TESSCO TECHNOLOGIES INC - Quarter Report: 2020 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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Commission File Number: 001-33938

TESSCO Technologies Incorporated

(Exact name of registrant as specified in its charter)

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(410) 229-1000

(Registrant’s telephone number, including area code)

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

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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 ☐

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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 ☐

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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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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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. ☐

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

Yes ☐       No ☑

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The number of shares of the registrant’s Common Stock, $0.01 par value per share, outstanding as of July 31, 2020, was 8,712,771.

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TESSCO Technologies Incorporated

Index to Form 10-Q

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PART I. FINANCIAL INFORMATION

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Item 1. Financial Statements.

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TESSCO Technologies Incorporated

Consolidated Balance Sheets

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See accompanying notes to unaudited consolidated financial statements.

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TESSCO Technologies Incorporated

Unaudited Consolidated Statements of Loss

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See accompanying notes to unaudited consolidated financial statements.

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TESSCO Technologies Incorporated

Unaudited Consolidated Statements of Changes in Shareholders’ Equity

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See accompanying notes to unaudited consolidated financial statements.

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TESSCO Technologies Incorporated

Unaudited Consolidated Statements of Cash Flows

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See accompanying notes to unaudited consolidated financial statements.

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TESSCO Technologies Incorporated

Notes to Unaudited Consolidated Financial Statements

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Note 1. Description of Business and Basis of Presentation

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TESSCO Technologies Incorporated, a Delaware corporation (TESSCO, we, or the Company), architects and delivers innovative product and value chain solutions to support wireless systems. The Company provides marketing and sales services, knowledge and supply chain management, product-solution delivery and control systems utilizing extensive internet and information technology. Approximately 96% of the Company’s sales are made to customers in the United States. The Company takes orders in several ways, including phone, fax, online and through electronic data interchange. Almost all of the Company’s sales are made in United States Dollars.

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In management’s opinion, the accompanying interim Consolidated Financial Statements of the Company include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation of the Company’s financial position for the interim periods presented. These statements are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Certain information and footnote disclosures normally included in the Company’s annual financial statements have been omitted from these statements, as permitted under the applicable rules and regulations. The results of operations presented in the accompanying interim Consolidated Financial Statements are not necessarily representative of operations for an entire year. The information included in this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 29, 2020, filed with SEC on June 5, 2020.

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Note 2. Recently Issued Accounting Pronouncements

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Recently issued accounting pronouncements not yet adopted:

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In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. This ASU is effective for periods beginning after December 15, 2022. The Company is currently evaluating the impact the adoption of this new standard will have on its Consolidated Financial Statements and will adopt the standard on the first day of the Company’s 2024 fiscal year.

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Note 3. Intangible Assets

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Intangibles, net on our Consolidated Balance Sheet as of June 28, 2020, consists of capitalized internally development computer software and an indefinite lived intangible assets. Capitalized internally developed computer software, net of accumulated amortization, was $13,174,200 as of June 28, 2020. Amortization

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expense of capitalized internally developed computer software was $648,500 as of June 28, 2020. Indefinite lived intangible assets were $795,400 as of June 28, 2020.

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Note 4. Stock-Based Compensation

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The Company’s selling, general and administrative expenses for the fiscal quarter ended June 28, 2020 includes $311,900 of non-cash stock-based compensation expense. The Company’s selling, general and administrative expenses for the fiscal quarter ended June 30, 2019 includes $338,900 of non-cash stock-based compensation expense. Non-cash stock-based compensation expense is primarily related to our Performance Stock Units (PSUs), Restricted Stock Units (RSUs), Restricted Stock, and Stock Options, granted or outstanding under the Company’s Third Amended and Restated Stock and Incentive Plan (the “1994 Plan”) and 2019 Stock and Incentive Plan (the “2019 Plan” and together with the 1994 Plan, the “Plans”), which was approved at the Annual Meeting of Shareholders held on July 25, 2019. No additional awards may be granted under the 1994 Plan, although awards outstanding under the 1994 Plan remain outstanding and governed by its terms.

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Performance Stock Units: The following table summarizes the activity under the Company’s PSU program under the Plans, for the first three months of fiscal 2021:

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The PSUs cancelled during the first quarter of fiscal 2021 primarily related to the fiscal 2020 grant of PSUs, which had a one-year measurement period (fiscal 2020). The PSUs were cancelled because the applicable fiscal 2020 performance targets were not attained. Per the provisions of the 2019 Plan, the shares related to these forfeited and cancelled PSUs were added back to the 2019 Plan and became available for future issuance under the 2019 Plan.

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If all unvested PSUs earned thus far are assumed to vest in accordance with terms of the applicable award agreement, total unrecognized compensation costs on these PSUs would be less than $0.1 million as of June 28, 2020, and would be expensed through fiscal 2022.

