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 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. Pro forma financial information is not disclosed, as the acquisition is not material.

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



	Purchase Price Allocation ⁽¹⁾
Settled in cash	$	27,328,000
Settled in common stock issued by Comtech	5,606,000
Aggregate purchase price at fair value	$	32,934,000
Allocation of aggregate purchase price:
Cash and cash equivalents	$	1,445,000
Current assets	9,897,000
Property, plant and equipment	777,000
Deferred tax assets	5,478,000
Accrued warranty obligations	(1,431,000		)
Current liabilities	(4,477,000		)
Contract liabilities, non-current	(1,604,000		)
Net tangible assets at fair value	$	10,085,000
Identifiable intangibles, deferred taxes and goodwill:				Estimated Useful Lives
Technology	$	6,779,000		10 years
Customer relationships	7,007,000			20 years
Trade name	1,828,000			20 years
Deferred tax liabilities	(4,153,000		)
Goodwill	11,388,000			Indefinite
Allocation of aggregate purchase price	$	32,934,000

⁽¹⁾ As reported in the Company's Quarterly Report on Form 10-Q for the three months ended October 31, 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 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.

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 net 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. 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:



	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	$	4,640,000		—		$	4,640,000
Property, plant and equipment	646,000			—		646,000
Deferred tax assets	3,376,000			(3,173,000	)	203,000
Accrued warranty obligations	(5,000,000		)	—		(5,000,000		)
Current liabilities	(3,094,000		)	—		(3,094,000		)
Net tangible assets at preliminary fair value	$	568,000		(3,173,000	)	$	(2,605,000	)
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	7,850,000			2,655,000		10,505,000			Indefinite
Allocation of aggregate purchase price	$	10,000,000		—		$	10,000,000

⁽¹⁾ As reported in the Company's Quarterly Report on Form 10-Q for the three months ended October 31, 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 $10,505,000 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 net 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 $1,000,000 to the preliminary purchase price. As the parties could not reach an agreement during the stipulated period of time, the matter is now in arbitration.

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) and residual goodwill.

CGC Technology Limited

On January 27, 2020, we completed the acquisition of CGC Technology Limited ("CGC"), a privately held company located in the United Kingdom, pursuant to the Share Purchase Agreement, dated as of January 27, 2020. CGC is a leading provider of high precision full motion fixed and mobile X/Y satellite tracking antennas, reflectors, radomes and other ground station equipment around the world. The acquisition of CGC brought established relationships with several top-tier European aerospace companies and other government entities, and we expect CGC to participate in the anticipated growth in the number of low Earth orbit ("LEO") and medium Earth orbit ("MEO") satellite constellations.

The acquisition has a preliminary purchase price for accounting purposes of $23,650,000, of which $12,075,000 was payable in cash and $11,575,000 was payable by the issuance of 323,504 shares of Comtech’s common stock at a volume weighted average stock price of $35.78. The fair value of consideration transferred in connection with this acquisition was $22,740,000, which was net of $160,000 of cash acquired and $750,000 payable by us upon the first anniversary of the closing of the transaction, subject to certain conditions. The preliminary purchase price for accounting purposes is subject to finalization.

We are accounting for the acquisition of CGC under the acquisition method of accounting in accordance with FASB ASC 805, "Business Combinations." The purchase price was allocated to the assets acquired and liabilities assumed, based on their preliminary fair value as of January 27, 2020, 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 condensed consolidated statements of operations for the three and six months ended January 31, 2020 include a nominal amount of revenue contribution from CGC. 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 CGC acquisition:



