TESSCO TECHNOLOGIES INC - Quarter Report: 2021 September (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

​

​

FORM 10-Q

​

​

Commission File Number: 001-33938

TESSCO Technologies Incorporated

(Exact name of registrant as specified in its charter)

​

​

(410) 229-1000

(Registrant’s telephone number, including area code)

​

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

​

​

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑       No ☐

​

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑       No ☐

​

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

​

​

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. ☐

​

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

Yes ☐       No ☑

​

The number of shares of the registrant’s Common Stock, $0.01 par value per share, outstanding as of October 27, 2021, was 8,966,765.

​

​

​

​

Table of Contents

TESSCO Technologies Incorporated

Index to Form 10-Q

​

​

​

​

​

2

Table of Contents

PART I. FINANCIAL INFORMATION

​

Item 1. Financial Statements.

​

TESSCO Technologies Incorporated

Unaudited Consolidated Balance Sheets

​

​

See accompanying notes to unaudited consolidated financial statements.

​

3

Table of Contents

TESSCO Technologies Incorporated

Unaudited Consolidated Statements of (Loss) Income

​

​

See accompanying notes to unaudited consolidated financial statements.

​

​

4

Table of Contents

TESSCO Technologies Incorporated

Unaudited Consolidated Statements of Changes in Shareholders’ Equity

​

​

See accompanying notes to unaudited consolidated financial statements.

​

5

Table of Contents

TESSCO Technologies Incorporated

Unaudited Consolidated Statements of Cash Flows

​

​

See accompanying notes to unaudited consolidated financial statements.

​

6

Table of Contents

TESSCO Technologies Incorporated

Notes to Unaudited Consolidated Financial Statements

​

Note 1. Description of Business and Basis of Presentation

​

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 97% 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.

​

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 28, 2021, filed with SEC on June 11, 2021.

​

On October 28, 2020, the Company entered into a definitive Inventory Purchase Agreement (the “Agreement”) which, at a closing held on December 2, 2020, resulted in the Company’s exit from its retail business through the sale to Voice Comm, LLC, a Delaware limited liability company (“Voice Comm”), of most of the Company’s retail inventory, the Ventev brand as it relates to mobile device accessory products, and certain other retail-related assets. The accompanying Consolidated Financial Statements for all periods presented reflect the results of the Retail segment as a discontinued operation. As a result, certain amounts have been reclassified on the consolidated balance sheet and consolidated statement of (loss) income to conform with current period presentation. See Note 9, “Discontinued Operations”, for further information.

​

​

​

Note 2. Recently Issued Accounting Pronouncements

​

Recently issued accounting pronouncements not yet adopted:

​

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.

​

7

Table of Contents

Recently issued accounting pronouncements adopted:

​

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach for intraperiod tax allocation, and the methodology for calculating income taxes in an interim period.  This ASU is effective for periods beginning after December 15, 2020. The Company adopted this standard on the first day of the 2022 fiscal year on a prospective basis.  The standard did not have a material impact on the financial statements.

​

​

Note 3. Intangible Assets

​

Intangible assets, net on our Consolidated Balance Sheets as of September 26, 2021, consists of capitalized software for internal use and indefinite lived intangible assets. Capitalized software for internal use, net of accumulated amortization, was $23,768,400 and $18,341,100 as of September 26, 2021 and March 28, 2021, respectively. Amortization expense of capitalized software for internal use was $198,100 and $502,300 for the three months ended September 26, 2021 and September 27, 2020, respectively. Amortization expense of capitalized software for internal use was $395,200 and $1,150,800 for the six months ended September 26, 2021 and September 27, 2020, respectively. Indefinite lived intangible assets were $795,400 as of September 26, 2021 and March 28, 2021.

