Acquisitions

Solacom Technologies Inc.

On February 28, 2019, we completed our acquisition of Solacom Technologies Inc. ("Solacom"), pursuant to the Arrangement Agreement, dated as of January 7, 2019, by and among Solacom, Comtech and Solar Acquisition Corp., a Canadian corporation and a direct, wholly-owned subsidiary of Comtech. Solacom is a leading provider of Next Generation 911 ("NG-911") solutions for public safety agencies. The acquisition of Solacom was a significant step in our strategy of enhancing our public safety and location technologies.

The acquisition has an aggregate purchase price for accounting purposes of $32,934,000, of which $27,328,000 was settled in cash and $5,606,000 was settled with the issuance of 208,669 shares of Comtech’s common stock at a volume weighted average stock price of $26.86. The fair value of consideration transferred in connection with this acquisition was $31,489,000, which was net of $1,445,000 of cash acquired. The cash portion of the purchase price was funded principally through borrowings under our Credit Facility.

We are accounting for the acquisition of Solacom under the acquisition method of accounting in accordance with FASB ASC 805, "Business Combinations" ("ASC 805"). The purchase price was allocated to the assets acquired and liabilities assumed, based on their preliminary fair value as of February 28, 2019, pursuant to the business combination accounting rules. Acquisition plan expenses were not included as a component of consideration transferred and were expensed in the period incurred. Our Consolidated Statement of Operations for fiscal 2019 includes a nominal amount of revenue and contribution from Solacom. Pro forma financial information is not disclosed, as the acquisition is not material.

The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed in connection with the Solacom acquisition:



	Preliminary Purchase Price Allocation ⁽¹⁾			Measurement Period Adjustments		Purchase Price Allocation (as adjusted)
Settled in cash	$	27,328,000		—		$	27,328,000
Settled in common stock issued by Comtech	5,606,000			—		5,606,000
Aggregate purchase price at fair value	$	32,934,000		—		$	32,934,000
Allocation of aggregate purchase price:
Cash and cash equivalents	$	1,445,000		—		$	1,445,000
Current assets	9,425,000			471,000		9,896,000
Property, plant and equipment	777,000			—		777,000
Deferred tax assets, non-current	5,374,000			(315,000	)	5,059,000
Accrued warranty obligations	(1,431,000		)	—		(1,431,000		)
Current liabilities	(4,477,000		)	—		(4,477,000		)
Contract liabilities, non-current	(1,604,000		)	—		(1,604,000		)
Net tangible assets at preliminary fair value	$	9,509,000		156,000		$	9,665,000
Identifiable intangibles, deferred taxes and goodwill:									Estimated Useful Lives
Technology	$	6,779,000		—		$	6,779,000		10 years
Customer relationships	7,007,000			—		7,007,000			20 years
Trade name	1,828,000			—		1,828,000			20 years
Deferred tax liabilities	(4,153,000		)	—		(4,153,000		)
Goodwill	11,964,000			(156,000	)	11,808,000			Indefinite
Allocation of aggregate purchase price	$	32,934,000		—		$	32,934,000

⁽¹⁾As initially reported in the Company's Quarterly Report on Form 10-Q for the three and nine months ended April 30, 2019.

The acquired identifiable intangible assets are being amortized on a straight-line basis, which we believe approximates the pattern in which the assets are utilized over their estimated useful lives. The fair value of customer relationships and backlog was estimated primarily based on the value of the discounted cash flows that the related intangible asset could be expected to generate in the future. The fair value of technology and trade name was estimated based on the discounted capitalization of royalty expense saved because we now own the assets. Among the factors contributing to the recognition of goodwill, as a component of the purchase price allocation, were synergies in products and technologies and the addition of a skilled, assembled workforce. This goodwill has been assigned to our Commercial Solutions segment based on specific identification and is generally not deductible for income tax purposes.

The allocation of the aggregate purchase price shown in the above table was based upon a valuation and estimates and assumptions that are subject to change within the purchase price allocation period (generally one year from the acquisition date). The primary areas of the purchase price allocation not yet finalized include a final assessment of income taxes and residual goodwill.

