurement. We may be challenged upon review by the applicable taxing authority and positions taken by us may not be sustained. We recognize all or a portion of the benefit of income tax positions only when we have made a determination that it is "more-likely-than-not" that the tax position will be sustained upon examination, based upon the technical merits of the position and other factors. For tax positions that are determined as "more-likely-than-not" to be sustained upon examination, the tax benefit recognized is the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement. We recognize potential interest and penalties related to uncertain tax positions in income tax expense. In assessing the need for a valuation allowance for deferred tax assets, we consider all positive and negative evidence, including past financial performance, timing and judgments about future taxable income and tax planning strategies. Valuation allowances are established, when necessary, to reduce net deferred tax assets to the amount "more-likely-than-not" expected to be realized. We continuously evaluate additional facts representing positive and negative evidence in determining our ability to realize these deferred tax assets. Significant judgment is required in determining income tax provisions and tax positions. The ultimate outcome of tax exposures and risks involves significant uncertainties. If actual outcomes differ materially from these estimates, they could have a material impact on our results of operations and financial condition.
Our U.S. federal income tax returns for fiscal 2021 through 2023 are subject to potential future Internal Revenue Service ("IRS") audit. None of our state income tax returns prior to fiscal 2020 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.
Capitalized Engineering Costs. We generally expense all research and development costs. Research and development expenses include payroll, employee benefits, stock-based compensation expense, and other personnel-related expenses associated with product development. Research and development expenses also include third-party development and programming costs. Costs incurred internally in researching and developing software to be sold are charged to expense until technological feasibility has been established for the software. Judgment is required in determining when technological feasibility of a product is established. Technological feasibility for our advanced communication software solutions is generally reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to customers and when we are able to validate the marketability of such product. Once technological feasibility is established, all software costs are capitalized until the product is available for general release to customers. To date, cost capitalized related to software developed for the purpose of selling to third parties was not material, but could increase in the future.
As it relates to software developed for the purpose of internal-use (e.g., hosted "SaaS" applications within our Terrestrial and Wireless Networks segment), costs capitalized primarily consist of direct labor and third-party vendor costs associated with creating the software. Software development projects generally include three stages: the preliminary project stage (all costs are expensed as incurred), the application development stage (certain costs are capitalized and certain costs are expensed as incurred) and the post-implementation/operation stage (all costs are expensed as incurred). Costs capitalized in the application development stage include costs related to the design and implementation of the selected software components, software build and configuration infrastructure, and software interfaces. Capitalization of costs requires judgment in determining when a project has reached the application development stage, the proportion of time spent in the application development stage, and the period over which we expect to benefit from the use of that software. For the three months ended October 31, 2024 and 2023, capitalized internal-use software costs were $1.0 million and $0.6 million, respectively. Capitalized internal use software costs are amortized once the software is placed in service on the straight-line method over the estimated useful life of the software, which is generally three years.
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Provisions for Excess and Obsolete Inventory. We record a provision for excess and obsolete inventory based on historical and projected usage trends. Other factors may also influence our provision, including decisions to restructure or exit a product line, technological change and new product development. These factors could result in a change in the amount of excess and obsolete inventory on hand. Additionally, our estimates of future product demand may prove to be inaccurate, in which case we may have understated or overstated the provision required for excess and obsolete inventory. In the future, if we determine that our inventory was overvalued, we would be required to recognize such costs in our financial statements at the time of such determination. Any such charge could be material to our results of operations and financial condition. As discussed in Part I. - Financial Information - Item 1. - Note (8) - Inventories, in connection with our initiatives to transform our Company (e.g., reevaluating our business plans to identify opportunities to focus future investment on our most strategic, high-margin revenue opportunities), during the three months ended October 31, 2024, we recorded a non-cash charge of $11.4 million within Cost of Sales on our Condensed Consolidated Statement of Operations. Such non-cash charge related to the write down of inventory associated with approximately 70 products within our satellite ground infrastructure product line that were either discontinued or being de-emphasized going forward. Such non-cash charge also included the write down of inventory associated with the CGC Divestiture, which was determined during the first quarter of fiscal 2025 to no longer be salable.
Allowance for Doubtful Accounts. We perform credit evaluations of our customers and adjust credit limits based upon customer payment history and current creditworthiness, as determined by our review of our customers’ current credit information. Generally, we will require cash in advance or payment secured by irrevocable letters of credit before an order is accepted from an international customer that we do not do business with regularly. In addition, we seek to obtain insurance for certain domestic and international customers. We monitor billing events, collections and payments from our customers and maintain an allowance for doubtful accounts based upon our historical experience and any specific customer collection issues that we have identified. In light of ongoing tight credit market conditions and high interest rates, we continue to see requests from our customers for higher credit limits and longer payment terms. We have, on a limited basis, approved certain customer requests. Also, more recently, we experienced a significant increase in the overall level of contract assets (i.e., unbilled receivables) related to large, long-term contracts with certain U.S. government and international customers. We continue to monitor our accounts receivable credit portfolio. Except as discussed below, to-date, there has been no material changes in our billed accounts receivable credit portfolio as a result of the challenging business conditions. Although our overall credit losses have historically been within the allowances we established, we may not be able to accurately predict our future credit loss experience, given the current poor business environment. Measurement of credit losses requires consideration of historical loss experience, including the need to adjust for changing business conditions, and judgments about the probable effects of relevant observable data, including present economic conditions such as delinquency rates and the financial health of specific customers. Future changes to the estimated allowance for doubtful accounts could be material to our results of operations and financial condition. As discussed in Part I. - Financial Information - Item 1. - Note (7) - Accounts Receivables, during the first quarter of fiscal 2025, we determined that an unbilled receivable contract asset in the amount of $19.0 million, related to an international customer and reseller of our troposcatter technologies, was at risk of not being invoiced or collected, principally due to the customer's near-term ability to secure certain opportunities in its pipeline. As a result and considering that we offered a price concession (i.e., variable consideration) to our customer in the first quarter of fiscal 2025, we reversed $1.6 million of cumulative revenue and associated unbilled receivable contract assets related to this transaction, and recorded a non-cash charge to fully reserve for the remaining $17.4 million unbilled receivable contract asset within our allowance for doubtful accounts.
Derivative Instruments and Warrant Liabilities. We evaluate our financial instruments, including our Credit Facility, Subordinated Credit Facility, Convertible Preferred Stock and warrants to issue our common stock pursuant to the terms of such instruments, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. Such evaluation considers a qualitative and quantitative assessment of whether the host instrument is more debt or equity-like, and if embedded derivatives should be bifurcated from the host instrument and/or combined for accounting purposes. For derivatives that are accounted for as liabilities, the derivative is initially recorded at its estimated fair value and is then re-valued at each reporting date, with changes in its estimated fair value reported in our Condensed Consolidated Financial Statements. To estimate such fair values, with the assistance of a third party valuation expert, we primarily use Monte Carlo simulation models, on a with and without basis, or Black-Scholes option pricing models, each adjusted for instrument-specific terms. Due to the nature of our derivative instruments and warrant liabilities, we must use Level 3 inputs for estimating fair value, which are unobservable inputs developed using the best available information under the circumstances. Level 3 inputs are supported by little or no market activity, are significant to the fair value of the assets or liabilities and reflect our assumptions related to how market participants would use similar inputs to price the asset or liability. Accordingly, our estimates and assumptions could prove to be inaccurate. Also, changes in such estimates and assumptions from period to period could be material to our results of operations and financial condition. See Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (5) – Fair Value Measurements and Financial Instruments for further information.
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Fiscal 2025: First Quarter Results and Business Outlook
Financial results for the first quarter of fiscal 2025 include:
•Consolidated net sales were $115.8 million, compared to $126.2 million in the fourth quarter of fiscal 2024 and $151.9 million in the first quarter of fiscal 2024;
•Gross margin was 12.5%, compared to 21.5% in our fourth quarter of fiscal 2024 and 31.5% in our first quarter of fiscal 2024; gross margin in the more recent fiscal quarter includes an $11.4 million non-cash charge related to the write down of certain inventories as a result of restructuring activities during the quarter within our Satellite and Space Communications segment;
•GAAP net loss attributable to common stockholders was $155.9 million and included, among other things: a $79.6 million non-cash impairment charge in our Satellite and Space Communications segment related to goodwill, $17.9 million of restructuring costs (including the non-cash inventory write down, discussed above), a $17.4 million non-cash charge to fully reserve for an unbilled receivable contract asset related to an international customer and reseller of our troposcatter technologies, $6.6 million of intangible asset amortization, $1.6 million of proxy solicitation costs, $0.6 million of CEO transition costs, and $0.3 million of strategic emerging technology costs for next-generation satellite technology; the more recent quarter also reflects the amendment of the Credit Facility, issuance of the Subordinated Credit Facility and extinguishment of the Series B-1 Convertible Preferred Stock upon exchange for the Series B-2 Convertible Preferred Stock on October 17, 2024;
•GAAP EPS net loss of $5.29 and Non-GAAP EPS net loss of $1.27;
•Adjusted EBITDA loss (a Non-GAAP financial measure discussed below) of $19.4 million, compared to Adjusted EBITDA income of $0.3 million, or 0.2% of consolidated net sales for the fourth quarter of fiscal 2024 and $18.4 million, or 12.1% of consolidated net sales for the first quarter of fiscal 2024;
•New bookings (also referred to as orders) of $127.9 million, representing a quarterly book-to-bill ratio of 1.10x (a measure defined as bookings divided by net sales);
•Backlog of $811.0 million as of October 31, 2024, compared to $798.9 million as of July 31, 2024 and $695.9 million as of October 31, 2023;
•Revenue visibility of approximately $1.6 billion. We measure this revenue visibility as the sum of our $811.0 million of funded backlog, plus the total unfunded value of certain multi-year contracts that we have received and from which we expect future orders;
•Cash flows used in operating activities were $21.8 million, due primarily to a decrease in net sales and gross profit during the more recent quarter, in addition to the significant increase in the overall level of contract assets (i.e., unbilled receivables) in fiscal 2024 related to our progress on large, long-term "over-time" contracts awarded to us by certain U.S. government and international customers, as well as the timing of payments to our suppliers as we execute on our backlog. As experienced in the latter part of fiscal 2024, we expect the level of our unbilled receivables to decline throughout fiscal 2025, for instance, as we invoice our U.S. government and domestic customers upon physical delivery of products or the achievement of specified contractual milestones. Additionally, cash flows used in operating activities during the more recent quarter include $5.8 million in aggregate payments for restructuring costs, including severance, CEO transition, proxy solicitation and strategic emerging technology costs for next-generation satellite technology.
Non-GAAP financial measures discussed above are reconciled to the most directly comparable GAAP financial measures in the table included in the below section “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of the Results of Operations for the Three Months Ended October 31, 2024 and 2023.”
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Other Key Business Developments and Updates
Satellite and Space Communications
In September 2023, we were awarded a large, multi-year GFSR contract by the U.S. Army with a total potential value of $544.0 million. Through this program, we would provide ongoing communications and IT infrastructure support for the U.S. Army, Air Force, Navy, Marine Corps and NATO. The incumbent protested (and lost) the award of the contract to Comtech several times. In November 2024, the most recent protest had been decided in our favor; however, shortly thereafter, the incumbent once again protested the matter and the award remains under protest.
In September 2023, we won a highly competitive $48.6 million contract to deliver next-generation Enterprise Digital Intermediate Frequency Multi-Carrier (“EDIM”) modems for the U.S. Army's satellite communications ("SATCOM") digitization and modernization programs. We are progressing with our efforts on this contract and pleased to have secured more than $8.5 million in incremental funding this past quarter, bringing the cumulative funding for this contract to $19.1 million.
In September 2024, we announced the launch of our Digital Common Ground ("DCG") platforms, based on the proven success of previous Comtech software-defined modem platforms. Comtech’s DCG portfolio is also designed to evolve over time to incorporate new capabilities and keep pace with the upgrade cycle of new innovative satellite constellations, significantly reducing overall lifecycle costs for customers while also delivering industry leading performance and efficiency.
In September 2024, the U.S. Navy Information Warfare Systems Command awarded us a sole source contract for our software-defined SLM-5650B modems, upgrade kits, firmware and technical support. The contract has a four-year period of performance and is valued in excess of $50.0 million. Funded orders received to date are valued at approximately $2.0 million.
In October 2024, we were awarded a production order, valued in excess of $5.0 million, from an existing customer deploying a new LEO constellation. Deliveries associated with this order are anticipated to begin in the mid-2025 timeframe.
In October 2024, within our satellite ground infrastructure product line, we were awarded over $6.0 million in funded orders from a new international customer for certain frequency-type power amplifiers.
In October 2024, we were awarded approximately $2.0 million in funded orders from a new international customer of our ELEVATETM networking platform. We believe these orders confirm demand for our advanced TDMA VSAT technology, involving mesh connectivity and network optimization.
In July 2024, SES Space & Defense awarded us an initial order for our software defined SLM-5650B and other next-generation modems for use in the O3B mPower infrastructure. During the first quarter of fiscal 2025, we have since received additional awards from SES for software licenses and high-power amplifiers to further support the O3B mPower constellation.
During the three months ended October 31, 2024, we were awarded in excess of $16.0 million of funded orders calling for the supply of VSAT equipment and related services for the U.S. Army. In November 2024, the follow-on contract (referred to as "VSAT IV") was not awarded to Comtech; however, we protested the matter and our protest remains pending.
In November 2024, we announced the appointment of Daniel Gizinski as President of our Satellite and Space Communications segment. Mr. Gizinski brings over 15 years of experience in satellite communications engineering, operations, product strategy and executive management to his new role. Prior to his appointment as President of this segment, Mr. Gizinski served as Chief Strategy Officer and President of the Comtech Satellite Network Technologies division, among other positions within Comtech. With a proven track record of driving growth and fostering innovation, he will oversee all aspects of this segment, including product development, operations and market expansion.
As it relates to our troposcatter product line, throughout most of fiscal 2024, we experienced elevated levels of unbilled receivables due to the timing of our performance and billings related to certain large U.S. government and international customer contracts. During the first quarter of fiscal 2025, we maintained deliveries of next-generation troposcatter terminals related to our U.S. Marine Corps and U.S. Army contracts, contributing to a meaningful reduction of our consolidated unbilled receivables (before allowances for doubtful accounts), from $123.7 million at July 31, 2024 to $111.7 million at October 31, 2024. In December 2024, however, we received a notice from our prime contractor to stop work associated with the U.S. Marine Corps contract. While information is limited at this point in time, we believe the end customer may be considering a possible termination of the contract, in whole or in part. As of December 31, 2024, our unbilled receivables related to the U.S. Marine Corps contract approximated $10.8 million. Future results of operations related to our troposcatter solutions product line will depend on the nature, timing and amounts associated with resolving this matter.
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Terrestrial and Wireless Networks
During the first quarter of 2025, we were pleased to have been awarded the following:
•Large, multi-year location-based services maintenance and support contract from one of the largest wireless carriers in the U.S. The contract has a five-year period of performance and is valued in excess of $19.0 million. During the fiscal quarter, this customer also awarded us over $2.5 million in various other orders for location-based services and related solutions;
•Renewal of critical enhanced 911 call routing services, valued in excess of $30.0 million, for one of the largest wireless carriers in the U.S.;
•Next-generation ("NG-911") Guardian call handling solution for a city located in south-central British Columbia, Canada. These services, valued in excess of $2.0 million over the next several years, support emergency communications for various PSAPs and citizens located in that municipality;
•In the prior fiscal year, we were awarded a large multi-year NG-911 contract by the Commonwealth of Massachusetts, valued at over $250.0 million. During the most recent quarter, we were awarded over $1.0 million of incremental funding to continue servicing certain PSAPs within the state; and
•Incremental funding related to our NG-911 deployment in South Carolina in excess of $1.0 million. During the quarter, we were successful in expanding the number of PSAPs and counties being serviced by our solutions within the state.
With strategic wins in the U.S., Canada and Australia, we believe Comtech's position as a trusted leader in 911, NG-911 and public safety applications positions us increasingly well when it comes to delivering similarly sophisticated solutions for other types of emergencies.
Unallocated and Other Matters
In November 2024, we announced that our Board of Directors (the “Board”) unanimously elected Kenneth H. Traub as the Executive Chairman of our Company. Mark Quinlan stepped down from his role as Chairman of the Board and will continue serving on the Board. Former U.S. Army Chief Information Officer, Lieutenant General (Retired) Bruce T. Crawford, was also elected to serve as Lead Independent Director. Additionally, the Board has named Mr. Traub as President and Chief Executive Officer, effective as of January 13, 2025, in addition to his current role as Chairman, replacing Mr. Ratigan effective immediately. Pursuant to his separation agreement and release, Mr. Ratigan resigned from his position as President and Chief Executive Officer and as a director.
In November 2024, we announced that our Board entered into a cooperation agreement with Fred Kornberg, Michael Porcelain, and Oleg Timoshenko (the “Investor Group”). Pursuant to the agreement: we appointed Michael Hildebrandt, Senior Investment Professional at Freshford Capital Management, to the Board, effective immediately; the Board will appoint an additional new independent director mutually acceptable to both our Board and the Investor Group (the “Additional Director”); two of our current directors will not stand for reelection at the 2024 Annual Meeting; the Investor Group will support our slate of directors for election at the 2024 Annual Meeting and will withdraw its nomination of eight directors for election at the meeting; the Investor Group has agreed to customary standstill restrictions and voting commitments until the nomination deadline for our Fiscal 2025 Annual Meeting of Stockholders, or until the nomination deadline for our Fiscal 2026 Annual Meeting of Stockholders if we nominate Mr. Hildebrandt and the Additional Director for reelection at the Fiscal 2025 Annual Meeting of Stockholders.
In November 2024, we released our first-ever Corporate Social Responsibility (“CSR”) report for fiscal 2024. Among other things, the CSR report highlights our progress in environmental impact, workforce development and community investment. Our FY24 CSR Report presents a great opportunity to outline what we stand for, and how our investments in our team and responsible business practices drive momentum and value within our organization, throughout our supplier network and in our communities.
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Subsequent to quarter-end, in connection with our initiatives to optimize our go-forward cost structure with our future expected business, we reduced our workforce by approximately 7%. Such reductions were made in our Satellite and Space Communications and Unallocated segments. Annualized cost savings associated with this action, representing total labor costs but before severance costs, approximate $18.0 million. Severance associated with such actions of approximately $1.1 million will be expensed in the second quarter of fiscal 2025. As of the issuance date, we had approximately 1,500 employees, compared to 1,676 employees as of July 31, 2024.
Business Outlook
During the second quarter of fiscal 2025, business conditions continue to be challenging, and the operating environment is largely unpredictable, due to many factors including, but not limited to: uncertainties related to our recently announced transformation strategy and associated actions we may take; uncertainties related to our ability to operate as going concern, fluctuations in interest rates; inflation; continuing resolutions associated with the U.S. Federal budget; repercussions of military conflicts in Russia, Ukraine and the Middle East; and a potential global recession. Order and production delays, contract protests and/or terminations, delayed cash collections from customers, disruptions in component availability and/or quality, increased pricing both for labor and parts, lower levels of factory utilization and higher logistics and operational costs resulting from such conditions have or could impact our business as well. In light of these business conditions and resulting challenges, we anticipate variability from time to time as we move through our transformation strategy. Accordingly, we are not providing forward-looking guidance on a GAAP or Non-GAAP basis.
Additional information related to our Business Outlook for Fiscal 2025 and a definition and explanation of Adjusted EBITDA is included in the below section Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Comparison of the Results of Operations for the Three Months Ended October 31, 2024 and 2023.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED OCTOBER 31, 2024 AND 2023
Net Sales. Consolidated net sales were $115.8 million and $151.9 million for the three months ended October 31, 2024 and 2023, respectively, representing a decrease of $36.1 million, or 23.8%. The period-over-period decrease reflects significantly lower net sales in our Satellite and Space Communications segment offset, in part, by higher net sales in our Terrestrial and Wireless Networks segment, as further discussed below.
Satellite and Space Communications
Net sales in our Satellite and Space Communications segment were $58.9 million for the three months ended October 31, 2024 as compared to $102.4 million for the three months ended October 31, 2023, a significant decrease of $43.5 million or 42.5%. Related segment net sales for the three months ended October 31, 2024 primarily reflect lower net sales of our troposcatter and SATCOM solutions (including progress toward delivering next-generation troposcatter terminals to the U.S. Marine Corps and U.S. Army, VSAT equipment to the U.S. Army and COMET terminals to an international customer), high power solid state amplifiers related to the PST Divestiture (which was completed in November 2023), and satellite ground station solutions (primarily X/Y steerable antennas related to the CGC Divestiture initiated in our fourth quarter of fiscal 2024). Our Satellite and Space Communications segment represented 50.9% of consolidated net sales for the three months ended October 31, 2024 as compared to 67.4% for the three months ended October 31, 2023. Our book-to-bill ratio (a measure defined as bookings divided by net sales) in this segment for the three months ended October 31, 2024 was 0.99x.
Terrestrial and Wireless Networks
Net sales in our Terrestrial and Wireless Networks segment were $56.9 million for the three months ended October 31, 2024, as compared to $49.5 million for the three months ended October 31, 2023, an increase of $7.4 million, or 14.9%. Related segment net sales for the three months ended October 31, 2024 primarily reflect higher net sales of our call handling and NG-911 services, offset in part by lower net sales of our location based solutions. Our Terrestrial and Wireless Networks segment represented 49.1% of consolidated net sales for the three months ended October 31, 2024 as compared to 32.6% for the three months ended October 31, 2023. Our book-to-bill ratio in this segment for the three months ended October 31, 2024 was 1.22x.
Bookings, sales and profitability in both segments can fluctuate dramatically from period-to-period due to many factors, including unpredictable funding, deployment and technology decisions by our customers and changes in the general business environment. Period-to-period fluctuations in bookings are normal for our segments. As such, period-to-period comparisons of our results may not be indicative of a trend or future performance. Also, we announced that we are exploring strategic alternatives for our businesses. Accordingly, future results of operations can be impacted by the timing and outcome of such initiatives. There can be no assurance that the exploration of strategic alternatives will result in a transaction or other strategic changes or outcomes.
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Geography and Customer Type
Sales by geography and customer type, as a percentage of related sales, for the three months ended October 31, 2024 and 2023 are as follows:
| Three months ended October 31, | ||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||||||||||
| Satellite and Space Communications | Terrestrial and Wireless Networks | Consolidated | ||||||||||||||||||||||||||||||||||||
| U.S. government | 68.6 | % | 51.8 | % | 1.0 | % | 1.2 | % | 35.4 | % | 35.3 | % | ||||||||||||||||||||||||||
| Domestic | 8.2 | % | 15.5 | % | 90.0 | % | 91.3 | % | 48.4 | % | 40.2 | % | ||||||||||||||||||||||||||
| Total U.S. | 76.8 | % | 67.3 | % | 91.0 | % | 92.5 | % | 83.8 | % | 75.5 | % | ||||||||||||||||||||||||||
| International | 23.2 | % | 32.7 | % | 9.0 | % | 7.5 | % | 16.2 | % | 24.5 | % | ||||||||||||||||||||||||||
| Total | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||||||||||||||||||||
Sales to U.S. government customers include sales to the DoD, intelligence and civilian agencies, as well as sales directly to or through prime contractors. Domestic sales include sales to commercial customers, as well as to U.S. state and local governments. For the three months ended October 31, 2024 and 2023, except for the U.S. government, there were no customers that represented 10% or more of consolidated net sales. International sales for the three months ended October 31, 2024 and 2023 (which include sales to U.S. domestic companies for inclusion in products that are sold to international customers) were $18.8 million and $37.2 million, respectively. Except for the U.S., no individual country (including sales to U.S. domestic companies for inclusion in products that are sold to a foreign country) represented 10% or more of consolidated net sales for the three months ended October 31, 2024 and 2023.
Gross Profit. Gross profit was $14.5 million and $47.9 million for the three months ended October 31, 2024 and 2023, respectively, a decrease of $33.4 million. Gross profit, as a percentage of consolidated net sales, for the three months ended October 31, 2024 was 12.5% as compared to 31.5% for the three months ended October 31, 2023. Our gross profit in our first quarter of fiscal 2025 (both in dollars and as a percentage of consolidated net sales) reflects: (i) overall product mix changes, as discussed above; (ii) a non-cash charge of $11.4 million related to the write down of certain inventories as a result of restructuring activities within our Satellite and Space Communications segment; (iii) the expensing of work in process inventory related to certain loss contracts in our satellite ground infrastructure product line; (iv) higher expected costs at completion, as we advanced certain nonrecurring engineering related projects in our satellite ground infrastructure product line through development and toward production; and (v) late delivery penalties related to a Modular Transportable Transmission Systems (or "MTTS" troposcatter solutions) order. Excluding the non-cash inventory-related charge, our gross profit, as a percentage of consolidated net sales, for the first quarter of fiscal 2025 would have been 22.4%, a decrease to the 31.5% reported in our first quarter of fiscal 2024, but a sequential increase to the 21.5% reported in our fourth quarter of fiscal 2024. Gross profit (both in dollars and as a percentage of consolidated net sales) in the first quarter of fiscal 2024 was influenced by a large, high margin sale of COMET terminals to an international customer, which did not repeat in the first quarter of fiscal 2025. Gross profit, as a percentage of related segment net sales, is further discussed below.
Our Satellite and Space Communications segment's gross profit, both in dollars and as a percentage of related segment net sales, for the three months ended October 31, 2024 decreased significantly in comparison to the three months ended October 31, 2023. The gross profit percentage in the more recent period reflects changes in products and services mix, as well as other segment related items, as discussed above.
Our Terrestrial and Wireless Networks segment's gross profit, in dollars, increased and, as a percentage of related segment net sales, decreased for the three months ended October 31, 2024 in comparison to the three months ended October 31, 2023. The gross profit percentage in the more recent period reflects changes in products and services mix, as discussed above.
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Included in consolidated cost of sales for the three months ended October 31, 2024 and 2023 are provisions for excess and obsolete inventory of $12.5 million and $0.1 million, respectively. As discussed in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies - Provisions for Excess and Obsolete Inventory, we regularly review our inventory and record a provision for excess and obsolete inventory based on historical and projected usage trends. As discussed above and in Part I. - Financial Information - Item 1. - Note (8) - Inventories, in connection with our initiatives to transform our Company, during three months ended October 31, 2024, we recorded a non-cash charge of $11.4 million within Cost of Sales on our Condensed Consolidated Statement of Operations related to the write down of inventory associated with approximately 70 products within our satellite ground infrastructure product line that were either discontinued or being de-emphasized going forward. Such non-cash charge also included the write down of inventory associated with the CGC Divestiture that was no longer considered salable during the period.
Our consolidated gross profit, as a percentage of consolidated net sales, depends on the volume of sales, sales mix and related gross profit for each segment, and therefore is inherently difficult to forecast. Our consolidated gross profit, as a percentage of consolidated net sales, may also be impacted by the timing and outcome of actions we may take related to our transformation strategy.
Selling, General and Administrative Expenses. Selling, general and administrative expenses were $51.6 million and $32.7 million for the three months ended October 31, 2024 and 2023, respectively. As a percentage of consolidated net sales, selling, general and administrative expenses were 44.6% and 21.5% for the three months ended October 31, 2024 and 2023, respectively.