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Restricted Stock Units: On May 15, 2020, the Compensation Committee, with the concurrence of the full Board of Directors, granted an aggregate of 21,000 RSUs under the 2019 Plan to non-employee directors of the Company. These awards provide for the issuance of shares of the Company’s common stock in accordance with a vesting schedule that generally provides for the vesting of 25% of the award on or about each of May 15 of 2021, 2022, 2023 and 2024, provided that the participant remains associated with the Company (or meets other criteria as prescribed in the applicable agreement) on each such date.

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Restricted Stock: On May 15, 2020, the Compensation Committee, with the concurrence of the full Board of Directors, awarded an aggregate of 65,821 shares of the Company’s common stock as restricted stock under the 2019 Plan to non-employee directors of the Company in lieu of their annual cash retainer for fiscal 2021. The value of the restricted shares at the time of issue to each director was determined by the Compensation Committee to approximate the cash amount of the 2021 fiscal year board retainer per director. These shares of restricted stock were issued subject to a risk of forfeiture that will lapse in whole or in part on July 1, 2021,

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generally depending on the length of continued service of the recipient on the Board for fiscal 2021. Dividends accruing in respect of the shares of restricted stock, if any, will accrue but will not be paid until July 1, 2021 and only in respect of those shares for which the risk of forfeiture has then lapsed.

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As of June 28, 2020, there was approximately $0.7 million of total unrecognized compensation cost related to all outstanding RSUs, assuming all shares are earned. Unrecognized compensation costs are expected to be recognized ratably over a weighted average period of approximately three years.

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PSUs and RSUs are expensed based on the grant date fair value, calculated as the closing price of TESSCO common stock as reported by Nasdaq on the date of grant minus the present value of dividends expected to be paid on the common stock before the award vests, because dividends or dividend-equivalent amounts do not accrue and are not paid on unvested PSUs and RSUs.

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The Company accounts for forfeitures as they occur rather than estimate expected forfeitures. To the extent that forfeitures occur, stock-based compensation related to the restricted awards may be different from the Company’s expectations.

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Stock Options: On April 30, 2020 and May 15, 2020, stock options for an aggregate of 160,000 shares of common stock were granted under the 2019 Plan. These stock options have exercise prices equal to the market price of the Company’s common stock on the grant date, and the terms thereof provide for 25% vesting after one year and then 1/36 per month over the following three years, subject, however, to acceleration or termination upon the occurrence of certain events, as described in the applicable award agreement. The grant date value of the Company’s stock options is determined using the Black-Scholes-Merton pricing model, based upon facts and assumptions existing at the date of grant.

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In addition, on May 15, 2020, performance-based stock options for an aggregate of 65,000 shares of common stock were granted under the 2019 Plan to certain officers of the Company. These stock options also have exercise prices equal to the market price of the Company’s stock on the grant date, and the terms thereof also provide for 25% vesting after one year and then 1/36 per month over the following three years, but these stock options also impose two shorter term performance-based milestones, with the satisfaction of each milestone an additional condition to vesting of one-half of the options. The grant date value of the Company’s stock options is determined using the Black-Scholes-Merton pricing model, based upon facts and assumptions existing at the date of grant.

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The value of each option at the date of grant is amortized as compensation expense over the service period. This occurs without regard to subsequent changes in stock price, volatility, or interest rates over time, provided the option remains outstanding.

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The following tables summarize the pertinent information for outstanding options.

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As of June 28, 2020, there was approximately $1.3 million of total unrecognized compensation costs related to these options, assuming all shares are earned. These unrecognized compensation costs are expected to be recognized ratably over a period of approximately three years.  

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Note 5. Borrowings Under Revolving Credit Facility

On October 19, 2017, the Company and its primary operating subsidiaries, as co-borrowers, and SunTrust Bank, as Administrative Agent and Lender, and Wells Fargo Bank, National Association, as a Lender, entered into an Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”), which amended and restated the terms of a previously established secured Revolving Credit Facility with the same lenders, and which resulted in, among other modifications, an increase in the Company’s borrowing limit to up to $75 million, from the previous borrowing limit of up to $35 million. Capitalized terms used but not otherwise defined in this and the following three paragraphs have the meanings ascribed to each in the Amended and Restated Credit Agreement.