​

​

Note 4. Borrowings Under Revolving Credit Facility

On October 29, 2020, the Company entered into a Credit Agreement (the “Credit Agreement”) among the Company, the Company’s primary operating subsidiaries as co-borrowers, the Lender(s) party thereto from time to time, and Wells Fargo Bank, National Association (“Wells”), as Administrative Agent, swingline lender and an issuing bank. Terms used, but not defined, in this and the following ten (10) paragraphs have the meanings set forth in the Credit Agreement or the related Guaranty and Security Agreement. This new facility replaced a previously existing credit facility among the Company and certain subsidiaries, the lenders party thereto (which included Wells) and Truist Bank (successor by merger to SunTrust Bank), as administrative agent.

​

The Credit Agreement provides for a senior secured asset based revolving credit facility of up to $75 million (the “2020 Revolving Credit Facility”), which matures on April 29, 2024. The 2020 Revolving Credit Facility includes a $5.0 million letter of credit sublimit and provides for the issuance of Swingline Loans. The applicable Credit Agreement also includes a provision permitting the Company, subject to certain conditions, to increase the aggregate amount of the commitments under the 2020 Revolving Credit Facility to an aggregate commitment amount of up to $125 million with optional additional commitments from then existing Lenders or new commitments from additional lenders, although no Lender is obligated to increase its commitment. Availability is determined in accordance with the Borrowing Base, which is generally 85% of Eligible Accounts minus the Dilution Reserve, plus a calculated value of Eligible Inventory aged less than 181 days plus the lesser of $4 million and a calculated value of Inventory aged more than 180 days minus a calculated Reserve, as further detailed and set forth in the Credit Agreement.

​

Borrowings initially accrue (or accrued) interest from the applicable borrowing date:  (A) if a LIBOR Rate Loan, at a per annum rate equal to the LIBOR Rate plus the LIBOR Rate Margin of 2.25% until the March 31, 2021 financial statements were delivered and thereafter (i) if the Fixed Charge Coverage Ratio is less than 1.10:1.00, then the LIBOR Rate plus 2.25% or (ii) if the Fixed Charge Coverage Ratio is greater than or equal

8

Table of Contents

to 1.10:1.00, then the LIBOR Rate plus 2.00%; (B) if a Base Rate Loan, at a per annum rate equal to the Base Rate plus the Base Rate Margin of 1.25% per annum until the March 31, 2021 financial statements were delivered and thereafter (i) if the Fixed Charge Coverage Ratio is less than 1.10:1.00, then the Base Rate of 1.25% or (ii) if the Fixed Charge Coverage Ratio is greater than or equal to 1.10:1.00, then the Base Rate plus 1.00%. The Credit Agreement contains a LIBOR floor of 0.25% so that if the LIBOR Rate is below 0.25%, then the LIBOR Rate will be deemed to be equal to 0.25% for purposes of the Credit Agreement.

​

The Company is required to pay a monthly Unused Line Fee on the average daily unused portion of the 2020 Revolving Credit Facility, at a per annum rate equal to 0.25%.

​

Pursuant to Amendment No. 1 to Credit Agreement dated July 12, 2021 (the “Amendment”), between Tessco and Wells, Wells agreed to a 25 basis point reduction in certain otherwise applicable rates and fees over an agreed period, as set forth in the Amendment. The Amendment also included certain changes related to the transition away from the use of LIBOR as a rate option, and is expected to simplify day-to-day management of the 2020 Revolving Credit Facility. It is anticipated that, so long as no event of default occurs, the interest rate applicable to borrowings under the 2020 Revolving Credit Facility will be lower than it otherwise would have been, going forward, until the end of the agreed period. On September 26, 2021, the interest rate applicable to borrowings under the secured 2020 Revolving Credit Facility was 2.09%, which includes the 25 basis point reduction included in the Amendment as discussed above.