During the first quarter of fiscal 2025, we determined that an unbilled receivable contract asset in the amount of $19.0 million, related to an international customer and reseller of our troposcatter technologies, was at risk of not being invoiced or collected, principally due to the customer's near-term ability to secure certain opportunities in its pipeline. As a result and considering that we offered a price concession (i.e., variable consideration) to our customer in the first quarter of fiscal 2025, we reversed $1.6 million of cumulative revenue and associated unbilled receivable contract assets related to this transaction, and recorded a non-cash charge to fully reserve for the remaining $17.4 million unbilled receivable contract asset within our allowance for doubtful accounts. Also, during the three months ended October 31, 2024 and 2023, we incurred $6.5 million and $3.7 million of restructuring costs within selling, general and administrative expenses, respectively, primarily to streamline our operations and improve efficiency, including severance costs and costs associated with those activities supporting our announced pursuit of strategic alternatives. Excluding such provision for doubtful accounts and restructuring costs, selling, general and administrative expenses for the three months ended October 31, 2024 and 2023 would have been $27.7 million, or 23.9% and $29.0 million or 19.1%, respectively, of consolidated net sales. The increase in our selling, general and administrative expenses, as a percentage of consolidated net sales, is primarily due to lower consolidated net sales, as discussed above. Also, during the first quarter of fiscal 2025, we experienced higher legal, professional and accounting related fees as compared to the first quarter of fiscal 2024.
Amortization of stock-based compensation expense recorded as selling, general and administrative expenses in the three months ended October 31, 2024 was not material. Amortization of stock-based compensation expense recorded as selling, general and administrative expenses in the three months ended October 31, 2023 was $2.2 million. During the three months ended October 31, 2024, we reversed a portion of our stock-based compensation expense related to performance shares due to lower-than-estimated achievement of fiscal 2022 performance share goals. Stock-based compensation expense for the more recent period also reflects the forfeiture of awards related to our former Chief Operating Officer, whose employment was terminated during our first quarter of fiscal 2025. With respect to stock-based compensation expense reported in the prior year period, we had determined to settle fiscal 2024 non-equity annual incentive awards accrued during such period with stock-based awards in lieu of cash. Also, contributing to the higher stock-based compensation expense in the prior year period was our annual grant of stock-based awards to non-executive employees. Due to the number of shares available for grant under the 2023 Plan, such grants of stock-based awards did not occur in our first quarter of fiscal 2025. Amortization of stock-based compensation is not allocated to our two reportable operating segments.
Research and Development Expenses. Research and development expenses were $3.7 million and $7.8 million for the three months ended October 31, 2024 and 2023, respectively, representing a decrease of $4.1 million or 52.5%. As a percentage of consolidated net sales, research and development expenses were 3.2% and 5.1% for the three months ended October 31, 2024 and 2023, respectively.
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For the three months ended October 31, 2024 and 2023, research and development expenses of $0.9 million and $4.7 million, respectively, related to our Satellite and Space Communications segment and $2.7 million and $2.9 million, respectively, related to our Terrestrial and Wireless Networks segment. The remaining research and development expenses of $0.1 million and $0.2 million in the three months ended October 31, 2024 and 2023, respectively, related to the amortization of stock-based compensation expense. Lower research and development expenses reflect our prioritization of resources across various programs.
During the three months ended October 31, 2024 and 2023, we incurred $0.3 million and $1.4 million, respectively, of strategic emerging technology costs in our Satellite and Space Communications segment for next-generation satellite technology to advance our solutions offerings to be used with new broadband satellite constellations. We expect strategic emerging technology costs to decrease in fiscal 2025 as a result of our fourth quarter fiscal 2024 decision to cease operations related to our steerable antenna product line in the U.K.
Whenever possible, we seek customer funding for research and development to adapt our products to specialized customer requirements. During the three months ended October 31, 2024 and 2023, customers reimbursed us $1.5 million and $4.0 million, respectively, which is not reflected in the reported research and development expenses but is included in net sales with the related costs included in cost of sales.
In addition to increases in customer-funded research and development activities in recent years, during the three months ended October 31, 2024 and 2023, we also experienced an increase in engineering efforts related to cost to fulfill contract assets and internal use software, for which we capitalized $2.1 million and $1.1 million, respectively. As a result of these trends, a more focused prioritization of resources across various programs and the impact of prior reductions in force announced in fiscal 2023, our research and development expenses for financial reporting purposes has significantly decreased more recently as compared to historical periods.
Amortization of Intangibles. Amortization relating to intangible assets with finite lives for the three months ended October 31, 2024 and 2023 was $6.6 million (of which $3.0 million was for the Satellite and Space Communications segment and $3.6 million was for the Terrestrial and Wireless Networks segment) compared to $5.3 million (of which $1.7 million was for the Satellite and Space Communications segment and $3.6 million was for the Terrestrial and Wireless Networks segment), respectively. The increase in our Satellite and Space Communications segment's amortization during the more recent quarter reflects the acceleration of amortization of CGC's intangibles due to the impact of the CGC Divestiture.
Impairment of Long-Lived Assets, including Goodwill. Based on the lower-than-expected financial performance during the first quarter of fiscal 2025, and other recent developments through the issuance date, within our Satellite and Space Communications segment, we determined that we were required to perform an interim quantitative goodwill impairment test as of October 31, 2024. Based on our quantitative evaluation, we determined that our Satellite and Space Communications reporting unit had an estimated fair value below its carrying value and concluded that our goodwill in this reporting unit was impaired. As a result, in the first quarter of fiscal 2025, we recognized a $79.6 million non-cash goodwill impairment charge in our Satellite and Space Communications reporting unit. In addition to testing goodwill for impairment, we also assessed the recoverability of the carrying values of our other long-lived assets in this segment, including identifiable intangible assets with finite useful lives. Based on our evaluation, we determined that the fair values of such assets were not impaired. See Part I. - Financial Information - Item 1. - Note (16) - Long-Lived Assets, including Goodwill for further information.
Proxy Solicitation Costs. During three months ended October 31, 2024, we incurred $1.6 million of proxy solicitation costs (including legal and advisory fees) in our Unallocated segment as a result of a now-settled proxy contest. There were no similar costs in the prior year.
CEO Transition Costs. CEO transition costs were $0.6 million for the three months ended October 31, 2024, consisting principally of legal and advisory fees, including those related to a third party CEO search firm. There were no similar costs in the corresponding period of the prior year.
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Operating Income (Loss). Operating loss for the three months ended October 31, 2024 was $129.2 million, as compared to operating income of $2.1 million for the three months ended October 31, 2023. Operating income (loss) by reportable segment is shown in the table below:
| Three months ended October 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | Satellite and Space Communications | Terrestrial and Wireless Networks | Unallocated | Consolidated | ||||||||||||||||||||||||||||||||||||||||||||||
| Operating income (loss) | $ | (118.8) | 10.1 | 5.3 | 4.0 | (15.7) | (12.1) | $ | (129.2) | 2.1 | ||||||||||||||||||||||||||||||||||||||||
| Percentage of related net sales | NA | 9.9 | % | 9.3 | % | 8.2 | % | NA | NA | NA | 1.4 | % | ||||||||||||||||||||||||||||||||||||||
Our GAAP operating loss of $129.2 million for the three months ended October 31, 2024 reflects: (i) a non-cash goodwill impairment charge of $79.6 million; (ii) $17.9 million of restructuring costs, including a non-cash inventory write down during the quarter (of which $13.8 million, $0.1 million and $4.0 million related to our Satellite and Space Communications, Terrestrial and Wireless Networks and Unallocated segments, respectively); (iii) $6.6 million of amortization of intangibles; (iv) $1.6 million of proxy solicitation costs; (v) $0.6 million of CEO transition costs; (vi) $0.3 million of strategic emerging technology costs; (vii) $0.3 million of amortization of cost to fulfill assets; and (viii) $0.2 million of amortization of stock-based compensation, as discussed above. Excluding such items, our consolidated operating loss for the three months ended October 31, 2024 would have been $22.3 million.
Our GAAP operating income of $2.1 million for the three months ended October 31, 2023 reflects: (i) $5.3 million of amortization of intangibles; (ii) $3.7 million of restructuring costs (of which $0.8 million and $2.9 million related to our Satellite and Space Communications and Unallocated segments, respectively); (iii) $2.6 million of amortization of stock-based compensation; (iv) $1.4 million of strategic emerging technology costs; and (v) $0.2 million of amortization of cost to fulfill assets, as discussed above. Excluding such items, our consolidated operating income for the three months ended October 31, 2023 would have been $15.3 million, or 10.1% of consolidated net sales.
The decrease, excluding the above items, from $15.3 million of operating income to $22.3 million of operating loss for the more recent period primarily reflects lower consolidated net sales and gross profit (both in dollars and as a percentage of consolidated net sales) and higher selling, general and administrative expenses, offset in part by lower research and development expenses, as discussed above. Operating income (loss) by reportable segment is further discussed below.
The decrease in our Satellite and Space Communications segment operating income for the three months ended October 31, 2024 primarily reflects a non-cash goodwill impairment charge of $79.6 million, significantly lower net sales and gross profit, both in dollars and as a percentage of related segment net sales (including an $11.4 million non-cash charge related to the write down of certain inventory), higher selling, general and administrative expenses (due primarily to a $17.4 million non-cash charge related to an allowance for doubtful accounts) and higher amortization of intangibles, offset in part by lower research and development expenses, as discussed above.
The increase in our Terrestrial and Wireless Networks segment operating income, both in dollars and as a percentage of the related segment net sales, for the three months ended October 31, 2024 primarily reflects higher net sales, offset in part by a lower gross profit percentage, as discussed above.
Excluding the impact of proxy solicitation costs, CEO transition costs and its respective portion of restructuring charges in each period, Unallocated expenses for the three months ended October 31, 2024 would have been $9.5 million, as compared to $9.2 million for the three months ended October 31, 2023. The increase in Unallocated expenses, excluding such items, was primarily due to higher selling, general and administrative expenses, as discussed above.
Interest Expense and Other. Interest expense was $9.5 million and $4.9 million for the three months ended October 31, 2024 and 2023, respectively. The increase is primarily due to higher interest rates and fees under our Credit Facility entered into on June 17, 2024 and subsequently amended on October 17, 2024 (the "Credit Facility"), as discussed in Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (10) - Credit Facility and, to a lesser extent, a higher average debt balance outstanding during the more recent period. Our effective interest rate (including amortization of deferred financing costs) in the three months ended October 31, 2024 was approximately 19.0%, as compared to 10.5% in the prior year period. Our cash borrowing rate (which excludes the amortization of deferred financing costs) under our Credit Facility approximated 16.6%, as compared to 9.2% in the prior year period.
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Interest (Income) and Other. Interest (income) and other for both the three months ended October 31, 2024 and 2023 was nominal. All of our available cash and cash equivalents are currently invested in bank deposits and money market deposit accounts which, at this time, are currently yielding an immaterial interest rate.
Write-off of Deferred Financing Costs. During the three months ended October 31, 2024, in connection with the October 17, 2024 amendment to the Credit Facility and due to the borrowing capacity of the Revolver Loan being limited by the revolving lender's and Agent's consent right, a pro-rata amount of financing fees totaling $1.4 million were immediately expensed during three months ended October 31, 2024.
Change in Fair Value of Warrants and Derivatives. During the three months ended October 31, 2024, we recorded a $5.5 million non-cash expense due to the remeasurement of warrants and derivatives related to our Credit Facility, Subordinated Credit Facility and Convertible Preferred Stock. See Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (10) - Credit Facility, Note (11) - Subordinated Credit Facility and Note (18) - Convertible Preferred Stock for more information. These warrants and derivatives were not outstanding in the corresponding period of the prior year.
Provision for (Benefit from) Income Taxes. For the three months ended October 31, 2024, we recorded a tax expense of $2.1 million, as compared to a tax benefit of $1.3 million recorded in the three months ended October 31, 2023. Our effective tax rate (excluding discrete tax items) for the three months ended October 31, 2024 and 2023 was (3.8)% and 122.00%, respectively. The change in rate from 122.0% to (3.8)% is primarily due to changes in expected product and geographical mix and not providing for tax benefits on U.S. deferred tax assets in the more recent period.
For purposes of determining our (3.8)% estimated annual effective tax rate for fiscal 2025, the impairment of long-lived assets, including goodwill, the change in fair value of warrants and derivatives, proxy solicitation costs and CEO transition costs are considered significant, unusual or infrequently occurring discrete tax items and are excluded from the computation of our effective tax rate.
During the three months ended October 31, 2024, we recorded a net discrete tax benefit of $0.1 million primarily related to proxy solicitation costs and CEO transition costs. During the three months ended October 31, 2023, we recorded a net discrete tax benefit of $2.0 million primarily related to our decision to sell our Power Systems Technology product line (the "PST Divestiture') in a taxable transaction and settlement of stock-based awards.
Our U.S. federal income tax returns for fiscal 2021 through 2023 are subject to potential future IRS audit. None of our state income tax returns prior to fiscal 2020 are subject to audit. Future tax assessments or settlements could have a material adverse effect on our consolidated results of operations and financial condition.
Net Loss Attributable to Common Stockholders. During the three months ended October 31, 2024 and 2023, consolidated net loss attributable to common stockholders was $155.9 million and $3.3 million, respectively. In addition to those items discussed above, the more recent period includes: (i) $58.6 million of dividends related to our Convertible Preferred Stock outstanding during the quarter; offset in part by (ii) a $51.2 million gain related to the exchange of our Series B-1 Convertible Preferred Stock for Series B-2 Convertible Preferred Stock on October 17, 2024.
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Adjusted EBITDA. Adjusted EBITDA (both in dollars and as a percentage of related net sales) for both the three months ended October 31, 2024 and 2023 are shown in the table below (numbers in the table may not foot due to rounding):
| Three months ended October 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | 2024 | 2023 | |||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | Satellite and Space Communications | Terrestrial and Wireless Networks | Unallocated | Consolidated | ||||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | (119.4) | 9.3 | 5.3 | 4.1 | (34.4) | (14.9) | $ | (148.4) | (1.4) | ||||||||||||||||||||||||||||||||||||||||
| (Benefit from) provision for income taxes | (0.1) | 0.2 | — | (0.3) | 2.2 | (1.3) | 2.1 | (1.3) | ||||||||||||||||||||||||||||||||||||||||||
| Interest (income) and other | 0.6 | (0.3) | — | 0.2 | — | — | 0.6 | (0.1) | ||||||||||||||||||||||||||||||||||||||||||
| Interest expense | — | 0.9 | — | — | 9.5 | 4.1 | 9.5 | 4.9 | ||||||||||||||||||||||||||||||||||||||||||
| Write-off of deferred financing costs | — | — | — | — | 1.4 | — | 1.4 | — | ||||||||||||||||||||||||||||||||||||||||||
| Change in fair value of warrants and derivatives | — | — | — | — | 5.5 | — | 5.5 | — | ||||||||||||||||||||||||||||||||||||||||||
| Amortization of stock-based compensation | — | — | — | — | 0.2 | 2.6 | 0.2 | 2.6 | ||||||||||||||||||||||||||||||||||||||||||
| Amortization of intangibles | 3.0 | 1.7 | 3.6 | 3.6 | — | — | 6.6 | 5.3 | ||||||||||||||||||||||||||||||||||||||||||
| Impairment of long-lived assets, including goodwill | 79.6 | — | — | — | — | — | 79.6 | — | ||||||||||||||||||||||||||||||||||||||||||
| Depreciation | 0.8 | 1.0 | 2.0 | 2.0 | 0.1 | 0.1 | 2.9 | 3.0 | ||||||||||||||||||||||||||||||||||||||||||
| Amortization of cost to fulfill assets | 0.3 | 0.2 | — | — | — | — | 0.3 | 0.2 | ||||||||||||||||||||||||||||||||||||||||||
| Restructuring costs | 13.8 | 0.8 | 0.1 | — | 4.0 | 2.9 | 17.9 | 3.7 | ||||||||||||||||||||||||||||||||||||||||||
| Strategic emerging technology costs | 0.3 | 1.4 | — | — | — | — | 0.3 | 1.4 | ||||||||||||||||||||||||||||||||||||||||||
| Proxy solicitation costs | — | — | — | — | 1.6 | — | 1.6 | — | ||||||||||||||||||||||||||||||||||||||||||
| CEO transition costs | — | — | — | — | 0.6 | — | 0.6 | — | ||||||||||||||||||||||||||||||||||||||||||
| Adjusted EBITDA | $ | (21.1) | 15.1 | 11.0 | 9.6 | (9.2) | (6.4) | $ | (19.4) | 18.4 | ||||||||||||||||||||||||||||||||||||||||
| Percentage of related net sales | NA | 14.8 | % | 19.3 | % | 19.5 | % | NA | NA | NA | 12.1 | % | ||||||||||||||||||||||||||||||||||||||
The decrease in consolidated Adjusted EBITDA, both in dollars and as a percentage of consolidated net sales, for the three months ended October 31, 2024 as compared to the three months ended October 31, 2023 reflects lower consolidated net sales and gross profit (both in dollars and as a percentage of consolidated net sales) and higher selling, general and administrative expenses (due to a $17.4 million non-cash charge related to an allowance for doubtful accounts), offset in part by lower research and development expenses, as discussed above.
The decrease in our Satellite and Space Communications segment's Adjusted EBITDA, both in dollars and as a percentage of related segment net sales, reflects significantly lower net sales and gross profit (both in dollars and as a percentage of related segment net sales) and higher selling, general and administrative expenses (due to a $17.4 million non-cash charge related to an allowance for doubtful accounts), offset in part by lower research and development expenses, as discussed above.
The increase in our Terrestrial and Wireless Networks segment's Adjusted EBITDA, in dollars, reflects higher net sales, offset in part by a lower gross profit percentage, as discussed above.
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A reconciliation of our fiscal 2024 GAAP Net Loss to Adjusted EBITDA is shown in the table below (numbers in the table may not foot due to rounding):
| ($ in millions) | Fiscal Year 2024 | |||||||
| Reconciliation of GAAP Net Loss to Adjusted EBITDA: | ||||||||
| Net loss | $ | (100.0) | ||||||
| Benefit from income taxes | (0.3) | |||||||
| Interest expense | 22.2 | |||||||
| Interest (income) and other | 0.7 | |||||||
| Write-off of deferred financing costs | 1.8 | |||||||
| Change in fair value of warrants | (4.3) | |||||||
| Amortization of stock-based compensation | 6.1 | |||||||
| Amortization of intangibles | 21.2 | |||||||
| Depreciation | 12.2 | |||||||
| Impairment of long-lived assets, including goodwill | 64.5 | |||||||
| Amortization of cost to fulfill assets | 1.0 | |||||||
| Restructuring costs | 12.5 | |||||||
| Strategic emerging technology costs | 4.1 | |||||||
| CEO transition costs | 2.9 | |||||||
| Loss on PST Divestiture | 1.2 | |||||||
| Adjusted EBITDA | $ | 45.7 | ||||||
Our Adjusted EBITDA is a Non-GAAP measure that represents earnings (loss) before interest, income taxes, depreciation, amortization of intangibles, impairment of long-lived assets, including goodwill, amortization of cost to fulfill assets, amortization of stock-based compensation, CEO transition costs, change in fair value of warrants and derivatives, proxy solicitation costs, restructuring costs, strategic emerging technology costs (for next-generation satellite technology) and write-off of deferred financing costs, and in the recent past, acquisition plan expenses, change in fair value of the convertible preferred stock purchase option liability, COVID-19 related costs, facility exit costs, strategic alternatives expenses and other and loss on business divestiture. These items, while periodically affecting our results, may vary significantly from period to period and may have a disproportionate effect in a given period, thereby affecting the comparability of results. Although closely aligned, our definition of Adjusted EBITDA is different than EBITDA (as such term is defined in our Credit Facility) utilized for financial covenant calculations and also may differ from the definition of EBITDA or Adjusted EBITDA used by other companies and therefore may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA is also a measure frequently requested by our investors and analysts. We believe that investors and analysts may use Adjusted EBITDA, along with other information contained in our SEC filings, including GAAP measures, in assessing our performance and comparability of our results with other companies. Our Non-GAAP measures reflect the GAAP measures as reported, adjusted for certain items as described herein and also excludes the effects of our outstanding convertible preferred stock.
These Non-GAAP financial measures have limitations as an analytical tool as they exclude the financial impact of transactions necessary to conduct our business, such as the granting of equity compensation awards, and are not intended to be an alternative to financial measures prepared in accordance with GAAP. These measures are adjusted as described in the reconciliation of GAAP to Non-GAAP measures in the tables presented herein, but these adjustments should not be construed as an inference that all of these adjustments or costs are unusual, infrequent or non-recurring. Non-GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, financial measures determined in accordance with GAAP. Investors are advised to carefully review the GAAP financial results that are disclosed in our SEC filings. As we have not provided future financial targets, there is no need to reconcile our business outlook to the most directly comparable GAAP measures. Furthermore, even if targets had been provided, items such as stock-based compensation, adjustments to the provision for income taxes, amortization of intangibles and interest expense, which are specific items that impact these measures, have not yet occurred, are out of our control, or cannot be predicted. For example, quantification of stock-based compensation expense requires inputs such as the number of shares granted and market price that are not currently ascertainable. Accordingly, reconciliations to the Non-GAAP forward looking metrics would not be available without unreasonable effort and such unavailable reconciling items could significantly impact our financial results.
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Reconciliations of our GAAP consolidated operating income (loss), net income (loss) attributable to common stockholders and net income (loss) per diluted common share to the corresponding Non-GAAP measures are shown in the tables below (numbers and per share amounts in the tables may not foot due to rounding). Non-GAAP net income (loss) attributable to common stockholders and non-GAAP net income (loss) per diluted common share reflect Non-GAAP provisions for income taxes based on year-to-date results, as adjusted for the Non-GAAP reconciling items included in the tables below. We evaluate our Non-GAAP effective income tax rate on an ongoing basis, and it can change from time to time. Our Non-GAAP effective income tax rate can differ materially from our GAAP effective income tax rate. In addition, due to the GAAP net loss for the period, Non-GAAP net income per diluted common share for the three months ended October 31, 2023 was computed using weighted average diluted shares outstanding of 28,982,000 during the period.
| Three months ended October 31, 2024 | |||||||||||||||||||||||||||||
| ($ in millions, except for per share amount) | Operating Loss | Net Loss Attributable to Common Stockholders | Net Loss per Diluted Common Share | ||||||||||||||||||||||||||
Reconciliation of GAAP to Non-GAAP Earnings: | |||||||||||||||||||||||||||||
GAAP measures, as reported | $ | (129.2) | $ | (155.9) | $ | (5.29) | |||||||||||||||||||||||
| Change in fair value of warrants and derivatives | — | 5.5 | 0.19 | ||||||||||||||||||||||||||
Adjustments to reflect redemption value of convertible preferred stock | — | 58.6 | 1.99 | ||||||||||||||||||||||||||
Gain on extinguishment of convertible preferred stock | — | (51.2) | (1.74) | ||||||||||||||||||||||||||
Impairment of long-lived assets, including goodwill | 79.6 | 79.6 | 2.70 | ||||||||||||||||||||||||||
Restructuring costs | 17.9 | 17.2 | 0.58 | ||||||||||||||||||||||||||
Amortization of intangibles | 6.6 | 6.1 | 0.21 | ||||||||||||||||||||||||||
Proxy solicitation costs | 1.6 | 1.5 | 0.05 | ||||||||||||||||||||||||||
CEO transition costs | 0.6 | 0.6 | 0.02 | ||||||||||||||||||||||||||
Amortization of stock-based compensation | 0.2 | 0.1 | — | ||||||||||||||||||||||||||
Strategic emerging technology costs | 0.3 | 0.3 | 0.01 | ||||||||||||||||||||||||||
Amortization of cost to fulfill assets | 0.3 | 0.3 | 0.01 | ||||||||||||||||||||||||||
| Non-GAAP measures | $ | (22.3) | $ | (37.3) | $ | (1.27) | |||||||||||||||||||||||
| Three months ended October 31, 2023 | |||||||||||||||||||||||||||||
| ($ in millions, except for per share amount) | Operating 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 | $ | 2.1 | $ | (3.3) | $ | (0.11) | |||||||||||||||||||||||
Adjustment to reflect redemption value of convertible preferred stock | — | 1.8 | 0.06 | ||||||||||||||||||||||||||
Amortization of intangibles | 5.3 | 4.1 | 0.14 | ||||||||||||||||||||||||||
Restructuring costs | 3.7 | 2.9 | 0.10 | ||||||||||||||||||||||||||
Amortization of stock-based compensation | 2.6 | 2.1 | 0.07 | ||||||||||||||||||||||||||
Strategic emerging technology costs | 1.4 | 1.1 | 0.04 | ||||||||||||||||||||||||||
Amortization of cost to fulfill assets | 0.2 | 0.2 | 0.01 | ||||||||||||||||||||||||||
Net discrete tax benefit | — | (2.0) | (0.07) | ||||||||||||||||||||||||||
| Non-GAAP measures | $ | 15.3 | $ | 6.8 | $ | 0.24 | |||||||||||||||||||||||
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LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents were $29.6 million and $32.4 million at October 31, 2024 and July 31, 2024, respectively. For the three months ended October 31, 2024, our cash flows reflect the following:
•Net cash used in operating activities was $21.8 million and $14.5 million for the three months ended October 31, 2024 and 2023, respectively. The period-over-period decrease in cash flows from operating activities reflects lower net sales and gross profit in the first quarter of fiscal 2025, as well as overall changes in net working capital requirements, principally the timing of: (i) payments to vendors; and (ii) progress toward completion on contracts accounted for over time, including related shipments, billings and collections. Over the past several quarters, we have experienced elevated levels of contract assets (i.e., unbilled receivables) related to large, long-term contracts with certain U.S. government and international customers. While such contract assets are trending lower more recently due to shipments, billings and collections from our customers, such contract activity has resulted in a material increase in working capital requirements.
•Net cash used in investing activities for the three months ended October 31, 2024 and 2023 was $2.4 million and $3.2 million, respectively, and primarily reflects capital expenditures to build-out cloud-based computer networks to support our previously announced NG-911 contract wins and capital investments and building improvements in connection with our manufacturing facilities.
•Net cash provided by financing activities was $21.4 million and $17.0 million for the three months ended October 31, 2024 and 2023, respectively. During the three months ended October 31, 2024, we: (i) entered into a Subordinated Credit Facility with existing holders of our convertible preferred stock and received proceeds of $25.0 million; and (ii) paid deferred financing costs of $2.8 million in connection with both the Subordinated Credit Facility and our Credit Facility. During the three months ended October 31, 2023, we: (i) had net borrowings under our prior credit facility of $19.6 million; and (ii) paid deferred financing costs of $0.3 million. We also made $0.7 million and $1.7 million of payments to remit employees' statutory tax withholding requirements related to the net settlement of stock-based awards during the three months ended October 31, 2024 and 2023, respectively.
The Credit Facility, Subordinated Credit Facility and Convertible Preferred Stock are discussed below and in Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements – Note (10) – Credit Facility, Note (11) - Subordinated Credit Facility and Note (18) – Convertible Preferred Stock.
Liquidity and Going Concern
Pursuant to the requirements of ASC Topic 205-40, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, we are required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern. This evaluation does not take into consideration the potential mitigating effect of our plans that have not been fully implemented or are not within our control as of the date the unaudited Condensed Consolidated Financial Statements are issued. When substantial doubt exists, we evaluate whether the mitigating effect of our plans sufficiently alleviates substantial doubt about our ability to continue as a going concern. The mitigating effect of our plans, however, is only considered if both (i) it is probable that the plans will be effectively implemented within one year after the date that the unaudited Condensed Consolidated Financial Statements are issued, and (ii) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about our ability to continue as a going concern within one year after the date that the unaudited Condensed Consolidated Financial Statements are issued.
As of the date these financial statements were issued (the "issuance date"), we evaluated whether the following conditions or events, considered in the aggregate, raise substantial doubt about our ability to continue as a going concern over the next twelve months beyond the issuance date.
