TESSCO TECHNOLOGIES INC - Quarter Report: 2021 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 August 2, 2021, was 8,896,075.

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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) Income

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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 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.

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

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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 balance sheet and statement of (loss) income to conform with current period presentation. See Note 11, “Discontinued Operations”, for further information.

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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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Recently issued accounting pronouncements adopted:

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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.

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Note 3. Intangible Assets

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Intangible assets, net on our Consolidated Balance Sheets as of June 27, 2021, consists of capitalized software for internal use and indefinite lived intangible assets. Capitalized software for internal use, net of accumulated amortization, was $20,490,300 and $18,341,100 as of June 27, 2021 and March 28, 2021, respectively. Amortization expense of capitalized software for internal use was $175,500 and $648,500 for the fiscal quarter ended June 27, 2021 and June 28, 2020, respectively. Indefinite lived intangible assets were $795,400 as of June 27, 2021 and March 28, 2021.

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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 27, 2021 includes $254,900, of non-cash stock-based compensation expense. The Company’s selling, general and administrative expenses for the fiscal quarter ended June 28, 2020 included $311,900, 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”), the latter of 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 2022:

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If all unvested PSUs earned and outstanding as of June 27, 2021 are assumed to have then vested (and the underlying shares issued) in accordance with terms of the applicable award agreement, total unrecognized compensation costs on these PSUs would be less than $0.2 million as of June 27, 2021, and would be expensed through fiscal 2022.

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Restricted Stock Units: On April 29, 2021 the Compensation Committee, with the concurrence of the full

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Board of Directors, granted an aggregate of 12,000 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 2022, 2023, 2024 and 2025, 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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Additionally, on May 25, 2021, the Compensation Committee, with the concurrence of the full Board of Directors, granted an aggregate of 24,761 RSUs under the 2019 Plan to non-employee directors of the Company.  The RSUs were issued in lieu of cash payments for fiscal 2022 Board and Committee meetings.  These awards provide for the issuance of shares of the Company’s common stock on May 25, 2022, 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 April 29, 2021 the Compensation Committee, with the concurrence of the full Board of Directors, awarded an aggregate of 22,252 shares of the Company’s common stock as restricted stock under the 2019 Plan to certain non-employee directors of the Company in lieu of their annual cash retainer for fiscal 2022. 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 2022 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, 2022, generally depending on the length of continued service of the recipient on the Board for fiscal 2022. Dividends accruing in respect of the shares of restricted stock, if any, will accrue but will not be paid until July 1, 2022 and only in respect of those shares for which the risk of forfeiture has then lapsed.

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As of June 27, 2021, there was approximately $0.4 million of total unrecognized compensation cost related to all outstanding RSUs and restricted stock, 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: During the first quarter of fiscal 2022, stock options for an aggregate of 177,500 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.

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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.  The value of each option 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 27, 2021, there was approximately $1.2 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 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 Lenders party thereto, 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.

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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 Swing 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

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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.

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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 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 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. On June 27, 2021, the interest rate applicable to borrowings under the secured 2020 Revolving Credit Facility was 2.62%.

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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%.

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Notwithstanding the above, 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 a 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. This description is qualified in its entirety by the actual terms of the Amendment, a copy of which is attached as Exhibit 10.1 to this Quarterly Report on Form 10-Q.

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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, 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.

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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.

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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 June 27, 2021, borrowings under the secured 2020 Revolving Credit Facility totaled $39.7 million and, therefore, the Company had $35.3 million available for borrowing as of June

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27, 2021, subject to the Borrowing Base limitation and compliance with the other applicable terms referenced above.

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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.

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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) 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.

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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.

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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 27, 2021 because the Company operated at a loss. The number of diluted weighted-average common shares would have been 8,943,722 for the fiscal quarter ended June 27, 2021, if the Company was in a positive earning position. At June 27, 2021, stock options with respect to 1,008,458 shares of common stock were outstanding, of which 705,958 were anti-dilutive. There were no anti-dilutive PSUs or RSUs outstanding as of June 27, 2021.

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Note 7. Business Segment

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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.

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Market activity for the first quarter of fiscal years 2022 and 2021 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 Sheets.

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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 27, 2021 and June 28, 2020, the aggregate value of the shares withheld totaled $28,900 and $58,800, 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 27, 2021 and June 28, 2020, revenue from the Company’s largest customer

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accounted for 7.2% and 12.9% of revenue from continuing operations, respectively.

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For the fiscal quarter ended June 27, 2021, sales of products purchased from the Company’s largest supplier accounted for 33.3% of revenue from continuing operations. For the fiscal quarter ended June 28, 2020, sales of products purchased from the Company’s largest supplier accounted for 26.8% of revenue from continuing operations. No other suppliers accounted for more than 10% of consolidated revenue.

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Note 11. Discontinued Operations

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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.

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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.

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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 months ended June 27, 2021 and June 28, 2020:

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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.

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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 June 27, 2021 and March 28, 2021:

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The product inventory remaining at June 27, 2021 represents Retail inventory that was not sold to Voice Comm.  Management intends to sell through this inventory in the near term in alignment with the plan to exit the Retail business.

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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 three months ended June 27, 2021 and June 28, 2020 was $4.1 million and $1.6 million, respectively.

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

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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 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, Reno, Nevada and San Antonio, Texas.

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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.

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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.

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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.

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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.

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

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to maintain these 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, 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.

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Results of Continuing Operations

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

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Total Revenues. Revenues for the first quarter of fiscal 2022 increased 8.8% compared with the first quarter of fiscal 2021. Revenues in our commercial market (formerly referred to as VAR and Integrator) increased 3.0%, and revenue in our public carrier market increased 17.2%.  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.