​

Following an Event of Default, the Lenders’ may at their option increase the applicable per annum rate to a rate equal to two percentage points above the otherwise applicable rate and with certain events of default, such increase is automatic. In addition, the 25 basis point reduction, insofar as then otherwise available under the Amendment, will terminate, and at the written election of the Agent or the Required Lenders at any time while an Event of Default exists, the Company will no longer have the option to request that revolving loans be based on the LIBOR Rate.

​

The Credit Agreement contains one financial covenant, a Fixed Charge Coverage Ratio, which is tested only if Excess Availability (generally, borrowing availability less the aggregate of trade payables and book overdrafts, each in excess of historical amounts) is less than the greater of (a) 16.7% of the maximum amount of the Credit Facility (at closing, $12,525,000) and (b) $12,500,000.  In addition, the Credit Agreement contains provisions 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.

​

Borrowings under the 2020 Revolving Credit Facility were initially used to pay all indebtedness outstanding under the previously existing credit facility among the Company and certain subsidiaries, the lenders party thereto and Truist Bank (successor by merger to SunTrust Bank), as administrative agent, and may be used for working capital and other general corporate purposes, and as further provided in, and subject to the applicable terms of, the Credit Agreement. As of September 26, 2021, borrowings under the secured 2020 Revolving Credit Facility totaled $45.7 million and, therefore, the Company had $29.3 million available for borrowing as of September 26, 2021, subject to the Borrowing Base limitation and compliance with the other applicable terms referenced above.

​

The Company is required to make certain prepayments under the 2020 Revolving Credit Facility under certain circumstances, including from net cash proceeds from certain asset dispositions in excess of certain thresholds.

​

The Credit Agreement contains representations, warranties and affirmative covenants. The Credit Agreement also contains negative covenants and restrictions on, among other things: (i) Indebtedness, (ii) liens, (iii)

9

Table of Contents

fundamental changes, (iv) disposition of assets, (v) restricted payments (including certain restrictions on redemptions and dividends), (vi) investments and (vii) transactions with affiliates. The Credit Agreement also contains events of default, such as payment defaults, cross-defaults to other material indebtedness, misrepresentations, bankruptcy and insolvency, the occurrence of a Change of Control and the failure to observe the negative covenants and other covenants contained in the Credit Agreement and the other loan documents.

​

Pursuant to a related Guaranty and Security Agreement, by and among the Company, the other borrowers under the Credit Agreement and other operating subsidiaries of the Company (collectively, the “Loan Parties”), and Wells, as Administrative Agent, the Obligations, which include the obligations under the Credit Agreement, are guaranteed by the Loan Parties, and secured by continuing first priority security interests in the Company’s and the other Loan Parties’ (including both borrowers and guarantors) Accounts, Books, Chattel Paper, Deposit Accounts, General Intangibles, Inventory, Negotiable Collateral, Supporting Obligations, Money, Cash Equivalents or other assets that come into the possession, custody or control of the Agent or any Lender, and related assets, and the proceeds and products of any of the foregoing (the “Collateral”). The security interests in the Collateral are in favor of the Administrative Agent, for the benefit of the Lenders party to the Credit Agreement from time to time and any other holders of the Obligations. The Obligations secured also include 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.

​

Note 5. Earnings Per Share

​

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 three and six month periods ended September 26, 2021 because the Company operated at a loss. The number of diluted weighted-average common shares would have been 8,954,118 for the three months ended September 26, 2021, and 8,950,863 for the six months ended September 26, 2021, if the Company was in a positive earning position. At September 26, 2021, stock options with respect to 973,458 shares of common stock were outstanding, of which 843,458 were anti-dilutive. There were no anti-dilutive PSUs or RSUs outstanding as of September 26, 2021.

​

​

Note 6. Business Segment

​

After exiting our Retail business, the Company operates as one business segment. The Company will continue to present revenue and gross profit by the following customer markets: (1) public carriers, which are generally responsible for building and maintaining the infrastructure system and provide airtime service to individual subscribers; and (2) commercial, formerly value-added resellers and integrators, which includes value-added resellers, the government channel and private system operator markets.