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Over the past three fiscal years, we incurred operating losses of $79.9 million, $14.7 million and $33.8 million in fiscal 2024, 2023 and 2022, respectively. More recently, we recognized an operating loss of $129.2 million in the three months ended October 31, 2024. In addition, over the past three fiscal years, net cash used in operating activities was $54.5 million and $4.4 million in fiscal 2024 and 2023, respectively, and net cash provided by operating activities was $2.0 million in fiscal 2022. More recently, net cash used in operating activities was $21.8 million in the three months ended October 31, 2024. Our ability to meet future anticipated liquidity needs over the next year beyond the issuance date will largely depend on our ability to generate positive cash inflows from operations, maximize our borrowing capacity under our Credit Facility, as discussed further below, and/or secure other sources of outside capital. While we believe we will be able to generate sufficient positive cash inflows, maximize our borrowing capacity and secure outside capital, there can be no assurance our plans will be successfully implemented and, as such, we may be unable to continue as a going concern over the next year beyond the issuance date.
As discussed further in Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements – Note (10) – Credit Facility, on June 17, 2024, we entered into a $222.0 million credit facility with a new syndicate of lenders, which replaced our prior credit facility. As further discussed below, we subsequently amended the credit facility on October 17, 2024 (the "Credit Facility"). The Credit Facility consists of a committed $162.0 million term loan (“Term Loan”) and $60.0 million revolving loan (“Revolver Loan”). At both October 31, 2024 and January 10, 2025 (the date closest to the issuance date), total outstanding borrowings under the Credit Facility were $199.5 million. At both October 31, 2024 and January 10, 2025, $32.5 million was drawn on the Revolver Loan. As of the issuance date, our available sources of liquidity approximate $28.5 million, consisting solely of qualified cash and cash equivalents. That is, our available sources of liquidity do not include the remaining portion of the committed Revolver Loan due to the revolving lender's and Agent's consent right, discussed below, to any borrowings that exceed $32.5 million.
The Credit Facility, among other things, requires compliance with new restrictive and financial covenants, including: a maximum Net Leverage Ratio of 3.25x commencing with the fiscal quarter ending January 31, 2025; a minimum Fixed Charge Coverage Ratio of 1.20x commencing with the four fiscal quarter period ending January 31, 2025; a minimum Average Liquidity requirement at each fiscal quarter end of $20.0 million; and a minimum EBITDA of $35.0 million for the four fiscal quarter period ending October 31, 2025. Such ratios adjust under the Credit Facility in future periods. Over the next twelve months beyond the issuance date, commencing with our fiscal quarter ending January 31, 2025, we believe that we will not be able to comply with one or more of these covenants.
The Credit Facility was amended on October 17, 2024 to waive certain defaults or events of default, including in connection with our Net Leverage Ratio and Fixed Charge Coverage Ratio covenants as of July 31, 2024. The amendment also, among other things: (i) increased the interest rate margins applicable to the loans; (ii) modified certain financial and collateral reporting requirements; (iii) provided a consent right to the revolving lender and Agent with respect to $27.5 million of Revolver Loan borrowings above $32.5 million; (iv) permitted the incurrence of $25.0 million of senior unsecured subordinated debt (as described below); (v) amended the maturity date to the earlier of (x) July 31, 2028 or (y) 90 days prior to the earliest date that the debt under the Subordinated Credit Agreement (as defined below) becomes due and payable; and (vi) suspended certain financial covenant testing through the end of our fiscal quarter ending January 31, 2025.
In addition, we entered into a Subordinated Credit Agreement with the existing holders of our Convertible Preferred Stock (the “Subordinated Credit Agreement”) on October 17, 2024, which provides a subordinated unsecured term loan facility in the aggregate principal amount of $25.0 million (the “Subordinated Credit Facility”). The proceeds of the Subordinated Credit Facility: (i) cured our default on certain financial covenants under the Credit Facility, as discussed above; (ii) provided additional liquidity to us; and (iii) funded our general working capital needs.
Our ability to meet our current obligations as they become due may be impacted by our ability to remain compliant with the financial covenants required by the Credit Facility, or to obtain future waivers or amendments from the lenders in the event compliance is not maintained. While we believe we will be able to secure such waivers or amendments, as needed, there can be no assurance such waivers or amendments will be secured or on terms that are acceptable to us. If we are unable to secure waivers or amendments, the lenders may declare an event of default, which would cause an immediate acceleration and repayment of all outstanding principal, interest and fees due under our Credit Facility. Absent our ability to repay the forgoing amounts upon the declaration of an event of default, the lenders may exercise their rights and remedies under the Credit Facility, which may include, among others, a seizure of substantially all of our assets and/or the liquidation of our operations. If an event of default occurs that allows the lenders to exercise these rights and remedies over the next year beyond the issuance date, we will be unable to continue as a going concern.
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As of the issuance date, our plans to address our ability to continue as a going concern include, among other things:
•executing a strategy to transform Comtech (ongoing and future actions supporting our transformation strategy include: an exploration of strategic alternatives for our various businesses and product lines; the pursuit of further portfolio-shaping opportunities to enhance profitability, efficiency and focus; and the implementation of additional operational initiatives to both achieve profitable results from operations as well as to align our go-forward cost structure with our future state business), as discussed further in Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements – Note (21) – Cost Reduction and Restructuring Related Activities;
•pursuing initiatives to reduce investments in working capital, namely accounts receivable and inventory;
•improving process disciplines to attain and maintain profitable operations by entering into more favorable sales or service contracts;
•reevaluating our business plans to identify opportunities (e.g., within each of our segments) to focus future investment on our most strategic, high-margin revenue opportunities;
•reevaluating our business plans to identify opportunities to further reduce capital expenditures;
•seeking opportunities to improve liquidity through any combination of debt and/or equity financing (including possibly restructuring our Credit Facility, Convertible Preferred Stock and/or Subordinated Credit Facility); and
•seeking other strategic transactions and/or measures including, but not limited to, the potential sale or divestiture of assets in addition to the wind down of our steerable antenna product line in Basingstoke, U.K.
While we believe the implementation of some or all of the elements of our plans over the next year beyond the issuance date will be successful, these plans are not all solely within management’s control and, as such, we can provide no assurance our plans are probable of being effectively implemented as of the issuance date. Therefore, the adverse conditions and events described above are uncertainties that raise substantial doubt about our ability to continue as a going concern. The accompanying Condensed Consolidated Financial Statements in Part I. - Item 1. have been prepared on the basis that we will continue to operate as a going concern, which contemplates we will be able to realize assets and settle liabilities and commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying Condensed Consolidated Financial Statements do not include any adjustments that may result from the outcome of these uncertainties.
Our material cash requirements are for working capital, debt service (including interest and fees), capital expenditures, income tax payments, facilities lease payments and dividends related to our Convertible Preferred Stock, which are payable in kind or in cash under certain circumstances.
Our material cash requirements could increase beyond our current expectations due to factors, including but not limited to: (i) an inability to meet our current obligations under our Credit Facility and/or Subordinated Credit Facility as they become due, or to obtain future waivers or amendments from the lenders in the event compliance is not maintained; (ii) a future redemption by the holders of our Convertible Preferred Stock; (iii) general economic conditions; (iv) a change in government spending priorities and/or contracting decisions; (v) larger than usual customer orders; or (vi) actions we may take related to our strategic transformation.
Also, in light of our recently announced strategic transformation initiatives, we continue to review and evaluate our capital allocation plans. Furthermore, we may choose to raise additional funds through equity and debt financing transactions to provide additional flexibility or to pursue acquisitions. Although it is difficult in the current economic and credit environment to predict the terms and conditions of financing that may be available in the future, we believe that we would have sufficient access to credit from financial institutions and/or financing from public and private debt and equity markets.
In addition to making capital investments for our high-volume manufacturing centers, we have been making significant capital expenditures and building out cloud-based computer networks to support our previously announced NG-911 contract wins. We expect capital investments for these and other initiatives to continue throughout fiscal 2025.
Our investment policy relating to our cash and cash equivalents is intended to minimize principal loss while at the same time maximize the income we receive without significantly increasing risk. To minimize risk, we generally invest excess cash and cash equivalents in money market mutual funds (both government and commercial), certificates of deposit, bank deposits, and U.S. Treasury securities. Money market mutual funds we invest in are direct obligations of the U.S. government, bank securities guaranteed by the Federal Deposit Insurance Corporation, certificates of deposit and commercial paper and other securities issued by other companies. While we cannot predict future market conditions or market liquidity, we believe our investment policies are appropriate in the current environment. Ultimately, the availability of our cash and cash equivalents is dependent on a well-functioning liquid market.
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On July 13, 2022, we filed a $200.0 million shelf registration statement with the SEC for the sale of various types of securities, including debt securities. This shelf registration statement was declared effective by the SEC as of July 25, 2022 and expires on July 25, 2025. To date, we have not issued any securities pursuant to our $200.0 million shelf registration statement. Because of delinquencies in our Exchange Act reporting, we cannot issue securities under the shelf registration statement without first filing a post-effective amendment to such shelf registration statement with the SEC.
On September 29, 2020, our Board of Directors authorized a $100.0 million stock repurchase program, which replaced our prior program. The $100.0 million stock repurchase program has no time restrictions and repurchases may be made from time to time in open-market or privately negotiated transactions, or by other means in accordance with federal securities laws. There were no repurchases of our common stock during the three months ended October 31, 2024 and 2023.
In fiscal 2023, we adjusted the Company’s capital allocation plans and determined to forgo a common stock dividend. Future common stock dividends, if any, remain subject to compliance with financial covenants under our Credit Facility, as well as Board approval and certain voting rights of holders of our Convertible Preferred Stock.
At October 31, 2024, cash and cash equivalents includes $0.3 million of cash deposited as collateral in connection with outstanding standby letters of credit to guarantee future performance on certain customer contracts.
Commitments
In the normal course of business, other than as discussed below, we routinely enter into binding and non-binding purchase obligations primarily covering anticipated purchases of inventory and equipment. We do not expect that these commitments, as of October 31, 2024, will materially adversely affect our liquidity. At October 31, 2024, cash payments due under contractual obligations (including estimated interest expense on our Credit Facility), excluding purchase orders that we entered into in our normal course of business, are as follows:
| ($ in thousands) | Total | Due Within 1 Year | ||||||||||||
| Credit Facility - principal payments | $ | 199,495 | 5,063 | |||||||||||
| Credit Facility - interest payments | 88,322 | 30,024 | ||||||||||||
| Operating lease obligations | 41,622 | 7,981 | ||||||||||||
| Subordinated Credit Facility | 25,000 | — | ||||||||||||
| Contractual cash obligations | $ | 354,439 | 43,068 | |||||||||||
See Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (10) - Credit Facility and Note (11) - Subordinated Credit Facility for additional information on the commitments under our Credit Facility and Subordinated Credit Facility, respectively, and Note (12) - Leases for additional information on our lease commitments. As stated above, the amounts in the table represent cash payments due under contractual obligations. However, over the next twelve months beyond the issuance date, commencing with our fiscal quarter ending January 31, 2025, we believe that we will not be able to comply with one or more of our financial covenants related to our Credit Facility and Subordinated Credit Facility. As a result, all amounts outstanding under our Credit Facility and Subordinated Credit Facility have been presented as current liabilities on our Condensed Consolidated Balance Sheets as of October 31, 2024.
As discussed in Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (18) – Convertible Preferred Stock, the holders of the Convertible Preferred Stock have the option to redeem such shares for cash: (i) in the event of the occurrence of an asset sale meeting certain criteria; (ii) on or after April 30, 2027 in the event of a satisfaction of the existing Credit Facility; and (iii) in all other cases, October 31, 2028. As the Convertible Preferred Stock are not mandatorily redeemable for cash, the redemption value of such shares are not presented in the table above.
In the ordinary course of business, we include indemnification provisions in certain of our customer contracts. Pursuant to these agreements, we have agreed to indemnify, hold harmless and reimburse the indemnified party for certain losses suffered or incurred by the indemnified party, including but not limited to losses related to third-party intellectual property claims. It is not possible to determine the maximum potential amount under these agreements due to a history of nominal claims and the unique facts and circumstances involved in each particular agreement.
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As discussed further in Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (20) - Legal Proceedings and Other Matters, we are subject to certain pending and threatened legal actions and a number of indemnification demands and we are incurring ongoing legal expenses in connection with these matters. Our insurance policies may not cover the cost of defending and/or resolving such matters. As a result, pending or future claims asserted against us by a party could result in legal costs and damages that could have a material adverse effect on our consolidated results of operations and financial condition.
We have entered into employment and/or change of control agreements, as well as indemnification agreements with certain of our executive officers and certain key employees. All of these agreements may require payments by us, in certain circumstances, including, but not limited to, a change in control of the Company or termination of the employee.
Our Condensed Consolidated Balance Sheet at October 31, 2024 includes total liabilities of $8.7 million for uncertain tax positions, including interest, any or all of which may result in a cash payment. The future payments related to uncertain tax positions have not been presented in the table above due to the uncertainty of the amounts and timing of any potential cash settlement with the taxing authorities.
RECENT ACCOUNTING PRONOUNCEMENTS
We are required to prepare our Condensed Consolidated Financial Statements in accordance with the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") which is the source for all authoritative U.S. generally accepted accounting principles, which is commonly referred to as "GAAP." The FASB ASC is subject to updates by the FASB, which are known as Accounting Standards Updates ("ASUs"). See Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (3) – Adoption of Accounting Standards and Updates for further information.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our earnings and cash flows are subject to fluctuations due to changes in interest rates primarily from borrowings under our Credit Facility. Based on the amount of outstanding debt under our Credit Facility, a hypothetical change in interest rates by 10% would change interest expense by approximately $3.3 million over a one-year period. Although we do not currently use interest rate derivative instruments to manage exposure to interest rate changes, we may choose to do so in the future in connection with our Credit Facility.
Our earnings and cash flows are also subject to fluctuations due to changes in interest rates on our investment of available cash balances. As of October 31, 2024, we had cash and cash equivalents of $29.6 million, which consisted of cash and highly-liquid money market deposit accounts. Many of these investments are subject to fluctuations in interest rates, which could impact our results. Based on our investment portfolio balance as of October 31, 2024, a hypothetical change in interest rates of 10% would have a nominal impact on interest income over a one-year period. Ultimately, the availability of our cash and cash equivalents is dependent on a well-functioning liquid market.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(f) and 15d-15(f) of the Securities Exchange Act of 1934), was carried out by us under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer.
Based on this evaluation, we concluded that our disclosure controls and procedures were not effective as of October 31, 2024, as a result of the material weaknesses in our internal control over financial reporting discussed below.
Notwithstanding our material weaknesses, we have concluded that the condensed consolidated financial statements and other financial information included in this Form 10-Q fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the U.S. ("U.S. GAAP").
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A system of controls, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Material Weaknesses in Internal Control over Financial Reporting
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
As previously disclosed in our Annual Report on Form 10-K for the year ended July 31, 2024, we did not design and maintain an effective control environment commensurate with our financial reporting requirements based on the criteria in the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control Framework (2013), as we lacked a sufficient complement of resources with an appropriate level of knowledge and experience to establish effective process and controls. The control environment material weakness contributed to other material weaknesses within our system of internal control over financial reporting at the control activity level, where we did not design and implement effective control activities, including controls related to revenue, inventory and other assets. Deficiencies in control activities contributed to accounting errors and the potential for there to have been material accounting errors within revenue, inventory and other assets.
In connection with our preparation of our Quarterly Report on Form 10-Q for the three months ended October 31, 2024, we identified an additional deficiency that individually represents a material weakness in our internal control over financial reporting. Specifically, we did not have a sufficient complement of internal and external resources with appropriate technical accounting expertise to perform control activities, or to reach appropriate accounting conclusions for complex accounting matters and transactions, which included debt, convertible preferred stock and related embedded derivatives.
Changes In Internal Control Over Financial Reporting
Other than for the material weaknesses described above, there have been no changes in our internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act that occurred during our fiscal quarter ended October 31, 2024, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Remediation Plan
Our remediation efforts are ongoing and we will continue our initiatives to hire additional skilled resources in program management and accounting and finance related functions, and implement and document policies, procedures, and internal controls. Remediation of the identified material weaknesses and strengthening of our internal control environment will require a substantial effort throughout fiscal 2025 and beyond, as necessary. We will test the ongoing operating effectiveness of the new and existing controls in future periods. The material weaknesses cannot be considered completely remediated until the applicable controls have operated for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
The certifications of our Chief Executive Officer and Chief Financial Officer, that are Exhibits 31.1 and 31.2, respectively, should be read in conjunction with the foregoing information for a more complete understanding of the references in those Exhibits to disclosure controls and procedures and internal control over financial reporting.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
See Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements - Note (20) – Legal Proceedings and Other Matters of this Form 10-Q for information regarding legal proceedings and other matters.
Item 1A. Risk Factors
Except as set forth below, there have been no material changes to the description of the risk factors affecting our business previously disclosed in “Part I. - Item 1A. - Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended July 31, 2024, as filed with the SEC on October 30, 2024, which are hereby incorporated by reference.
We may fail to realize all of the anticipated benefits of our strategic and operational initiatives, or those benefits may take longer to realize than expected.
We are continuing to execute a strategy to transform Comtech through the exploration of strategic alternatives for our various businesses and product lines, the pursuit of further portfolio-shaping opportunities to enhance profitability, efficiency and focus, and the implementation of additional operational initiatives to both achieve profitable results from operations, as well as to align our go-forward cost structure with our future state business. There can be no assurance that any of these initiatives will result in outcomes on terms acceptable to us or at all. Even if any of these initiatives were completed, there can be no assurance as to the timing of completing these activities. Moreover, we may not realize any or all of the anticipated benefits from our pursuit of these initiatives, and related transactions could in fact adversely affect our business. Our ability to realize the anticipated benefits of our transformation strategy will depend, to a large extent, on our ability to continue to focus on, and to achieve more predictable growth, related to our remaining business. Some of the anticipated benefits may not occur for a significant period of time. In addition, we may retain certain liabilities or obligations related to any disposed of businesses that may arise under contract or law, or may have difficulties enforcing our rights, contractual or otherwise, against the buyer. The outcome of these initiatives and the related transactions may not enhance long-term stockholder value as anticipated. Further, our strategic transformation could result in near term restructuring charges and a material impairment of our goodwill and/or intangible assets, among other things.
Many of these factors will be outside of our control and any one of them could result in increased costs, including restructuring charges, decreases in the amount of expected revenues and diversion of management’s time and energy, which could adversely affect our business, financial condition and results of operations. In addition, the process of such strategic transformations, including divesting assets, carries an inherent risk of market fluctuations and economic uncertainties that could undermine the value we expect to realize.
Our current cash and liquidity projections raise substantial doubt about our ability to continue as a going concern.
Pursuant to the requirements of ASC Topic 205-40, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern, we are required to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern. This evaluation does not take into consideration the potential mitigating effect of our plans that have not been fully implemented or are not within our control as of the date the unaudited Condensed Consolidated Financial Statements are issued. When substantial doubt exists, we evaluate whether the mitigating effect of our plans sufficiently alleviates substantial doubt about our ability to continue as a going concern. The mitigating effect of our plans, however, is only considered if both (i) it is probable that the plans will be effectively implemented within one year after the date that the unaudited Condensed Consolidated Financial Statements are issued, and (ii) it is probable that the plans, when implemented, will mitigate the relevant conditions or events that raise substantial doubt about our ability to continue as a going concern within one year after the date that the unaudited Condensed Consolidated Financial Statements are issued.
As of the date these financial statements were issued (the "issuance date"), we evaluated whether the following conditions or events, considered in the aggregate, raise substantial doubt about our ability to continue as a going concern over the next twelve months beyond the issuance date.
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Over the past three fiscal years, we incurred operating losses of $79.9 million, $14.7 million and $33.8 million in fiscal 2024, 2023 and 2022, respectively. More recently, we recognized an operating loss of $129.2 million in the three months ended October 31, 2024. In addition, over the past three fiscal years, net cash used in operating activities was $54.5 million and $4.4 million in fiscal 2024 and 2023, respectively, and net cash provided by operating activities was $2.0 million in fiscal 2022. More recently, net cash used in operating activities was $21.8 million in the three months ended October 31, 2024. Our ability to meet future anticipated liquidity needs over the next year beyond the issuance date will largely depend on our ability to generate positive cash inflows from operations, maximize our borrowing capacity under our Credit Facility, as discussed further below, and/or secure other sources of outside capital. While we believe we will be able to generate sufficient positive cash inflows, maximize our borrowing capacity and secure outside capital, there can be no assurance our plans will be successfully implemented and, as such, we may be unable to continue as a going concern over the next year beyond the issuance date.
As discussed further in Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements – Note (10) – Credit Facility, on June 17, 2024, we entered into a $222.0 million credit facility with a new syndicate of lenders, which replaced our prior credit facility. As further discussed below, we subsequently amended the credit facility on October 17, 2024 (the "Credit Facility"). The Credit Facility consists of a committed $162.0 million term loan (“Term Loan”) and $60.0 million revolving loan (“Revolver Loan”). At both October 31, 2024 and January 10, 2025 (the date closest to the issuance date), total outstanding borrowings under the Credit Facility were $199.5 million. At both October 31, 2024 and January 10, 2025, $32.5 million was drawn on the Revolving Loan. As of the issuance date, our available sources of liquidity approximate $28.5 million, consisting solely of qualified cash and cash equivalents. That is, our available sources of liquidity do not include the remaining portion of the committed Revolver Loan due to the revolving lender's and Agent's consent right, discussed below, to any borrowings that exceed $32.5 million.
The Credit Facility, among other things, requires compliance with new restrictive and financial covenants, including: a maximum Net Leverage Ratio of 3.25x commencing with the fiscal quarter ending January 31, 2025; a minimum Fixed Charge Coverage Ratio of 1.20x commencing with the four fiscal quarter period ending January 31, 2025; a minimum Average Liquidity requirement at each fiscal quarter end of $20.0 million; and a minimum EBITDA of $35.0 million for the four fiscal quarter period ending October 31, 2025. Such ratios adjust under the Credit Facility in future periods. Over the next twelve months beyond the issuance date, commencing with our fiscal quarter ending January 31, 2025, we believe that we will not be able to comply with one or more of these covenants.
The Credit Facility was amended on October 17, 2024 to waive certain defaults or events of default, including in connection with our Net Leverage Ratio and Fixed Charge Coverage Ratio covenants as of July 31, 2024. The amendment also, among other things: (i) increased the interest rate margins applicable to the loans; (ii) modified certain financial and collateral reporting requirements; (iii) provided a consent right to the revolving lender and Agent with respect to $27.5 million of Revolver Loan borrowings above $32.5 million; (iv) permitted the incurrence of $25.0 million of senior unsecured subordinated debt (as described below); (v) amended the maturity date to the earlier of (x) July 31, 2028 or (y) 90 days prior to the earliest date that the debt under the Subordinated Credit Agreement (as defined below) becomes due and payable; and (vi) suspended certain financial covenant testing through the end of our fiscal quarter ending January 31, 2025.
In addition, we entered into a Subordinated Credit Agreement with the existing holders of our Convertible Preferred Stock (the “Subordinated Credit Agreement”) on October 17, 2024, which provides a subordinated unsecured term loan facility in the aggregate principal amount of $25.0 million (the “Subordinated Credit Facility”). The proceeds of the Subordinated Credit Facility: (i) cured our default on certain financial covenants under the Credit Facility, as discussed above; (ii) provided additional liquidity to us; and (iii) funded our general working capital needs.
Our ability to meet our current obligations as they become due may be impacted by our ability to remain compliant with the financial covenants required by the Credit Facility, or to obtain future waivers or amendments from the lenders in the event compliance is not maintained. While we believe we will be able to secure such waivers or amendments, as needed, there can be no assurance such waivers or amendments will be secured or on terms that are acceptable to us. If we are unable to secure waivers or amendments, the lenders may declare an event of default, which would cause an immediate acceleration and repayment of all outstanding principal, interest and fees due under our Credit Facility. Absent our ability to repay the forgoing amounts upon the declaration of an event of default, the lenders may exercise their rights and remedies under the Credit Facility, which may include, among others, a seizure of substantially all of our assets and/or the liquidation of our operations. If an event of default occurs that allows the lenders to exercise these rights and remedies over the next year beyond the issuance date, we will be unable to continue as a going concern.
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As of the issuance date, our plans to address our ability to continue as a going concern include, among other things:
•executing a strategy to transform Comtech (ongoing and future actions supporting our transformation strategy include: an exploration of strategic alternatives for our various businesses and product lines; the pursuit of further portfolio-shaping opportunities to enhance profitability, efficiency and focus; and the implementation of additional operational initiatives to both achieve profitable results from operations as well as to align our go-forward cost structure with our future state business), as discussed further in Part I. - Financial Information - Item 1. - Notes to Condensed Consolidated Financial Statements – Note (21) – Cost Reduction and Restructuring Related Activities;
•pursuing initiatives to reduce investments in working capital, namely accounts receivable and inventory;
•improving process disciplines to attain and maintain profitable operations by entering into more favorable sales or service contracts;
•reevaluating our business plans to identify opportunities (e.g., within each of our segments) to focus future investment on our most strategic, high-margin revenue opportunities;
•reevaluating our business plans to identify opportunities to further reduce capital expenditures;
•seeking opportunities to improve liquidity through any combination of debt and/or equity financing (including possibly restructuring our Credit Facility, Convertible Preferred Stock and/or Subordinated Credit Facility); and
•seeking other strategic transactions and/or measures including, but not limited to, the potential sale or divestiture of assets in addition to the wind down of our steerable antenna product line in Basingstoke, U.K.
While we believe the implementation of some or all of the elements of our plans over the next year beyond the issuance date will be successful, these plans are not all solely within management’s control and, as such, we can provide no assurance our plans are probable of being effectively implemented as of the issuance date. Therefore, the adverse conditions and events described above are uncertainties that raise substantial doubt about our ability to continue as a going concern. The accompanying Condensed Consolidated Financial Statements in Part I. - Item 1. have been prepared on the basis that we will continue to operate as a going concern, which contemplates we will be able to realize assets and settle liabilities and commitments in the normal course of business for the foreseeable future. Accordingly, the accompanying Condensed Consolidated Financial Statements do not include any adjustments that may result from the outcome of these uncertainties.
In addition, the perception that we may not be able to continue as a going concern may cause customers, vendors and others to review and alter their business relationships and terms with us, and may affect our credit rating. If we seek additional financing to fund operations and there remains substantial doubt about our ability to continue as a going concern, financing sources may be unwilling to provide such funding to us on commercially reasonable terms, or at all. Uncertainty regarding our ability to continue as a going concern could also have a material and adverse impact on the price of our common stock, which could negatively impact our ability to obtain additional stock-based financing or enter into strategic transactions.
We may not continue to have access to the credit markets on acceptable terms and conditions, which could limit our ability to secure bonds required for existing and new projects.
We occasionally access the credit markets to obtain performance bonds, bid bonds, standby letters of credit and surety bonds to secure our performance of contractual obligations. We may not continue to have access to the capital markets or bank credit markets on terms acceptable to us, which could negatively affect our ability to bid new projects and our operating cash flows. Uncertainty with respect to the availability of these credit support lines could also impact the attractiveness and valuation of the relevant lines of business in connection with our strategic process. In addition, a downgrade in our credit rating could limit our ability to access the credit markets in order to provide performance bonds, bid bonds, standby letters of credit and surety bonds. Moreover, our customers and financial institutions with which we interact may exercise the right to require additional collateral based on market perceptions or market conditions, which could impair our access to and cost of funding certain projects.