GD NG-911 Business

On April 29, 2019, we completed the acquisition of a state and local government NG-911 business pursuant to the Asset Purchase Agreement, dated as of April 29, 2019, by and among General Dynamics Information Technology, Inc., Comtech and Comtech NextGen LLC, a Delaware limited liability company and indirect, wholly-owned subsidiary of Comtech. The acquisition of this NG-911 business from GD (the "GD NG-911 business") has a preliminary cash purchase price of $10,000,000 (which is subject to a working capital adjustment). In connection with this acquisition, we also announced an award of a five-year contract to develop, implement and operate a NG-911 emergency communications system for a Northeastern state. Immediately after our announcement of this acquisition, we hired approximately sixty GD NG-911 employees and completed the integration of this business into our Commercial Solutions segment’s public safety and location technologies product line. The acquisition, contract award and hiring of talented employees are expected to strengthen Comtech’s position in the growing NG-911 solutions market.

We are accounting for the acquisition of this business under the acquisition method of accounting in accordance with FASB ASC 805. The purchase price, which is subject to a pending closing date balance sheet adjustment process under the purchase agreement, was allocated to the assets acquired and liabilities assumed, based on their preliminary fair value as of April 29, 2019, pursuant to the business combination accounting rules. Acquisition plan expenses were not included as a component of consideration transferred and were expensed in the period incurred. Our Consolidated Statements of Operatons for fiscal 2019 include a nominal amount of revenue and contribution from the GD NG-911 business. Pro forma financial information is not disclosed, as the acquisition is not material.

The following table summarizes the preliminary fair value of the assets acquired and liabilities assumed in connection with the acquisition of the GD NG-911 business:



	Preliminary Purchase Price Allocation ⁽¹⁾			Measurement Period Adjustments			Purchase Price Allocation (as adjusted)
Aggregate purchase price at fair value	$	10,000,000		—			$	10,000,000
Allocation of aggregate purchase price:
Current assets	$	5,790,000		(1,330,000		)	$	4,460,000
Property, plant and equipment	646,000			—			646,000
Deferred tax assets, non-current	3,292,000			134,000			3,426,000
Accrued warranty obligations	(5,000,000		)	—			(5,000,000		)
Current liabilities	(3,960,000		)	798,000			(3,162,000		)
Net tangible assets at preliminary fair value	$	768,000		(398,000		)	$	370,000
Identifiable intangibles, deferred taxes and goodwill:										Estimated Useful Lives
Customer relationships	$	20,300,000		$	—		$	20,300,000		10 years
Technology	3,500,000			—			3,500,000			15 years
Other liabilities	(21,700,000		)	—			(21,700,000		)
Deferred tax liabilities	(518,000		)	—			(518,000		)
Goodwill	7,650,000			398,000			8,048,000			Indefinite
Allocation of aggregate purchase price	$	10,000,000		—			$	10,000,000

⁽¹⁾ As initially reported in the Company's Quarterly Report on Form 10-Q for the three and nine months ended April 30, 2019.

The acquired identifiable intangible assets are being amortized on a straight-line basis, which we believe approximates the pattern in which the assets are utilized over their estimated useful lives. The fair value of customer relationships was estimated based on the value of the discounted cash flows that the related intangible asset could be expected to generate in the future. The fair value of technology was estimated based on the discounted capitalization of royalty expense saved because we now own the assets. The preliminary fair value of other liabilities was based on the difference in discounted cash flows related to remaining performance obligations under a certain acquired contract as compared to current market terms for similar arrangements that a market participant would expect. Other liabilities will be credited against cost of sales over the remaining performance of the contract, which was 5.25 years as of the acquisition date.

Among the factors contributing to the recognition of goodwill, as a component of the purchase price allocation, were synergies in solution offerings and the addition of a skilled, assembled workforce. We currently estimate that approximately $7,300,000 of goodwill resulting from the acquisition will be tax deductible. This goodwill has been assigned to our Commercial Solutions segment based on specific identification.

We are currently finalizing a working capital adjustment, pursuant to the terms of the purchase agreement. In August 2019, the seller proposed and requested an approximate $2,900,000 upward adjustment to the preliminary purchase price. We do not agree with their proposed adjustment and believe that we are entitled to a reduction of approximately $890,000 to the preliminary purchase price. We expect to reach an amicable resolution.

The allocation of the preliminary purchase price shown in the above table was based on a valuation and estimates and assumptions that are subject to change within the purchase price allocation period (generally one year from the acquisition date). The primary areas of the purchase price allocation not yet finalized include the purchase price (due to a pending closing date balance sheet adjustment process under the purchase agreement), a final assessment of accrued warranty obligations, income taxes and residual goodwill.