​

10

Table of Contents

Market activity for the second quarter and first six months of fiscal years 2022 and 2021 are as follows (in thousands):

​

​

​

​

​

​

Note 7. Shares Withheld

​

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 six months ended September 26, 2021 and September 27, 2020, the aggregate value of the shares withheld totaled $66,400 and $72,900, respectively.

​

​

​

​

​

​

Note 8. Concentration of Risk

​

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

​

No customer accounted for more than 10% of revenue for the three and six months ended September 26, 2021 and September 27, 2020.

​

For the three months ended September 26, 2021 and September 27, 2020, sales of products purchased from the Company’s largest supplier accounted for 29.0% and 26.5% of revenue from continuing operations, respectively. No other suppliers accounted for more than 10% of consolidated revenue.

​

For the six months ended September 26, 2021 and September 27, 2020, sales of products purchased from the Company’s largest supplier accounted for 31.1% and 26.7% of revenue from continuing operations, respectively. No other suppliers accounted for more than 10% of consolidated revenue.

​

​

​

11

Table of Contents

Note 9. Discontinued Operations

​

At a closing on December 2, 2020, the Company sold most of its retail inventory, the Ventev brand as it relates to mobile device accessory products, and certain other retail-related assets to Voice Comm, LLC (Voice Comm). Cash proceeds of $9.5 million were received at closing, which occurred during the third quarter of fiscal 2021. As part of the sale agreement, the Company is entitled to royalty payments of up to $3.0 million in the aggregate on the sale of Ventev branded products by Voice Comm over a four-year period after the closing. Additionally, future customer returns to the Company may be resold to Voice Comm over a two-year period after the closing.

​

As a result of the disposal described above, the operating results of the former Retail segment has been included in Income (loss) from discontinued operations, net of taxes, in the Consolidated Statements of (Loss) Income for all periods presented.

​

The accompanying Consolidated Financial Statements for all periods presented reflect the results of the Retail segment as a discontinued operation. The following table presents the financial results of the Retail segment for the three and six months ended September 26, 2021 and September 27, 2020:

​

​

The financial results reflected above may not fully represent our former Retail segment stand-alone operating net profit, as the results reported within Income (loss) from discontinued operations, net of taxes, include only certain costs that are directly attributable to this former segment and exclude certain corporate overhead and operational costs that may have been previously allocated for each period.

​

The following table summarizes the major classes of assets attributable to discontinued operations that are included in the Current portion of assets held for sale in the Company’s Consolidated Balance Sheets as of September 26, 2021 and March 28, 2021:

​

​

Management intends to sell through this inventory in the near term in alignment with the plan to exit the Retail business.

​

12

Table of Contents

In our Consolidated Statements of Cash Flows, the cash flows from discontinued operations are not separately classified. Cash provided by operating activities from discontinued operations for the six months ended September 26, 2021 and September 27, 2020 was $4.6 million and $9.4 million, respectively.

​

13

Table of Contents

​

​

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 28, 2021, filed with the SEC on June 11, 2021.

​

Business Overview and Environment

​

Tessco architects and delivers innovative product and value chain solutions to support wireless systems. Although we sell products to customers in many countries, approximately 97% of our sales are made to customers in the United States. We have operations and office facilities in Hunt Valley, Maryland, and Reno, Nevada.

​

On December 2, 2020, we sold most of our Retail inventory and certain other retail-related assets to Voice Comm. In connection with this sale, we assigned or licensed certain Ventev^®- related intellectual property to Voice Comm, including our Ventev^® trademark for their use in connection with the sale of mobile device and accessory products. Together, this resulted in our exit from our Retail business. Cash proceeds of $9.5 million were received at the time of sale. As part of the sale agreement, we are entitled to royalty payments, up to $3.0 million in the aggregate, on the sale of Ventev^® branded products by Voice Comm over a four-year period after closing. Additionally, some customer returns we receive may be resold to Voice Comm over a two-year period after closing. As a result of the disposal, the operating results of our former Retail segment have been included in Income (loss) from discontinued operations, net of taxes in the Consolidated Statements of (Loss) Income for all periods presented.  We retain the Ventev^® tradename for non-mobile device accessory products.