	Purchase Price Allocation
Payable in cash	$	12,075,000
Payable in common stock issued by Comtech	11,575,000
Preliminary purchase price at fair value	$	23,650,000
Preliminary allocation of aggregate purchase price:
Cash and cash equivalents	$	160,000
Current assets	3,336,000
Property, plant and equipment	1,457,000
Operating lease assets	924,000
Deferred tax assets, non-current	588,000
Accrued warranty obligations	(1,000,000		)
Current liabilities	(7,060,000		)
Non-current liabilities	(1,329,000		)
Net tangible liabilities at preliminary fair value	$	(2,924,000	)
Identifiable intangibles, deferred taxes and goodwill:				Estimated Useful Lives
Technology	$	5,000,000		20 years
Customer relationships	7,000,000			15 years
Trade name	800,000			5 years
Deferred tax liabilities	(2,176,000		)
Goodwill	15,950,000			Indefinite
Preliminary allocation of aggregate purchase price	$	23,650,000

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 preliminary fair value of customer relationships (which include acquired backlog) was primarily based on the value of the discounted cash flows that the related intangible asset could be expected to generate in the future. The preliminary fair value of technology and trade name was 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 preliminary purchase price allocation, were synergies in products and technologies and the addition of a skilled, assembled workforce. This goodwill has been assigned to our Government Solutions segment based on specific identification and is generally not deductible for income tax purposes.

The allocation of the preliminary purchase price shown in the above table was based upon a preliminary 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 potential indemnification obligations of the seller under the Share Purchase Agreement), a final assessment of assets acquired and liabilities assumed, including intangible assets and their remaining useful lives, accrued warranty obligations, income taxes and residual goodwill.

UHP Networks Inc.

On November 14, 2019, we entered into an agreement to acquire UHP Networks Inc. and its sister company (together, "UHP"), a leading provider of innovative and disruptive satellite ground station solutions, for a purchase price of approximately $40,000,000, of which we anticipate $5,000,000 to be paid in Comtech common stock with the remaining balance payable in cash. The purchase agreement also provides an earn-out up to an additional $10,000,000 payable, at our election, in cash and or shares of Comtech common stock, if certain agreed upon sales milestones are reached in the twelve-month period following completion of the acquisition. We believe that our acquisition of UHP will be a significant step in enhancing our solutions offerings for the satellite ground station market. The transaction is subject to customary closing conditions and is expected to occur late in the second half of our fiscal 2020.

Gilat Satellite Networks Ltd.

On January 29, 2020, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with Gilat Satellite Networks Ltd. ("Gilat"), a worldwide leader in satellite networking technology, solutions and services with market leading positions in the satellite ground station and in-flight connectivity solutions markets and deep expertise in operating large network infrastructures.

Under the terms of the Merger Agreement, Comtech will acquire Gilat by way of a merger of Comtech's newly formed subsidiary with and into Gilat, with Gilat surviving the merger as a wholly-owned subsidiary of Comtech. Pursuant to the Merger Agreement, each Gilat ordinary share will be converted into the right to receive consideration of (i) $7.18 in cash, without interest, plus (ii) 0.08425 of a share of Comtech common stock, with cash payable in lieu of fractional shares. Based on such consideration, on January 29, 2020, the date we entered into the Merger Agreement, Gilat had an enterprise value of approximately $532,500,000.

During the twelve months ended December 31, 2019, Gilat reported revenue of $263,492,000 with GAAP operating income of $25,572,000. As of December 31, 2019, Gilat had approximately $74,778,000 of unrestricted cash and cash equivalents and debt of approximately $8,096,000. We expect to fund the cash portion of the acquisition by redeploying a portion of both our and Gilat's unrestricted cash and cash equivalents, with the remaining funds provided by a new $800,000,000 secured credit facility, which is discussed further in Note (11) - "Credit Facility."

In connection with the acquisition of Gilat, we expect to incur transaction related expenses including certain compensatory and other merger related payments, professional fees and debt related costs. We preliminarily estimate that these expenses will approximate $28,640,000, some of which were expensed as of January 31, 2020, others to be expensed upon closing, and others to be expensed over time following the closing or capitalized in accordance with purchase accounting rules. Pursuant to accounting rules, the acquisition is expected to result in a material increase in annual amortization expense related to intangibles and possible other fair value adjustments.

The transaction is subject to customary closing conditions, including the approval of Gilat shareholders and expiration of the applicable waiting period under the Hart-Scott Rodino Antitrust Improvements Act of 1976.