Our business is highly dependent on the budgetary decisions of our government customers, including the U.S. government (including prime contractors to the U.S. government), and changes in the U.S. government’s fiscal policies or budgetary priorities may have a material adverse effect on our business, operating results and financial condition.
During our fiscal years ended July 31, 2024, 2023 and 2022, sales to the U.S. government (including sales to prime contractors to the U.S. government) were $182.3 million, $172.0 million and $132.6 million, or 33.7%, 31.3% and 27.2% of our consolidated net sales, respectively. In addition, a large portion of our existing backlog consists of orders related to U.S. government contracts and our Business Outlook for Fiscal 2025 and beyond depends, in part, on significant new orders from the U.S. government, which undergoes extreme budgetary pressures from time to time.
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We rely on U.S. government spending on our communication solutions, and our receipt of future orders depends in large part on continued funding by the U.S. government for the programs in which we participate. These spending levels are not generally correlated with any specific economic cycle, but rather follow the cycle of general public policy and political support for this type of spending. Government contracts are conditioned upon the continuing availability of congressional appropriations and Congress’ failure to appropriate funds, or Congress’s actions to reduce or delay spending on, or reprioritize its spending away from, U.S. government programs which we participate in, could negatively affect our results of operations. Because many of the items we sell to the U.S. government are included in large programs realized over a period of several years, it is difficult, if not impossible, to determine specific amounts that are or will be appropriated for our products and services. As such, our assessments relating to the impact of changes in U.S. government spending may prove to be incorrect.
Further, the recent presidential election and congressional seat turnover may result in increased regulatory and economic uncertainty, including the spending priorities of the new U.S. presidential administration and Congress and what challenges budget reductions will present for us and our industry generally. For example, on November 12, 2024, President-elect Trump announced a planned advisory commission, the “Department of Government Efficiency,” to reform federal government processes and reduce expenditures. Changes in federal policy by the executive branch and regulatory agencies may occur over time through the new presidential administration’s and/or Congress’s policy and personnel changes, which could lead to changes involving the defense industry. However, the nature, timing and economic and political effects of such potential changes remain highly uncertain. Any future changes in U.S. policy and the United States’ response to global geopolitical developments could affect us in substantial and unpredictable ways. At this time, it is unclear whether and how any future changes or uncertainty surrounding future changes will adversely affect our operating environment and, therefore, demand for our products, our business, financial condition and results of operations.
The federal debt limit continues to be actively debated as plans for long-term national fiscal policy are discussed. The outcome of these discussions, which will be affected by the changes in presidential administration and in Congress following the elections in 2024, could have a significant impact on defense spending broadly and programs we support in particular. The failure of Congress to approve future budgets and/or increase the debt ceiling of the U.S. on a timely basis could delay or result in the loss of contracts for the procurement of our products and services and we may be asked or required to continue to perform for some period of time on certain of our U.S. government contracts, even if the U.S. government is unable to make timely payments. A decrease in DoD or Department of Homeland Security expenditures, the elimination or curtailment of a material program in which we are involved, or changes in payment patterns of our customers as a result of changes in U.S. government spending could have an adverse effect on our business, results of operations and financial condition.
On December 21, 2024, President Biden signed a bipartisan Continuing Resolution (CR; H.R. 10545) to extend federal spending and avert a government shutdown through March 14, 2025. Accordingly, it is still possible that a partial shutdown of the U.S. government may occur, or additional interim budgets may be adopted. As such, we may experience delayed orders, delayed payments and adverse impacts on our results of operations. We may experience related supply chain delays, disruptions or other problems associated with financial constraints faced by our suppliers and subcontractors. All of the aforementioned conditions and factors could have a material adverse effect on our business, results of operations and financial condition. Additionally, cost cutting, efficiency initiatives, reprioritization, other affordability analyses, and changes in budgetary priorities by our governmental customers, including the U.S. government, could adversely impact both of our operating segments. We are unable to predict the impact these or similar events could have on our business, financial position, results of operations or cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
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Item 5. Other Information
Compensatory Arrangements of Certain Officers
On January 10, 2025, we and Jeffery P. Robertson, President of the Terrestrial & Wireless Networks segment, entered into an amendment (the “Amendment”) to Mr. Robertson’s existing employment agreement, dated as of February 26, 2024 (the “Existing Employment Agreement”) and, on January 10, 2025, we and Mr. Robertson entered into a retention bonus agreement (the “Retention Agreement”).
Pursuant to the Amendment, Mr. Robertson will receive an increased annualized base salary of $550,000, retroactive to September 1, 2024. Mr. Robertson will continue to be eligible to receive an annual bonus with a target bonus of 75% of his annual base salary and a maximum bonus of up to 200% of his annual base salary (or such other amount as determined by the Compensation Committee) based on individual and Company performance goals and will still be entitled to participate in health, insurance, retirement, and other benefits provided generally to similarly situated employees of the Company.
The Amendment provides that, upon a divestiture of the Terrestrial & Wireless Networks segment while Mr. Robertson remains an employee of the Company, Mr. Robertson’s (i) awarded but unvested RSUs shall vest in full and (ii) long-term performance shares shall be accelerated on a pro-rata basis based on the number of days in the applicable performance period through the date of the closing of such transaction and on the performance measurement. In addition, if the Company closes a divestiture of the Terrestrial & Wireless Networks segment or consummates a change of control transaction which includes the Terrestrial & Wireless Networks segment and Mr. Robertson remains an employee of the Company, Mr. Robertson, in exchange for a release of claims, is entitled to receive a transaction payment based on the “net purchase price” of such transaction.
Pursuant to the Retention Agreement, Mr. Robertson, in exchange for continued compliance with the restrictive covenants set forth in the Retention Agreement (as described below), is entitled to receive a retention bonus of $268,125, with 33.33% due on the first regularly scheduled payroll date following February 28, 2025 and 66.67% due on the first regularly scheduled payroll date following May 31, 2025 (in both cases, subject to applicable tax withholdings and other authorized deductions). Such payments are subject to Mr. Robertson’s continued employment on each payment date and provided each payment date does not occur during a resignation period. Upon a termination without “cause” (as defined in the Retention Agreement) prior to a scheduled payment(s), in exchange for a release of claims, Mr. Robertson will be entitled to a pro-rata portion of the retention bonus that has not yet vested. In addition, if Mr. Robertson engages in “detrimental activity” (as defined in the Retention Agreement) prior to, or during the one year period following the final payment date of the retention bonus, we may direct (at any time, within one year thereafter) that all payments received pursuant to the Retention Agreement shall be immediately forfeited to us, and Mr. Robertson shall immediately pay the total of any net payments received. The Retention Agreement also contains customary restrictive covenants, including a perpetual confidentiality provision and a non-solicitation and non-hire covenant beginning on the first payment date of the retention bonus and ending on the date that is 12 months after the last payment date of the retention bonus.
The foregoing summary of the terms of the Existing Employment Agreement, the Amendment, and the Retention Agreement is subject to the full and complete terms of the Existing Employment Agreement, the Amendment, and the Retention Agreement which we expect to file as exhibits to our periodic report covering the effective date of the Amendment and the Retention Agreement.
Securities Trading Plans of Directors and Officers
During the three months ended October 31, 2024, none of our directors or officers adopted terminated
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Item 6. Exhibits
Exhibit 3.1 – Certificate of Designations designating the Series B-2 Convertible Preferred Stock, dated as of October 17, 2024 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, dated October 18, 2024)
Exhibit 3.2 – Form of Certificate of Elimination eliminating the Series B-1 Convertible Preferred Stock, dated as of October 23, 2024 (incorporated by reference to Exhibit 3(a)(v) to the Company’s Annual Report on Form 10-K, dated October 30, 2024)
Exhibit 4.1 – Form of Warrant Agreement (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K, dated October 18, 2024)
Exhibit 10.1 – 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 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated October 18, 2024)
Exhibit 10.2 – 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 (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K, dated October 18, 2024)
Exhibit 10.3 – Subscription and Exchange Agreement, dated as of October 17, 2024, by and among Comtech Telecommunications Corp. and the Investors named therein (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K, dated October 18, 2024)
Exhibit 10.4 – Form of Voting Agreement (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K, dated October 18, 2024)
Exhibit 10.5 – Registration Rights Agreement, dated as of October 17, 2024, by and among Comtech Telecommunications Corp. and the Investors named therein (incorporated by reference to Exhibit 10.5 to the Company’s Current Report on Form 8-K, dated October 18, 2024)
Exhibit 10.6– Cooperation Agreement, dated November 17, 2024, by and among Comtech Telecommunications Corp. and Michael Porcelain, Fred Kornberg and Oleg Timoshenko (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K, dated November 18, 2024)
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Exhibit 101.INS - The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended October 31, 2024, formatted in inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders' Equity, (iv) Condensed Consolidated Statement of Cash Flows, and (v) Notes to Condensed Consolidated Financial Statements
Exhibit 101.SCH - Inline XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL - Inline XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.LAB - Inline XBRL Taxonomy Extension Labels Linkbase Document
Exhibit 101.PRE - Inline XBRL Taxonomy Extension Presentation Linkbase Document
Exhibit 101.DEF - Inline XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 104 - Cover Page Interactive Data File (embedded within the Inline XBRL document and contained in Exhibit 101)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
COMTECH TELECOMMUNICATIONS CORP.
(Registrant)
| Date: | January 13, 2025 | By: /s/ Kenneth H. Traub | ||||||
| (Date) | Kenneth H. Traub, Chairman of the Board | |||||||
| President and Chief Executive Officer | ||||||||
| (Principal Executive Officer) | ||||||||
| Date: | January 13, 2025 | By: /s/ Michael A. Bondi | ||||||
| (Date) | Michael A. Bondi | |||||||
| Chief Financial Officer | ||||||||
| (Principal Financial and Accounting Officer) | ||||||||
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Exhibit 10.7
EMPLOYMENT AGREEMENT
This Employment Agreement (this “Agreement”) is made and entered into as of October 28, 2024, by and between John Ratigan (“Executive”) and Comtech Telecommunications Corp., a Delaware corporation (the “Company”).
WHEREAS, the Company desires to employ Executive and to enter into this Agreement embodying the terms of such employment, and Executive desires to enter into this Agreement and to accept such employment, subject to the terms and provisions of this Agreement.
NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are mutually acknowledged, the Company and Executive hereby agree as follows:
1. Definitions. Capitalized terms not otherwise defined in this Agreement shall have the meaning set forth on Appendix A, attached hereto.
2. Employment Term. Executive’s employment with the Company pursuant to the terms of this Agreement shall be effective as of October 28, 2024 (the “Effective Date”), and shall continue until the third anniversary of the Effective Date (the “Initial Term”) and thereafter, shall continue on a year-to-year basis (each, a “Renewal Term”), unless either party provides the other written notice of non-renewal at least ninety (90) days prior to the expiration of the Initial Term or any Renewal Term, as applicable (a “Notice of Non-Renewal”); provided, that the Initial Term or any Renewal Term may be ended earlier pursuant to Section 5 of this Agreement.
3. Position, Duties and Responsibilities; Performance.
3.1. Position, Duties and Responsibilities. During the Employment Term, Executive shall be employed and serve as President and Chief Executive Officer of the Company (together with such other position or positions consistent with Executive’s title as the Board shall specify from time to time) and shall have such duties, authority and responsibilities commensurate with such title. Executive also agrees to serve as an officer and/or director of any other member of the Company Group, in each case without additional compensation.
3.2. Performance. Executive shall devote substantially all of Executive’s business time, attention, skill, and efforts to the performance of Executive’s duties under this Agreement and, except as provided below, shall not engage in any other business or occupation, including any outside employment or consulting services, during the Employment Term, including, without limitation, any activity that (x) conflicts with the interests of the Company or any other member of the Company Group, (y) interferes with the performance of Executive’s duties for the Company, or (z) interferes with Executive’s exercise of Executive’s judgment in the Company’s best interests. Notwithstanding the foregoing, nothing in this Section 3.2 shall preclude Executive from (i) serving, with the prior written consent of the Board, as a member of the boards of directors or advisory boards (or their equivalents in the case of a non-corporate entity) of for-profit public or private companies (other than the Company) or as a member of the boards
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of directors or advisory boards (or their equivalents) of other social, community or charitable organizations, (ii) engaging in charitable activities, social and community affairs (including as an informal advisor to charitable, social or community organizations), (iii) delivering lectures, engaging in social media, participating in symposiums, panel discussions, fireside chats, industry and professional engagements and various other thought leadership endeavors, and (iv) managing Executive’s personal investments and related affairs or engaging as a passive investor in other companies (collectively, the “Permitted Activities”); provided, however, that the activities set out in clauses (i), (ii), (iii), and (iv) shall be limited by Executive so as not to materially interfere, individually or in the aggregate, with the performance of Executive’s duties and responsibilities hereunder and do not conflict with any applicable Company policy on conduct.
3.3. Place of Performance. Executive shall spend time, as is necessary to perform his duties, at the Company’s Headquarters, although Executive understands that the Company’s scope of operations and future business interests will require Executive to travel frequently to other offices of the Company Group, as well as travel to various other customers, partners, suppliers and other entities relevant to, or potentially relevant to the Company’s current and future potential business interests across the United States and globally during the Employment Term. Executive will use his judgement to prioritize the focus of his efforts in this regard and operate in the long-term best interest of the Company.
4. Compensation. During the Employment Term, Executive shall be entitled to the following compensation:
4.1. Base Salary. Executive shall be paid an annualized base salary of $750,000 in periodic installments in accordance with the Company’s customary payroll practices, subject to annual review, with adjustments, if any, as may be approved in writing by the Company’s Compensation Committee.
4.2. Annual Bonus. For each completed fiscal year of the Employment Term, Executive shall be eligible to receive an annual bonus (the “Annual Bonus”). As of the Effective Date, Executive’s annual target bonus opportunity shall be equal to 100% of Base Salary (the “Target Bonus”), based on the achievement of individual performance goals and Company performance goals (such Company performance goals that are the same as the Company performance goals applicable to the other senior executive officers of the Company, as a group) as are established by the Board; provided, that, depending on the results, Executive’s actual bonus may be lower or higher than the target amount, with a minimum bonus opportunity of 0% of Base Salary and a maximum bonus opportunity of 200% of Base Salary or such higher amount as is provided to other similarly situated senior executives of the Company for the applicable fiscal year, as determined by the Board. The Annual Bonus shall otherwise be subject to the terms and conditions adopted by the Board or the Company’s Compensation Committee under which bonuses are generally payable to senior executives of the Company, as in effect from time to time, and reflected in the Company’s compensation guidelines. The Annual Bonus, if any, shall be paid no later than the end of the calendar year in which the fiscal year to which it relates ends promptly after completion of the Company’s audited year-end financial statements
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for such fiscal year (but in any event by the end of the calendar year in which the fiscal year ends) and at the same time as annual bonuses are paid to the other senior executive officers of the Company. In order to be eligible to earn an Annual Bonus, except as otherwise set forth in Section 5.5, Executive must be employed by the Company through the date of payment of the Annual Bonus.
4.3. Equity Incentive. Subject to approval by the Board or the Company’s Compensation Committee, following the Effective Date, Executive will be granted equity awards as follows, each of which shall be subject to the terms of the Equity Plan and the applicable award agreements which shall be entered into following the Effective Date:
(a) An annual grant of a number of restricted stock units equal to $400,000 divided by the Share Price (rounded up to the nearest whole share) on the date of grant, which shall vest in equal annual installments on each of the first three (3) anniversaries of the grant date, subject to Executive’s continued employment on each such vesting date.
(b) An annual grant of a target number of long-term performance shares equal to $800,000, of which $200,000 shall be settled in cash and $600,000 shall be settled in common stock divided by the Share Price (rounded up to the nearest whole share) on the date of grant, all of which shall vest on the third anniversary of the grant date based on achievement, as determined by the Board, of performance objectives relating to the EBITDA, revenue and the relative total shareholder return of the Company’s common stock relative to the total shareholder return of the S&P 600 Index over a three (3) year performance period, subject to Executive’s continued employment through the third anniversary of the grant date.
(c) A one-time grant of 100,000 long-term performance shares (the “VWAP PSUs”), which shall vest subject to achievement of certain volume weighted average price (“VWAP”) targets. The VWAP PSUs will be eligible to vest on or before the third anniversary of the grant date with (i) 25% of the VWAP PSUs vesting if the Company’s 60-day VWAP equals or exceeds $8.00, (ii) 25% of the shares subject to the PSUs vesting if the Company’s 60-day VWAP equals or exceeds $10.00, (iii) 25% of the shares subject to the PSUs vesting if the Company’s 60-day VWAP equals or exceeds $12.00 and (iv) 25% of the shares subject to the PSUs vesting if the Company’s 60-day VWAP equals or exceeds $14.00.
4.4. [RESERVED]
4.5. Employee Benefits. During the Employment Term, Executive shall be entitled to participate in health, insurance, retirement, and other benefits provided generally to similarly situated employees of the Company. Executive shall also be entitled to the same number of holidays, vacation days, and sick days, as well as any other benefits, in each case as are generally allowed to similarly situated employees of the Company in accordance with the Company policy as in effect from time to time. Nothing contained herein shall be construed to limit the Company’s ability to amend, suspend, or terminate any employee benefit plan or policy at any time without providing Executive notice, and the right to do so is expressly reserved.
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4.6. Business Expenses. Executive shall be entitled to reimbursement for all reasonable and necessary out-of-pocket business, entertainment and travel expenses incurred by Executive in connection with the performance of Executive’s duties hereunder in accordance with the Company’s expense reimbursement policies and procedures and the terms and conditions of this Agreement.
5. Termination of Employment.
5.1. General. The Employment Term, and Executive’s employment hereunder, shall terminate upon the earliest to occur of (i) Executive’s death, (ii) a termination by reason of a Disability, (iii) a termination by the Company with or without Cause, and (iv) a termination by Executive with or without Good Reason. Except as otherwise expressly required by law (e.g., COBRA) or as specifically provided herein or in any plan or grant, all of Executive’s rights to Base Salary, Annual Bonus, employee benefits and other compensatory amounts hereunder (if any) shall cease upon the termination of Executive’s employment hereunder (the “Termination Date”).
5.2. Deemed Resignation. Upon any termination of Executive’s employment for any reason, except as may otherwise be requested by the Company in writing and agreed upon in writing by Executive, Executive shall be deemed to have resigned from any and all directorships, committee memberships, and any other positions Executive holds with the Company or any other member of the Company Group or any other entities for which Executive serves as a representative of the Company, including, but not limited to, the Board.
5.3. Termination Due to Death or Disability. Executive’s employment shall terminate automatically upon Executive’s death. The Company may terminate Executive’s employment immediately upon the occurrence of a Disability upon the giving of written notice to Executive while the Disability exists, such termination to be effective upon Executive’s receipt of such written notice of such termination. Upon Executive’s death or in the event that Executive’s employment is terminated due to Executive’s Disability, Executive or Executive’s estate or Executive’s beneficiaries, as the case may be, shall be entitled to the Accrued Obligations. Following Executive’s death or a termination of Executive’s employment by reason of a Disability, except as set forth in this Section 5.3, Executive shall have no further rights to any compensation or any other benefits under this Agreement.
5.4. Termination by the Company for Cause. The Company may terminate Executive’s employment at any time for Cause, effective upon delivery to Executive of written notice of such termination; provided, however, that Executive’s termination will be subject to any applicable cure period set forth in the definition of Cause and if applicable, will only be effective if Executive fails to cure the event or circumstance constituting “Cause” within such cure period. In the event that the Company terminates Executive’s employment for Cause, Executive shall be entitled only to the Accrued Obligations. Following such termination of Executive’s employment for Cause, except as set forth in this Section 5.4, Executive shall have no further rights to any compensation or any other benefits under this Agreement.
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5.5. Termination by the Company without Cause. The Company may terminate Executive’s employment at any time without Cause, effective upon delivery to Executive of written notice of such termination. In the event that Executive’s employment is terminated by the Company without Cause (other than due to death or Disability), Executive shall be entitled to:
(a) The Accrued Obligations;
(b) Any unpaid Annual Bonus in respect of any completed fiscal year that has ended prior to the date of such termination, which amount shall be paid at such time annual bonuses are paid to other senior executives of the Company, but in no event later than the date that is two and one-half months following the last day of the fiscal year in which such termination occurred;
(c) Subject to satisfaction of the performance objectives applicable for the fiscal year in which such termination occurs, as determined by the Board, an amount equal to (A) the Annual Bonus otherwise payable to Executive for the fiscal year in which such termination occurred, assuming Executive had remained employed through the applicable payment date, multiplied by (B) a fraction, the numerator of which is the number of days elapsed from the commencement of such fiscal year through the date of such termination and the denominator of which is 365 (or 366, as applicable), which amount shall be paid at such time annual bonuses are paid to other senior executives of the Company, but in no event later than the date that is two and one-half months following the last day of the fiscal year in which such termination occurred;
(d) An amount equal to one times Executive’s Base Salary at the time of the Termination Date, such amount to be paid in one lump sum on the sixtieth (60th) day following the Termination Date (the “Payment Date”); and
(e) If Executive timely and properly elects continuation coverage under the Consolidated Omnibus Reconciliation Act of 1985 (“COBRA”), the Company shall reimburse Executive for the monthly COBRA premium paid by Executive for himself and his dependents. Any such reimbursement for the period prior to the Payment Date shall be paid to Executive in a lump sum on the Payment Date and any reimbursement for any month (or portion thereof) on and after the Payment Date shall be paid to Executive on the tenth day of the month immediately following the month in which Executive timely remits the premium payment. Executive shall be eligible to receive such reimbursement until the earliest of: (i) the first anniversary of the Termination Date (the “Benefits Reimbursement Period”); (ii) the date Executive is no longer eligible to receive COBRA continuation coverage; and (iii) the date on which Executive becomes eligible to receive substantially similar coverage from another employer. Notwithstanding the foregoing, if the Company’s making payments under this Section 5.5(e) would violate the nondiscrimination rules applicable to non-grandfathered group health plans, or result in the imposition of penalties under the Patient Protection and Affordable Care Act of 2010 and the related regulations and guidance promulgated thereunder (“PPACA”), the parties agree to reform this Section 5.5(e) in a manner as is necessary to comply with PPACA.
Notwithstanding the foregoing, the payments and benefits described in clauses (b), (c), (d) and (e) above shall immediately terminate, and the Company shall have no further obligations
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to Executive with respect thereto, in the event that Executive breaches Section 9 of this Agreement. Following such termination of Executive’s employment by the Company without Cause, except as set forth in this Section 5.5, Executive shall have no further rights to any compensation or any other benefits under this Agreement. For the avoidance of doubt, Executive’s sole and exclusive remedy upon a termination of employment by the Company without Cause shall be receipt of the Severance Benefits.
5.6. Termination by Executive with Good Reason. Executive may terminate Executive’s employment with Good Reason in accordance with the time periods and cure periods set forth in the definition of Good Reason. Executive shall be entitled to the same payments and benefits as provided in Section 5.5 hereof for a termination by the Company without Cause, subject to the same conditions on payment and benefits as described in Section 5.5 hereof. Following such termination of Executive’s employment by Executive with Good Reason, except as set forth in this Section 5.6, Executive shall have no further rights to any compensation or any other benefits under this Agreement. For the avoidance of doubt, Executive’s sole and exclusive remedy upon a termination of employment with Good Reason shall be receipt of the Severance Benefits.
5.7. Termination by Executive without Good Reason or Termination Following a Notice of Non-Renewal. Executive may terminate Executive’s employment without Good Reason by providing the Company ninety (90) days’ prior written notice of such termination (a “Termination Without Good Reason”). In the event of a Termination Without Good Reason or a termination of Executive’s employment as a result of a Notice of Non-Renewal, Executive shall be entitled only to the Accrued Obligations. In the event of a Termination without Good Reason, the Company may, in its sole and absolute discretion, by written notice accelerate such date of termination without changing the characterization of such termination as a termination by Executive without Good Reason. Following a Termination Without Good Reason or a termination of Executive’s employment as a result of a Notice of Non-Renewal, except as set forth in this Section 5.7, Executive shall have no further rights to any compensation or any other benefits under this Agreement.
5.8. Termination of Employment in Connection With a Change in Control. Notwithstanding the terms set forth in Section 5.5 and 5.6, if Executive’s employment with the Company is terminated pursuant to Section 5.5 or Section 5.6 hereof (i) within 90 days prior to the effective time of a Change in Control or (ii) from the effective time of a Change in Control until the date that is 12 months after the occurrence of a Change in Control, subject to the same conditions on payment and benefits set forth in Section 5.5, (i) Executive shall be entitled to the payments and benefits provided in Sections 5.5(a), (b), (c) and (e) hereof, (ii) the Benefits Reimbursement Period shall be the second anniversary of the Termination Date, and (iii) Executive shall be entitled to an amount equal to one and a half (1.5) times the sum of (y) an amount equal to Executive’s Base Salary at the time of the Termination Date plus (z) an amount equal to Executive’s Target Bonus for the year in which the Termination Date occurs, such amount to be paid in one lump sum on the Payment Date; provided, however, in the event such termination occurs within the 90 day period prior to the effective time of a Change in Control, the amount due to Executive under clause (ii) that is in excess of the amount previously paid to
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Executive under Section 5.5(d), shall be paid within sixty (60) days following the effective time of such Change in Control, and (iii) all equity incentive awards held by Executive which are subject to performance-based vesting conditions will vest based upon target performance, effective as of the date of Executive’s termination and will be settled within 60 days of the later of the Termination Date or, if later, Change in Control (or, to the extent required to comply with Section 409A of the Code, such later time as specified in the applicable award agreement). For the avoidance of doubt, Executive shall not be entitled to duplicate amounts under Section 5.5(d) and clause (ii) of the foregoing sentence. With respect to clause (iii) of the foregoing sentence, in the event of a termination of employment which occurs prior to a Change in Control, any such award shall remain outstanding for ninety (90) days following such termination of employment and, if no Change in Control has occurred as of such date, shall be treated in accordance with the terms of the applicable award agreement (including, if applicable, treating any unvested performance-based equity incentive awards as forfeited as of the Termination Date).
5.9. Release. Notwithstanding any provision herein to the contrary, the payment of any amount or provision of any benefit pursuant to Section 5.5, Section 5.6 or 5.8 (other than the Accrued Obligations) (collectively, the “Severance Benefits”) shall be conditioned upon Executive’s execution, delivery to the Company, and non-revocation of the Release of Claims (and the expiration of any revocation period contained in such Release of Claims) within sixty (60) days following the date of Executive’s termination of employment hereunder. If Executive fails to execute the Release of Claims in such a timely manner so as to permit any revocation period to expire prior to the end of such sixty (60) day period, or timely revokes Executive’s acceptance of such release following its execution, Executive shall not be entitled to any of the Severance Benefits. Further, to the extent that any of the Severance Benefits constitutes “nonqualified deferred compensation” for purposes of Section 409A of the Code, any payment of any amount or provision of any benefit otherwise scheduled to occur prior to the sixtieth (60th) day following the date of Executive’s termination of employment hereunder, but for the condition on executing the Release of Claims as set forth herein, shall not be made until the first regularly scheduled payroll date following such sixtieth (60th) day, and any remaining Severance Benefits thereafter due shall be provided to Executive according to the applicable schedule set forth herein.
