UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
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DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part III of this Form 10-K not included herein is incorporated herein by reference to the corresponding portions of the definitive Proxy Statement for the registrant’s 2023 Annual Meeting of Shareholders if filed within 120 days after the 2023 fiscal year end , or by reference to an amendment to this Form l0-K to be filed prior to or in lieu of such Proxy Statement, not later than the end of such 120-day period.
TABLE OF CONTENTS
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Management's Discussion and Analysis of Financial Condition and Results of Operations
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Item 1. Business.
TESSCO Technologies Incorporated (which we refer to as “Tessco”, “we”, or the “Company”) is a value-added technology distributor, manufacturer, and solutions provider serving customers in the wireless infrastructure market. The Company was founded in 1982 with a commitment to deliver industry-leading products, knowledge, solutions, and customer service. Tessco supplies over 50,000 products from more than 300 of the industry’s top manufacturers in mobile communications, Wi-Fi, Internet of Things, 5G, wireless backhaul, and more. Tessco is a single source for outstanding customer experience, expert knowledge, and complete end-to-end solutions for the wireless industry.
On December 2, 2020, we sold most of our retail inventory and certain other retail-related assets to Voice Comm, LLC (“Voice Comm”). In connection with this sale, we assigned or licensed our Ventev®- related intellectual property, including the Ventev® trademark, to Voice Comm for their use in connection with the sale of mobile device and accessory products. Together, this resulted in the Company’s exit from its Retail business. Accordingly, the accompanying Consolidated Financial Statements for fiscal years 2021 and 2022 reflect the results of the Retail segment as a discontinued operation. The activity related to discontinued operations for fiscal year 2023 was immaterial and therefore is included within results from continuing operations. See Note 20, “Discontinued Operations”, to our Consolidated Financial Statements included in this Annual Report on Form 10-K for further information. Additionally, the narrative discussion presented below in this Item 1 of this Annual Report is specific to the continuing operations of the Company (formerly, our Commercial segment), unless otherwise noted. We generally retain rights to the Ventev® brand as it relates to other than mobile device and accessory products.
On April 11, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Alliance USAcqCo 2, Inc., a Delaware corporation (“Parent”), and Alliance USAcqCo 2 Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”). Parent and Merger Sub are entities affiliated with Lee Equity Partners, LLC and Twin Point Capital LLC, which also own Alliance Corporation, a value-added distributor of equipment for the wireless industry, and GetWireless, LLC, a value-added distributor of cellular solutions that connect the Internet of Things (IoT). See Note 21, “Subsequent Events”, to our Consolidated Financial Statements included in this Annual Report on Form 10-K for further information.
Our customers include a diversified mix of carrier and public network operators, tower owners, program managers, contractors, integrators, private system operators (including railroads, utilities, mining operators and oil and gas operators), federal, state and local governments, manufacturers, national solutions providers and value-added resellers. We currently serve an average of approximately 3,400 different customers per month.
We provide our customers with products and solutions to help them support these primary applications:
|●||DAS (Distributed Antenna Systems) for In-Building Cellular and Public Safety Coverage|
|●||First Responder Communications and FirstNet™|
|●||IoT (Internet of Things)|
|●||Small Cell and Macro Cell Wireless Base Station Infrastructure, including 5G buildouts|
|●||In-Vehicle and Mobile Communications|
|●||Test and Maintenance|
|●||CBRS (Citizens Broadband Radio Service) and PLTE (Private Long-Term Evolution) Networks|
We source and develop our product offerings from leading manufacturers throughout the world, and also offer innovative, high quality products developed and manufactured under our proprietary brand, Ventev®, to our customers.
Our operational platform removes complexity for customers and suppliers by streamlining the management of the supply chain and lowering total inventory and cost by providing the option of guaranteed availability and complete, on-time delivery to the point of use.
We began our “total source” operations in 1982, reincorporated as a Delaware corporation in 1987, and have been listed on Nasdaq (symbol: TESS), since 1994. We operate under ISO 9001:2015 and TL 9000:2016-V R6.3/5.7 registrations.
For information regarding our website address and regarding material available free of charge through the website, see the information appearing under the heading “Available Information” included in Item 7 to this Annual Report on Form 10-K for the fiscal year ended March 26, 2023.
We operate as two segments: Carrier, which is comprised of customers that are generally responsible for building and maintaining the infrastructure system and provide airtime service to individual subscribers; and Commercial, which includes value-added resellers, the government channel and private system operator markets. The Company previously operated as one segment in fiscal 2021 and identified a change to our reportable segments in the fourth quarter of fiscal 2022 as a result of changes in organizational structure.
Sales to the Carrier segment accounted for approximately 42% of our fiscal year 2023 revenues, and sales to the Commercial segment accounted for 58% of fiscal year 2023 revenues.
Our top ten customer relationships were responsible for 36% of our revenues for fiscal year 2023, and revenue from our largest customer accounted for 10% of our revenues.
Approximately 98% of our sales have been made to customers in the United States during each of the past three fiscal years, although we currently sell to customers in over 40 countries. Due to our diverse product offerings and our wide customer base, our business is not significantly affected by seasonality in the aggregate. However, our sales could be affected by weather conditions or events in the United States, especially in our fourth fiscal quarter. Our fourth fiscal quarter is also at times impacted by delays in our customers’ calendar year budget approval processes.
We principally offer competitively priced, manufacturer branded products, ranging from simple hardware items to sophisticated test equipment, with per item prices ranging from less than $1 to over $50,000 and gross profit margins ranging from less than 5% to 99%. We offer products broadly classified into the following three categories: base station infrastructure; network systems; and installation, test and maintenance products.
Base station infrastructure products are used to build, repair and upgrade wireless broadband systems. These products include base station antennas, cable and transmission lines, small towers, lightning protection devices, connectors, power systems, enclosures, grounding, jumpers, miscellaneous hardware, and mobile antennas. Network systems products include fixed and mobile broadband radio equipment, wireless networking filtering systems, distributed antenna systems, two-way radios and security and surveillance products. Installation, test and maintenance products are used to install, tune, and maintain wireless communications equipment. Products include sophisticated analysis equipment and various frequency-, voltage- and power-measuring devices, as well as an assortment of tools, hardware, GPS, safety, replacement and component parts and supplies required by service technicians. Inventory typically has a life cycle that tends to be tied to changes in regulation or technology and includes products typically used by business entities or governments.
While we principally provide manufacturer branded products, a variety of products are developed, manufactured and offered under our own brand, VentevÒ. These products generally consist of network infrastructure products, such as radio enclosures, power products, cable and antennas. Sales of Ventev® products were approximately 9% of our revenues in fiscal year 2023.
Tessco’s Technical Services and Solutions Engineering teams are a key element of our offering as a value-added distributor. These teams include Solution Architects, Inbuilding, Power and Broadband Designers and Customer Technical Support (“CTS”) personnel. The broad product and supplier knowledge along with the multiple supplier certifications possessed by these teams have been recognized as a great benefit by our supplier partners and customers. Solution Architects are specialists in their area of expertise providing consultation and system design. The CTS team are product level experts ensuring the correct devices are specified based on the application. This team can also recommend additional ancillary products (antennas, cables, power, enclosures, etc.) needed to provide a complete solution for the customer’s application.