​

As a result of this sale and our exit from the Retail business during the third quarter of fiscal 2021, we now operate as one business segment.

​

We provide certain information within two key markets: (1) public carriers, which are generally responsible for building and maintaining the infrastructure system and provide airtime service to individual subscribers; and (2) commercial, which includes value-added resellers, the government channel and private system operator markets.

​

We offer a wide range of products that are classified into three categories: base station infrastructure; network systems; and installation, test and maintenance. Base station infrastructure products are used to build, repair and upgrade wireless telecommunications. 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. In this category, we have also been growing our offering of wireless broadband, 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.

​

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 low, and the risk of new competitors entering the market is high. Consolidation of larger wireless carriers has

14

Table of Contents

and will most likely continue to impact our current and potential customer base. In addition, the agreements or arrangements with our customers or suppliers looking to us for product and supply chain solutions are typically of limited duration and are terminable by either party upon several months or otherwise short notice. Our ability to maintain these relationships is subject to competitive pressures and challenges and depends upon a number of factors that often differ for each relationship. 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 the overall global economic environment or other events beyond our control, including the COVID-19 pandemic. We believe, however, that our strength in service, the breadth and depth of our product offering, our information technology system, our large customer base, and our purchasing relationships with approximately 300 manufacturers provide us with a significant competitive advantage over new entrants to the market.

​

​

​

​

15

Table of Contents

Results of Continuing Operations

​

Second quarter of Fiscal Year 2022 Compared with Second quarter of Fiscal Year 2021

​

Total Revenues. Revenues for the second quarter of fiscal 2022 increased 22.1% compared with the second quarter of fiscal 2021. Revenues in our commercial market (formerly referred to as VAR and Integrator) increased 9.5%, and revenue in our public carrier market increased 43.8%.  This increase in the public carrier market was due to gaining additional market share and improving macro-economic trends as the impact of the COVID-19 pandemic on our business lessens.  The increase in commercial market revenues was also largely driven by the lower impact of COVID-19.

​

Cost of Goods Sold. Cost of goods sold for the second quarter of fiscal 2022 increased 23.6% compared with the second quarter of fiscal 2021. Cost of goods sold in our commercial market and public carrier market increased by 10.9% and 42.3%, respectively. These increases in cost of goods sold in both markets were largely driven by changes in revenue and customer mix, as discussed above.

​

Total Gross Profit. Gross profit for the second quarter of fiscal 2022 increased by 15.6% compared to the second quarter of fiscal 2021. This increase was primarily due to increased revenues. Overall gross profit margin decreased from 19.3% in last year’s second quarter to 18.2% for the second quarter of fiscal 2022.  Gross profit margin in our public carrier market increased to 11.8% from 10.9% in the same quarter last year. Gross profit margin in our commercial market decreased to 23.1% in the second quarter of fiscal 2022 from 24.1% in the same quarter last year. The gross margin improvements in the public carrier market are primarily related to changes in customer and product mix. The gross margin decline in the commercial market is primarily attributable to customer mix, with a significant transaction with a customer with lower margins. Gross margins in both markets were positively impacted by higher freight charged to customers in response to and to partially offset increased freight costs incurred, which is included in selling, general, and administrative expenses.

​

Selling, General and Administrative Expenses. Total selling, general and administrative expenses increased by 1.0% or $0.2 million for the second quarter of fiscal 2022, compared to the second quarter of fiscal 2021. Selling, general and administrative expenses as a percentage of revenues decreased from 23.4% for the second quarter of fiscal 2021, to 19.3% for the second quarter of fiscal 2022.