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In addition to increasing the Company’s borrowing limit, and among other modifications, the Amended and Restated Credit Agreement extended the maturity date of the secured Revolving Credit Facility to October 19, 2021. The Amended and Restated Credit Agreement also set forth financial covenants, including a fixed charge coverage ratio to be maintained at any time during which the borrowing availability, as determined in accordance with the Amended and Restated Credit Agreement, falls below $10 million, as well as terms that could limit our ability to engage in specified transactions or activities, including (but not limited to) investments and acquisitions, sales of assets, payment of dividends, issuance of additional debt and other matters. The Amended and Restated Credit Agreement provides for a $5.0 million sublimit for the issuance of standby letters of credit, a $12.5 million sublimit for swingline loans and an accordion feature which, subject to certain conditions, could increase the aggregate amount of the commitments to up to $125 million, with the optional commitments being provided by existing Lenders or new lenders reasonably acceptable to the Administrative Agent. No Lender is obligated to increase its commitment. Availability is determined in accordance with a Borrowing Base, which has been expanded to include not only Eligible Receivables but also Eligible Inventory and is generally: (A) the sum of (i) 85% of Eligible Receivables; (ii) the Inventory Formula Amount for all Eligible Inventory which is aged less than 181 days; and (iii) the lesser of (x) $4 million and (y) the Inventory Formula Amount for all Eligible Inventory which is aged at least 181 days; minus (B) Reserves.

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Borrowings under the Amended and Restated Credit Agreement initially accrue interest from the applicable borrowing date at an Applicable Rate equal to the Eurodollar Rate plus the Applicable Margin. The Eurodollar Rate is the rate per annum obtained by dividing (i) LIBOR by (ii) a percentage equal to 1.00 minus the Eurodollar Reserve Percentage. When the Applicable Rate is the Eurodollar Rate plus the Applicable Margin, the Applicable Margin is 1.50% if Average Availability is greater than or equal to $15 million, and 1.75% otherwise.  On June 28, 2020, the interest rate applicable to borrowings under the secured Revolving Credit Facility was 1.68%. Under certain circumstances, the Applicable Rate is subject to change at the Lenders’ option from the Eurodollar Rate plus the Applicable Margin to the Base Rate plus the Applicable Margin.  Following an Event of Default, in addition to changing the Applicable Rate to the Base Rate plus the Applicable Margin, the Lenders’ may at their option set the Applicable Margin at 0.50% if the Base Rate applies or 1.75% if the Eurodollar Rate applies, and increase the Applicable Rate by an additional 200 basis points. The Applicable Rate adjusts on the first Business Day of each calendar month.  The Company is required to pay a monthly Commitment Fee on the average daily unused portion of the secured Revolving Credit Facility provided for pursuant to the Amended and Restated Credit Agreement, at a per annum rate equal to 0.25%.

In connection with the entering into of the Amended and Restated Credit Agreement, the Company, the other Company affiliate borrowers under the Amended and Restated Credit Agreement and other subsidiaries of the Company, referred to collectively as the Loan Parties, executed and delivered to SunTrust Bank, as Administrative Agent, a Reaffirmation Agreement, pursuant to which the obligations of the Loan Parties under a Guaranty and Security Agreement previously delivered by them in connection with the secured Revolving Credit Facility as previously existing (including the previously existing guaranty by the Loan Parties not otherwise Borrowers and the previously existing grant by the Company and the other Loan Parties of a continuing first priority security interest in inventory, accounts receivable and deposit accounts, and on all documents, instruments, general intangibles, letter of credit rights, and all proceeds) were ratified and confirmed as respects the Obligations arising from time to time under the secured Revolving Credit Facility provided for under the Amended and Restated Credit Agreement, and as respects certain other obligations of the Loan Parties to the Lenders and their affiliates arising from time to time, relating to swaps, hedges and cash management and other bank products.  

Borrowings may be used for working capital and other general corporate purposes, as further provided in, and subject to the applicable terms of, the Amended and Restated Credit Agreement. As of June 28, 2020, borrowings under the secured Revolving Credit Facility totaled $25.3 million and, therefore, the Company had $49.7 million available for borrowing as of June 28, 2020, subject to the Borrowing Base limitation and compliance with the other applicable terms of the Amended and Restated Credit Agreement, including the covenants referenced above. The line of credit has a lockbox arrangement associated with it and therefore the outstanding balance is classified as a current liability on our balance sheet.  As of March 29,2020, borrowings under the secured Revolving Credit Facility totaled $25.6 million and, therefore, the Company had $49.4 million available on its revolving line of credit facility as of March 29, 2020, again subject to the Borrowing Base limitation and compliance with the other applicable terms of the Amended and Restated Credit Agreement, including the covenants referenced above.

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Note 6. Earnings Per Share

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The Company presents the computation of earnings per share (“EPS”) on a basic and diluted basis. Basic EPS is computed by dividing net income by the weighted average number of shares outstanding during the reported period. Diluted EPS is computed similarly to basic EPS, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential additional common shares that were dilutive had been issued. Common shares are excluded from the calculation if they are determined to be anti-dilutive. Diluted EPS was equal to basic EPS for the fiscal quarter ended June 28, 2020

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because the Company operated at a loss. The number of diluted weighted-average common shares would have been 8,686,214 for the fiscal quarter ended June 28, 2020, if the Company was at a positive earning position. At June 28, 2020, stock options with respect to 1,060,958 shares of common stock were outstanding, of which 855,958 were anti-dilutive. There were no anti-dilutive PSUs or RSUs outstanding as of June 28, 2020.