These teams provide customer support on thousands of calls and support ticket-items per year. They have completed designs covering solutions for DAS, IoT, WiFi, Networking, Wireless Broadband, Power Systems and Testing applications. These solutions teams support both existing and emerging markets, including Macro/Small Cells, Public Safety, Utilities, Transportation, National Solutions Providers, Government, System Integrators and Fortune 500 companies.
As part of our commitment to customer service, we typically allow most customers to return most products for any reason, for credit, within 30 days of the date of purchase. Total returns and credits have been less than 3% of revenues in each of the past three fiscal years.
Revenues from sales of products purchased from our largest supplier accounted for 29% of fiscal year 2023 revenues. No other individual supplier accounted for more than 10% of revenues. Revenues from sales of products purchased from our ten largest suppliers generated approximately 51% of our total fiscal year 2023 revenues.
The amount of purchases we make from each of our more than 300 suppliers may significantly increase or decrease over time. As the level of business changes, we may request, or be requested by our suppliers, to adjust the terms of our relationships. Therefore, our ability to purchase and re-sell products from each of our suppliers depends on our ability to reach and maintain agreements with these suppliers on acceptable business terms. In addition, the agreements and arrangements on which most of our larger supplier relationships are based are typically of limited duration and terminable for any or no reason by either party upon notice of varying lengths, usually between several months or otherwise short notice. Generally, we believe that alternative sources of supply are available for many of the product types we carry, although we may be unable, or find it more difficult, to source branded products from other than the manufacturer.
The scope of products available for purchase from a given supplier may fluctuate and is generally limited only by the scope of the supplier’s catalog and available inventory. Therefore, we may source the same product type from multiple suppliers, although in some instances branded products are available only from the manufacturer or a particular supplier, and in some instances, customers might favor one supplier or brand over another. The terms of the supplier contract typically apply to all products purchased from a particular supplier, whether or not the item is specifically identified in the contract.
When negotiating with suppliers, we seek the most favorable terms available under the circumstances. Our preferred terms include among others, terms that provide for product warranty and return rights, as well as product liability and intellectual property indemnification rights, in each case consistent with our preferred business methods and objectives. We have not been able, nor do we expect in the future to be able, to negotiate the inclusion of all our preferred terms, or our preferred language for those terms, in every supplier contract. The degree of our success in this regard is largely a function of the parties’ relative bargaining positions.
We are dedicated to superior performance, quality and consistency of service in an effort to maintain and expand supplier relationships but there can be no assurance that we will continue to be successful in this regard in the future, or that competitive pressures or other events beyond our control will not have a negative impact on our ability to maintain these relationships or to continue to derive revenues from these relationships.
Method of Operation
We believe that we have developed a highly integrated, technologically advanced and efficient method of operation based on the following key tenets:
|●||Understanding and anticipating customers’ needs and building solutions by cultivating lasting relationships;|
|●||Providing customers with sales, service and technical support, 24 hours a day, 7 days a week, 365 days a year;|
|●||Providing customers what they need, when and where they need it by delivering integrated product and supply chain solutions; and|
|●||Helping customers enhance their operations by providing real-time order tracking and performance measurement.|
Market Development and Sales: In order to meet the needs of a dynamic and diverse marketplace, our sales and marketing activities are focused on our customers across our two business segments: 1) Carrier and 2) Commercial. This organization allows for the development of unique product and solution offerings to meet the needs of our diverse customer base.
We understand and anticipate our customers’ needs, which allows us to offer comprehensive solutions and establish long-lasting relationships. Our customer base includes more than 171,000 fully opted in contacts across the full breadth of the wireless industry, with over 214,000 additional active contacts in our database, representing potential new customers. We are able to identify each contact’s unique need for information and the way in which they wish to receive it. This can include targeted marketing materials, including email marketing, web marketing, advertisements, direct mailers, and trade show marketing, to drive purchases and new business development. For instance, our email publication, The Wireless Update, is sent to a targeted list of 80,000 contacts each week.
Our dedicated sales team provides customer service and maintains key information about every customer or potential customer utilizing our Customer Relationship Management (“CRM”) and marketing automation tools ensuring a positive experience at every interaction and allowing us to identify promising leads and allocate resources to convert them to customers. We serve approximately 3,400 customers each month and our goal is to create an experience that nurtures loyalty among our customers and delivers mutually beneficial outcomes in every transaction.
Solutions Engineering and Product Management: We actively monitor advances in technologies and industry trends, through both market research and continual customer and manufacturer interaction to enhance our product offering as new wireless communications products and technologies are developed. To complement our broad product portfolio, we provide technical expertise and consultation to assist our customers in understanding technology and choosing the right products for their specific application.
In addition to determining the product offering, our Product and Solutions Engineering Teams provide the technical foundation for both customers and our personnel. Our product management software is continually updated to add new products and additional technical information in response to manufacturer specification changes and customer inquiries. This software provides detailed information on each SKU offered, including full product descriptions, category classifications, technical specifications, illustrations, product cost, pricing and delivery information, alternative and associated products, and purchase and sales histories. This information is available on a real-time basis to all of our personnel for product development, procurement, technical support, cataloging and marketing.
Strategic Marketing – As a thought leader in the wireless industry, Tessco’s marketing materials educate the industry and promote our services and unique value proposition. Our weekly commercial digital newsletter, The Wireless Update, keeps 80,000 of our customers informed on the latest news in the industry, new products and solutions from our manufacturers, upcoming events and training opportunities, and more. In addition, strategic marketing supports the organization through
the development of compelling original content, training programs, and other customer and manufacturer programs that solve business challenges and increase the value Tessco provides to the industry.
Tessco.com® is our e-commerce site and the digital gateway to our comprehensive industry expertise, products, and solutions for wireless. In addition to access to our inventory of products for every solution, Tessco.com features:
|●||Real-time product availability;|
|●||Real-time customer-specific pricing;|
|●||Easy ordering capabilities that allow for the construction and configuration of complete, end-to-end solutions that can be converted to an order, or saved, copied, shared, uploaded and emailed;|
|●||A variety of customer service, financial and technical support pages, including account controls which include all of the tools necessary to track and manage orders, find the right support, review saved orders, handle warranty claims, and explore Tessco’s capabilities;|
|●||Order confirmation – specifying the contents, delivery date, tracking number and total cost of an order;|
|●||Order reservations, order status, and order history; and|
|●||Manufacturer portal pages designed to showcase each manufacturer partner’s offer in a custom fashion.|
Key improvements made to Tessco.com this past year include:
|●||Migrated to new website and backend as part of our enterprise resource planning (“ERP”) migration plan, resulting in far superior customer experience and 80% drop in response times;|
|●||Launched punchout procurement ability;|
|●||Launched Hotjar, an online customer experience recording tool; and|
|●||Launched resolution bot and Product Tours through the Intercom Platform.|
Tessco.com empowers our customers to make better decisions by delivering product knowledge so they are fully informed. This destination also enables our manufacturers to reach a broad and diverse customer base with their product offer and brand features.