6. Section 280G. Notwithstanding anything to the contrary in this Agreement, this Section 6 shall apply in the event of (i) a “change in the ownership or effective control” of the Company or (ii) a “change in the ownership of a substantial portion of the assets” of the Company, each within the meaning of Section 280G of the Code (collectively, an “Excise Tax Event”). If an Excise Tax Event is consummated, and as a result any payments and benefits provided for in this Agreement, together with any other payments and benefits which Executive has the right to receive from the Company or any of its affiliates, would constitute a “parachute payment” (as defined in Section 280G(b)(2) of the Code), then the payments and benefits provided for in this Agreement shall be either (a) reduced (but not below zero) so that the present value of such total amounts and benefits received by Executive from the Company and its affiliates will be one dollar ($1.00) less than three times Executive’s “base amount” (as defined in Section 280G(b)(3) of the Code) and so that no portion of such amounts and benefits received by Executive shall be subject to the excise tax imposed by Section 4999 of the Code, or any
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interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the “Excise Tax”), or (b) paid in full, whichever produces the better net after-tax position to Executive (taking into account any applicable Excise Tax and any other applicable taxes). The reduction of payments and benefits hereunder, if applicable, shall be made in the following order: (1) by reducing the amounts of any payments or benefits that would not constitute deferred compensation under Section 409A, to the extent necessary to decrease the payments subject to the Excise Tax, as agreed by the Company and Executive; (2) next, by reducing, payments or benefits to be paid in cash hereunder and that constitute deferred compensation under Section 409A in the order in which such payment or benefit would be paid or provided (beginning with such payment or benefit that would be made last in time and continuing, to the extent necessary, through to such payment or benefit that would be made first in time); and (3) finally, by reducing any non-cash or in-kind benefit to be provided hereunder and that constitute deferred compensation under Section 409A in a similar order to that described in clause (2). The determination as to whether any such reduction in the amount of the payments and benefits provided hereunder is necessary shall be made by the Company in good faith. If a reduced payment or benefit is made or provided and through error or otherwise that payment or benefit, when aggregated with other payments and benefits from the Company (or its affiliates) used in determining if a “parachute payment” exists, exceeds one dollar ($1.00) less than three times Executive’s base amount, then Executive shall immediately repay such excess to the Company upon notification that an overpayment has been made. Nothing in this Section 6 shall require the Company to be responsible for, or have any liability or obligation with respect to, Executive’s Excise Tax liabilities.
7. Cooperation. The parties agree that certain matters in which Executive will be involved during the Employment Term may necessitate Executive’s cooperation in the future. Accordingly, following the termination of Executive’s employment for any reason, to the extent reasonably requested by the Board, Executive shall cooperate with the Company in connection with matters arising out of Executive’s service to the Company; provided, that, the Company shall make reasonable efforts to minimize disruption of Executive’s other activities. The Company shall reimburse Executive for reasonable expenses incurred in connection with such cooperation and, to the extent that Executive is required to spend substantial time on such matters, the Company shall compensate Executive at an hourly rate based on Executive’s Base Salary on the Termination Date, unless such time is as a witness in a legal proceeding, in which case the Company will only pay costs and expenses as permitted by law.
8. Confidential Information. Executive recognizes that the nature of Executive’s services are such that Executive will have access to information that constitutes trade secrets, is of a confidential nature, is of great value to the Company Group or is the foundation on which the business of the Company is predicated (“Confidential Information”). Executive agrees, during his employment and thereafter, not to disclose to any person other than the Company Group’s employees or the Company Group’s legal counsel or other parties authorized by the Company Group to receive confidential information nor use for any purpose, other than the performance of this Agreement, any Confidential Information. Confidential Information includes data or material (regardless of form) which is: (a) a trade secret; (b) provided, disclosed or delivered to Executive by the Company, any officer, director, employee, agent, attorney,
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accountant, consultant or other person or entity employee by the Company in any capacity, any customer, borrower or business associate of the Company Group or any public authority having jurisdiction over the Company Group of any business activity conducted by the Company Group; or (c) produced, developed, obtained or prepared by or on behalf of Executive or the Company Group (whether or not such information was developed in the performance of this Agreement) with respect to the Company Group or any assets, business activities, officers, directors, employees, borrowers or customers of the foregoing. However, Confidential Information will not include any information, data or material which at the time of disclosure or use was generally available to the public other than by a breach of this Agreement, was available to the party to whom disclosed on a non-confidential basis by disclosure or access provided by the Company Group or a third party, or was otherwise developed or obtained independently by the person to whom disclosed without a breach of this Agreement. The foregoing notwithstanding, nothing in this Agreement prohibits Executive from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. On request by the Company, the Company will be entitled to a copy of any Confidential Information in the possession of Executive. The provisions of this Section 8 will survive the termination, expiration or cancellation of Executive’s employment. Executive will deliver to the Company all originals and copies of the documents or materials containing Confidential Information. Executive further agrees that if Executive executes additional Company policies or agreements to protect the Confidential Information, this Agreement shall be read in conjunction with any such policies or Agreements to provide the broadest and greatest protection to the Confidential Information.
9. Protective Covenants.
9.1. Acknowledgment. Executive understands that the nature of Executive’s position gives him access to and knowledge of Confidential Information and places him in a position of trust and confidence with the Company Group. Executive understands and acknowledges that the intellectual services he provides to the Company Group are unique, special, and extraordinary. Executive further understands and acknowledges that the Company Group’s ability to reserve these for the exclusive knowledge and use of the Company Group is of great competitive importance and commercial value to the Company Group, and that improper use or disclosure by Executive is likely to result in unfair or unlawful competitive activity.
9.2. Non-Competition. Executive covenants and agrees that during his employment with the Company and for a period of twenty-four (24) consecutive months after the Termination Date, irrespective of the reason for the termination (the “Restricted Period”), Executive will not directly or indirectly, engage in any business (as an owner, joint venturer, partner, stockholder, director, officer, consultant, agent or otherwise, other than as the owner of less than 1% of the outstanding class of a publicly traded security) which competes with the business in which the Company is presently engaged or may be engaged at any time during the Employment Term. Nothing in this Section 9.2 shall be construed as limiting Executive’s duty of loyalty to the
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Company while he is employed by the Company, or any other duty he may otherwise have to the Company while he is employed by the Company.
9.3. Non-Solicitation of Employees. Executive covenants and agrees that during the Restricted Period, Executive shall not, individually or jointly with others, directly or indirectly, recruit, hire, encourage, or attempt to recruit or hire, or by assisting others, any employees of the Company Group with whom Executive worked, had business contact, or about whom Executive gained non-public or Confidential Information (the “Company Group’s employees or former employees”), nor shall Executive contact or communicate with same, other than on behalf of the Company Group, for the purpose of inducing, assisting, encouraging and/or facilitating the Company Group’s employees to terminate their employment with the Company Group or find employment or work with another person or entity.
Additionally, Executive shall not provide or pass along to any person or entity the name, contact and/or background information about any of the Company Group’s employees or provide references or any other information about them. Additionally, Executive shall not provide or pass along to the Company Group’s employees any information regarding potential jobs or entities or persons to work for, including but not limited to, job openings, job postings, or the names or contact information of individuals or companies hiring people or accepting job applications. Further, Executive shall not offer employment to or work to any employees of the Company Group’s employees or former employees. For purposes of this covenant “Company Group’s employees or former employees” shall refer to employees of the Company Group Executive supervised, was supervised by, or otherwise worked with in any capacity during the twelve (12) month period prior to the Termination Date.
9.4. Non-Solicitation of Customers. Executive understands and acknowledges that because of Executive’s experience with and relationship to the Company Group, he will have access to and learn about much or all of the Company Group’s customer information and goodwill. “Customer Information” includes, but is not limited to, names, phone numbers, addresses, e-mail addresses, order history, order preferences, chain of command, pricing information and other information identifying facts and circumstances specific to the customer and relevant to Company’s industry. Executive understands and acknowledges that loss of this customer relationship and/or goodwill will cause significant and irreparable harm to the Company. Executive agrees and covenants, that during the Restricted Period, Executive shall not, directly or indirectly, solicit, contact (including but not limited to e-mail, regular mail, express mail, telephone, fax, and instant message), attempt to contact or meet with the Company’s current or prospective customers for purposes of offering or accepting goods or services similar to or competitive with those offered by the Company.
9.5. Reasonableness. The Company and Executive have attempted to specify a reasonable period of time and reasonable restrictions to which the provisions of this Section 9 shall apply. The Company and Executive agree, however, that if a court or agency of competent jurisdiction determines that any of the terms of this Section 9 are not enforceable because they are overbroad or for any other reason, the provisions of this Section 9 shall be reformed and
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modified to reflect restrictions that are determined to be reasonable by such court or agency of competent jurisdiction.
10. Non-Disparagement. Executive agrees and covenants that he will not at any time make, publish or communicate to any person or entity or in any public forum any defamatory or disparaging remarks, comments or statements concerning the Company Group or its businesses, or any of its employees, officers, and existing and prospective customers, suppliers, investors and other associated third parties. This Section 10 does not, in any way, restrict or impede Executive from exercising protected rights to the extent that such rights cannot be waived by agreement or from complying with any applicable law or regulation or a valid order of a court of competent jurisdiction or an authorized government agency, provided, that such compliance does not exceed that required by the law, regulation or order. Executive shall promptly provide written notice of any such order to the Company’s General Counsel. The Company agrees and covenants that, as soon as reasonably practicable following the date hereof, it shall instruct its executive officers and directors to refrain from making any defamatory or disparaging remarks, comments, or statements concerning the Executive to any third parties.
11. Acknowledgement. Executive acknowledges and agrees that the services to be rendered by him to the Company are of a special and unique character; that Executive will obtain knowledge and skill relevant to the Company’s industry, methods of doing business and marketing strategies by virtue of Executive’s employment; and that the protective covenants and other terms and conditions of this Agreement are reasonable and reasonably necessary to protect the legitimate business interest of the Company Group.
12. Remedies. In the event of a breach or threatened breach by Executive of Sections 7 10 of this Agreement, Executive hereby consents and agrees that the Company shall be entitled to seek, in addition to other available remedies, a temporary or permanent injunction or other equitable relief against such breach or threatened breach from any court of competent jurisdiction, without the necessity of showing any actual damages or that money damages would not afford an adequate remedy, and without the necessity of posting any bond or other security. The aforementioned equitable relief shall be in addition to, not in lieu of, legal remedies, monetary damages or other available forms of relief.
13. Arbitration. The Company and Executive mutually consent to the final resolution by binding arbitration in New York, New York, of any and all claims or disputes the Company may have against or with Executive, and/or Executive may have against or with Company. Arbitration shall be administered exclusively by American Arbitration Association and shall be conducted consistent with the rules, regulations and requirements thereof for employment disputes as well as any requirements imposed by state law. Any arbitral award determination shall be final and binding upon the Parties. Notwithstanding the foregoing, expressly excluded from Arbitration are any claims Executive may have for workers’ compensation benefits or unemployment compensation benefits. Also excluded are claims for declaratory relief or injunctive relief and/or damages arising from alleged unfair competition or solicitation, theft of trade secrets or business property, or the enforceability or breach of protective covenants.
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14. Proprietary Rights.
14.1. Work Product. Executive acknowledges and agrees that all writings, works of authorship, technology, inventions, discoveries, ideas and other work product of any nature whatsoever, that are created, prepared, produced, authored, edited, amended, conceived or reduced to practice by Executive individually or jointly with others during the period of his employment by the Company and relating in any way to the business or contemplated business, research or development of the Company (regardless of when or where the Work Product is prepared or whose equipment or other resources is used in preparing the same) and all printed, physical and electronic copies, all improvements, rights and claims related to the foregoing, and other tangible embodiments thereof (collectively, “Work Product”), as well as any and all rights in and to copyrights, trade secrets, trademarks (and related goodwill), patents and other intellectual property rights therein arising in any jurisdiction throughout the world and all related rights of priority under international conventions with respect thereto, including all pending and future applications and registrations therefor, and continuations, divisions, continuations-in-part, reissues, extensions and renewals thereof (collectively, “Intellectual Property Rights”), shall be the sole and exclusive property of the Company.
14.2. Work Made for Hire; Assignment. Executive acknowledges that, by reason of being employed by the Company at the relevant times, to the extent permitted by law, all of the Work Product consisting of copyrightable subject matter is “work made for hire” as defined in 17 U.S.C. § 101 and such copyrights are therefore owned by the Company. To the extent that the foregoing does not apply, Executive hereby irrevocably assigns to the Company, for no additional consideration, Executive’s entire right, title and interest in and to all Work Product and Intellectual Property Rights therein, including the right to sue, counterclaim and recover for all past, present and future infringement, misappropriation or dilution thereof, and all rights corresponding thereto throughout the world. Nothing contained in this Agreement shall be construed to reduce or limit the Company’s rights, title or interest in any Work Product or Intellectual Property Rights so as to be less in any respect than that the Company would have had in the absence of this Agreement.
14.3. Further Assurances; Power of Attorney. During and after his employment, Executive agrees to reasonably cooperate with the Company to (a) apply for, obtain, perfect and transfer to the Company the Work Product as well as an Intellectual Property Right in the Work Product in any jurisdiction in the world; and (b) maintain, protect and enforce the same, including, without limitation, executing and delivering to the Company any and all applications, oaths, declarations, affidavits, waivers, assignments and other documents and instruments as shall be requested by the Company. Executive hereby irrevocably grants the Company power of attorney to execute and deliver any such documents on Executive’s behalf in his name and to do all other lawfully permitted acts to transfer the Work Product to the Company and further the transfer, issuance, prosecution and maintenance of all Intellectual Property Rights therein, to the full extent permitted by law, if Executive does not promptly cooperate with the Company’s request (without limiting the rights the Company shall have in such circumstances by operation of law). The power of attorney is coupled with an interest and shall not be effected by Executive’s subsequent incapacity.
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14.4. No License. Executive understands that this Agreement does not, and shall not be construed to, grant Executive any license or right of any nature with respect to any Work Product or Intellectual Property Rights or any Confidential Information, materials, software or other tools made available to him by the Company.
15. Exit Obligations. Upon voluntary or involuntary termination of Executive’s employment, Executive shall (i) provide or return to the Company any and all Company Group property and all Company Group documents and materials belonging to the Company and stored in any fashion, including but not limited to those that constitute or contain any Confidential Information or Work Product, that are in the possession or control of Executive, whether they were provided to Executive by the Company Group or any of its business associates or created by Executive in connection with his employment by the Company; and (ii) delete or destroy all copies of any such documents and materials not returned to the Company that remain in Executive’s possession or control, including those stored on any non-Company Group devices, networks, storage locations and media in Executive’s possession or control.
16. Publicity. Executive hereby irrevocably consents to any and all uses and displays, by the Company Group and its agents, representatives and licensees, of Executive’s name, voice, likeness, image, appearance and biographical information in, on or in connection with any pictures, photographs, audio and video recordings, digital images, websites, television programs and advertising, other advertising and publicity, sales and marketing brochures, books, magazines, other publications, CDs, DVDs, tapes and all other printed and electronic forms and media throughout the world, at any time during or after the period of his employment by the Company, for all legitimate commercial and business purposes of the Company Group (“Permitted Uses”) without further consent from or royalty, payment or other compensation to Executive. Executive hereby forever waives and releases the Company Group and its directors, officers, employees and agents from any and all claims, actions, damages, losses, costs, expenses and liability of any kind, arising under any legal or equitable theory whatsoever at any time during or after the period of his employment by the Company, arising directly or indirectly from the Company Group’s and its agents’, representatives’ and licensees’ exercise of their rights in connection with any Permitted Uses.
17. Taxes. The Company may withhold from any payments made under this Agreement all applicable taxes, including but not limited to income, employment, and social insurance taxes, as shall be required by law. Executive acknowledges and represents that the Company has not provided any tax advice to Executive in connection with this Agreement and that Executive has been advised by the Company to seek tax advice from Executive’s own tax advisors regarding this Agreement and payments that may be made to Executive pursuant to this Agreement, including specifically, the application of the provisions of Section 409A of the Code to such payments.
18. Set Off; Mitigation. The Company’s obligation to pay Executive the amounts provided and to make the arrangements provided hereunder shall be subject to set-off, or recoupment of agreed amounts owed by Executive to the Company or its affiliates; provided,
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however, that to the extent any amount so subject to set-off, counterclaim, or recoupment is payable in installments hereunder, such set-off, counterclaim, or recoupment shall not modify the applicable payment date of any installment, and to the extent an obligation cannot be satisfied by reduction of a single installment payment, any portion not satisfied shall remain an outstanding obligation of Executive and shall be applied to the next installment only at such time the installment is otherwise payable pursuant to the specified payment schedule, no right shall exist with regard to setoff or recoupment to the extent it would violate Section 409A of the Code and there shall be no right to setoff or recoupment with regard to any not agreed upon amounts. Executive shall not be required to mitigate the amount of any payment provided pursuant to this Agreement by seeking other employment or otherwise, and except as provided in Section 5.5(e), the amount of any payment provided for pursuant to this Agreement shall not be reduced by any compensation earned as a result of Executive’s other employment or otherwise.
19. Governing Law. This Agreement, for all purposes, shall be construed in accordance with the laws of the State of New York without regard to conflicts of law principles; provided, however, that any provisions relating to equity compensation shall also be subject to any federal or state securities laws that may be applicable and the rules of any stock exchange on which the relevant equity is listed for trading.
20. Entire Agreement. Except as expressly set forth herein, this Agreement contains all of the understandings and representations between Executive and the Company pertaining to the subject matter hereof and supersedes all prior and contemporaneous understandings, agreements, representations and warranties, both written and oral, with respect to such subject matter, except that nothing herein shall be deemed to alter or amend that certain Indemnification Agreement between Executive and the Company or any of Executive’s obligations pursuant to any agreement or plan concerning confidential and proprietary information, intellectual property, or any other protective or restrictive covenants, each of which is intended to be preserved hereby and shall be in addition to, and not in lieu of, the similar restrictions and covenants set forth herein. The parties mutually agree that the Agreement can be specifically enforced in court and can be cited as evidence in legal proceedings alleging breach of the Agreement.
21. Modification and Waiver. No provision of this Agreement may be amended or modified unless such amendment or modification is agreed to in writing and signed by Executive and by an executive officer of the Company. No waiver by either of the parties of any breach by the other party hereto of any condition or provision of this Agreement to be performed by the other party hereto shall be deemed a waiver of any similar or dissimilar provision or condition at the same or any prior or subsequent time, nor shall the failure of or delay by either of the parties in exercising any right, power or privilege hereunder operate as a waiver thereof to preclude any other or further exercise thereof or the exercise of any other such right, power or privilege.
22. Severability. Should any provision of this Agreement be held by a court or arbitrator of competent jurisdiction to be enforceable only if modified, or if any portion of this Agreement shall be held as unenforceable and thus stricken, such holding shall not affect the validity of the remainder of this Agreement, the balance of which shall continue to be binding upon the parties with any such modification to become a part hereof and treated as though
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originally set forth in this Agreement. The parties further agree that any such court or arbitrator is expressly authorized to modify any such unenforceable provision of this Agreement in lieu of severing such unenforceable provision from this Agreement in its entirety, whether by rewriting the offending provision, deleting any or all of the offending provision, adding additional language to this Agreement or by making such other modifications as it deems warranted to carry out the intent and agreement of the parties as embodied herein to the maximum extent permitted by law. The parties expressly agree that this Agreement as so modified by the court or arbitrator shall be binding upon and enforceable against each of them. In any event, should one or more of the provisions of this Agreement be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions hereof, and if such provision or provisions are not modified as provided above, this Agreement shall be construed as if such invalid, illegal or unenforceable provisions had not been set forth herein.
23. Captions. Captions and headings of the sections and paragraphs of this Agreement are intended solely for convenience and no provision of this Agreement is to be construed by reference to the caption or heading of any Section or paragraph.
24. Counterparts. This Agreement may be executed in separate counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument.
25. Additional Section 409A Provisions. Notwithstanding any provision in this Agreement to the contrary:
25.1. Any payment otherwise required to be made hereunder to Executive at any date as a result of the termination of Executive’s employment shall be delayed for such period of time as may be necessary to meet the requirements of Section 409A(a)(2)(B)(i) of the Code (the “Delay Period”). On the first business day following the expiration of the Delay Period, Executive shall be paid, in a single cash lump sum, an amount equal to the aggregate amount of all payments delayed pursuant to the preceding sentence, and any remaining payments not so delayed shall continue to be paid pursuant to the payment schedule set forth herein.
25.2. Each payment in a series of payments hereunder shall be deemed to be a separate payment for purposes of Section 409A of the Code.
25.3. Notwithstanding anything herein to the contrary, the payment (or commencement of a series of payments) hereunder of any nonqualified deferred compensation (within the meaning of Section 409A of the Code) upon a termination of employment shall be delayed until such time as Executive has also undergone a “separation from service” as defined in Treas. Reg. 1.409A-1(h), at which time such nonqualified deferred compensation (calculated as of the date of Executive’s termination of employment hereunder) shall be paid (or commence to be paid) to Executive on the schedule set forth in Section 5 as if Executive had undergone such termination of employment (under the same circumstances) on the date of Executive’s ultimate “separation from service.”
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25.4. To the extent that any right to reimbursement of expenses or payment of any benefit in-kind under this Agreement constitutes nonqualified deferred compensation (within the meaning of Section 409A of the Code), (i) any such expense reimbursement shall be made by the Company no later than the last day of the taxable year following the taxable year in which such expense was incurred by Executive, (ii) the right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit, and (iii) the amount of expenses eligible for reimbursement or in-kind benefits provided during any taxable year shall not affect the expenses eligible for reimbursement or in-kind benefits to be provided in any other taxable year; provided, that the foregoing clause shall not be violated with regard to expenses reimbursed under any arrangement covered by Section 105(b) of the Code solely because such expenses are subject to a limit related to the period the arrangement is in effect.
25.5. While the payments and benefits provided hereunder are intended to be structured in a manner to avoid the implication of any penalty taxes under Section 409A of the Code, in no event whatsoever shall any member of the Company Group be liable for any additional tax, interest, or penalties that may be imposed on Executive as a result of Section 409A of the Code for failing to comply with Section 409A of the Code (other than for withholding obligations or other obligations applicable to employers, if any, under Section 409A of the Code) provided that the Company Group act in reasonable good faith in connection with complying with Section 409A of the Code.
26. Successors and Assigns; No Third-Party Beneficiaries.
26.1. This Agreement shall inure to the benefit of the Company and its respective permitted successors and assigns. Neither this Agreement nor any of the rights, obligations, or interests arising hereunder may be assigned by the Company to any person other than to an acquiror of all or substantially all of the assets of the Company who assumes the agreement in writing.
26.2. Executive’s rights and obligations under this Agreement shall not be transferable by Executive by assignment or otherwise, without the prior written consent of the Company; provided, however, that if Executive shall die, all amounts then payable to Executive hereunder shall be paid in accordance with the terms of this Agreement to Executive’s devisee, legatee, or other designee, or if there be no such designee, to Executive’s estate.
26.3. Except as otherwise set forth in Section 5.3 or Section 26.2 hereof, nothing expressed or referred to in this Agreement will be construed to give any Person other than the Company, the other members of the Company Group, and Executive any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement.
27. Notification to Subsequent Employer. When Executive’s employment with the Company terminates, Executive agrees to notify any subsequent employer of the protective covenants sections contained in this Agreement. Executive will also deliver a copy of such notice to the Company before Executive commences employment with any subsequent employer. In addition, Executive authorizes the Company to provide a copy of the protective covenants
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sections of this Agreement to third parties, including but not limited to, Executive’s subsequent, anticipated or possible future employer.
28. Notice.
28.1. Place of Delivery. Every notice or other communication relating to this Agreement shall be in writing, and shall be mailed to or delivered to the party for whom or which it is intended at such address as may from time to time be designated by it in a notice mailed or delivered to the other party as herein provided; provided, that unless and until some other address be so designated, all notices and communications by Executive to the Company shall be mailed or delivered to the Company at its principal executive office, and all notices and communications by the Company to Executive may be given to Executive personally or may be mailed to Executive at Executive’s last known address, as reflected in the Company’s records.
28.2. Date of Delivery. Any notice so addressed shall be deemed to be given (i) if delivered by hand, on the date of such delivery, (ii) if mailed by courier or by overnight mail, on the first business day following the date of such mailing, and (iii) if mailed by registered or certified mail, on the third business day after the date of such mailing.
29. Representations of Executive. Executive represents and warrants to the Company that:
29.1. Executive is entering into this Agreement voluntarily and that Executive’s employment hereunder and compliance with the terms and conditions hereof will not conflict with or result in the breach by Executive of any agreement to which Executive is a party or by which Executive may be bound;
29.2. Executive has not violated, and in connection with Executive’s employment with the Company will not violate, any non-solicitation, non-competition, or other similar covenant or agreement with any Person by which Executive is or may be bound; and
29.3. In connection with Executive’s employment with the Company, Executive will not use any confidential or proprietary information Executive may have obtained in connection with employment or service with any prior service recipient.
30. Survival. Upon the expiration or other termination of this Agreement, the respective rights and obligations of the parties hereto shall survive such expiration or other termination to the extent necessary to carry out the intentions of the parties under this Agreement.
31. Acknowledgment of Full Understanding. EXECUTIVE ACKNOWLEDGES AND AGREES THAT HE HAS FULLY READ, UNDERSTANDS AND VOLUNTARILY ENTERS INTO THIS AGREEMENT. EXECUTIVE ACKNOWLEDGES AND AGREES THAT HE HAS HAD AN OPPORTUNITY TO ASK QUESTIONS AND CONSULT WITH AN ATTORNEY OF HIS CHOICE BEFORE SIGNING THIS AGREEMENT.
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[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above-written.
Comtech Telecommunications Corporation | ||||||||
By: | /s/ Michael A. Bondi | |||||||
Name: Michael A. Bondi | ||||||||
Title: Chief Financial Officer | ||||||||
Executive | ||||||||
By: | /s/ John Ratigan | |||||||
Name: John Ratigan | ||||||||
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Appendix A
Definitions
“Accrued Obligations” shall mean (i) all accrued but unpaid Base Salary through the date of termination of Executive’s employment, (ii) any unpaid or unreimbursed expenses incurred in accordance with Section 4.6 hereof, (iii) any benefits provided under the Company’s employee benefit plans upon a termination of employment, including the Equity Plan and related award grants, and (iv) all rights to indemnification and directors and officers liability insurance coverage.
“Base Salary” shall mean the salary provided in Section 4.1, as in effect from time to time.
“Board” shall mean the Board of Directors of the Company.
“Cause” shall mean (i) Executive’s willful misconduct, gross negligence, dishonesty, misappropriation, breach of fiduciary duty or fraud with regard to the Company or any of its assets or businesses, (ii) Executive’s conviction of or pleading of guilty or nolo contendere with regard to a crime that constitutes a felony (or state law equivalent) or a crime that constitutes a misdemeanor involving moral turpitude; (iii) Executive’s failure to perform Executive’s duties (other than a failure resulting from Executive’s Disability), (iv) Executive’s failure to comply with any valid and legal directive of the Board; (v) Executive’s material violation of the Company’s written policies or codes of conduct, including written policies relating to discrimination, harassment, performance of illegal or unethical activities, and ethical misconduct; or (vi) Executive’s material breach of any obligation under this Agreement or any other written agreement with the Company. Except for a failure, breach or refusal which, by its nature, cannot reasonably be expected to be cured, Executive shall have ten (10) business days from the delivery date of the notice of termination within which to cure any acts constituting Cause. The Company may place Executive on paid leave for up to 60 days while it is determining whether there is a basis to terminate Executive’s employment for Cause. Such paid leave will not constitute Good Reason.
“Change in Control” shall have the meaning set forth in the Equity Plan.
“Code” shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder.
“Company Group” shall mean the Company together with any of its direct or indirect subsidiaries.