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Note 7. Business Segments

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The Company evaluates its business within two segments: commercial and retail. The commercial segment consists of the following customer markets: (1) public carriers, that are generally responsible for building and maintaining the infrastructure system and provide airtime service to individual subscribers; and (2) value-added resellers and integrators, which includes value-added resellers, the government channel and private system operator markets.

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The retail segment consists of the retail market which includes retailers, independent dealer agents and carriers.

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To provide investors with better visibility, the Company also discloses revenue and gross profit by its four product categories:

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The Company evaluates revenue, gross profit, and income before provision for income taxes at the segment level.  Certain cost of sales and other applicable expenses have been allocated to each segment based on a percentage of revenues and/or gross profit, where appropriate.

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Segment activity for the first quarter of fiscal years 2021 and 2020 are as follows (in thousands):

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Supplemental revenue and gross profit information by product category for the first quarter of fiscal years 2021 and 2020 are as follows (in thousands):

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Note 8. Leases

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The Company leases certain office spaces and equipment. Leases with an initial term of twelve months or less are not recorded on the balance sheet. The Company’s leases include rental payments adjusted for inflation. The right-of-use lease asset and lease liability are recorded on our Consolidated Balance Sheet.

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Quantitative information regarding the Company’s leases is as follows:

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Note 9. Shares Withheld

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The Company withholds shares of common stock from its employees and directors at their request, equal to the minimum federal and state tax withholdings or proceeds due to the Company related to vested PSUs, stock option exercises and vested RSUs. For the three months ended June 28, 2020 and June 30, 2019, the aggregate value of the shares withheld totaled $58,800 and $189,100, respectively.

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Note 10. Concentration of Risk

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The Company’s future results could be negatively impacted by the loss of certain customer and/or vendor relationships.

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For the fiscal quarter ended June 28, 2020, revenue from the Company’s largest customer accounted for 10.4% of consolidated revenue. For the fiscal quarter ended June 30, 2019, no customer accounted for more than 10% of total consolidated revenues.

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For the fiscal quarter ended June 28, 2020, sales of products purchased from the Company’s largest supplier accounted for 21.6% of consolidated revenue. For the fiscal quarter ended June 30, 2019, sales of products purchased from the Company’s largest supplier accounted for 21.5% of consolidated revenue. No other suppliers accounted for more than 10% of consolidated revenue.

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Note 11. Subsequent Event

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On July 2, 2020, the Board of Directors adopted resolutions providing for the retirement of the Company’s then accumulated treasury stock, and for a corresponding reduction in capital. Immediately prior to the retirement, the Company held 5,789,600 shares of issued but not outstanding common stock as treasury stock, at a cost of

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$58,555,000. Upon retirement, the cost of the treasury stock was netted against retained earnings, and the number of authorized and unissued shares of common stock correspondingly increased by 5,789,600 shares. The total number of authorized shares of common stock remains unchanged at 15,000,000. The impact of these resolutions will be reflected within the consolidated financial statements beginning with the second quarter of fiscal 2021. There has been no change to the total stockholders’ equity as a result of such resolutions.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. This commentary should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations from the Company’s Annual Report on Form 10-K for the fiscal year ended March 29, 2020, filed with the SEC on June 5, 2020.

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Business Overview and Environment

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TESSCO architects and delivers innovative product and value chain solutions to support wireless broadband systems. Although we sell products to customers in many countries, approximately 96% of our sales are made to customers in the United States. We have operations and office facilities in Hunt Valley, Maryland, Reno, Nevada and San Antonio, Texas.

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The Company evaluates its business within two segments: commercial and retail. The commercial segment consists of the following customer markets:  (1) public carriers, that are generally responsible for building and maintaining the infrastructure system and provide airtime service to individual subscribers; and (2) value-added resellers and integrators, which includes value-added resellers, the government channel and private system operator markets. The retail segment consists of the retail market which includes retailers, independent dealer agents and carriers.

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We offer a wide range of products that are classified into four product categories: base station infrastructure; network systems; installation, test and maintenance; and mobile device accessories. Base station infrastructure products are used to build, repair and upgrade wireless telecommunication systems. Sales of traditional base station infrastructure products, such as base station radios, cable and transmission lines and antennas are in part dependent on capital spending in the wireless communications industry. Network systems products are used to build and upgrade computing and internet networks. We have also been growing our offering of wireless broadband, distributed antennas systems (DAS), network equipment, security and surveillance products, which are not as dependent on the overall capital spending of the industry. Installation, test and maintenance products are used to install, tune, and maintain wireless communications equipment. This category is made up of sophisticated analysis equipment and various frequency, voltage and power-measuring devices, replacement parts and components as well as an assortment of tools, hardware and supplies required by service technicians. Mobile device accessories products include cellular phone and data device accessories.  