Customer Success Team: Our customer support teams are responsible for delivering sales and customer support services through an effective and efficient transaction system. We also continually monitor our customer service performance through customer surveys and process auditing. By combining our broad product offering with a commitment to superior customer service, we seek to reduce a customer's overall procurement costs by enabling the customer to consolidate the number of suppliers from which it obtains products, while also reducing the customer's need to maintain high inventory levels.
Our CRM and ERP systems provide detailed information on every customer account, including recent inquiries, buying and credit histories, separate buying locations within a customer account and contact history for key personnel, as well as detailed product information, including technical, product availability, and pricing information. Theses systems enable any customer support representative to provide any customer with personalized service and also allows non-technical personnel to provide a high level of technical product information and order assistance.
We believe that our commitment to providing prompt, professional and efficient customer service before, during and after the sale enables us to maximize sales, customer satisfaction and customer retention. The monthly average number of customers decreased from approximately 3,700 for fiscal year 2022 to approximately 3,400 in fiscal year 2023. Due to the addition of several larger new relationships and an achievement of a greater share of many of our larger customers’ purchases, the average monthly purchase per customer increased from $9,400 in fiscal year 2022 to $11,000 in fiscal year 2023.
Procurement and Inventory Management: Our product management and purchasing system provides customers with a total source of broad and deep product availability, while attempting to maximize the return on our inventory investment.
We use our demand planning software and ERP system to monitor and manage our inventory. Historical sales results, sales projections and information regarding supplier lead times are all used to determine appropriate inventory levels. Our inventory management systems also provides early warning reports regarding upcoming inventory requirements. As of March 26, 2023, and March 27, 2022, the Company had a backlog of approximately $65 million and $75 million, respectively. The decrease in backlog is due to improvements in the global supply chain during fiscal year 2023, following disruptions that more adversely affected the Company and the industry as a whole during fiscal year 2022. For fiscal years ended March 26, 2023, and March 27, 2022, inventory write-offs and reserves were 1.5% and 1.1% of total purchases, respectively. Inventory turns for fiscal years 2023 and 2022 were 5.5 and 6.2, respectively.
Fulfillment and Distribution: Orders are received at our Timonium, Maryland and Reno, Nevada customer sales support centers. As orders are received, customer representatives have access to technical information, alternative and complementary product selections, product availability and pricing information, as well as customer purchasing and credit histories and recent inquiry summaries. An automated warehouse management system, which is integrated with the product planning and procurement system, allows us to ensure inventory control, to minimize multiple product shipments to complete an order and to limit inventory duplication. Bar-coded labels are used on every product, allowing distribution center personnel to utilize radio frequency scanners to locate products, fill orders and update inventory records in real-time, thus reducing overhead associated with the distribution functions. We contract with a variety of freight line and parcel transportation carrier partners to deliver orders to customers.
Performance and Delivery Guarantee (“PDG”) charges are generally calculated on the basis of the weight of the products ordered and on the delivery service requested, rather than on distance to the customer. We believe that this approach emphasizes on-time delivery instead of shipment dates, enabling customers to minimize their inventories and reduce their overall procurement costs while guaranteeing date specific delivery, thereby encouraging them to make us their total source supplier. We experienced an increase in third-party freight costs in fiscal year 2023 as a result of inflationary pressures and, as a result, we have increased PDG charges to customers to offset these increased costs.
Information Technology: Our information technology systems are critical to the success of our operations. We have made and continue to make substantial investments in the development of these systems, which integrate cataloging, marketing, sales, fulfillment, inventory control and purchasing, financial control and internal and external communications. Our systems include highly developed customer and product databases and are integrated with our Configuration, Fulfillment and Delivery system. The information contained in these systems is available on a real-time basis to all of our employees as needed and is utilized in every area of our operations. Over the past three years, we have been preparing to replace our legacy ERP software system with a modern ERP system. This new ERP system was deployed in the fourth quarter of fiscal year 2023.
We believe that we have been successful to date in pursuing a highly integrated, technologically advanced and efficient method of operations; however, disruption to our day-to-day operations, including failure of our information technology or distribution systems, or freight carrier interruption, could impair our ability to receive and process orders or to ship products in a timely and cost-efficient manner.
The wireless communications distribution industry is competitive and fragmented, and is comprised of distributors such as Accu-Tech, Alliance Corporation, Anixter/Wesco, Graybar, KGPCo Logistics, Primus, ScanSource Inc., Synnex, Talley Communications, W.W. Grainger Inc., and Winncom. In addition, many manufacturers sell and fulfill directly to customers. Barriers to entry for distributors are relatively low, and the risk of new competitors entering the market is high. 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 often terminable by either party upon several months or otherwise short notice. Accordingly, our ability to maintain these relationships is subject to competitive pressures and challenges. Some of our current competitors have substantially greater capital resources and sales and distribution
capabilities than we do. In response to competitive pressures from any of our current or future competitors, we may be required to lower selling prices in order to maintain or increase market share, and such measures could adversely affect our operating results. We believe, however, that our strength in service, the breadth and depth of our product offerings, our information technology systems, our knowledge and expertise in wireless technologies and the wireless marketplace, and our large customer base and purchasing relationships with more than 300 manufacturers, provide us with a significant competitive advantage over new entrants to the market.
Continuing changes in the wireless communications industry, including risks associated with conflicting technology, changes in technology, inventory obsolescence, and consolidation among wireless carriers, could adversely affect future operating results.
We believe that the principal competitive factors in supplying products to the wireless communications industry are the quality and consistency of customer service, particularly timely delivery of complete orders, breadth and quality of products offered and total procurement costs to the customer. We believe that we compete favorably with respect to each of these factors. In particular, we believe we differentiate ourselves from our competitors based on the breadth of our product offerings, our ability to quickly provide products and supply chain solutions in response to customer demand and technological advances, our knowledge and expertise in wireless technologies, the level of our customer service and the reliability of our order fulfillment process.
We seek to protect our intellectual property through a combination of trademarks, service marks, confidentiality agreements, trade secret protection and, if and when appropriate, patent protection. Thus far, we have generally sought to protect our intellectual property, including our product data and information, customer information and information technology systems, through trademark filings and nondisclosure, confidentiality and trade secret agreements. We typically require our employees, consultants, and others having access to our intellectual property, to sign confidentiality and nondisclosure agreements. There can be no assurance that these confidentiality and nondisclosure agreements will be honored, or whether they can be fully enforced, or that other entities may not independently develop systems, technologies or information similar to that on which we rely.
TESSCO Communications Incorporated, a wholly-owned subsidiary of TESSCO Technologies Incorporated, maintains a number of registered trademarks and service marks in connection with our business activities, including: TESSCO®, TESSCO Technologies®, Tessco.com®, Ventev®, and The Wireless Update®, among many others. Our general policy is to file for trademark and service mark protection for each of our trademarks and trade names and to enforce our rights against any infringement.
We currently hold ten patents related to our Ventev® products. We intend, if and when appropriate, to seek patent protection for any additional patentable technology. The ability to obtain patent protection involves complex legal and factual questions. Others may obtain patent protection for technologies that are important to our business, and as a result, our business may be adversely affected. In response to patents of others, we may need to license the right to use technology patented by others or, in the event that a license cannot be obtained, to design our systems around the patents of others.