​

The increase in our selling, general and administrative expenses was primarily due to an increase of $1.0 million in freight expense, resulting from higher sales and higher freight rates due to national supply chain constraints. This increase was partially offset by a $0.5 million decrease in information technology expenses during the second quarter of fiscal 2022 as compared to the second quarter of fiscal 2021 and a $0.3 million decrease in corporate support expenses. The decrease in information technology expenses is primarily attributable to consolidating third-party providers and eliminating costs. The decrease in corporate support expenses is primarily driven by lower bad debts expense due to strong collection efforts, as described further in the following paragraph.

​

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 $313,900 and $41,200, for the three months ended September 26, 2021 and September 27, 2020, respectively.

​

16

Table of Contents

Interest, Net. Net interest expense increased from $105,900 for the second quarter of fiscal 2021 to $158,700 for the second quarter of fiscal 2022. An increase in the average amount outstanding on our 2020 Revolving Credit Facility and higher interest rates resulted in increased interest expense in the second fiscal quarter of 2022. This increase in interest expense is partially offset by an increase in capitalized interest, which increased from $58,200 in the second quarter of fiscal 2021 to $137,100 for the second quarter of fiscal 2022.

​

Income Taxes, Net Income and Diluted Earnings per Share. The effective tax rate decreased from 21.9% for the second quarter of fiscal 2021 to 5.6% for the second quarter of fiscal 2022. The decrease in the effective tax rate is primarily attributable to the Company using a net operating loss (“NOL”) carryback in 2021 allowable under the CARES Act, which was a one-time tax law change that expired at the end of 2021. Net loss increased 56.7% and diluted loss per share decreased from ($0.34) to ($0.14) for the second quarter of fiscal 2022, compared to the corresponding prior-year quarter.

​

Discontinued Operations. Net income from discontinued operations was $0.4 million for the second quarter of fiscal year 2022 compared to $2.7 million for the second quarter of fiscal year 2021. See Note 9, “Discontinued Operations”, to our Consolidated Financial Statements included as part of this Quarterly Report on Form 10-Q,  for further discussion.

​

​

First Six Months of Fiscal Year 2022 Compared with First Six Months of Fiscal Year 2021

​

Total Revenues. Revenues for the first six months of fiscal 2022 increased 15.2% compared with the first six months of fiscal 2021. Revenues in our commercial market (formerly referred to as VAR and Integrator) increased 6.2%, and revenue in our public carrier market increased 29.3%.  This increase in the public carrier market was due to gaining additional market share and improving macro-economic trends as the impact of the COVID-19 pandemic lessens. The increase in commercial market revenues was also largely driven by the lower impact of COVID-19.

​

Cost of Goods Sold. Cost of goods sold for the first six months of fiscal 2022 increased 14.6% compared with the first six months of fiscal 2021. Cost of goods sold in our commercial market and public carrier market increased by 5.4% and 27.0%, respectively. These increases in cost of goods sold in both markets were largely driven by changes in revenue and customer mix, as discussed above.

​

Total Gross Profit. Gross profit for the first six months of fiscal 2022 increased by 17.6% compared to the first six months of fiscal 2021. This increase was primarily due to increased revenues.  Overall gross profit margin increased from 18.1% in the first six months of fiscal 2021 to 18.5% for the first six months of fiscal 2022. Gross profit margin in our commercial market increased from 23.2% to 23.7% in the first six months of fiscal 2022 compared to the first six months of fiscal 2021.  Gross profit margin in our public carrier market increased from 10.2% to 11.7% in the first six months of fiscal 2022 compared to the first six months of fiscal 2021. The gross margin improvements in both markets are primarily attributable to changes in customer and product mix, as well as higher freight charges to customers in response to and to partially offset increased freight costs incurred, which is included in selling, general, and administrative expenses.