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Our ongoing ability to earn revenues and gross profits from customers and suppliers looking to us for product and supply chain solutions depends upon a number of factors. The terms, and accordingly the factors, applicable to each relationship often differ. Among these factors are the strength of the customer’s or supplier’s business, the supply and demand for the product or service, including price stability, changing customer or supplier requirements, and our ability to support the customer or supplier and to continually demonstrate that we can improve the way they do business. In addition, the agreements or arrangements on which our customer and supplier relationships are based are typically of limited duration, typically do not include any obligation in respect of any specific product purchase or sale and are terminable by either party upon several months or otherwise relatively short notice. Because of the nature of our business, we have been affected from time to time in the past by the loss and changes in the business habits of significant customers and suppliers, and expect that we will again be so affected from time to time in the future. Our customer and supplier relationships could also be affected by wireless carrier consolidation or the overall global economic environment, or other events beyond our control, including the COVID-19 pandemic.

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The wireless communications distribution industry is competitive and fragmented and is comprised of several national distributors. In addition, many manufacturers sell direct. Barriers to entry for distributors are relatively

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low, particularly in the mobile devices and accessories market, and the risk of new competitors entering the marketplace is high. Consolidation of larger wireless carriers has and will most likely continue to impact our current and potential customer base. Our ability to maintain customer and supplier relationships is subject to competitive pressures and challenges. We believe, however, that our strength in service, the breadth and depth of our product offering, our information technology system, industry experience and knowledge, and our large customer base and purchasing relationships with approximately 350 manufacturers, provide us with a significant competitive advantage over new entrants to the marketplace.

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Results of Operations

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First quarter of Fiscal Year 2021 Compared with First quarter of Fiscal Year 2020

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Total Revenues. Revenues for the first quarter of fiscal 2021 decreased 8.3% compared with the first quarter of fiscal 2020. Revenue in the commercial segment decreased by 2.2%.  Revenues in our public carrier market increased by 17.2%, partially offset by a 12.2% decline in revenues in the value-added resellers and integrators market. Revenues in our retail segment decreased by 27.2%. The decline in revenues in the retail segment and VAR and Integrators market were largely driven by a combination of continued overall softness in these markets, and the impact of COVID-19 in the first quarter of fiscal year 2021, which affected both of our business segments. We expect the challenges we have been facing in our retail segment to continue for the foreseeable future and are focused on measures to manage the decline of this segment. We also expect the challenges we have been facing in our commercial segment to continue, but to a much lesser extent, and we are focused on growth and expansion of this segment .

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Cost of Goods Sold. Cost of goods sold for the first quarter of fiscal 2021 decreased 4.2% compared with the first quarter of fiscal 2020. In the commercial segment, cost of goods sold increased by 2.0%. Cost of goods sold in our public carrier market increased by 21.5%, partially offset by a 9.6% decrease in cost of goods sold in our value-added resellers and integrators market. Cost of goods sold in our retail segment decreased by 22.4%. These changes in cost of goods sold in both segments were largely driven by changes in revenue and customer mix, as discussed above.

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As discussed above under the heading “Business Overview and Environment,” our ongoing ability to earn revenues and gross profits from customers and suppliers depends upon a number of factors that often differ for each relationship. Agreements or arrangements on which these relationships are based typically do not include any obligation in respect of any specific product purchase or sale, are of limited duration, and are terminable by either party upon relatively short notice. We have been affected from time to time in the past by the loss and changes in the business habits of significant customers and suppliers, and expect that we will again be so affected from time to time in the future. Our customer and supplier relationships could also be affected by wireless carrier consolidation or the overall global economic environment, or other events beyond our control, including the COVID-19 pandemic.

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Total Gross Profit. Gross profit for the first quarter of fiscal 2021 decreased by 25.5% compared to the first quarter of fiscal 2020. This decrease was primarily due to lower sales volume and a change in customer mix favoring the lower margin public carrier market. Within our commercial segment, gross profit margin in our public carrier market decreased from 12.7% to 9.5%. Gross profit margin in our value-added resellers and integrators market decreased from 24.5% to 22.2%. We experienced margin compression within our public carrier market primarily due to a change in customer mix, with increased sales going to larger customers with lower margins. Within our retail segment, gross profit margin decreased from 15.7% to 10.1% in the first quarter of fiscal 2021, compared to 2020, primarily due to customer mix as smaller, higher margin customers

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experienced impacts related to COVID-19. As a result of these drivers on gross profit, overall gross profit margin decreased to 15.7% in the first quarter of fiscal 2021, compared to 19.3% in the first quarter of fiscal 2020.