We are subject to various laws and governmental regulations concerning environmental matters and employee safety and health matters in the United States. Compliance with these federal, state and local laws and regulations related to protection of the environment and employee safety and health has had no material effect on our business. There were no material expenditures for environmental projects in fiscal year 2023, and there are no material expenditures planned for such purposes in fiscal year 2024.
At Tessco, we aspire to build relationships and collaboration within all levels of the organization to create a culture that values and rewards all team members. Our culture encourages and rewards exceptional performance and
continuous improvement, fosters teamwork, and supports career development and growth. We provide benefits that address the needs of our team members, compensation that is rewarding, and a learning environment that is both exciting and challenging, and we provide many different growth opportunities that benefit from the many skills of our diverse workforce. We have a professional working environment that fosters respect and celebrates our diverse perspectives.
As of March 26, 2023, we had 557 full-time equivalent employees, increased from 530 as of March 27, 2022, in part as a result of an increased Information Technology headcount with the implementation of our new ERP System. Of our full-time equivalent employees, 268 were engaged in customer and supplier service, marketing, sales and product management, 179 were engaged in fulfillment and distribution operations and 110 were engaged in administration and technology systems services. Our employees are not covered by collective bargaining agreements. Each year, we set corporate, department and individual goals against which we measure performance during our annual review process.
We offer a very competitive health benefit that is the same for all of our team members and is very affordable to employees. We encourage our employees to participate in our health and wellness programs which include medical, dental and vision insurance. We offer a 401(k) program with an employer match, tax saving flexible spending accounts, Tessco paid life insurance and Employee Assistance Program.
We believe that the structure of our compensation program is aligned with the interests of our shareholders, rewards performance, and serves to attract and retain employees.
We post all of our positions internally and follow a selection process that is open to all. Team Members who want to learn more about new opportunities are encouraged to have discussions with any of our Team Leaders as outlined in our open-door policy. We follow all processes and procedures of Affirmative Action and set yearly goals to ensure diversity in all of our Equal Employment Opportunity categories.
We have a commitment to sustainable environmental practices and operations, diversity and inclusion, professional and leadership development, community involvement, and participation in and support of charitable causes. Our employee population is approximately 41% female and 39% minorities. Additionally, women currently hold 36% and minorities hold 29% of our key leadership positions. We continually strive to improve and created an Environmental, Social, and Governance (“ESG”) Committee made up of individuals from around the organization to focus on our employee population as well as our environmental and social stewardship. We strive to provide our employees with a variety of resources and tools to promote training and development. We consider our employee relations to be excellent.
Executive officers are appointed annually by the Board of Directors and, subject to the terms of any applicable employment agreement, serve at the discretion of the Board of Directors. Information regarding our current executive officers is as follows:
President and Chief Executive Officer
Sandip Mukerjee joined the Company as Chief Executive Officer in August of 2019. Mr. Mukerjee served as President, Global Professional and Consulting Business, Nokia Software from 2016 to 2019. Before that, Mr. Mukerjee worked for Alcatel where he held the positions of Sr. Vice President, Wireless and Software Strategy from 2006 to 2010 and then President and General Manager, Advanced Communications from 2010 to 2013 and President & General Manager, IP Platforms for the Americas from 2013 to 2016.
Aric M. Spitulnik
Senior Vice President, Secretary, and Chief Financial Officer
Aric Spitulnik joined the Company in 2000. Mr. Spitulnik was appointed Controller in 2005 and Vice President in 2006. In 2012, he was appointed Corporate Secretary, and in 2014 he was appointed Senior Vice President. Since October 2013, Mr. Spitulnik has served as the Company’s Chief Financial Officer.
Thad W. Lowe
Senior Vice President, Chief Technology Officer and General Manager, Ventev
Thad Lowe joined Tessco in 2020 and currently holds a dual role as the General Manager of the Ventev business and Senior Vice President, Chief Technology Officer. Previously, Mr. Lowe held various leadership positions at Airspan Networks from 2017 to 2020, most recently as Head of Small Cell Solutions and Development and at Samsung Electronics America from 2015 to 2017, where he served in a variety of roles including Vice President of Technology Solutions & Support and Vice President of Engineering and Network Services.
Tammy S. Ridgley
Senior Vice President, Customer Success and Vendor Management
Tammy Ridgley joined Tessco in 1995. Ms. Ridgley is Senior Vice President, Customer Success and Vendor Management since 2022. Previously, she held several leadership positions in Sales, Program Management, and Product Management.
Item 1A. Risk Factors.
We are not able to identify or control all circumstances that could occur in the future that may adversely affect our business and operating results. The following are certain risk factors that could adversely affect our business, financial position and results of operations. These risk factors and others described in this Annual Report on Form 10-K should be considered in connection with evaluating the forward-looking statements contained in this Annual Report on Form 10-K because these factors could cause the actual results and conditions to differ materially from those projected in the forward-looking statements. Additional risks and uncertainties that management is not aware of or focused on, or that management currently deems immaterial may also adversely affect our business, financial position and results of operations. If our business, financial position and results of operations are adversely affected by any of these or other adverse events, our stock price would also likely be adversely affected.
RISKS RELATING TO OUR BUSINESS
We have incurred net losses in each of the past four fiscal years, and we may not be able to achieve profitability, or do so in a timely manner.
We incurred consolidated net losses in each of the past five fiscal years, including net losses of $4.3 million and $2.7 million for fiscal years 2023 and 2022, respectively ($4.3 million and $3.3 million, respectively, from continuing operations). During the past four years, we have taken steps to refresh our management team and board of directors. While we recently transitioned to our new ERP system, we expect to continue to invest in information technology. Such ongoing efforts may prove to be more expensive than we currently anticipate, and we may not succeed in increasing our revenues sufficiently to offset these higher expenses. While we believe we are making progress to improve our operating profitability, there can be no assurances that we will achieve profitability or that profitability will be achieved in a timely manner.
We face risks related to adverse global or national economic conditions or events (including health epidemics and trade wars and other outbreaks and events beyond our control) that could significantly disrupt our business and adversely affect our business, financial position and results of operations.
Our business, financial position, and results of operations, could be adversely affected by weak or unstable global or national economic conditions, including international trade protection measures and disputes, such as those between the United States and China, and public health issues or events, such as the COVID-19 pandemic discussed below. A significant portion of our product offerings, including a majority of our private label Ventev products and products we acquire from our suppliers, are manufactured in foreign countries, including China. Our ability to meet our customers' demands depends, in part, on our ability to obtain timely and adequate delivery of inventory from our suppliers. Weak or unstable global or national economic conditions could harm our suppliers’ businesses, contributing to product shortages or delays, supply chain disruptions, increased product costs and other adverse effects on their operations, which could hamper our ability or preclude us from obtaining timely and adequate delivery of inventory from our suppliers, as needed to support our business. In addition, many products produced for others in the industries we serve, and which our product offerings are intended to complement, are subject to many of the same risks and uncertainties as are ours, and perhaps others. If production or sales of those products are impacted by negative events, so will be the demand for our complementary products. Any of these events or occurrences could have a negative impact on our business, financial position, and results of operations.
