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General | 3 Months Ended
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Oct. 31, 2024
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
General | 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. 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 3.25x 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 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. 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. 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.

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