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Selling, General, Administrative and Restructuring Expenses. Total selling, general and administrative expenses decreased by $4.4 million for the first quarter of fiscal 2021, compared to the first quarter of fiscal 2020. Selling, general and administrative expenses as a percentage of revenues decreased from 21.4% for the first quarter of fiscal 2020, to 19.8% for the first quarter of fiscal 2021.

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The decrease in our selling, general and administrative expenses was primarily due to a decrease of $2.2 million in compensation and benefit expense, $1.0 million in sales promotion expense, and $0.7 million in freight expense during the first quarter of fiscal 2021 as compared to the first quarter of fiscal 2020. These decreases were largely due to the decline in overall revenues and in cost reduction initiatives undertaken in the first quarter, primarily associated with the retail segment.

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The Company also incurred a $0.5 million restructuring charge related to severance expense for the first quarter of fiscal 2020.

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We continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate reserve based on this evaluation. We also evaluate the credit worthiness of prospective and current customers and make decisions regarding extension of credit terms to such customers based on this evaluation. We had bad debt recovery, net of expense of $13,700 and bad debt expense of $135,400 for the three months ended June 28, 2020 and June 30, 2019, respectively.

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Interest, Net. Net interest expense decreased from $208,700 for the first quarter of fiscal 2020 to $110,700 for the first quarter of fiscal 2021. Decrease in interest rates have resulted in decreased interest expense under our secured Revolving Credit Facility (discussed in Note 4 to our Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q).

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Income Taxes, Net Income and Diluted Earnings per Share. The effective tax rate decreased from 29.4% for the first quarter of fiscal 2020 to 7.7% for the first quarter of fiscal 2021. The decrease in the effective tax rate resulted from several discrete items including changes associated with state adjustments related to the CARES Act. We expect the tax rate to be higher for the rest of the fiscal year. Net income decreased 85.8% and diluted earnings per share decreased 86.2% for the first quarter of fiscal 2021, compared to the corresponding prior-year quarter.

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Liquidity and Capital Resources

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The following table summarizes our cash flows provided by or used in operating, investing and financing activities for the three months ended June 28, 2020 and June 30, 2019.

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Net cash provided by operating activities was $1.4 million for the first three months of fiscal 2021, compared with net cash used in operating activities of $2.0 million for the first three months of fiscal 2020. This fiscal 2020 inflow was due to a decrease in accounts receivable, partially offset by the net loss and a decrease in trade accounts payable.  

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Net cash used in investing activities was $1.2 million for the first three months of fiscal 2021, compared to $1.9 million used in the first three months of fiscal 2020. Cash used in both periods was due to capital expenditures largely comprised of investments in information technology.

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Net cash used in financing activities was $0.3 million for the first three months of fiscal 2021, compared to net cash provided by financing activities of $3.8 million for the first three months of fiscal 2020. We repaid our asset based secured Revolving Credit Facility during the first three months of fiscal 2021, leading to a cash outflow of $0.2 million during this period. During the first three months of fiscal 2020, we utilized our asset based secured Revolving Credit Facility, leading to a cash inflow of $5.7 million during this period. This inflow was partially offset by a cash outflow of $1.7 million during the first three months of fiscal 2020 due to cash dividends paid to shareholders. No cash dividend was paid during the first three months of fiscal 2021.

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On October 19, 2017, the Company and its primary operating subsidiaries, as co-borrowers, entered into an Amended and Restated Credit Agreement with SunTrust Bank, as Administrative Agent, and Wells Fargo Bank, National Association, as a lender (the “Amended and Restated Credit Agreement”), which amended and restated the terms of a previously established secured Revolving Credit Facility and which resulted in, among other modifications, an increase in the Company’s borrowing limit to up to $75 million, from the previous borrowing limit of up to $35 million.  In addition to increasing the borrowing limit, and among other modifications, the Amended and Restated Credit Agreement extended the applicable maturity date to October 19, 2021. As of June 28, 2020, borrowings under the secured Revolving Credit Facility totaled $25.3 million; therefore, we then had $49.7 million available, subject to the Borrowing Base limitations and compliance with the other applicable terms of the Amended and Restated Credit Agreement, including the financial and other covenants discussed in Note 4 to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Borrowings under the Amended and Restated Credit Agreement accrue interest at the rates, and the Company is required to pay a monthly commitment fee, as also discussed in Note 4 to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