In late December 2019, a strain of coronavirus, commonly referred to as COVID-19, surfaced in Wuhan, China. On January 30, 2020, the World Health Organization declared this coronavirus outbreak a health emergency of international concern. During the fourth quarter of fiscal year 2020, COVID-19 spread to the U.S. and resulted in most states imposing restrictions on travel, business operations and gatherings. As a result, many of our customers were temporarily closed or significantly scaled back their operations. Many non-essential projects were delayed, or project venues have been unreachable. While vaccines have been introduced and are continuing to be rolled out across the United States and elsewhere, our business and results of operations have been, and may continue to be, adversely affected to the extent the coronavirus and its ongoing and lingering effects continue to harm the U.S. and world economy generally, or otherwise interfere with our supply chain or the manufacture of products that ours are intended to complement or otherwise
rely upon. Because we source some of our products from foreign markets, we may be susceptible to the effects of continuing outbreaks or resurgences of coronavirus elsewhere, and any resulting disruption of our supply chain.
We may also experience negative effects from future health epidemics or outbreaks or other world events or disasters, including wars and similar conflicts, beyond our control. These events are impossible to forecast and difficult to mitigate. As a consequence, our operating results for a particular period may be more difficult to predict. Any of these events could have a material adverse effect on our business, results of operations, and financial condition.
We face significant competition in the wireless communications distribution industry.
The wireless communications distribution industry is competitive and fragmented, and is comprised of several national distributors, as well as numerous regional distributors. In addition, many manufacturers sell and fulfill directly to customers. Barriers to entry for distributors are relatively low and the risk of new competitors entering the market is high. Some of our current competitors have substantially greater capital resources and sales and distribution capabilities than we do. In response to competitive pressures from any of our current or future competitors, we may be required to lower selling prices in order to maintain or increase market share, and such measures could adversely affect our operating results. We are also seeing increased competition in the form of e-commerce sites as consumers and business are increasingly looking to the internet to purchase goods.
We offer no assurance that we will not lose market share, or that we will not be forced in the future to reduce our prices in response to the actions of our competitors, thereby reducing our revenues and gross margins. Furthermore, to remain competitive we may be forced to offer more credit or extended payment terms to our customers. This could increase our required capital, financing costs, and the amount of our bad debt expenses.
We typically purchase and sell our products on the basis of individual sales or purchase orders, and even in those cases where we have standing agreements or arrangements with our customers and suppliers, those agreements and arrangements typically contain no purchase or sale obligations and are otherwise terminable by either party upon several months or otherwise short notice.
Our sales to customers and our purchases from suppliers are largely governed by individual sales or purchase orders, so there is no guarantee of future business. In some cases, we have formal agreements or arrangements with significant customers or suppliers, but they are largely administrative in nature and are terminable by either party upon several months or otherwise short notice, and they typically contain no purchase or sale obligations. Many of our customer and supplier contracts contain “evergreen” clauses, although this too is largely a matter of administrative convenience, because the contracts are nevertheless typically terminable on short notice, and because no purchase and sale obligation in any event arises other than pursuant to an accepted purchase order. When negotiating with customers and suppliers, we seek the most favorable terms available under the circumstances. Our preferred supplier terms include, among others, terms that provide for product warranty and return rights, as well as product liability and intellectual property indemnification rights, in each case consistent with our preferred business methods and objectives. We have not been able, nor do we expect in the future to be able to negotiate the inclusion of all our preferred terms, or our preferred language for those terms, in every contract. The degree of our success in this regard is largely a function of the parties’ relative bargaining positions.
When unable to negotiate the inclusion of our preferred terms or preferred language in a particular supplier contract, we assess any increased risk presented, as well as mitigating factors, analyze our overall business objectives, and then proceed accordingly. In some instances, we refuse the contract and seek other sources for the product, and in other instances business objectives and circumstances are determined to outweigh or mitigate any increased risk, or otherwise dictate that we proceed with the contract, notwithstanding. We consistently seek to manage contractual risks resulting from supplier contracts not including our preferred terms or language. However, these risks persist, and even when we are successful in negotiating our preferred terms, performance of these terms is not assured.
If our suppliers refuse to, or for any reason are unable to, supply products to us in sufficient quantities to meet demand, or at all, and if we are not able to procure those products from alternative sources, we may not be able to maintain appropriate inventory levels to meet customer demand and our financial position and results of operations would be
adversely affected. Similarly, if customers decide to purchase from other sources, instead of from us, or experience significant changes in demand internally or from their own customer bases, become financially unstable (including on account of unforeseen events or events beyond their control, such as the COVID-19 pandemic), or are acquired by another company, our ability to generate revenues from these customers may, or in some cases would, be significantly affected, resulting in an adverse effect on our financial position and results of operations.
The loss or any change in the business habits of key customers or suppliers may have a material adverse effect on our financial position and results of operations.
Because our standing arrangements and agreements with our customers and suppliers typically contain no purchase or sale obligations and are terminable by either party upon several months or otherwise relatively short notice, we are subject to significant risks associated with the loss or change at any time in the business habits and financial condition of key customers or suppliers. We have experienced the loss and changes in the business habits of key customer and supplier relationships in the past and may do so again in the future.
Sales of products purchased from our largest supplier generated approximately 29% of our revenues in fiscal year 2023, and sales of products purchased from our largest ten suppliers generated approximately 52% of fiscal year 2023 revenues. As is the case with many of our supplier and customer relationships, our contractual arrangements with these large suppliers are terminable by either party upon several months’ notice. If these contracts or our relationships with these suppliers terminate for any reason, or if any of our other significant supplier relationships terminate for any reason, and we are not able to sell or procure a sufficient supply of those products from alternative sources, or at all, our financial position and results of operations would be adversely affected. Our suppliers are subject to many, if not all of the same (or similar) risks and uncertainties to which we are subject, as well as other risks and uncertainties. Accordingly, we are at a continual risk of loss of sources of supply on account of a number of factors and forces, many of which are largely beyond our control.
In fiscal year 2023, our largest customer accounted for 10% of our revenues and our five largest customers together accounted for 29% of our revenues. Also, customer mix can change rapidly, and we may see changes in customer concentrations in the future. If or when any of our significant customer relationships terminate for any reason, and we are not able to replace those customers and associated revenues, our financial position and results of operations would be adversely affected.
The loss of customer relationships and the corresponding reduction in the volume of product sales identified to those relationships, can also affect our negotiating ability with suppliers supplying those products. This can affect our margins on sales of those products to other customers. If we are unable to replace those products at favorable pricing and terms, or if we are unable to acquire those products from suppliers or offer those products to our customers on favorable terms, our competitiveness may suffer and result in reduced revenues and profits. Like our suppliers, our customers are subject to many if not all of the same (or similar) risks and uncertainties to which we are subject, as well as other risks and uncertainties, and we compete with others for their business. Accordingly, we are at continual risk of loss of their business on account of a number of factors and forces, many of which are largely beyond our control.
There can be no assurance that we will be successful in replacing any of our past, present or future supplier or customer relationships if and when lost, or that we will not suffer a substantial reduction in revenues as a result of loss of any such relationship. As such, supplier, customer, or revenue loss would adversely affect our financial position and results of operations.