​

Selling, General and Administrative Expenses. Total selling, general and administrative expenses increased by 0.7% or $0.3 million for the first six months of fiscal 2022, compared to the first six months of fiscal 2021. Selling, general and administrative expenses as a percentage of revenues decreased from 22.8% for the first six months of fiscal 2021, to 20.0% for the first six months of fiscal 2022.

​

The increase in our selling, general and administrative expenses was primarily due to an increase of $2.2 million

17

Table of Contents

in freight expense, resulting from higher sales and higher freight rates due to national supply chain constraints. This increase was partially offset by a $1.8 million decrease in information technology expenses during the first six months of fiscal 2022 as compared to the first six months of fiscal 2021 and a $0.7 million decrease in corporate support expenses. The decrease in information technology expenses is primarily attributable to consolidating third-party providers and eliminating costs. The decrease in corporate support expenses is primarily attributable to lower third-party professional and consulting expense.

​

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 $126,100 and $10,800, for the six months ended September 26, 2021 and September 27, 2020, respectively.

​

Interest, Net. Net interest expense increased from $216,600 for the six months of fiscal 2021 to $372,400 for the first six months of fiscal 2022. An increase in the average amount outstanding on our 2020 Revolving Credit Facility and higher interest rates resulted in increased interest expense in the first six months of fiscal quarter 2022. This increase in interest expense is partially offset by an increase in capitalized interest, which increased from $107,000 in the first six months of fiscal 2021 to $347,600 in the first six months of fiscal 2022.

​

Income Taxes, Net Income and Diluted Earnings per Share. The effective tax rate decreased from 12.8% for the first six months of fiscal 2021 to 1.1% for the first six months of fiscal 2022. The decrease in the effective tax rate is primarily attributable to the Company using a NOL carryback in 2021 allowable under the CARES Act, which was a one-time tax law change that expired at the end of 2021. Net loss decreased 55.4% and diluted loss per share decreased from ($0.91) to ($0.39) for the first six months of fiscal 2022, compared to the corresponding prior-year period.

​

Discontinued Operations. Net income from discontinued operations was $0.9 million for the first six months of fiscal year 2022 compared to $2.9 million for the first six months of fiscal year 2021. See Note 9, “Discontinued Operations”, to our Consolidated Financial Statements included as part of this Quarterly Report on Form 10-Q,  for further discussion.

​

​

Liquidity and Capital Resources

​

The following table summarizes our cash flows provided by or used in operating, investing and financing activities for the six months ended September 26, 2021 and September 27, 2020.

​

​

Net cash used in operating activities was $10.3 million for the first six months of fiscal 2022, compared with net cash provided by operating activities of $0.4 million for the first six months of fiscal 2021. The fiscal 2022 outflow was due to the net loss, and an increase in inventory and accounts receivable, partially offset by a decrease in income taxes receivable.  

​

18

Table of Contents

Net cash used in investing activities was $3.8 million for the first six months of fiscal 2022, compared to $7.0 million used in the first six months of fiscal 2021. Both years are related to capital expenditures, largely comprised of investments in information technology.

​

Net cash provided by financing activities was $15.0 million for the first six months of fiscal 2022, compared to net cash provided by financing activities of $6.5 million for the first six months of fiscal 2021. Utilization of our asset based secured 2020 Revolving Credit Facility during the first six months of fiscal 2022 resulted in a cash inflow of $15.1 million during this period. During the first six months of fiscal 2021, we utilized our previous asset based secured Revolving Credit Facility, leading to a cash outflow of $6.5 million during this period.