In connection with the entering into of the Amended and Restated Credit Agreement, the Company and the other Company affiliate borrowers under the Amended and Restated Credit Agreement, and other subsidiaries, referred to collectively as the Loan Parties, executed and delivered to SunTrust Bank, as Administrative Agent, a Reaffirmation Agreement, pursuant to which the obligations of the Loan Parties under the Guaranty and Security Agreement previously delivered by the Loan Parties in connection with the secured Revolving Credit Facility as previously existing (including the previously existing guaranty by the Loan Parties not otherwise Borrowers and the previously existing grant by the Company and the other Loan Parties of a continuing first priority security interest in inventory, accounts receivable and deposit accounts, and on all documents, instruments, general intangibles, letter of credit rights, and all proceeds) were ratified and confirmed as respects the Obligations arising from time to time under the secured Revolving Credit Facility provided for pursuant to the Amended and Restated Credit Agreement.  

We believe that our existing cash, payments from customers and availability under our secured Revolving Credit Facility will be sufficient to support our operations for at least the next twelve months. To minimize interest expense, our policy is to apply excess available cash to reduce the balance outstanding from time to time on our secured Revolving Credit Facility.  Our increased focus over the past several quarters on business opportunities for sales to our public carrier customers led to the recent expansion of our secured Revolving

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Credit Facility, and has at times resulted in increased borrowings and dependence on that facility. We expect this trend to continue, although at present we have no plans for any further expansion of the facility.  If we were to undertake an acquisition or other major capital purchases that require funds in excess of existing sources of liquidity, we would look to sources of funding from additional credit facilities, debt and/or equity issuances. As of June 28, 2020, we do not have any material capital expenditure commitments.

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In addition, our liquidity could be negatively impacted by decreasing revenues and profits resulting from a decrease in demand for our products or a reduction in capital expenditures by our customers, or by the weakened financial conditions of our customers or suppliers, in each case as a result of a downturn in the global economy, among other factors.

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Recent Accounting Pronouncements  

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A description of recently issued and adopted accounting pronouncements is contained in Note 2 to our Consolidated Financial Statements.

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Critical Accounting Policies and Estimates

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Our discussion and analysis of our financial condition and results of operations are based on our unaudited Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

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For a detailed discussion on our critical accounting policies, please refer to our Annual Report on Form 10-K for the fiscal year ended March 29, 2020, filed with the SEC on June 5, 2020.

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Off-Balance Sheet Arrangements

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We have no material off-balance sheet arrangements.

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Forward-Looking Statements

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This Quarterly Report on Form 10-Q may contain forward-looking statements. These forward-looking statements may generally be identified by the use of the words “may,” “will,” “expects,” “anticipates,” “believes,” “estimates,” “intends,” “projects,” “plans,” “should,” “would,” “could,” and similar expressions, but the absence of these words or phrases does not necessarily mean that a statement is not forward looking. Forward looking statements involve a number of known and unknown risks and uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Our actual results may differ materially from those described in or contemplated by any such forward-looking statement for a variety of reasons, including those risks identified in our most recent Annual Report on Form 10-K, this Quarterly Report on Form 10-Q, and other periodic reports filed with the SEC, under the heading “Risk Factors” and otherwise. Consequently, the reader is cautioned to consider all forward-looking statements in light of the risks to which they are subject.

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We are not able to identify or control all circumstances that could occur in the future that may adversely affect our business and operating results. Without limiting the risks that we describe in our periodic reports and

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elsewhere, among the risks that could lead to a materially adverse impact on our business or operating results are the following: termination or non-renewal of limited duration agreements or arrangements with our vendors and affinity partners that are typically terminable by either party upon several months or otherwise relatively short notice; loss of significant customers or relationships, including affinity relationships; loss of customers either directly or indirectly as a result of consolidation among large wireless service carriers and others within the wireless communications industry; the strength of our customers', vendors' and affinity partners' business; increasingly negative or prolonged adverse economic conditions, including those adversely affecting consumer confidence or consumer or business spending, or otherwise adversely affecting our vendors or customers, including their access to capital or liquidity or our customers’ demand for, or ability to fund or pay for, our products and services; our dependence on a relatively small number of suppliers and vendors, which could hamper our ability to maintain appropriate inventory levels and meet customer demand; changes in customer and product mix that affects gross margin; effect of “conflict minerals” regulations on the supply and cost of certain of our products; failure of our information technology system or distribution system; system security or data protection breaches; technology changes in the wireless communications industry, or technological failures, which could lead to significant inventory obsolescence and/or our inability to offer key products that our customers demand; third-party freight carrier interruption; increased competition, including from manufacturers or national and regional distributors of the products we sell and the absence of significant barriers to entry which could result in pricing and other pressures on profitability and market share; our relative bargaining power and inability to negotiate favorable terms with our vendors and customers; our inability to access capital and obtain financing as and when needed; claims against us for breach of the intellectual property rights of third parties; product liability claims; our inability to protect certain intellectual property, including systems and technologies on which we rely; our inability to hire or retain our key professionals, management and staff; health epidemics or pandemics or other outbreaks or events, or national or world events or disasters beyond our control, which includes continuing restrictions resulting from the COVID-19 pandemic, actions taken in response to the COVID-19 pandemic, and any localized impact of the COVID-19 pandemic, which adversely affect our personnel or operations or our ability to fulfill orders, complete implementations, or recognize revenue; and the possibility that, for unforeseen reasons, we may be delayed in entering into or performing, or may fail to enter into or perform, anticipated contracts or may otherwise be delayed in realizing or fail to realize anticipated revenues or anticipated savings.