Changes in customer or product mix could cause our gross margin to decline.
We continually experience changes in customer and product mix that affect gross margin. Changes in customer and product mix result primarily from changes in customer demand, customer acquisitions or losses, selling and marketing activities and competition.
Our future business depends on the continued tendency of wireless equipment manufacturers and network operators to outsource aspects of their business to us.
We provide functions such as distribution, inventory management, fulfillment, e-commerce solutions, and other outsourced services for many wireless manufacturers and network operators. Certain wireless equipment manufacturers and network operators have elected, and others may elect, to undertake these services internally. Additionally, our customer service levels, industry consolidation, competition, deregulation, technological changes or other developments could reduce the degree to which members of the global wireless industry rely on outsourced logistic services such as the services we provide. Any significant change in the market for our outsourced services could have a material adverse effect on our business. Our outsourced services are generally provided under short-term contractual arrangements. The failure to obtain renewals or otherwise maintain these agreements on terms, including price, consistent with our current terms could have an adverse effect on our business.
We require substantial capital to operate, and the inability to obtain financing on favorable terms will adversely impact our business, financial position and results of operations.
Our business requires substantial capital to operate and to finance accounts receivable and product inventory that are not financed by trade creditors. We have historically relied upon cash generated from operations, revolving credit facilities and trade credit from our suppliers to satisfy our capital needs and finance growth. The impact of the COVID-19 pandemic on financial markets continues, and as new regulations come into effect and financial markets change on account of these and other forces and events, including increasing or continuing inflation, the cost of acquiring financing and the methods of financing may change. Changes in our credit rating or other market factors may increase our interest expense or other costs of capital, or capital may not be available to us on competitive terms to fund our working capital needs. Our existing secured revolving credit facility contains various financial and other covenants that may limit our ability to borrow or limit our flexibility in responding to business conditions. In addition, even if the terms of our revolving credit facility would otherwise allow or require, our lenders may refuse to lend to us through no fault of ours. The inability to maintain or when necessary obtain adequate sources of financing could have an adverse effect on our business. Our existing secured revolving credit facility includes variable rate debt, thus exposing us to risk of fluctuations in interest rates. Such fluctuations in interest rates could have an adverse effect on our business, financial position and results of operations. We may in the future use interest rate swaps in an effort to achieve a desired proportion of fixed and variable rate debt. We would utilize these derivative financial instruments to enhance our ability to manage risk, including interest rate exposures that exist as part of our ongoing business operations. However, our use of these instruments may not effectively limit or eliminate our exposure to a decline in operating results due to changes in interest rates.
Our ability to maintain and borrow under our revolving credit facility could be constrained by the level of eligible receivables and product inventory or by any failure to meet certain financial and other covenants in our revolving credit agreement.
Our borrowing availability under our secured revolving credit facility is determined in part by a borrowing base and is limited to certain amounts of eligible accounts receivable and inventory. If the value of these accounts receivable and product inventory were to decrease significantly, the amount available for borrowing under the facility would decrease and our ability to borrow under the facility could be significantly impacted. Borrowing under the facility is also conditioned upon compliance with financial and other covenants included in the revolving credit agreement and a related guaranty and security agreement. Among these is a covenant to maintain a fixed charge coverage ratio at any time during which the borrowing availability is otherwise less than $15.75 million. There are no assurances that we will be able to comply with all applicable covenants in these agreements, and in the event that we do not, our ability to borrow under our secured revolving credit facility could be limited or suspended or could terminate.
If we fail to meet our payment or other obligations under our secured revolving credit facility, our lenders could foreclose on, and acquire control of, a significant portion of our assets.
Indebtedness under our secured revolving credit facility is secured by continuing first priority security interests in our inventory, accounts receivable, and deposit accounts, and on all documents, instruments, general intangibles, letter of credit rights, and chattel paper relating to inventory and accounts receivable, and to all proceeds of the foregoing. If we
fail to meet our payment or other obligations under our secured revolving credit facility, our lenders could foreclose on these assets, which would have a material adverse effect on our business, results of operations, and financial condition.
The telecommunications products marketplace is dynamic and challenging because of the continued introduction of new products and services.
We must constantly introduce new products, services, and product features to meet competitive pressures. We may be unable to timely change our existing merchandise sales mix in order to meet these competitive pressures, which may result in increased inventory costs, inventory write-offs, or loss of market share.
Additionally, our inventory may also lose value due to price changes made by our significant suppliers, in cases where our arrangements with these suppliers do not provide for inventory price protection, or in cases where the supplier is unable or unwilling to provide these protections.
Consolidation among wireless service carriers could result in the loss of significant customers.
The wireless service carrier industry has experienced significant consolidation in recent years. If any of our significant customers or partners are acquired or consolidate with other carriers, or are otherwise involved in any significant transaction that results in them ceasing to do business with us, or significantly reducing the level of business that they do with us, our revenues from those customers could be affected, resulting in an adverse effect on our financial position and results of operations.
The failure of our information technology or telecommunication systems, or our inability to maintain or upgrade our information technology or telecommunication systems without incident or delay, or undue cost, could have a material adverse effect on our business, financial position, and results of operations.
We are highly dependent upon our internal information technology and telecommunication systems, including our new ERP system, many of which are proprietary, to operate our business. These systems support all aspects of our business operations, including means of internal and external communication, inventory and order management, shipping, receiving, and accounting. In addition, all of these systems require continued maintenance and also require upgrading or replacement from time to time. Although our recent transition to a new ERP system was largely successful, adaptation to the new system, both internally and externally, continues and presents continuing risks and challenges. There can be no assurance that any of our systems will not fail or experience disruptions, that we will be able to attract and retain qualified personnel necessary for the operation of such systems, that we will be able to expand and improve our systems, that we will be able to convert or transition, or that we or our customers and vendors will be able to adapt, to new systems efficiently as and when necessary, or that we will be able to integrate new programs effectively with our existing programs, in each case without incident or delay, or undue cost.
Complications with the design or implementation of our new enterprise resource planning system could adversely impact our business and operations.
We rely extensively on information systems and technology to manage our business and summarize operating results. We implemented a new global enterprise resource planning system in the fourth quarter of fiscal 2023, which replaced our existing operating and financial systems. The new ERP system is designed to accurately maintain the Company’s financial records, enhance operational functionality and provide timely information to the Company’s management team related to the operation of the business. Although the recent implementation of this new ERP system was largely successful, adaptation to the new system, both internally and externally, continues and presents continuing risks and challenges. The ERP system implementation process has required, and will continue to require, the investment of significant personnel and financial resources, which could adversely affect the Company’s earnings and liquidity.
We, like most businesses, are subject to risk of cyber-attack and fraudulent and criminal activities of others and incur significant costs in efforts to defend these attacks and activities.