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Cost of Goods Sold. Cost of goods sold for the first quarter of fiscal 2022 increased 6.6% compared with the first quarter of fiscal 2021. Cost of goods sold in our public carrier market increased by 14.6%, and cost of goods sold in our commercial market increased by 0.2%, in each case for the first quarter year-over-year. These changes in cost of goods sold in both markets 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 2022 increased by 19.7% compared to the first quarter of fiscal 2021. This increase was primarily due to increased revenues.  Overall gross profit margin increased from 17.1% in last year’s first quarter to 18.8% for the first quarter of fiscal 2022.  Gross profit margin in our public carrier market increased to 11.6% from 9.5% in the same quarter last year. Gross profit margin in our commercial market increased to 24.4% in the first quarter of fiscal 2022 from 22.2% in the same quarter last year. These gross margin improvements are primarily related to changes in customer and product mix, as well as higher freight charged to customers to offset increased freight costs included in selling, general, and administrative expenses.

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Selling, General and Administrative Expenses. Total selling, general and administrative expenses increased by $0.1 million for the first quarter of fiscal 2022, compared to the first quarter of fiscal 2021. Selling, general and administrative expenses as a percentage of revenues decreased from 22.3% for the first quarter of fiscal 2021, to 20.6% for the first quarter of fiscal 2022.

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The increase in our selling, general and administrative expenses was primarily due to an increase of $1.2 million in freight expense, resulting from higher sales and higher rates due to national supply chain constraints and higher compensation and benefits cost of $0.7 million, primarily related to higher sales commissions and increased health insurance costs.  These increases were partially offset by a $1.4 million decrease in information technology expenses during the first quarter of fiscal 2022 as compared to the first quarter of fiscal 2021.

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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 expense of $187,800 and $30,400, for the three months ended June 27, 2021 and June 28, 2020, respectively.

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Interest, Net. Net interest expense increased from $110,700 for the first quarter of fiscal 2021 to $213,700 for the first quarter of fiscal 2022. An increase in the average amount outstanding and higher interest rates under our 2020 Revolving Credit Facility resulted in increased interest expense in the first fiscal quarter of 2022. In addition, capitalized interest increased from $48,800 from the first quarter of fiscal 2021 to $210,500 for the first quarter of fiscal 2022.

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Income Taxes, Net Income and Diluted Earnings per Share. The effective tax rate decreased from 6.2% for the first quarter of fiscal 2021 to 1.8% for the first quarter of fiscal 2022. Net loss decreased 54.6% and diluted loss per share decreased from $(0.56) to ($0.25) for the first quarter of fiscal 2022, compared to the corresponding prior-year quarter.

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Discontinued Operations. Net income from discontinued operations was $0.5 million for the first quarter of fiscal year 2022 compared to $0.2 million for the first quarter of fiscal year 2021. See footnote 11, “Discontinued Operations”, for further discussion.

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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 27, 2021 and June 28, 2020.

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Net cash used in operating activities was $5.8 million for the first three months of fiscal 2022, compared with net cash provided by operating activities of $3.4 million for the first three months of fiscal 2021. The fiscal 2022 outflow was due to the net loss, and the increase in inventory, accounts receivable and prepaid expenses, partially offset by an increase in accounts payable.  

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Net cash used in investing activities was $2.2 million for the first three months of fiscal 2022, compared to $3.2 million used in the first three months of fiscal 2021. Both years are related to capital expenditures, largely comprised of investments in information technology.

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Net cash provided by financing activities was $9.1 million for the first three months of fiscal 2022, compared to net cash used in financing activities of $0.3 million for the first three months of fiscal 2021. We utilized our asset based secured Revolving Credit Facility during the first three months of fiscal 2022, leading to a cash inflow of $9.1 million during this period. During the first three months of fiscal 2021, we utilized our asset based secured Revolving Credit Facility, leading to a cash outflow of $0.2 million during this period.

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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 Lenders party thereto, 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 June 27, 2021, borrowings under the secured 2020 Revolving Credit Facility totaled $39.7 million; therefore, we then had $35.3 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 5 to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Borrowings under the Credit Agreement accrue interest at the rates, and the Company is required to pay a monthly commitment fee, as also discussed in Note 5 to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

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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 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. We expect this trend to continue, although at present we have no plans for any further expansion of the current 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 27, 2021, 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 28, 2021, filed with the SEC on June 11, 2021.

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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 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 Robert B. Barnhill, Jr. and/or other activist investors; termination or non-renewal of limited duration agreements or arrangements with our suppliers and affinity partners which are typically terminable by either party upon several months or otherwise relatively short notice; loss of significant customers, suppliers or relationships, including affinity relationships; loss of customers or reduction in customers’ business either directly or indirectly as a result of consolidation among large wireless service carriers and others within the wireless communications industry; any deterioration in the strength of our customers', suppliers and affinity partners' businesses; increasingly negative or adverse economic conditions, including those adversely affecting consumer confidence or consumer or business spending, or otherwise adversely affecting 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, 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 or our inability to maintain or upgrade our technology or telecommunications systems without undue cost, incident or delay; system security and 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 to 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 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 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 or with dispositions of lines of business; claims against us for breach of the intellectual property rights of third parties; product liability claims; our inability to protect certain

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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; 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, 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 and our California sales tax returns for the period January 1, 2018 through December 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 2. Unregistered Sales of Equity Securities and Use of Proceeds.

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None.

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Item 3. Defaults Upon Senior Securities.

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None.

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Item 4. Mine Safety Disclosures.

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Not applicable.

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Item 5. Other Information.

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None.

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Item 6. Exhibits.

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*Filed herewith

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Signature

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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.

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