​

On October 29, 2020, we entered into a Credit Agreement (the “Credit Agreement”) among the Company, the Company’s primary operating subsidiaries as co-borrowers, the Lender(s) party thereto from time to time, and Wells Fargo Bank, National Association (“Wells”), as Administrative Agent, swingline lender and an issuing bank, and terminated our previous secured Revolving Credit Facility. The Credit Agreement provides for a senior secured asset based revolving credit facility of up to $75 million (the “2020 Revolving Credit Facility”), which matures in forty-two months, on April 29, 2024. This new facility replaced a previously existing facility. As of September 26, 2021, borrowings under the secured 2020 Revolving Credit Facility totaled $45.7 million; therefore, we then had $29.3 million available, subject to the Borrowing Base limitations and compliance with the other applicable terms of the 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 Credit Agreement accrue interest at the rates as discussed in Note 4 to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

​

We believe that our existing cash, payments from customers and availability under the secured 2020 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 2020 Revolving Credit Facility.  Our increased focus over the past several years on business opportunities for sales to our public carrier customers led to the recent expansion of our borrowing limits, as now reflected in the 2020 secured Revolving Credit Facility, and has at times resulted in increased borrowings and dependence on that 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 September 26, 2021, we do not have any material capital expenditure commitments.

​

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.

​

Recent Accounting Pronouncements  

​

A description of recently issued and adopted accounting pronouncements is contained in Note 2 to our Consolidated Financial Statements included as part of this Quarterly Report on Form 10-Q.

​

Critical Accounting Policies and Estimates

​

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

19

Table of Contents

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.

​

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 28, 2021, filed with the SEC on June 11, 2021.

​

Off-Balance Sheet Arrangements

​

We have no material off-balance sheet arrangements.

​

Forward-Looking Statements

​

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.

We are not able to identify or control all circumstances that could occur in the future that may materially and adversely affect our business and operating results. Without limiting the risks that we describe in our periodic reports and elsewhere, among the risks that could lead to a materially adverse impact on our business or operating results are the following: the impact and results of any new or continued activism activities by activist investors; termination or non-renewal of limited duration agreements or arrangements with our suppliers, which are typically terminable by either party upon several months or otherwise relatively short notice; loss of significant customers, suppliers or other relationships, or reduction of customer business or product availability; loss of customers or suppliers either directly or indirectly as a result of consolidation among large wireless service carriers and others within the wireless communications industry; deterioration in the strength of our customers' or suppliers' business; negative or adverse economic conditions, including those adversely affecting consumer confidence or consumer or business spending or otherwise adversely impacting our suppliers or customers, including their access to capital or liquidity, or our customers' demand for, or ability to fund or pay for, the purchase of our products and services; our dependence on a relatively small number of suppliers, which could hamper our ability to maintain appropriate inventory levels and meet customer demand; changes in customer and product mix that affect 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; our inability to maintain or upgrade our technology or telecommunication systems without undue cost, incident or delay; system security or data protection breaches and exposure to cyber-attacks, and the cost associated with ongoing efforts to maintain cyber-security measures and to meet applicable compliance standards; damage or destruction of our distribution or other facilities; prolonged or otherwise unusual quality or performance control problems; technology changes in the wireless communications industry or technological failures, which could lead to significant inventory obsolescence or devaluation and/or our inability to offer key products that our customers

20

Table of Contents

demand; third-party freight carrier interruption; increased competition from competitors, including 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 suppliers and customers; our inability to access capital and obtain or retain financing as and when needed; transitional and other risks associated with acquisitions of companies that we may undertake in an effort to expand our business; 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 for any reason 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; changes in political and regulatory conditions, including tax and trade policies; and the possibility that, for unforeseen or other 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.

​

Available Information

​

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.

​

Item 4. Controls and Procedures.

​

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, 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.

​

21

Table of Contents

PART II. OTHER INFORMATION

​

Item 1. Legal Proceedings.

​

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

​

​

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

​

None.

​

Item 3. Defaults Upon Senior Securities.

​

None.

​

Item 4. Mine Safety Disclosures.

​

Not applicable.

​

Item 5. Other Information.

​

None.

​

​

22

Table of Contents

Item 6. Exhibits.

​

​

*Filed herewith

​

​

​

23

Table of Contents

Signature

​

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

​

​

​

​

​

​

​

24