We like most businesses are continually subject to risk of cyber-attack and fraudulent and criminal activities of others, and are continually engaged in an effort to defend against and to ward off attacks from hackers and others. We have experienced cyber-attacks and suffered as a result of the fraudulent and criminal activities of others from time to time. Any of such problems or events, including any significant damage or destruction of our systems, including pursuant to or as a result of system security breaches, data protection breaches or other cyber-attacks, could result in significant disruption in our business and operations, harm our relationship with our customers or suppliers, and result in significant losses in revenues. Corrective action and compliance with applicable privacy and data protection laws could be costly. Any of these or similar events or occurrences could have an adverse effect on our business, financial position and results of operations. While we maintain insurance in an effort to manage some of these risks, insurance may not cover all losses and recovery is subject to applicable deductibles and other terms and limitations of the policies.
We depend heavily on e-commerce, and website security breaches or internet disruptions could have a material adverse effect on our business, financial position, and results of operations.
We rely on the internet (including Tessco.com®) for a significant percentage of our orders and information exchanges with our customers. The internet and individual websites have experienced a number of disruptions and slowdowns, some of which were caused by organized attacks. In addition, some websites have experienced security breakdowns. There can be no assurances that our website will not experience any material breakdowns, disruptions or breaches in security. If we were to experience a security breakdown, disruption or breach that compromised sensitive information, this could harm our relationship with our customers or suppliers. Disruption of our website or the internet in general could impair our order processing or more generally prevent our customers and suppliers from accessing information or placing orders. This could have an adverse effect on our business, financial position, and results of operations.
System security breaches or data protection breaches could adversely disrupt our business and harm our reputation, financial position, and results of operations.
We manage and store various proprietary information and sensitive or confidential data relating to our business. In addition, we routinely process, store and transmit large amounts of data, including sensitive and personally identifiable information, including customer credit card data and other information. Breaches of our security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us or our customers or suppliers, including the potential loss or disclosure of such information or data as a result of fraud, trickery or other forms of deception, could expose us, our customers or the individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. In addition, the costs and operational consequences of implementing further data protection measures could be significant. Such breaches, costs and consequences could adversely affect our business, results of operations or cash flows.
We are also subject to payment card association operating rules, certification requirements and rules governing electronic funds transfers, including the Payment Card Industry Data Security Standard (PCI DSS), a security standard applicable to companies that collect, store, or transmit certain data regarding credit and debit cards, holders, and transactions. From time to time we may not be fully or materially compliant with PCI DSS or other payment card operating rules. Any failure to comply fully or materially with the PCI DSS now or at any point in the future may violate payment card association operating rules and the terms of our contracts with payment processors and merchant banks, and could subject us to fines, penalties, damages and civil liability, and could result in the loss of our ability to accept credit and debit card payments. Maintaining compliance with these regulations is costly and there is no guarantee that we will be successful or avoid fines, penalties, damages or civil liability, and even if successful, there is no guarantee that PCI DSS compliance will prevent illegal or improper use of our payment systems or the theft, loss or misuse of data pertaining to credit and debit cards, credit and debit card holders and credit and debit card transactions.
The inability to hire or retain certain key professionals, management and staff could adversely affect our business, financial condition and results of operations.
The nature of our business includes (but is not limited to) a high volume of transactions, business complexity, wide geographical coverage, and broad scope of products, suppliers, and customers. In order to compete, we must attract, retain and motivate executives and other key employees, including those in managerial, technical, sales, marketing and support positions. Hiring and retaining qualified executives, information technology and business generation personnel are critical to our business. Some members of our senior management team are parties to employment contracts or arrangements with us that provide for, among other things, various severance payments or benefits upon termination of their employment under certain circumstances, including termination by the Company without “cause” or for “good reason”, and those contracts generally renew from year to year, except for the employment contract with Mr. Mukerjee, our CEO, which commenced in August 2019, as amended in March 2023, and now expires in March 2026. The loss of any of the members of our senior management team, could have an adverse effect on our business, financial position and results of operations.
To attract, retain and motivate qualified employees, we rely heavily on stock-based incentive awards such as Performance Stock Units (“PSUs”), Restricted Stock Units (“RSUs”) and stock options. If performance targets associated with PSUs are not met, or the value of such awards does not appreciate as measured by the performance of the price of our common stock and/or if our other stock-based compensation, such as stock options, otherwise ceases to be viewed as a valuable benefit, our ability to attract, retain and motivate our employees could be adversely impacted, which could negatively affect our business, financial position and results of operations and/or require us to increase the amount we spend on cash and other forms of compensation. Our ability to issue PSUs, RSUs, stock options and other equity instruments is also limited by the provisions of and our available shares under our current and/or future stock incentive plans, which may be subject to shareholder approval. We may currently issue awards under our incentive plan through June 4, 2029, and only insofar as shares are available for awards thereunder. As of March 26, 2023, there were 507,523 shares available for future awards. Therefore, our ability to offer stock-based incentive awards may be limited, which may have an adverse effect on our continued ability to attract and retain, and motivate, our employees, and, subsequently, on our business, financial position and results of operations. In addition, an increase in the number of shares for future awards, under either current or future compensation or incentive plans or arrangements could lead to dilution of our other stockholders.
The damage or destruction of any of our principal distribution or administrative facilities could materially adversely impact our business, financial position and results of operations.
If either of our distribution centers in Hunt Valley, Maryland or Reno, Nevada, were to be significantly damaged or destroyed, we could suffer a loss of product inventory and our ability to conduct our business in the ordinary course could be materially and adversely affected. Similarly, if our office locations in Maryland or Nevada were to be significantly damaged or destroyed, our ability to conduct marketing, sales and other corporate activities in the ordinary course could be adversely affected.
Disruption to our supply chain could impair our ability to produce or deliver inventory, resulting in a negative impact on our operating results.
Due to several factors, including a raw materials shortage, global factory backlogs, transportation delays and customs delays caused in part due to the global economy recovering from the impact of COVID-19, our supply chain has been adversely impacted and lead times have increased considerably, beginning in the fourth quarter of fiscal year 2021. Future disruption to our global manufacturing operations or our supply chain could also result from, among other factors, the following:
•Pandemic outbreak of disease;
•Climate change and severity of extreme weather;
•Fire or explosion;
•Terrorism or other acts of violence;
•Labor strikes or other labor activities;
•Unavailability of raw or packaging materials;
•Operational and/or financial instability of key suppliers, and other vendors or service providers; and
•Suboptimal production planning which could impact our ability to cost-effectively meet product demand.
While we believe that most competitors are experiencing similar supply chain delays, we also believe that we are taking adequate precautions to mitigate the impact of the current disruptions to the extent possible and reasonable. We have strategies and plans in place intended to manage disruptive events such as the current supply chain disruption and other disruptions, if and when they occur, including our global supply chain strategies. If we are unable, or find that it is not financially feasible, to effectively procure sufficient inventory on a timely basis to meet our customers’ demands, due to the potential impacts of such disruptive events on our supply chain, our financial position, results of operations and cash flows could be negatively impacted.
We depend on third parties to manufacture products that we distribute and, accordingly, rely on their quality control procedures.
Product manufacturers typically provide limited warranties directly to the end consumer or to us, which we generally pass through to our customers. If a product we distribute for a manufacturer has quality or performance problems, our ability to provide products to our customers could be disrupted, which could adversely affect our operations.
We are subject to potential declines in inventory value.