“Disability” shall have the meaning set forth in the Equity Plan.
“Employment Term” shall mean the period during which Executive is employed by the Company, as specified in Section 2 hereof.
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“Equity Plan” shall mean the Company’s 2023 Stock Incentive Plan, as amended from time to time.
“Good Reason” shall mean the occurrence of any of the following, in each case during the Employment Term without Executive’s written consent: (i) a material reduction in Executive’s Base Salary, (ii) any material breach by the Company of any material provision of this Agreement, (iii) the Company’s failure to obtain an agreement from any successor to the Company to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no succession had taken place, except where such assumption occurs by operation of law, (iv) a material diminution in the nature or scope of Executive’s authority or responsibilities from those applicable to Executive as of the Effective Date (or as modified thereafter consistent with this Agreement); or (v) a material diminution in the duties associated with the positions described in Section 2 as such duties are constituted as of the Effective Date; provided, that in no event shall Executive’s resignation be for “Good Reason” unless (x) an event or circumstance set forth in clauses (i), (ii), (iii), (iv), or (v) shall have occurred and Executive provides the Company with written notice thereof within thirty (30) days after the initial occurrence or existence of such event or circumstance, which notice specifically identifies the event or circumstance that Executive believes constitutes Good Reason, (y) the Company fails to correct the circumstance or event so identified within thirty (30) days after the receipt of such notice, and (z) Executive resigns within sixty (60) days after the date of delivery of the notice referred to in clause (x) above. Executive acknowledges and agrees that Executive’s exclusive remedy in the event of any breach of this Agreement shall be to assert Good Reason pursuant to the terms and conditions of Section 5.6. Notwithstanding the foregoing, the Board’s decision to remove Executive as a member of the Board or as a member of any other directorship or committee of the Company Group shall not constitute Good Reason.
“Release of Claims” shall mean the Release of Claims in the form provided to Executive on or following the Termination Date.
“Share Price” shall mean the closing price of the common stock of the Company on the Nasdaq Stock Market on the date that the equity awards outlined in this Agreement are approved by the Board.
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Exhibit 10.8
EMPLOYMENT AGREEMENT
This Employment Agreement (this “Agreement”) is made and entered into as of November 27, 2024, by and between Kenneth Traub (“Executive”) and Comtech Telecommunications Corp., a Delaware corporation (the “Company”).
WHEREAS, the Company desires to employ Executive and to enter into this Agreement embodying the terms of such employment, and Executive desires to enter into this Agreement and to accept such terms of employment, subject to the terms and provisions of this Agreement.
NOW, THEREFORE, in consideration of the promises and mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which are mutually acknowledged, the Company and Executive hereby agree as follows:
1.Definitions. Capitalized terms not otherwise defined in this Agreement shall have the meaning set forth on Appendix A, attached hereto.
2.Employment Term. Executive’s employment with the Company pursuant to the terms of this Agreement shall be effective as of November 27, 2024 (the “Effective Date”), and shall continue until the third anniversary of the Effective Date (the “Initial Term”) and thereafter shall continue on a year-to-year basis (each, a “Renewal Term”), unless either party provides the other written notice of non-renewal at least ninety (90) days prior to the expiration of the Initial Term or any Renewal Term, as applicable (a “Notice of Non-Renewal”); provided, that the Initial Term or any Renewal Term may be ended earlier pursuant to Section 5 of this Agreement.
3.Position, Duties and Responsibilities; Performance.
3.1.Position, Duties and Responsibilities. During the Employment Term, Executive shall be employed and serve as Executive Chairman of the Company (together with such other position or positions consistent with Executive’s title as the Board shall specify from time to time) and shall have such duties, authority and responsibilities commensurate with such title. Executive also agrees to serve as an officer and/or director of any other member of the Company Group, in each case without additional compensation.
3.2.Performance. Executive shall devote Executive’s full business time, attention, skill, and efforts to the performance of Executive’s duties under this Agreement and, except as provided below, shall not engage in any other business or occupation, including any outside employment or consulting services, during the Employment Term, that (x) conflicts with the interests of the Company or any other member of the Company Group, (y) interferes with the performance of Executive’s duties for the Company, or (z) interferes with Executive’s exercise of Executive’s judgment in the Company’s best interests. Notwithstanding the foregoing, nothing in this Section 3.2 shall preclude Executive from (i) serving as a member of the board of directors of Tidewater, Inc., Edgio, Inc. and Nano Dimension Ltd. and serving as an expert witness on corporate governance in litigation pending as of the date of this Agreement; (ii) serving, with the prior written consent of the Board, as a member of other boards of directors or advisory boards (or their equivalents in the case of a non-corporate entity) of for-profit public or private companies (other than the Company) or as a member of the boards of directors or advisory boards (or their equivalents) of other social, community or charitable organizations, (iii) engaging in charitable activities, social and community affairs (including on the board of directors of St. Andrews Property Owners Association and the board of directors of YPO SunFlo Gold chapter and as an informal advisor to other charitable, social or community organizations), (iv) delivering lectures,
engaging in social media, participating in symposiums, panel discussions, fireside chats, industry and professional engagements and various other thought leadership endeavors, and (v) managing Executive’s personal investments and related affairs or engaging as a passive investor in other companies (collectively, the “Permitted Activities”); provided, however, that the activities set out in clauses (i), (ii), (iii), (iv) and (v) shall be limited by Executive so as not to materially interfere in Executive's reasonable judgment, individually or in the aggregate, with the performance of Executive’s duties and responsibilities hereunder and do not conflict with any applicable Company policy on conduct.
3.3.Place of Performance. Executive shall perform his duties hereunder at locations of his choosing. Executive understands that the Company’s scope of operations and future business interests may require Executive to travel to various offices of the Company Group, as well as travel to various other customers, partners, suppliers and other entities relevant to, or potentially relevant to the Company’s current and future potential business interests across the United States and globally during the Employment Term. Executive will use Executive’s judgement to prioritize the focus of Executive’s efforts in this regard and operate in what he believes to be in the long-term best interest of the Company.
4.Compensation.
During the Employment Term, Executive shall be entitled to the following compensation:
4.1.Base Salary. Executive shall be paid an annualized base salary of $900,000 in periodic installments in accordance with the Company’s customary payroll practices, subject to annual review, with adjustments, if any, as may be approved by the Compensation Committee.
4.2.Annual Bonus. For each completed fiscal year of the Employment Term, Executive shall be eligible to receive an annual bonus (the “Annual Bonus”). As of the Effective Date, Executive’s annual target bonus opportunity shall be equal to 100% of Base Salary for the fiscal year, or portion thereof (the “Target Bonus”), based on the achievement of individual performance goals and Company performance goals (such Company performance goals that are the same as the Company performance goals applicable to the other senior executive officers of the Company, as a group) as are established by the Board; provided, that, depending on the results, Executive’s actual bonus may be lower or higher than the target amount, with a minimum bonus opportunity of 0% of Base Salary and a maximum bonus opportunity of 200% of Base Salary (or such other amount as determined by the Board), provided that Executive’s bonus for the fiscal year ending July 31, 2025 (the “Initial Bonus”), shall not be less than 50% of Executive’s prorated Base Salary for such period. The Initial Bonus and Annual Bonus shall otherwise be subject to the terms and conditions adopted by the Compensation Committee under which bonuses are generally payable to senior executives of the Company, as in effect from time to time. The Initial Bonus and Annual Bonus, if any, shall be paid promptly after completion of the Company’s audited year-end financial statements for the fiscal year to which the Initial Bonus or Annual Bonus relates (but in any event no later than two and one-half months following the conclusion of the fiscal year to which the Initial Bonus or Annual Bonus relate) and at the same time as annual bonuses are paid to the other senior executive officers of the Company. In order to be eligible to earn the Initial Bonus or an Annual Bonus, except as otherwise set forth in Section 5.5, Executive must be employed by the Company through the date of payment thereof.
4.3.Equity Incentive. Subject to approval by the Board or the Company’s Compensation Committee, following the Effective Date, Executive will be granted equity awards as follows, subject to the Company’s 2023 Equity and Incentive Plan (the “Plan”) as of the first business day following the amendment of the Plan authorizing sufficient shares to fund the grants referenced herein (the “Grant Date”), each of which shall be subject to the applicable award agreements:
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(a) An annual grant of a number of restricted stock units equal to $400,000 divided by the Share Price (rounded up to the nearest whole share) on the Grant Date, which shall vest in equal annual installments on each of the first three (3) anniversaries of the Grant Date, subject to Executive’s continued employment on each such vesting date.
(b) An annual grant of a target number of long-term performance shares equal to $800,000, of which $200,000 shall be settled in cash and $600,000 shall be settled in common stock divided by the Share Price (rounded up to the nearest whole share) on the Grant Date, all of which shall vest on the third anniversary of the Grant Date based on achievement, as determined by the Board, of performance objectives relating to the EBITDA, revenue and the relative total shareholder return of the Company’s common stock relative to the total shareholder return of the S&P 600 Index over a three (3) year performance period, subject to Executive’s continued employment through the third anniversary of the Grant Date.
4.4.Employee Benefits. During the Employment Term, Executive shall be entitled to participate in health, insurance, retirement, and other benefits provided generally to similarly situated employees of the Company, subject to the terms of any such benefit plans. Executive shall also be entitled to the same number of holidays, vacation days, and sick days, as well as any other benefits, in each case as are generally allowed to similarly situated employees of the Company in accordance with the Company policy as in effect from time to time. Nothing contained herein shall be construed to limit the Company’s ability to amend, suspend, or terminate any employee benefit plan or policy at any time without providing Executive notice, and the right to do so is expressly reserved.
4.5.Business Expenses. Executive shall be entitled to reimbursement for all reasonable and necessary out-of-pocket business, entertainment and travel expenses incurred by Executive in connection with the performance of Executive’s duties hereunder in accordance with the Company’s expense reimbursement policies and procedures and the terms and conditions of this Agreement.
4.6.Equipment and Supplies. The Company shall supply to the Executive or reimburse Executive for the expenses incurred by Executive for any equipment or supplies that the Executive reasonably deems necessary for the Executive to fulfill his responsibilities hereunder.
5.Termination of Employment.
5.1.General. The Employment Term, and Executive’s employment hereunder, shall terminate upon the earliest to occur of (i) Executive’s death, (ii) a termination by reason of a Disability, (iii) a termination by the Company with or without Cause, and (iv) a termination by Executive with or without Good Reason. Except as otherwise expressly required by law (e.g., COBRA) or as specifically provided herein or in any plan or grant, all of Executive’s rights to Base Salary, Annual Bonus, employee benefits and other compensatory amounts hereunder (if any) shall cease upon the termination of Executive’s employment hereunder (the “Termination Date”).
5.2.Deemed Resignation. Upon any termination of Executive’s employment for any reason, except as may otherwise be requested by the Company in writing and agreed upon in writing by Executive, Executive shall be deemed to have resigned from any and all directorships, committee memberships, and any other positions Executive holds with the Company or any other member of the
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Company Group or any other entities for which Executive serves as a representative of the Company, including but not limited to the Board.
5.3.Termination Due to Death or Disability. Executive’s employment shall terminate automatically upon Executive’s death. The Company may terminate Executive’s employment immediately upon the occurrence of a Disability upon the giving of written notice to Executive while the Disability exists, such termination to be effective upon Executive’s receipt of such written notice of such termination. Upon Executive’s death or in the event that Executive’s employment is terminated due to Executive’s Disability, Executive or Executive’s estate or Executive’s beneficiaries, as the case may be, shall be entitled to (a) the Accrued Obligations, and (b) any unpaid Annual Bonus in respect of any completed fiscal year that has ended prior to the date of such termination, which amount shall be paid at such time annual bonuses are paid to other senior executives of the Company, in accordance with Section 4.2. Following Executive’s death or a termination of Executive’s employment by reason of a Disability, except as set forth in this Section 5.3, Executive shall have no further rights to any compensation or any other benefits under this Agreement.
5.4.Termination by the Company for Cause. The Company may terminate Executive’s employment at any time for Cause, effective upon delivery to Executive of written notice of such termination; provided, however, that Executive’s termination will be subject to any applicable cure period set forth in the definition of Cause and if applicable, will only be effective if Executive fails to cure the event or circumstance constituting “Cause” within such cure period. In the event that the Company terminates Executive’s employment for Cause, Executive shall be entitled only to the Accrued Obligations. Following such termination of Executive’s employment for Cause, except as set forth in this Section 5.4, Executive shall have no further rights to any compensation or any other benefits under this Agreement.
5.5.Termination by the Company without Cause. The Company may terminate Executive’s employment at any time without Cause, effective upon delivery to Executive of written notice of such termination. In the event that Executive’s employment is terminated by the Company or this Agreement is not renewed by the Company in accordance with Section 2 without Cause (other than due to death or Disability), Executive shall be entitled to:
(a)The Accrued Obligations;
(b)Any unpaid Annual Bonus in respect of any completed fiscal year that has ended prior to the date of such termination, which amount shall be paid at such time annual bonuses are paid to other senior executives of the Company, in accordance with Section 4.2, but in no event later than the date that is two and one-half months following the last day of the fiscal year in which such termination occurred;
(c)Subject to satisfaction of the performance objectives applicable for the fiscal year in which such termination occurs, as determined by the Compensation Committee, an amount equal to (A) the Annual Bonus otherwise payable to Executive for the fiscal year in which such termination occurred, assuming Executive had remained employed through the applicable payment date, multiplied by (B) a fraction, the numerator of which is the number of days elapsed from the commencement of such fiscal year through the date of such termination and the denominator of which is the number of days in the fiscal year in which the termination occurred, which amount shall be paid at such time annual bonuses are paid to other senior executives of the Company, in accordance with Section 4.2;
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(d)An amount equal to one times Executive’s Base Salary at the time of the Termination Date, such amount to be paid in one lump sum within sixty (60) days following the Termination Date (the “Payment Date”); and
(e)If Executive timely and properly elects continuation coverage under the Consolidated Omnibus Reconciliation Act of 1985 (“COBRA”), the Company shall reimburse Executive for the monthly COBRA premium paid by Executive for Executive and Executive’s dependents. Any such reimbursement for the period prior to the Payment Date shall be paid to Executive in a lump sum on the Payment Date and any reimbursement for any month (or portion thereof) on and after the Payment Date shall be paid to Executive on a monthly basis, subject to the Executive timely remitting the premium payment. Executive shall be eligible to receive such reimbursement until the earliest of: (i) the twelve (12) month anniversary of Executive’s termination date (the “Benefits Reimbursement Period”); and (ii) the date Executive is no longer eligible to receive COBRA continuation coverage.
Notwithstanding the foregoing, the payments and benefits described in clauses (b), (c), (d) and (e) above shall immediately terminate, and the Company shall have no further obligations to Executive with respect thereto, in the event that Executive breaches, as fully adjudicated and determined by a court of competent jurisdiction or a duly appointed arbitrator, Section 9 of this Agreement. Following such termination of Executive’s employment by the Company without Cause, except as set forth in this Section 5.5, Executive shall have no further rights to any compensation or any other benefits under this Agreement. For the avoidance of doubt, Executive’s sole and exclusive remedy upon a termination of employment by the Company without Cause shall be receipt of the Severance Benefits.
5.6.Termination by Executive with Good Reason. Executive may terminate Executive’s employment with Good Reason in accordance with the time periods and cure periods set forth in the definition of Good Reason. Executive shall be entitled to the same payments and benefits as provided in Section 5.5 hereof for a termination by the Company without Cause, subject to the same conditions on payment and benefits as described in Section 5.5 hereof. Following such termination of Executive’s employment by Executive with Good Reason, except as set forth in this Section 5.6, Executive shall have no further rights to any compensation or any other benefits under this Agreement. For the avoidance of doubt, Executive’s sole and exclusive remedy upon a termination of employment with Good Reason shall be receipt of the Severance Benefits.
5.7.Termination by Executive without Good Reason. Executive may terminate Executive’s employment without Good Reason by providing the Company ninety (90) days’ prior written notice of such termination (a “Termination Without Good Reason”) at any time. In the event of a Termination Without Good Reason, Executive shall be entitled only to the Accrued Obligations. In the event of a Termination without Good Reason, the Company may, in its sole and absolute discretion, by written notice accelerate such date of termination without changing the characterization of such termination as a termination by Executive without Good Reason. Following a Termination Without Good Reason, except as set forth in this Section 5.7, Executive shall have no further rights to any compensation or any other benefits under this Agreement.
5.8.Termination of Employment in Connection With a Change in Control. Notwithstanding the terms set forth in Section 5.5 and 5.6, if Executive’s employment with the Company is terminated pursuant to Section 5.5 or Section 5.6 hereof (i) within 90 days prior to the effective time of a Change in Control or (ii) from the effective time of a Change in Control until the date that is 12 months after the occurrence of a Change in Control, subject to the same conditions on payment and benefits set forth in Section 5.5, (i) Executive shall be entitled to the payments and
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benefits provided in Sections 5.5(a), (b), (c) and (e) hereof, (ii) Executive shall be entitled to an amount equal to one and a half (1.5) times the sum of (y) an amount equal to Executive’s Base Salary at the time of the Termination Date plus (z) an amount equal to Executive’s Target Bonus for the year in which the Termination Date occurs, such amount to be to be paid in one lump sum on the Termination Date; provided, however, in the event such termination occurs within the 90 day period prior to the effective time of a Change in Control, the amount due to Executive under clause (ii) that is in excess of the amount previously paid to Executive under Section 5.5(d), shall be paid within sixty (60) days following the effective time of such Change in Control, and (iii) all equity incentive awards held by Executive which are subject to performance-based vesting conditions will vest based upon target performance, effective as of the date of Executive’s termination and will be settled within 60 days of the later of the Termination Date or, if later, Change in Control (or, to the extent required to comply with Section 409A of the Code, such later time as specified in the applicable award agreement). For the avoidance of doubt, Executive shall not be entitled to duplicate amounts under Section 5.5(d) and clause (ii) of the foregoing sentence. With respect to clause (iii) of the foregoing sentence, in the event of a termination of employment which occurs prior to a Change in Control, any such award shall remain outstanding for ninety (90) days following such termination of employment and, if no Change in Control has occurred as of such date, shall be treated in accordance with the terms of the applicable award agreement (including, if applicable, treating any unvested performance-based equity incentive awards as forfeited as of the Termination Date).
5.9.Release. Notwithstanding any provision herein to the contrary, the payment of any amount or provision of any benefit pursuant to Section 5.5, Section 5.6 or 5.8 (other than the Accrued Obligations) (collectively, the “Severance Benefits”) shall be conditioned upon Executive’s execution, delivery to the Company, and non-revocation of the Release of Claims (and the expiration of any revocation period contained in such Release of Claims) within sixty (60) days following the date of Executive’s termination of employment hereunder. If Executive fails to execute the Release of Claims in such a timely manner so as to permit any revocation period to expire prior to the end of such sixty (60) day period, or timely revokes Executive’s acceptance of such release following its execution, Executive shall not be entitled to any of the Severance Benefits. Further, to the extent that any of the Severance Benefits constitutes “nonqualified deferred compensation” for purposes of Section 409A of the Code, any payment of any amount or provision of any benefit otherwise scheduled to occur prior to the sixtieth (60th) day following the date of Executive’s termination of employment hereunder, but for the condition on executing the Release of Claims as set forth herein, shall not be made until the first regularly scheduled payroll date following such sixtieth (60th) day, and any remaining Severance Benefits thereafter due shall be provided to Executive according to the applicable schedule set forth herein.
6.Section 280G. Notwithstanding anything to the contrary in this Agreement, this Section 6 shall apply in the event of (i) a “change in the ownership or effective control” of the Company or (ii) a “change in the ownership of a substantial portion of the assets” of the Company, each within the meaning of Section 280G of the Code (collectively, an “Excise Tax Event”). If an Excise Tax Event is consummated, and as a result any payments and benefits provided for in this Agreement, together with any other payments and benefits which Executive has the right to receive from the Company or any of its affiliates, would constitute a “parachute payment” (as defined in Section 280G(b)(2) of the Code), then the payments and benefits provided for in this Agreement shall be either (a) reduced (but not below zero) so that the present value of such total amounts and benefits received by Executive from the Company and its affiliates will be one dollar ($1.00) less than three times Executive’s “base amount” (as defined in Section 280G(b)(3) of the Code) and so that no portion of such amounts and benefits received by Executive shall be subject to the excise tax imposed by Section 4999 of the Code, or any interest or penalties with respect to such excise tax (such excise tax, together with any such interest or penalties, are hereinafter collectively referred to as the “Excise Tax”), or (b) paid in full, whichever produces the better net after-tax position to Executive (taking into account any applicable
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Excise Tax and any other applicable taxes). The reduction of payments and benefits hereunder, if applicable, shall be made in the following order: (1) by reducing the amounts of any payments or benefits that would not constitute deferred compensation under Section 409A, to the extent necessary to decrease the payments subject to the Excise Tax, as agreed by the Company and Executive; (2) next, by reducing, payments or benefits to be paid in cash hereunder and that constitute deferred compensation under Section 409A in the order in which such payment or benefit would be paid or provided (beginning with such payment or benefit that would be made last in time and continuing, to the extent necessary, through to such payment or benefit that would be made first in time); and (3) finally, by reducing any non-cash or in-kind benefit to be provided hereunder and that constitute deferred compensation under Section 409A in a similar order to that described in clause (2). The determination as to whether any such reduction in the amount of the payments and benefits provided hereunder is necessary shall be made by the Company in good faith. If a reduced payment or benefit is made or provided and through error or otherwise that payment or benefit, when aggregated with other payments and benefits from the Company (or its affiliates) used in determining if a “parachute payment” exists, exceeds one dollar ($1.00) less than three times Executive’s base amount, then Executive shall immediately repay such excess to the Company upon notification that an overpayment has been made. Nothing in this Section 6 shall require the Company to be responsible for, or have any liability or obligation with respect to, Executive’s Excise Tax liabilities.
7.Cooperation. The parties agree that certain matters in which Executive will be involved during the Employment Term may necessitate Executive’s cooperation in the future. Accordingly, following the termination of Executive’s employment for any reason, to the extent reasonably requested by the Board, Executive shall cooperate with the Company in connection with matters arising out of Executive’s service to the Company; provided, that, the Company shall make reasonable efforts to minimize disruption of Executive’s other activities. The Company shall reimburse Executive for reasonable expenses incurred in connection with such cooperation and, to the extent that Executive is required to spend substantial time on such matters, the Company shall compensate Executive at an hourly rate based on Executive’s Base Salary on the Termination Date, unless such time is as a witness in a legal proceeding, in which case the Company will only pay costs and expenses as permitted by law.
8.Confidential Information. Executive recognizes that the nature of Executive’s services are such that Executive will have access to information that constitutes trade secrets, is of a confidential nature, is of great value to the Company Group or is the foundation on which the business of the Company is predicated (“Confidential Information”). Executive agrees, during Executive’s employment and thereafter, not to disclose to any person other than the Company Group’s employees or the Company Group’s legal counsel or other parties authorized by the Company Group to receive confidential information nor use for any purpose, other than the performance of this Agreement, any Confidential Information. Confidential Information includes data or material (regardless of form) which is: (a) a trade secret; (b) provided, disclosed or delivered to Executive by the Company, any officer, director, employee, agent, attorney, accountant, consultant or other person or entity employee by the Company in any capacity, any customer, borrower or business associate of the Company Group or any public authority having jurisdiction over the Company Group of any business activity conducted by the Company Group; or (c) produced, developed, obtained or prepared by or on behalf of Executive or the Company Group (whether or not such information was developed in the performance of this Agreement) with respect to the Company Group or any assets, business activities, officers, directors, employees, borrowers or customers of the foregoing. However, Confidential Information will not include any information, data or material which at the time of disclosure or use was generally available to the public other than by a breach of this Agreement, was available to the party to whom disclosed on a non-confidential basis by disclosure or access provided by the Company Group or a third party, or was otherwise developed or obtained independently by the person to whom disclosed without a breach of this Agreement. The foregoing notwithstanding, nothing in this Agreement prohibits Executive from reporting possible violations of federal law or regulation to any governmental agency or entity,
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including but not limited to the Department of Justice, the Securities and Exchange Commission, Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. On request by the Company, the Company will be entitled to a copy of any Confidential Information in the possession of Executive. The provisions of this Section 8 will survive the termination, expiration or cancellation of Executive’s employment. Executive will deliver to the Company all originals and copies of the documents or materials containing Confidential Information. Executive further agrees that if Executive executes additional Company policies or agreements to protect the Confidential Information, this Agreement shall be read in conjunction with any such policies or Agreements to provide the broadest and greatest protection to the Confidential Information.
9.Protective Covenants.
9.1.Acknowledgment. Executive acknowledges and agrees that the services to be rendered by Executive to the Company are of a special and unique character; that Executive will obtain knowledge and skill relevant to the Company’s industry, methods of doing business and marketing strategies by virtue of Executive’s employment; and that the protective covenants and other terms and conditions of this Agreement are reasonable and reasonably necessary to protect the legitimate business interest of the Company Group. Executive further acknowledges and agrees that the nature of Executive’s position gives Executive access to and knowledge of Confidential Information and places Executive in a position of trust and confidence with the Company Group. Executive further understands and acknowledges that the intellectual services he provides to the Company Group are unique, special, and extraordinary. Executive further understands and acknowledges that the Company Group’s ability to reserve these for the exclusive knowledge and use of the Company Group is of great competitive importance and commercial value to the Company Group, and that improper use or disclosure by Executive is likely to result in unfair or unlawful competitive activity.
9.2.Non-Competition. Executive covenants and agrees that during Executive’s employment with the Company and for a period of twelve (12) consecutive months after the Termination Date, irrespective of the reason for the termination (the “Restricted Period”), Executive will not directly or indirectly, engage in any business (as an owner, joint venturer, partner, stockholder, director, officer, consultant, agent or otherwise, other than as the owner of less than 1% of the outstanding class of a publicly traded security) which competes with the business in which the Company is presently engaged or may be engaged at any time during the Employment Term. Nothing in this Section 9.2 shall be construed as limiting Executive’s duty of loyalty to the Company while he is employed by the Company, or any other duty he may otherwise have to the Company while he is employed by the Company.
9.3.Non-Solicitation of Employees. Executive covenants and agrees that during the Restricted Period, Executive shall not, individually or jointly with others, directly or indirectly, recruit, hire, encourage, or attempt to recruit or hire, or by assisting others, any employees of the Company Group with whom Executive worked, had business contact, or about whom Executive gained non-public or Confidential Information (the “Company Group’s employees or former employees”), nor shall Executive contact or communicate with same, other than on behalf of the Company Group, for the purpose of inducing, assisting, encouraging and/or facilitating the Company Group’s employees to terminate their employment with the Company Group or find employment or work with another person or entity.
Additionally, Executive shall not provide or pass along to any person or entity the name, contact and/or background information about any of the Company Group’s employees or provide references or any other information about them. Additionally, Executive shall not provide or pass along to the
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Company Group’s employees any information regarding potential jobs or entities or persons to work for, including but not limited to, job openings, job postings, or the names or contact information of individuals or companies hiring people or accepting job applications. Further, Executive shall not offer employment to or work to any employees of the Company Group’s employees or former employees. For purposes of this covenant “Company Group’s employees or former employees” shall refer to employees of the Company Group Executive supervised, was supervised by, or otherwise worked with in any capacity during the twelve (12) month period prior to the Termination Date.