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Available Information

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Our internet website address is: www.tessco.com. We make available free of charge through our website, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange Act as soon as reasonably practicable after such documents are electronically filed with, or furnished to, the Securities and Exchange Commission. Also available on our Website is our Code of Business Conduct and Ethics.

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Item 4. Controls and Procedures.

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The Company’s management, with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of the end of the period covered by this quarterly report. Controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of these controls and procedures required by Rules 13a-15(b) or 15d-15(b) of the Exchange Act, the Company’s management, including the CEO and CFO, have concluded that, as of the end of the period covered by this quarterly report,

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the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. During the period covered by this quarterly report, there have been no changes to the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

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Item 1. Legal Proceedings.

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Lawsuits and claims are filed against us from time to time in the ordinary course of business. We do not believe that any lawsuits or claims currently pending against the Company, individually or in the aggregate, are material, or will have a material adverse effect on our financial condition or results of operations. In addition, from time to time, we are also subject to review from federal and state taxing authorities in order to validate the amounts of income, sales and/or use taxes which have been claimed and remitted. Currently, our Florida sales tax returns for the period February 1, 2018 through July 31, 2018 are under examination by applicable taxing authorities.

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As we are routinely audited by state taxing authorities, we have estimated exposure and established reserves for our estimated sales tax audit liability.

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Item 1A. Risk Factors.

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Our business involves a high degree of risk. In addition to the other information included in this Quarterly Report on Form 10-Q, you should consider the risk factors previously disclosed in Part I “Item 1.A Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 29, 2020. Information that we have disclosed or will disclose from time to time in our public filings (including this Quarterly Report on Form 10-Q and other periodic reports filed under the Exchange Act) may provide additional data or information relative to our previously disclosed risk factors. We are not able to identify or control all circumstances that could occur in the future that may adversely affect our business and operating results. Additional risks and uncertainties that management is not aware of or focused on, or that management currently deems immaterial may also adversely affect our business, financial position and results of operations. There have been no material changes in any of the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended March 29, 2020.

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However, the COVID-19 pandemic continues to evolve internationally, nationally and locally, and we remain sensitive to the ongoing and changing risks that it presents, both known and unknown. As discussed in our most recent Annual Report on Form 10-K, we face risks related to health epidemics and other outbreaks and events beyond our control, and our business and results of operations have been, and may continue to be, adversely affected on account of the impact of the COVID-19 pandemic.  These risks include continuing COVID-19 related restrictions on our activities, other actions taken or required to be taken by us in response to the COVID-19 pandemic, and any localized impact of the COVID-19 pandemic, any, some or all of which could adversely affect our personnel or operations or our ability to fulfill orders, complete implementations, and recognize revenue. The COVID-19 pandemic also implicates workplace safety issues and concerns, and associated risks.

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Thus far, we have not suffered a widespread outbreak of COVID-19 among our employees or at our facilities, but the risk of future outbreaks persists, and our ongoing business operations and our financial results could be adversely affected should an outbreak occur among our personnel or at one of our facilities.

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In addition, we have previously including among our Risk Factors a discussion of the concentration of our stock ownership among a select group, including Robert B. Barnhill Jr. who holds approximately 18% of our outstanding common stock. In March 2020, Mr. Barnhill filed an amendment to Schedule 13-D with the SEC, indicating among other things his intention to consider and possibly pursue various actions with respect to his investment in the Company, including a strategic transaction in which he alone or with others might acquire all of our outstanding common stock not already held by him.  Subsequently, Mr. Barnhill filed another amendment to Schedule 13-D in which he announced his intention to vote against the re-election of four of our incumbent directors at our 2020 Annual Meeting of Stockholders, and then following the Annual Meeting another amendment to Schedule 13-D indicating an intention to pursue an agenda focused on board transition. In addition, another significant stockholder has filed a Schedule 13-D and amendments indicating, among other things, that it may engage in discussions with our Board and/or members of our management team concerning, without limitation, potential business combinations and strategic alternatives, our business, operations, capital structure, governance, management, strategy and other matters.

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