9.4.Non-Solicitation of Customers. Executive understands and acknowledges that because of Executive’s experience with and relationship to the Company Group, he will have access to and learn about much or all of the Company Group’s customer information and goodwill. “Customer Information” includes, but is not limited to, names, phone numbers, addresses, e-mail addresses, order history, order preferences, chain of command, pricing information and other information identifying facts and circumstances specific to the customer and relevant to Company’s industry. Executive understands and acknowledges that loss of this customer relationship and/or goodwill will cause significant and irreparable harm to the Company. Executive agrees and covenants, that during the Restricted Period, Executive shall not, directly or indirectly, solicit, contact (including but not limited to e-mail, regular mail, express mail, telephone, fax, and instant message), attempt to contact or meet with the Company’s current or prospective customers for purposes of offering or accepting goods or services similar to or competitive with those offered by the Company.
9.5.Reasonableness. The Company and Executive have attempted to specify a reasonable period of time and reasonable restrictions to which the provisions of this Section 9 shall apply. The Company and Executive agree, however, that if a court or agency of competent jurisdiction determines that any of the terms of this Section 9 are not enforceable because they are overbroad or for any other reason, the provisions of this Section 9 shall be reformed and modified to reflect restrictions that are determined to be reasonable by such court or agency of competent jurisdiction.
10.Non-Disparagement. Executive agrees and covenants that he will not at any time make, publish or communicate to any person or entity or in any public forum any defamatory or disparaging remarks, comments or statements concerning the Company Group or its businesses, or any of its employees, officers, and existing and prospective customers, suppliers, investors and other associated third parties. This Section 10 does not, in any way, restrict or impede Executive from exercising protected rights to the extent that such rights cannot be waived by agreement or from complying with any applicable law or regulation or a valid order of a court of competent jurisdiction or an authorized government agency, provided, that such compliance does not exceed that required by the law, regulation or order. Executive shall promptly provide written notice of any such order to the CEO. The Company agrees and covenants that, as soon as reasonably practicable following the date hereof, it shall instruct its executive officers and directors to refrain from making any defamatory or disparaging remarks, comments, or statements concerning Executive to any third parties.
11.Remedies. In the event of a breach or threatened breach by Executive of Sections 7 - 10 of this Agreement, Executive hereby consents and agrees that the Company shall be entitled to seek, in addition to other available remedies, a temporary or permanent injunction or other equitable relief against such breach or threatened breach from any court of competent jurisdiction, without the necessity of showing any actual damages or that money damages would not afford an adequate remedy, and without the necessity of posting any bond or other security. The aforementioned equitable relief shall be in addition to, not in lieu of, legal remedies, monetary damages or other available forms of relief.
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12.Arbitration. The Company and Executive mutually consent to the final resolution by binding arbitration in New York, New York, of any and all claims or disputes the Company may have against or with Executive, and/or Executive may have against or with Company. Arbitration shall be administered exclusively by American Arbitration Association and shall be conducted consistent with the rules, regulations and requirements thereof for employment disputes as well as any requirements imposed by state law. Any arbitral award determination shall be final and binding upon the Parties. Notwithstanding the foregoing, expressly excluded from Arbitration are any claims Executive may have for workers’ compensation benefits or unemployment compensation benefits. Also excluded are claims for declaratory relief or injunctive relief and/or damages arising from alleged unfair competition or solicitation, theft of trade secrets or business property, or the enforceability or breach of protective covenants.
13.Proprietary Rights.
13.1.Work Product. Executive acknowledges and agrees that all writings, works of authorship, technology, inventions, discoveries, ideas and other work product of any nature whatsoever, that are created, prepared, produced, authored, edited, amended, conceived or reduced to practice by Executive individually or jointly with others during the period of Executive’s employment by the Company and relating in any way to the business or contemplated business, research or development of the Company (regardless of when or where the Work Product is prepared or whose equipment or other resources is used in preparing the same) and all printed, physical and electronic copies, all improvements, rights and claims related to the foregoing, and other tangible embodiments thereof (collectively, “Work Product”), as well as any and all rights in and to copyrights, trade secrets, trademarks (and related goodwill), patents and other intellectual property rights therein arising in any jurisdiction throughout the world and all related rights of priority under international conventions with respect thereto, including all pending and future applications and registrations therefor, and continuations, divisions, continuations-in-part, reissues, extensions and renewals thereof (collectively, “Intellectual Property Rights”), shall be the sole and exclusive property of the Company.
13.2.Work Made for Hire; Assignment. Executive acknowledges that, by reason of being employed by the Company at the relevant times, to the extent permitted by law, all of the Work Product consisting of copyrightable subject matter is “work made for hire” as defined in 17 U.S.C. § 101 and such copyrights are therefore owned by the Company. To the extent that the foregoing does not apply, Executive hereby irrevocably assigns to the Company, for no additional consideration, Executive’s entire right, title and interest in and to all Work Product and Intellectual Property Rights therein, including the right to sue, counterclaim and recover for all past, present and future infringement, misappropriation or dilution thereof, and all rights corresponding thereto throughout the world. Nothing contained in this Agreement shall be construed to reduce or limit the Company’s rights, title or interest in any Work Product or Intellectual Property Rights so as to be less in any respect than that the Company would have had in the absence of this Agreement.
13.3.Further Assurances; Power of Attorney. During and after Executive’s employment, Executive agrees to reasonably cooperate with the Company to (a) apply for, obtain, perfect and transfer to the Company the Work Product as well as an Intellectual Property Right in the Work Product in any jurisdiction in the world; and (b) maintain, protect and enforce the same, including, without limitation, executing and delivering to the Company any and all applications, oaths, declarations, affidavits, waivers, assignments and other documents and instruments as shall be requested by the Company. Executive hereby irrevocably grants the Company power of attorney to execute and deliver any such documents on Executive’s behalf in Executive’s name and to do all other lawfully permitted acts to transfer the Work Product to the Company and further the transfer, issuance, prosecution and maintenance of all Intellectual Property Rights therein, to the full extent permitted by law, if Executive does not promptly cooperate with the Company’s request (without limiting the rights
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the Company shall have in such circumstances by operation of law). The power of attorney is coupled with an interest and shall not be effected by Executive’s subsequent incapacity.
13.4.No License. Executive understands that this Agreement does not, and shall not be construed to, grant Executive any license or right of any nature with respect to any Work Product or Intellectual Property Rights or any Confidential Information, materials, software or other tools made available to Executive by the Company.
14.Exit Obligations. Upon voluntary or involuntary termination of Executive’s employment, Executive shall (i) provide or return to the Company any and all Company Group property and all Company Group documents and materials belonging to the Company and stored in any fashion, including but not limited to those that constitute or contain any Confidential Information or Work Product, that are in the possession or control of Executive, whether they were provided to Executive by the Company Group or any of its business associates or created by Executive in connection with Executive’s employment by the Company; and (ii) delete or destroy all copies of any such documents and materials not returned to the Company that remain in Executive’s possession or control, including those stored on any non-Company Group devices, networks, storage locations and media in Executive’s possession or control.
15.Publicity. Executive hereby irrevocably consents to any and all uses and displays, by the Company Group and its agents, representatives and licensees, of Executive’s name, voice, likeness, image, appearance and biographical information in, on or in connection with any pictures, photographs, audio and video recordings, digital images, websites, television programs and advertising, other advertising and publicity, sales and marketing brochures, books, magazines, other publications, CDs, DVDs, tapes and all other printed and electronic forms and media throughout the world, at any time during or after the period of Executive’s employment by the Company, for all legitimate commercial and business purposes of the Company Group (“Permitted Uses”) without further consent from or royalty, payment or other compensation to Executive. Executive hereby forever waives and releases the Company Group and its directors, officers, employees and agents from any and all claims, actions, damages, losses, costs, expenses and liability of any kind, arising under any legal or equitable theory whatsoever at any time during or after the period of Executive’s employment by the Company, arising directly or indirectly from the Company Group’s and its agents’, representatives’ and licensees’ exercise of their rights in connection with any Permitted Uses.
16.Taxes. The Company may withhold from any payments made under this Agreement all applicable taxes, including but not limited to income, employment, and social insurance taxes, as shall be required by law. Executive acknowledges and represents that the Company has not provided any tax advice to Executive in connection with this Agreement and that Executive has been advised by the Company to seek tax advice from Executive’s own tax advisors regarding this Agreement and payments that may be made to Executive pursuant to this Agreement, including specifically, the application of the provisions of Section 409A of the Code to such payments.
17.Set Off; Mitigation. The Company’s obligation to pay Executive the amounts provided and to make the arrangements provided hereunder shall be subject to set-off, or recoupment of agreed amounts owed by Executive to the Company or its affiliates; provided, however, that to the extent any amount so subject to set-off, counterclaim, or recoupment is payable in installments hereunder, such set-off, counterclaim, or recoupment shall not modify the applicable payment date of any installment, and to the extent an obligation cannot be satisfied by reduction of a single installment payment, any portion not satisfied shall remain an outstanding obligation of Executive and shall be applied to the next installment only at such time the installment is otherwise payable pursuant to the specified payment schedule, no right shall exist with regard to setoff or recoupment to the extent it would violate Section 409A of the Code and there shall be no right to setoff or recoupment with regard to any not agreed upon
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amounts. Executive shall not be required to mitigate the amount of any payment provided pursuant to this Agreement by seeking other employment or otherwise, the amount of any payment provided for pursuant to this Agreement shall not be reduced by any compensation earned as a result of Executive’s other employment or otherwise.
18.Governing Law. This Agreement, for all purposes, shall be construed in accordance with the laws of the State of New York without regard to conflicts of law principles; provided, however, that any provisions relating to equity compensation shall also be subject to any federal or state securities laws that may be applicable and the rules of any stock exchange on which the relevant equity is listed for trading.
19.Entire Agreement. Except as expressly set forth herein, this Agreement contains all of the understandings and representations between Executive and the Company pertaining to the subject matter hereof and supersedes all prior and contemporaneous understandings, agreements, representations and warranties, both written and oral, with respect to such subject matter, except that nothing herein shall be deemed to alter or amend that certain Indemnification Agreement between Executive and the Company or any of Executive’s obligations pursuant to any agreement or plan concerning confidential and proprietary information, intellectual property, or any other protective or restrictive covenants, each of which is intended to be preserved hereby and shall be in addition to, and not in lieu of, the similar restrictions and covenants set forth herein. The parties mutually agree that the Agreement can be specifically enforced in court and can be cited as evidence in legal proceedings alleging breach of the Agreement.
20.Modification and Waiver. No provision of this Agreement may be amended or modified unless such amendment or modification is agreed to in writing and signed by Executive and by an executive officer of the Company. No waiver by either of the parties of any breach by the other party hereto of any condition or provision of this Agreement to be performed by the other party hereto shall be deemed a waiver of any similar or dissimilar provision or condition at the same or any prior or subsequent time, nor shall the failure of or delay by either of the parties in exercising any right, power or privilege hereunder operate as a waiver thereof to preclude any other or further exercise thereof or the exercise of any other such right, power or privilege.
21.Severability. Should any provision of this Agreement be held by a court or arbitrator of competent jurisdiction to be enforceable only if modified, or if any portion of this Agreement shall be held as unenforceable and thus stricken, such holding shall not affect the validity of the remainder of this Agreement, the balance of which shall continue to be binding upon the parties with any such modification to become a part hereof and treated as though originally set forth in this Agreement. The parties further agree that any such court or arbitrator is expressly authorized to modify any such unenforceable provision of this Agreement in lieu of severing such unenforceable provision from this Agreement in its entirety, whether by rewriting the offending provision, deleting any or all of the offending provision, adding additional language to this Agreement or by making such other modifications as it deems warranted to carry out the intent and agreement of the parties as embodied herein to the maximum extent permitted by law. The parties expressly agree that this Agreement as so modified by the court or arbitrator shall be binding upon and enforceable against each of them. In any event, should one or more of the provisions of this Agreement be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions hereof, and if such provision or provisions are not modified as provided above, this Agreement shall be construed as if such invalid, illegal or unenforceable provisions had not been set forth herein.
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22.Captions. Captions and headings of the sections and paragraphs of this Agreement are intended solely for convenience and no provision of this Agreement is to be construed by reference to the caption or heading of any Section or paragraph.
23.Counterparts. This Agreement may be executed in separate counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument.
24.Additional Section 409A Provisions.
Notwithstanding any provision in this Agreement to the contrary:
24.1.Any payment that is deemed nonqualified deferred compensation (withing the meaning of Section 409A of the Code) and otherwise required to be made hereunder to Executive at any date as a result of the termination of Executive’s employment shall be delayed for such period of time as may be necessary to meet the requirements of Section 409A(a)(2)(B)(i) of the Code (the “Delay Period”). On the first business day following the expiration of the Delay Period, Executive shall be paid, in a single cash lump sum, an amount equal to the aggregate amount of all payments delayed pursuant to the preceding sentence, and any remaining payments not so delayed shall continue to be paid pursuant to the payment schedule set forth herein.
24.2.Each payment in a series of payments hereunder shall be deemed to be a separate payment for purposes of Section 409A of the Code.
24.3.Notwithstanding anything herein to the contrary, the payment (or commencement of a series of payments) hereunder of any nonqualified deferred compensation (within the meaning of Section 409A of the Code) upon a termination of employment shall be delayed until such time as Executive has also undergone a “separation from service” as defined in Treas. Reg. 1.409A-1(h), at which time such nonqualified deferred compensation (calculated as of the date of Executive’s termination of employment hereunder) shall be paid (or commence to be paid) to Executive on the schedule set forth in Section 5 as if Executive had undergone such termination of employment (under the same circumstances) on the date of Executive’s ultimate “separation from service.”
24.4.To the extent that any right to reimbursement of expenses or payment of any benefit in-kind under this Agreement constitutes nonqualified deferred compensation (within the meaning of Section 409A of the Code), (i) any such expense reimbursement shall be made by the Company no later than the last day of the taxable year following the taxable year in which such expense was incurred by Executive, (ii) the right to reimbursement or in-kind benefits shall not be subject to liquidation or exchange for another benefit, and (iii) the amount of expenses eligible for reimbursement or in-kind benefits provided during any taxable year shall not affect the expenses eligible for reimbursement or in-kind benefits to be provided in any other taxable year; provided, that the foregoing clause shall not be violated with regard to expenses reimbursed under any arrangement covered by Section 105(b) of the Code solely because such expenses are subject to a limit related to the period the arrangement is in effect.
24.5.To the extent any payment of nonqualified deferred compensation (within the meaning of Section 409A of the Code) is subject to the Executive’s execution and non-revocation of a Release of Claims and the period to consider and revoke such Release of Claims spans two taxable years, then the payment of such nonqualified deferred compensation shall be payable in the later of the two taxable years to the extent necessary to comply with Section 409A of the Code.
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24.6.While the payments and benefits provided hereunder are intended to be structured in a manner to avoid the implication of any penalty taxes under Section 409A of the Code, in no event whatsoever shall any member of the Company Group be liable for any additional tax, interest, or penalties that may be imposed on Executive as a result of Section 409A of the Code for failing to comply with Section 409A of the Code (other than for withholding obligations or other obligations applicable to employers, if any, under Section 409A of the Code) provided that the Company Group act in reasonable good faith in connection with complying with Section 409A of the Code.
25.Successors and Assigns; No Third-Party Beneficiaries.
25.1.This Agreement shall inure to the benefit of the Company and its respective permitted successors and assigns. Neither this Agreement nor any of the rights, obligations, or interests arising hereunder may be assigned by the Company to any person other than to an acquiror of all or substantially all of the assets of the Company who assumes the agreement in writing.
25.2.Executive’s rights and obligations under this Agreement shall not be transferable by Executive by assignment or otherwise, without the prior written consent of the Company; provided, however, that if Executive shall die, all amounts then payable to Executive hereunder shall be paid in accordance with the terms of this Agreement to Executive’s devisee, legatee, or other designee, or if there be no such designee, to Executive’s estate.
25.3.Except as otherwise set forth in Section 5.3 or Section 25.2 hereof, nothing expressed or referred to in this Agreement will be construed to give any Person other than the Company, the other members of the Company Group, and Executive any legal or equitable right, remedy, or claim under or with respect to this Agreement or any provision of this Agreement.
26.Notification to Subsequent Employer. When Executive’s employment with the Company terminates, Executive agrees to notify any subsequent employer of the protective covenants sections contained in this Agreement. Executive will also deliver a copy of such notice to the Company before Executive commences employment with any subsequent employer. In addition, Executive authorizes the Company to provide a copy of the protective covenants sections of this Agreement to third parties, including but not limited to, Executive’s subsequent, anticipated or possible future employer.
27.Notice.
27.1.Place of Delivery. Every notice or other communication relating to this Agreement shall be in writing, and shall be mailed to or delivered to the party for whom or which it is intended at such address as may from time to time be designated by it in a notice mailed or delivered to the other party as herein provided; provided, that unless and until some other address be so designated, all notices and communications by Executive to the Company shall be mailed or delivered to the Company at its principal executive office, and all notices and communications by the Company to Executive may be given to Executive personally or may be mailed to Executive at Executive’s last known address, as reflected in the Company’s records.
27.2.Date of Delivery. Any notice so addressed shall be deemed to be given (i) if delivered by hand, on the date of such delivery, (ii) if mailed by courier or by overnight mail, on the first business day following the date of such mailing, and (iii) if mailed by registered or certified mail, on the third business day after the date of such mailing.
28.Representations of Executive. Executive represents and warrants to the Company that:
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28.1.Executive is entering into this Agreement voluntarily and that Executive’s employment hereunder and compliance with the terms and conditions hereof will not conflict with or result in the breach by Executive of any agreement to which Executive is a party or by which Executive may be bound;
28.2.Executive has not violated, and in connection with Executive’s employment with the Company will not violate, any non-solicitation, non-competition, or other similar covenant or agreement with any Person by which Executive is or may be bound; and
28.3.In connection with Executive’s employment with the Company, Executive will not use any confidential or proprietary information Executive may have obtained in connection with employment or service with any prior service recipient.
29.Survival. Upon the expiration or other termination of this Agreement, the respective rights and obligations of the parties hereto shall survive such expiration or other termination to the extent necessary to carry out the intentions of the parties under this Agreement.
30.Acknowledgment of Full Understanding. EXECUTIVE ACKNOWLEDGES AND AGREES THAT HE HAS FULLY READ, UNDERSTANDS AND VOLUNTARILY ENTERS INTO THIS AGREEMENT. EXECUTIVE ACKNOWLEDGES AND AGREES THAT HE HAS HAD AN OPPORTUNITY TO ASK QUESTIONS AND CONSULT WITH AN ATTORNEY OF EXECUTIVE’S CHOICE BEFORE SIGNING THIS AGREEMENT.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above-written.
COMTECH TELECOMMUNICATIONS CORP.
By: /s/ Michael A. Bondi
Name: Mike Bondi
Title: Chief Financial Officer
EXECUTIVE
By: /s/ Kenneth Traub
Name: Kenneth Traub
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Appendix A
Definitions
“Accrued Obligations” shall mean (i) all accrued but unpaid Base Salary through the date of termination of Executive’s employment, (ii) any unpaid or unreimbursed expenses incurred in accordance with Section 4.6 hereof, (iii) any benefits provided under the Company’s employee benefit plans upon a termination of employment, including the Equity Plan and related award grants, and (iv) all rights to indemnification and directors and officers liability insurance coverage.
“Base Salary” shall mean the salary provided in Section 4.1, as in effect from time to time.
“Board” shall mean the Board of Directors of the Company.
“Cause” shall mean (i) Executive’s willful misconduct, gross negligence, material dishonesty, misappropriation, breach of fiduciary duty or fraud with regard to the Company or any of its assets or businesses, (ii) Executive’s conviction of or pleading of guilty or nolo contendere with regard to a crime that constitutes a felony (or state law equivalent) or a crime that constitutes a misdemeanor involving moral turpitude; (iii) Executive’s material failure to perform Executive’s duties (other than a failure resulting from Executive’s Disability), (iv) Executive’s deliberate failure to comply with any valid and legal directive of the Board; (v) Executive’s material violation of the Company’s written policies or codes of conduct, including written policies relating to discrimination, harassment, performance of illegal or unethical activities, and ethical misconduct; or (vi) Executive’s material breach of any obligation under this Agreement or any other written agreement with the Company. Except for a failure, breach or refusal which, by its nature, cannot reasonably be expected to be cured, Executive shall have ten (10) business days from the delivery date of the notice of termination within which to cure any acts constituting Cause. The Company may place Executive on paid leave for up to 60 days while it is determining whether there is a basis to terminate Executive’s employment for Cause. Such paid leave will not constitute Good Reason.
“CEO” shall mean the Company’s Chief Executive Officer.
“Change in Control” shall have the meaning set forth in the Equity Plan.
“Code” shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder.
“Company Group” shall mean the Company together with any of its direct or indirect subsidiaries.
“Compensation Committee” shall mean the Compensation Committee of the Board.
“Disability” shall have the meaning set forth in the Equity Plan.
“Employment Term” shall mean the period during which Executive is employed by the Company, as specified in Section 2 hereof.
“Equity Plan” shall mean the Company’s 2000 Stock Incentive Plan, as amended from time to time or any other equity incentive plan which is sponsored by the Company or its affiliate or successor and in effect as of the Termination Date.
“Good Reason” shall mean the occurrence of any of the following, in each case during the Employment Term without Executive’s written consent: (i) a material reduction in Executive’s Base Salary, (ii) any material breach by the Company of any material provision of this Agreement, (iii) the Company’s failure to obtain an agreement from any successor to the Company to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no succession had taken place, except where such assumption occurs by operation of law, (iv) a material diminution in the nature or scope of Executive’s authority or responsibilities from those applicable to Executive as of the Effective Date (or as modified thereafter consistent with this Agreement); or (v) a material diminution in the duties associated with the positions described in Section 2 as such duties are constituted as of the Effective Date; provided, that in no event shall Executive’s resignation be for “Good Reason” unless (x) an event or circumstance set forth in clauses (i), (ii), (iii), (iv), or (v) shall have occurred and Executive provides the Company with written notice thereof within thirty (30) days after the initial occurrence or existence of such event or circumstance, which notice specifically identifies the event or circumstance that Executive believes constitutes Good Reason, (y) the Company fails to correct the circumstance or event so identified within thirty (30) days after the receipt of such notice, and (z) Executive resigns within sixty (60) days after the date of delivery of the notice referred to in clause (x) above. Executive acknowledges and agrees that Executive’s exclusive remedy in the event of any breach of this Agreement shall be to assert Good Reason pursuant to the terms and conditions of Section 5.6. Notwithstanding the foregoing, the Board’s decision to remove Executive as a member of the Board or as a member of any other directorship or committee of the Company Group shall not constitute Good Reason.
“Release of Claims” shall mean the Release of Claims in the form provided to Executive on or following the Termination Date.
Exhibit 10.9
CASH-SETTLED PERFORMANCE AWARD AGREEMENT
PURSUANT TO THE
COMTECH TELECOMMUNICATIONS CORP.
2023 EQUITY AND INCENTIVE PLAN
PURSUANT TO THE
COMTECH TELECOMMUNICATIONS CORP.
2023 EQUITY AND INCENTIVE PLAN
THIS CASH-SETTLED PERFORMANCE AWARD AGREEMENT (this “Agreement”), is made effective as of ###GRANT_DATE###, by and between Comtech Telecommunications Corp. (the “Company”) and ###PARTICIPANT_NAME### (the “Participant”).
WHEREAS, the Board of Directors of the Company (the “Board”) adopted, and the stockholders of the Company approved, the Comtech Telecommunications Corp. 2023 Equity and Incentive Plan (the “Plan”);
WHEREAS, pursuant to Section 1.3 of the Plan, the Committee has been appointed to administer the Plan;
WHEREAS, the Company, through the Committee under the Plan, wishes to grant to the Participant a Cash-Settled Performance Award under Article IV of the Plan that, following the achievement of the specified levels of performance, as set forth on the document titled “Performance Measures and Corresponding Earned Units” attached hereto as Appendix A (the “Performance Measures”), and, subject to the Participant’s continuing service with the Company or an Affiliate through the Final Certification Date (as defined below), may provide for the issuance of an amount in cash equal to (i) the number of performance units corresponding to the level of achievement of the Performance Measures (subject to accelerated earning, vesting and payment of such amount as specifically provided herein) (such performance units, the “Performance Units”), multiplied by (ii) the Fair Market Value of a share of Common Stock on the business day immediately prior to the Final Certification Date; and
WHEREAS, the Performance Units shall be subject to the terms of this Agreement and the Plan.
NOW, THEREFORE, the Company and the Participant agree as follows:
1. Grant of Cash-Settled Performance Award. Subject to the restrictions, terms and conditions of the Plan and this Agreement, on ###GRANT_DATE### (the “Grant Date”), the Company awarded and granted to the Participant an award under Article IV of the Plan with the designated target number of ###TOTAL_AWARDS### Performance Units (the “Target Performance Units”), which provides to the Participant a conditional right to earn the Target Performance Units, or a number of Performance Units for each Applicable Performance Period (as defined below) ranging from 0% to 200% of the Target Performance Units, by achievement of the designated levels of performance of each performance criteria as specified in the Performance Measures attached hereto as Appendix A, the earning of which would entitle the Participant to receive for each Performance Unit earned, in accordance with Section 2 below, an amount in cash equal to (i) the number of Performance Units corresponding to the level of achievement of the Performance Measures, multiplied by (ii) the Fair Market Value of a share of Common Stock on the business day immediately prior to the Final Certification Date, subject to the provisions of Sections 3 and 4 below.
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2. Certification Date. Subject to the Participant’s not incurring a termination of employment or service prior to the Final Certification Date (except as otherwise specifically set forth in this Agreement), upon the Committee determining and certifying the achievement of the Applicable Performance Measures on each of the applicable Annual Certification Dates with respect to the performance period beginning on [●] and ending on [●] (the “Full Three-Year Performance Period”), the performance period beginning on [●] and ending on [●] (the “First Applicable Performance Period”), or the performance period beginning on [●] and ending on [●] (the “Second Applicable Performance Period,” and together with the Full Three-Year Performance Period and the First Applicable Performance Period, each an “Applicable Performance Period”), the Participant shall have the right to receive an amount equal to the Fair Market Value of one share of Common Stock as of the business day immediately prior to the Final Certification Date for each Performance Unit earned based on the level of attainment of the applicable Performance Measures for the Applicable Performance Period in accordance with Appendix A (such earned Performance Units, the “Earned Units”) during the Applicable Performance Period, subject to the Participant remaining employed through the applicable Annual Certification Date, except as otherwise provided in Section 3. The Committee shall certify the level of achievement of each of the Performance Measures no later than the fifteenth (15th) day of the third month following the end of the Applicable Performance Period (the date of each such certification the “Annual Certification Date”, and the date of the Annual Certification Date following the Full Three-Year Performance Period, the “Final Certification Date”). All Performance Units that do not become Earned Units following the Committee’s certification on the Final Certification Date under the terms hereof shall be forfeited on such Final Certification Date.
3. Death or Disability/Change in Control before the Final Certification Date; Effect of Terminations of Employment.
3.1. Death, Disability and Termination of Employment.
(i) In the event of the Participant’s death or Disability prior to the Final Certification Date and prior to forfeiture of the Performance Units, the Performance Measures for the Full Three-Year Performance Period shall be deemed to be satisfied at a level equal to the greater of the designated Target Performance Level or the Projected Performance Level (as defined in Appendix A) as of the date of such death or Disability, and the resulting number of Earned Units less Earned Units earned for a prior completed Applicable Performance Period (if any), together with the number of Earned Units earned for any previously completed Applicable Performance Period shall become fully vested and cash payments with respect thereto shall (subject to Plan Section 17.13) be distributed to the Participant or his or her beneficiary within sixty (60) days following the Participant’s death or Disability, with the Fair Market Value to determine the cash payment to be determined based on the Fair Market Value of a share of Common Stock as of the date of death or Disability. The term “Disability” shall have the meaning set forth in Section 409A(a)(2)(C)(i) of the Code, provided that a “Disability” shall be deemed to have occurred only if it qualifies as a disability within the meaning of Treasury Regulation Section 1.409A-1(e)(1).
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(ii) In the event of the Participant’s termination of employment or service without Cause (and other than due to death or Disability) by the Company and its Affiliates on a date that is both prior to the Final Certification Date and prior to a Change in Control occurring, any Earned Units earned with respect to any previously-completed Applicable Performance Period shall be forfeited and disregarded, and the Participant shall earn for the Full Three-Year Performance Period a number of Earned Units (which shall not be less than zero) in an amount equal to the product of (x) the number of Performance Units the Participant would have earned based on the actual achievement of each of the Performance Measures for the Full Three-Year Performance Period as if the Participant remained employed or engaged by the Company through the Final Certification Date, times (y) a fraction, the numerator of which is the number of days during the Full Three-Year Performance Period that the Participant was employed or engaged by the Company, and the denominator of which is 1,095. The resulting number of Earned Units (if any) shall become fully vested and cash payments with respect thereto shall be distributed to the Participant in accordance with Section 4 hereof, subject to Participant’s timely execution and non-revocation of a release agreement prior to the Final Certification Date in a form required by the Company.
(iii) In the event of a termination of employment or service due to the Participant’s resignation for any or no reason on a date that is prior to the Final Certification Date, the following provisions shall apply:
(a) If on the Grant Date, the Participant has ten or more years of qualifying service with the Company (as determined by the Committee in its sole discretion) (a “Qualifying Long-Term Employee”), any Earned Units earned with respect to any previously-completed Applicable Performance Period shall be forfeited and disregarded, and the Participant shall earn for the Full Three-Year Performance Period a number of Earned Units (which shall not be less than zero) in an amount equal to the product of (x) the number of Performance Units the Participant would have earned based on the actual achievement of each of the Performance Measures for the Full Three-Year Performance Period as if the Participant remained employed by the Company through the Final Certification Date, times (y) a fraction, the numerator of which is the number of days during the Full Three-Year Performance Period that the Participant was employed by the Company, and the denominator of which is 1,095. The resulting number of Earned Units (if any) shall become fully vested and cash payments with respect thereto shall be distributed to the Participant in accordance with Section 4 hereof, subject to Participant’s timely execution and non-revocation of a release agreement prior to the Final Certification Date in a form required by the Company.
(b) If on the Grant Date, the Participant is not a Qualifying Long-Term Employee, all Performance Units, including any Earned Units, shall be forfeited on the date of such termination of employment or service for no consideration.
(iv) In the event of a termination of employment or service for Cause, all Performance Units, including any Earned Units, shall be forfeited on the date of such termination of employment or service for Cause for no consideration.
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3.2. Change in Control. In the event of a Change in Control prior to the Final Certification Date, the Performance Measure for the Full Three-Year Performance Period shall be deemed to be satisfied at a level equal to the greater of the designated Target Performance Level or the Projected Performance Level (as defined in Appendix A) as of the date of such Change in Control, and the resulting number of earned Performance Units, less any previously Earned Units, shall be deemed to be Earned Units and shall become fully vested as of the Change in Control (including in the case of a Participant whose employment or service terminated between the time of the Change in Control and the Assumption Deadline (as defined below)) and all cash payments with respect to the vested Earned Units shall (subject to any limitations under Section 409A of the Code) be distributed to the Participant within sixty (60) days following the Change in Control, with the Fair Market Value to determine the cash payment to be determined based on the Fair Market Value of a share of Common Stock as of the date of the Change in Control (which, for the avoidance of doubt, shall be based on the highest consideration per share received by a holder of Common Stock in the transaction or series of transactions that gave rise to the Change in Control if shareholders receive consideration in connection with the Change in Control); provided, however, that if the Performance Units constitute nonqualified deferred compensation, within the meaning of Section 409A of the Code, and the Change in Control is not a “change in control event,” within the meaning of Section 409A of the Code or if settlement upon a Change in Control would otherwise be prohibited under Section 409A of the Code, then the cash payments calculated under this Section 3.2 with respect to vested Earned Units shall be distributed to the Participant in accordance with Section 4 hereof or upon the Participant’s earlier death or Disability. Notwithstanding the foregoing, if the Committee reasonably determines in good faith but subject to and only in accordance with Section 409A of the Code, prior to the Assumption Deadline, that any Performance Units that are not Earned Units shall be honored or assumed, or new awards substituted therefor (each such honored, assumed or substituted Performance Unit hereinafter called an "Alternative Performance Unit"), by Participant's employer (or the parent or a subsidiary of such employer), then no acceleration of earning or vesting shall occur with respect to the Performance Units solely due to such event, provided that, such Alternative Performance Units must meet the following criteria:
(i) Each Alternative Performance Unit must be based on stock that is traded on an established securities market, or that will be so traded within 30 days after the Change in Control, or provide for a cash payment not less than the cash value of the Performance Unit based on the highest consideration per share received by a holder of Common Stock in the transaction or series of transactions that gave rise to the Change in Control;
(ii) The Alternative Performance Units must provide such Participant with rights, terms, conditions and entitlements substantially equivalent to or better than the rights, terms, conditions and entitlements applicable under the Performance Units, including, but not limited to, an identical or better vesting schedule than applied prior to the Change in Control;
(iii) The Alternative Performance Unit must have economic value substantially equivalent to the value of each Performance Unit (such equivalent values to be determined as of the time of the Change in Control);
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(iv) In furtherance of clause (ii) above, the performance goal applicable to the Alternative Performance Units (the “Alternative Performance Measure”) and the corresponding level at which Alternative Performance Units shall be earned must be determined by the Committee to be not less probable of being achieved than the Performance Measure immediately prior to the Change in Control (assuming the Change in Control had not occurred and assuming that the Company had incurred no expense in connection with the Change in Control);
(v) The Alternative Performance Units must be structured in a manner intended to comply with Section 409A of the Code to avoid any adverse tax consequences thereunder, to the extent applicable;
(vi) The Alternative Performance Units shall provide that, in the event that, within two years following the Change in Control and prior to the Final Certification Date, either the Participant has a termination of employment or service by his or her employer other than for Cause (with the result that immediately thereafter the Participant is not employed by such employer or its parent or other affiliates or that the Alternative Performance Units otherwise would be forfeited under their terms but for this provision), or if the termination of employment or service would constitute a resignation for “Good Reason” under any other agreement by and between the Participant and the employer or its parent or other affiliates, and Participant effects a termination of employment or service for such Good Reason, then the Alternative Performance Measure for the Full Three-Year Performance Period shall be deemed to be satisfied at the Maximum Performance level (as defined in Appendix A) as of the date of such termination of employment or service, and the resulting number of earned Alternative Performance Units less any Performance Units previously earned for a completed Applicable Performance Period, which together with Earned Units previously earned for previously completed Applicable Performance Periods (if any) shall be the resulting Earned Units, shall become fully vested (to the extent not vested prior thereto) and the cash payment with respect to such Earned Units shall be distributed to the Participant within five business days after such termination date; provided, however, that if the Performance Units constitute nonqualified deferred compensation, within the meaning of Section 409A of the Code, and the Change in Control is not a “change in control event,” within the meaning of Section 409A of the Code or if settlement upon such termination would otherwise be prohibited under Section 409A of the Code, then the vested Earned Units shall be distributed to the Participant in accordance with Section 4 hereof or upon the Participant’s earlier death or Disability.
(vii) Any changes after the Change in Control to the businesses the performance of which is measured under the Alternative Performance Measure, including but not limited to asset sales or dispositions, reorganizations, restructurings, acquisitions, or discontinuations of operations, that will or could have an adverse effect on the performance criteria under the Alternative Performance Measure during the Full Three-Year Performance Period shall be accompanied by adjustments to the Alternative Performance Measure so that such changes do not reduce the probability of the Performance Measure being achieved at the level that would have been obtained in the absence of such changes.
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For purposes of this Section 3.2, the “Assumption Deadline” shall be ten business days in advance of the Change in Control.
4. Vesting of Earned Units and Cash Distribution. Subject to Section 3, Earned Units shall vest and cash payments with respect thereto shall be distributed to the Participant within ten (10) days following the Final Certification Date (and in any event no later than two and half months following the conclusion of the Full Three-Year Performance Period).
Except as otherwise provided herein, there shall be no proportionate or partial vesting in the periods prior to the Final Certification Date and all vesting shall occur only on the Final Certification Date.
5. Dividend Equivalents. In the event that the Company declares and pays ordinary cash dividends on its outstanding Common Stock the record date for which is on or after the Grant Date and on or before the date of distribution of the cash payment with respect to the Earned Units (including during any period of deferral at the election of the Participant), the Participant shall be credited, as of the dividend payment date, for each Performance Unit that is potentially earnable under this Agreement, a cash amount equivalent to the cash amount paid at that date on one share of Common Stock. Such credited cash amount of dividend equivalents shall be earned and vested if and only if the related Performance Unit becomes earned and vested (i.e., it is forfeitable to the same extent as the related Performance Unit). No interest or earnings will be credited on accrued dividend equivalents. Dividend equivalents will be distributable at such time as cash payments resulting from the earning and vesting of the Performance Units to which the dividend equivalents relate are distributed.
6. Detrimental Activity. In the event the Participant engages in Detrimental Activity prior to, or during the one year period following the earlier of the Participant’s termination of employment or service or the Final Certification Date, the Committee may direct (at any time within one year thereafter) that all Performance Units shall be immediately forfeited to the Company and that the Participant shall pay over to the Company any cash amount paid with respect to the Earned Units or dividend equivalents paid in connection therewith.
7. Restrictions on Transfer. Unless otherwise approved by the Committee, the Performance Units are not transferable other than by will or by the laws of descent and distribution. In addition, unless otherwise approved by the Committee, the Performance Units shall not be sold, transferred, assigned, pledged, encumbered, hypothecated or otherwise disposed of (whether by operation of law or otherwise), and the Performance Units shall not be subject to execution, attachment or similar process. Upon any attempt to sell, transfer, assign, pledge, encumber, hypothecate or otherwise dispose of all or part of the Performance Units or in the event of any levy upon the Performance Units by reason of any execution, attachment or similar process contrary to the provisions hereof not otherwise approved by the Committee, the Performance Units and all rights thereunder, including the right to receive any cash payments, shall immediately become null and void.
8. Rights as a Stockholder. The Participant shall have no rights as a stockholder pursuant to this Agreement.
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9. Rights as a Participant. Except as otherwise specifically provided herein, the Participant shall have no right to receive any new award once the Participant no longer qualifies as a participant under the Plan.
10. Provisions of Plan Control. This Agreement is subject to all the terms, conditions and provisions of the Plan, including, without limitation, the amendment provisions thereof, and to such rules, regulations and interpretations relating to the Plan as may be adopted by the Committee or the Board and as may be in effect from time to time. Unless otherwise indicated, any capitalized term used but not defined herein shall have the meaning ascribed to such term in the Plan. The Plan is incorporated herein by reference. A copy of the Plan has been delivered to the Participant. If and to the extent that this Agreement conflicts or is inconsistent with the terms, conditions and provisions of the Plan, unless this Agreement expressly provides otherwise, the Plan shall control, and this Agreement shall be deemed to be modified accordingly.
11. Notices. Any notice or communication given hereunder shall be in writing and shall be deemed to have been duly given when delivered in person, or by United States mail, to the appropriate party at the address set forth below (or such other address as the party shall from time to time specify):
If to the Company, to:
Comtech Telecommunications Corp.
305 N. 54th Street
Chandler, AZ 85226
Attention: Secretary
305 N. 54th Street
Chandler, AZ 85226
Attention: Secretary
If to the Participant, to the address indicated after the Participant’s signature at the end of this Agreement.
12. Withholding. As a condition precedent to the payment of cash upon the vesting of the award, the Company or an Affiliate will withhold a portion of such cash payment which would otherwise be delivered to the Participant equal to the amounts that the Company (or an Affiliate) determines is required, under all applicable federal, state, local, foreign or other laws or regulations, to be withheld or paid over as income or other withholding taxes.
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13. Power of Attorney. The Company, its successors and assigns, is hereby appointed the attorney-in-fact, with full power of substitution, of the Participant for the purpose of carrying out the provisions of this Agreement and taking any action and executing any instruments which such attorney-in-fact may deem necessary or advisable to accomplish the purposes hereof, which appointment as attorney-in-fact is irrevocable and coupled with an interest. The Company, as attorney-in-fact for the Participant, may in the name and stead of the Participant, make and execute all conveyances, assignments and transfers of property provided for herein, and the Participant hereby ratifies and confirms that which the Company, as said attorney-in-fact, shall do by virtue hereof. Nevertheless, the Participant shall, if so requested by the Company, execute and deliver to the Company all such instruments as may, in the judgment of the Company, be advisable for this purpose.
14. Miscellaneous.
14.1. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, personal legal representatives, successors, trustees, administrators, distributees, devisees and legatees. The Company may assign to, and require, any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company or any affiliate by which the Participant is employed to expressly assume and agree in writing to perform this Agreement. Notwithstanding the foregoing, the Participant may not assign this Agreement.
14.2. This award of Performance Units and the issuance of cash payments hereunder shall not affect in any way the right or power of the Board or stockholders of the Company to make or authorize an adjustment, recapitalization or other change in the capital structure or the business of the Company, any merger or consolidation of the Company or subsidiaries, any issue of bonds, debentures, preferred or prior preference stock ahead of or affecting the Common Stock, the dissolution or liquidation of the Company, any sale or transfer of all or part of its assets or business or any other corporate act or proceeding. Performance Units and Earned Units shall be subject to adjustment in accordance with Section 5.7 of the Plan. For clarity, ordinary dividends on Common Stock will not trigger adjustments to Performance Units and Earned Units, and any adjustments to Performance Units and Earned Units shall take into account dividend equivalents credited thereon under Section 5.
14.3. The Participant agrees that the award of the Performance Units under this Agreement and the payment of cash hereunder and any dividend equivalents credited with respect thereto is special incentive compensation and that the Performance Units (even if treated as compensation for tax purposes) will not be taken into account as “salary” or “compensation” or “bonus” in determining the amount of any payment under any pension, retirement or profit-sharing plan of the Company or any life insurance, disability or other benefit plan of the Company.
14.4. This Agreement and the Plan constitute the entire agreement of the parties with respect to this award of Performance Units and supersede in their entirety all prior undertakings and agreements of the Company and the Participant with respect to such award. No modification or waiver of any of the provisions of this Agreement that is material and adverse to the Participant shall be effective unless in writing and signed by both parties.
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14.5. The failure of any party hereto at any time to require performance by another party of any provision of this Agreement shall not affect the right of such party to require performance of that provision, and any waiver by any party of any breach of any provision of this Agreement shall not be construed as a waiver of any continuing or succeeding breach of such provision, a waiver of the provision itself, or a waiver of any right under this Agreement.
14.6. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof and this Agreement shall be construed in all respects as if such invalid or unenforceable provision was omitted.
14.7. The headings of the sections of this Agreement have been inserted for convenience of reference only and shall in no way restrict or modify any of the terms or provisions hereof.
14.8. This Agreement shall be construed, interpreted and governed and the legal relationships of the parties determined in accordance with the internal laws of the State of Delaware without reference to rules relating to conflicts of law.
14.9 The Participant acknowledges that the Participant is subject to any clawback policy of the Company in effect as of the Grant Date or that is adopted after the Grant Date in order to comply with applicable law, including, without limitation, any policy adopted to comply with The Dodd-Frank Wall Street Reform and Consumer Protection Act.
15. Right to Terminate Employment or Service. Neither the Plan nor the grant of the award hereunder shall impose any obligations on the Company or an Affiliate and/or the stockholders of the Company to retain you as an employee or other service provider, nor shall it impose any obligation on your part to remain as an employee or other service provider of the Company or an Affiliate.
16. Section 409A of the Code. This Agreement is intended to be exempt from or comply with Section 409A of the Code, and shall be interpreted and construed accordingly, and each payment hereunder shall be considered a separate payment for purposes of Section 409A of the Code. To the extent this Agreement provides for the Performance Units to become vested and be settled upon the Participant’s termination of employment or service, the applicable cash payment shall be transferred to the Participant or the Participant’s beneficiary upon the Participant’s “separation from service,” within the meaning of Section 409A of the Code; provided that if the Participant is a “specified employee,” within the meaning of Section 409A of the Code, then to the extent the cash payments with respect to the Performance Units constitute nonqualified deferred compensation, within the meaning of Section 409A of the Code, such cash payments shall be made to the Participant or the Participant’s beneficiary upon the earlier to occur of (i) the six-month anniversary of such separation from service and (ii) the date of the Participant’s death.
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17. Agreement and Grant Not Effective Unless Accepted. By selecting the “Accept” button below you (i) agree to enter into this Agreement electronically, (ii) agree to the terms and conditions of the Agreement and (iii) acknowledge receipt of a copy of the Plan. Until you select the “Accept” button below, this award shall not be effective. If you do not select the “Accept” button within 90 days from the date the Agreement is made available to you electronically this award is subject to cancellation, in which case, the award shall be null and void upon such cancellation.
| Address | ###HOME_ADDRESS### | COMTECH TELECOMMUNICATIONS CORP. | ||||||||||||
| Employee Number | ###EMPLOYEE_NUMBER### | |||||||||||||
| Grant Name | ###GRANT_NAME### | |||||||||||||
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Comtech Internal – Limited Distribution | ||
APPENDIX A
CASH-SETTLED PERFORMANCE AWARD AGREEMENT
Performance Measure and Corresponding Earned Units
Under the Comtech Telecommunications Corp.
2023 Equity and Incentive Plan
Performance Measure and Corresponding Earned Units
Under the Comtech Telecommunications Corp.
2023 Equity and Incentive Plan
Fiscal 20XX-20XX Performance Period
The Participant shall earn Performance Units in accordance with the provisions set forth below, with any earned Performance Units constituting Earned Units under the Participant’s Long Term Performance Award Agreement of which this Appendix is a part (the “Performance Unit Agreement”). Capitalized terms in this Appendix shall have the meanings as defined in the Performance Unit Agreement.
Participant’s Target Performance Units will be allocated to the Performance Measures (as defined below) as follows:
1. Revenue Units. 1/3 of the Participant’s Target Performance Units will be allocated to the Company’s achievement of GAAP Revenue (as defined below) (“Revenue Units”);
2. EBITDA Units. 1/3 of the Participant’s Target Performance Units will be allocated to the Company’s achievement of Adjusted EBITDA (as defined below) (“EBITDA Units”); and
3. TSR Units. 1/3 of the Participant’s Target Performance Units will be allocated to the Company’s achievement of TSR (as defined below) (“TSR Units”).
The number of Performance Units earned by Participant for the Full Three-Year Performance Period shall be determined as of July 31, 20XX, as follows:
•The Revenue Units may be earned based on the Company’s cumulative GAAP revenues in fiscal years 20XX-20XX as reflected in the Company’s annual financial statement for the Applicable Performance Period (“GAAP Revenue”);
•The EBITDA Units may be earned based on the Company’s Adjusted EBITDA for fiscal years 20XX-20XX; and
•The TSR Units may be earned based on the Company’s achievement of TSR for fiscal years 20XX-20XX (TSR, together with Adjusted EBITDA and GAAP Revenue, the “Performance Measures”).
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| Performance Criteria for Full Three-Year Performance Period | Threshold | Target | Maximum | ||||||||
| Fiscal 20XX – 20XX GAAP Revenue | |||||||||||
| Fiscal 20XX – 20XX Adjusted EBITDA | |||||||||||
| Fiscal 20XX – 20XX TSR | |||||||||||
Notwithstanding the foregoing, the earning of the Performance Units shall accelerate (reducing the number of unearned Performance Units) prior to the end of the Full Three-Year Performance Period determined as of [●] and [●], respectively, as follows:
33% of the Revenue Units, EBITDA Units, and TSR Units shall be subject to accelerated earning based on the following grid:
| Performance Criteria for First Applicable Performance Period | Threshold | Target | Maximum | ||||||||
Fiscal [20XX] GAAP Revenue | |||||||||||
Fiscal [20XX] Adjusted EBITDA | |||||||||||
Fiscal [20XX] TSR | |||||||||||
Up to a total of 66% of the Revenue Units, EBITDA Units and TSR Units shall be subject to accelerated earning based on the following grid:
| Performance Criteria for Second Applicable Performance Period | Threshold | Target | Maximum | ||||||||
Fiscal [20XX]-[20XX] GAAP Revenue | |||||||||||
Fiscal [20XX]-[20XX] Adjusted EBITDA | |||||||||||
Fiscal [20XX]-[20XX] TSR | |||||||||||
Participant shall earn 50% of the applicable percentage of eligible Target Performance Units for “Threshold Performance,” 100% of the applicable percentage of eligible Target Performance Units for “Target Performance,” and 200% of the applicable percentage of eligible Target Performance Units for “Maximum Performance.”
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Participant shall earn 0% of the applicable percentage of eligible Target Performance Units for performance that is less than Threshold Performance. In the event of achievement of a Performance Measure between performance levels, the number of Earned Units will be determined based upon linear interpolation. In calculating the number of Earned Units for the Full Three-Year Performance Period or for the Second Applicable Performance Period, the number of Earned Units, and the shares deemed earned with respect to the prior Applicable Performance Period(s) will be subtracted.
For purposes of this Appendix A, “Adjusted EBITDA” shall be calculated as earnings before interest, income taxes, depreciation and amortization of intangibles, stock-based compensation, costs associated with exit or disposal activities under FASB ASC Topic 420, impairment loss on goodwill or long-lived intangibles under FASB ASC Topics 350 and 360, expenses relating to a potential or actual Change in Control, including expenses associated with an actual or potential proxy contest, expenses in connection with a potential or actual purchase business combination, including the write-off of purchased in-process research and development under FASB ASC Topic 805, or other related accounting literature, expenses associated with termination of employees under FASB ASC Topics 420, 712, or 715, or other related accounting literature, any adjustment to income before provision of income taxes as required by adoption of a new accounting standard, and any extraordinary item. Adjusted EBITDA shall be calculated in a manner consistent with the adjusted EBITDA non-GAAP operating metric used by management in assessing the Company's operating results.
For Purposes of this Appendix A, “Comparison Group” means the Company and each other company in the S&P 600 as of the Grant Date. Companies shall be removed from the Comparison Group if they cease to be publicly traded during the Applicable Performance Period (other than due to bankruptcy);
For purposes of this Appendix A, “TSR” means total shareholder return as applied to the Company or any company in the Comparison Group, meaning stock price appreciation from the beginning to the end of the Applicable Performance Period, plus dividends and distributions made or declared (assuming such dividends or distributions are deemed reinvested, as of the ex-dividend date, in the common stock of the Company or any company in the Comparison Group) during the Applicable Performance Period, expressed as a percentage return. For purposes of computing TSR, the stock price at the beginning and end of the Applicable Performance Period will be the average price of a share of common stock over the 20 trading days ending on the first or last day of the Applicable Performance Period, as applicable, adjusted for changes in capital structure; provided, however, that TSR will be negative one hundred percent (-100%) if a company: (i) filed for bankruptcy, reorganization, or liquidation under any chapter of the U.S. Bankruptcy Code; (ii) is the subject of an involuntary bankruptcy proceeding that is not dismissed within 30 days; (iii) is the subject of a stockholder approved plan of liquidation or dissolution; or (iv) ceases to conduct substantial business operations.
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The number of Performance Units earned based on TSR shall be determined by the Committee as follows:
1. For the Company and for each other company in the Comparison Group, the Committee shall determine the TSR for the Applicable Performance Period;
2. The Committee shall rank the TSR values by ordering the Comparison Group members (plus the Company if the Company is not one of the Comparison Group members at the time) from highest to lowest based on TSR for the Applicable Performance Period and counting down from the company with the highest TSR (ranked first) to the Company’s position on the list. If two companies are ranked equally, the ranking of the next company shall account for the tie, so that if one company is ranked first, and two companies are tied for second, the next company is ranked fourth. In determining the Company’s TSR percentile rank for the Applicable Performance Period, in the event that the Company’s TSR for the Applicable Performance Period is equal to the TSR(s) of one or more other Comparison Group members for the same period, the Company’s TSR percentile ranking will be determined by ranking the Company’s TSR for that period as being greater than such other Comparison Group members. After this ranking, the TSR percentile rank will be calculated using the following formula, rounded to the nearest whole percentile by application of regular rounding:
TSR Percentile Rank = [(N-R)/(N-1)] X 100
Where “N” represents the number of Comparison Group members for the relevant Applicable Performance Period (plus the Company if the Company is not one of the Comparison Group members for that Applicable Performance Period).
Where “R” represents the Company’s ranking among the Comparison Group members (plus the Company if the Company is not one of the Comparison Group members for the Applicable Performance Period).
For example, if the Company ranks seventh and there are sixteen companies in the Comparison Group (including the Company), the Company’s percentile rank will be 60%, which is equal to [(16-7)/(16-1)] X 100.
3. The Committee shall plot the percentile rank for the Company determined in the second step above into the appropriate percentage rank listed in the table above and determine the number of shares earned, if any, as a percent of target.
Notwithstanding the foregoing, if the Company’s absolute TSR is negative over any Applicable Performance Period, payout for the TSR portion of the award shall not exceed 100% of the applicable percentage of eligible Target Performance Units for such Applicable Performance Period.
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In connection with the death or Disability of the Participant or Change in Control of the Company during the Full Three-Year Performance Period, the Committee shall (if required by the Performance Unit Agreement) calculate a “Projected Performance Level” as the level of performance that would have been achieved over the Full Three-Year Performance Period if the rate of performance of each performance criteria from the beginning of the Full Three-Year Performance Period through the end of the fiscal quarter ending immediately prior to the date on which the Participant’s death or Disability or the Change in Control occurred had been sustained through the remaining fiscal quarters of the Full Three-Year Performance Period. If such death or Disability of the Participant or Change in Control occurs after the Full Three-Year Performance Period but prior to the Final Certification Date, the Projected Performance Level shall be the actual performance level achieved for the Full Three-Year Performance Period.
Determinations of the Committee regarding the level of achievement of the GAAP Revenue measures, the Adjusted EBITDA measures, and the TSR measures (including in connection with determining a Projected Performance Level), and the resulting Performance Units earned, and related matters, will be final and binding on the Participant.
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Exhibit 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kenneth H. Traub, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Comtech Telecommunications Corp.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c.evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: January 13, 2025
| /s/ Kenneth H. Traub | |||||
| Kenneth H. Traub, Chairman of the Board President and Chief Executive Officer | |||||
Exhibit 31.2
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael A. Bondi, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Comtech Telecommunications Corp.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
c.evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
a.all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b.any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: January 13, 2025
| /s/ Michael A. Bondi | |||||
| Michael A. Bondi Chief Financial Officer | |||||
Exhibit 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Comtech Telecommunications Corp. (the “Company”) on Form 10-Q for the period ended October 31, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kenneth H. Traub, Executive Chairman of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: January 13, 2025
| /s/ Kenneth H. Traub | |||||
| Kenneth H. Traub, Chairman of the Board President and Chief Executive Officer | |||||
Exhibit 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Comtech Telecommunications Corp. (the “Company”) on Form 10-Q for the period ended October 31, 2024 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael A. Bondi, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1.The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: January 13, 2025
| /s/ Michael A. Bondi | |||||
| Michael A. Bondi Chief Financial Officer | |||||