We are subject to the risk that the value of our inventory will decline as a result of price reductions by suppliers or technological obsolescence or failure. It is the policy of many of our suppliers to protect distributors like us from the loss in value of inventory due to technological change or failure, or the suppliers’ price reductions. Some suppliers (including those who manufacture our proprietary products), however, may be unwilling or unable to pay us for price protection claims or products returned to them under purchase agreements. No assurance can be given that such practices to protect distributors like us will continue, that unforeseen new product developments, product failure or product obsolescence will not adversely affect us, or that we will be able to successfully manage our existing and future inventories.
Our future operating results depend on our ability to purchase a sufficient amount of inventory to meet the demands of our customers.
Our ability to meet our customers' demands depends, in part, on our ability to obtain timely and adequate delivery of inventory from our suppliers. We have experienced shortages in the past that have negatively impacted our operations. Although we work closely with our suppliers to avoid these types of shortages, there can be no assurances that we will not encounter these problems in the future. Furthermore, certain of our products or components are available only from a single source or limited sources. We may not be able to diversify sources in a timely manner. A reduction or interruption in supplies or a significant increase in the price of supplies could have a negative impact on our results of operations or financial condition.
If our business does not perform well, or if we otherwise experience a decline in the fair values of a portion or all of our business, we may be required to recognize impairments of our intangible or other long-lived assets, which could adversely affect our results of operations or financial condition.
Indefinite lived intangible assets that are not amortized are initially recorded at fair value, and are reviewed for impairment at least annually or more frequently if impairment indicators are present.
In assessing the recoverability of indefinite lived intangible assets, we make estimates and assumptions about sales, operating margin, growth rates and discount rates based on our budgets, business plans, economic projections, anticipated future cash flows and marketplace data. There are inherent uncertainties related to these factors and management’s judgment in applying these factors. As of March 26, 2023, we had $795,400 of indefinite-lived intangible assets, which represented approximately 0.3% of total assets.
Deferred income tax assets and liabilities represent the tax effect of the differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets are assessed periodically by management to determine if they are realizable. Factors in management’s determination include the current tax laws, historical results, performance of the business, projections of future taxable income, and the feasibility of ongoing tax planning strategies. If based on available information, it is more likely than not that the deferred income tax asset will not be realized then a valuation allowance must be established with a corresponding charge to net income. Such charges could have an adverse effect on our results of operations or financial condition.
Our future results of operations may be impacted by prolonged weakness in the economic environment which may result in an impairment of the long-lived assets or the recording of a valuation allowance on our deferred tax assets, which could adversely affect our results of operations or financial condition.
We primarily rely on trademark filings and confidentiality agreements to protect our intellectual property rights.
In an effort to protect our intellectual property, including our product data, customer information and information technology systems, through trademark filings and nondisclosure, confidentiality and trade secret agreements, we typically require our employees, consultants and others having access to this information or our technology to execute confidentiality and non-disclosure agreements. These agreements, however, may not provide us with adequate protection against improper use or disclosure of confidential information, and these agreements may be breached. A breach of confidentiality could adversely affect our business. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants and others have previous employment or consulting relationships. Also, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. The disclosure of our proprietary information or trade secrets could impair our competitive position and could have an adverse effect on our business, financial condition and results of operations. Others may obtain patent protection for technologies that are important to our business, and as a result, our business, financial position and results of operations may be adversely affected. In response to patents of others, we may need to license the rights to use the technology patented by others or in the event that a license cannot be obtained, design our systems around the patents of others. There can be no assurances as to our ability to obtain any such licenses or to design around the patents of others, and our inability to do so could have an adverse effect on our business, financial position, and results of operations.
We offer credit to our customers and, therefore, are subject to significant credit risk.
We sell our products to a large and diverse customer base. We finance a significant portion of such sales through trade credit, typically by providing 30-day payment terms. As a result, our business could be adversely affected in the event of a deterioration of the financial condition of our customers, resulting in the customers’ inability to pay us on a timely basis or at all. This risk may increase if there is a general economic downturn affecting a large number of our customers and in the event our customers do not adequately manage their business or properly disclose their financial condition. Also, several of our larger customers, including tier 1 Carrier customers, require greater than 30-day payment terms which could increase our credit risk and decrease our operating cash flow.
We may explore additional growth through acquisitions.
As part of our growth strategy, we may continue to pursue the acquisition of companies that either complement or expand our existing business. As a result, we from time to time evaluate potential acquisition opportunities, which may be material in size and scope. In addition to those risks to which our business and the acquired businesses are generally subject, the acquisition of these businesses gives rise to transactional and transitional risks, and the risk that the anticipated benefits will not be realized.
Risks associated with the foreign suppliers from whom our products are sourced could adversely affect our financial performance.
The products we sell are sourced from a wide variety of domestic and international suppliers. Global sourcing of many of the products we sell is an important factor in our financial performance. Since the onset of the weakness in the
global economic environment due to the COVID-19 pandemic, certain of our suppliers, particularly those in Asia, have experienced financial difficulties and we believe it is possible that a limited number of suppliers may either cease operations or require increased prices in order to fulfill their obligations. Changes in our relationships with suppliers or increases in the costs of purchased raw materials, component parts or finished goods could result in delays, inefficiencies or our inability to market products. In addition, our profit margins would decrease if prices of purchased raw materials, component parts, or finished goods increase and we are unable to pass on those increases to our customers. The adoption or expansion of trade restrictions or the occurrence of trade wars could have a material adverse effect on our business, financial position and results of operation.
We rely on independent shipping companies to deliver inventory to us and to ship products to customers.
We rely on arrangements with independent shipping companies, for the delivery of our products from suppliers and to customers. The failure or inability of these shipping companies to deliver products, or the unavailability of their shipping services, even temporarily, could have a material adverse effect on our business. We may also be adversely affected by an increase in freight surcharges due to rising fuel costs and added security. This could adversely impact our selling, general and administrative expenses or lead to price increases to our customers which could decrease customer demand for our products.
Changes in income tax and other regulatory legislation.
We operate in compliance with applicable laws and regulations and make plans for our structure and operations based upon existing laws and anticipated future changes in the law. When new legislation is enacted with minimal advance notice, or when new interpretations or applications of existing laws are made, we may need to implement changes in our policies or structure. We are susceptible to unanticipated changes in legislation, especially relating to income and other taxes, import/export laws, hazardous materials and other laws related to trade, accounting and business activities. Such changes in legislation may have an adverse effect on our business.
We may be subject to litigation.
We may be subject to legal claims or regulatory matters involving stockholder, consumer, antitrust, intellectual property and other issues. Litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or other adverse effects. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on our business, financial position and results of operations for the period in which the ruling occurred or future periods.
We may incur product liability claims which could be costly and could harm our reputation.
The sale of our products subjects us to the risk of product liability claims. We have also been increasing our focus on sales of our proprietary Ventev® products and on providing an increased level of support services, including product and network designs, which also subjects us to risk of product liability and performance claim risk. We seek to allocate product liability risk to our suppliers where available but may not be successful in doing so. We currently maintain product liability insurance, but our product liability insurance coverage is subject to various coverage exclusions and limits and may not be obtainable in the future on terms acceptable to us, or at all. We do not know whether claims against us with respect to our products and services, if any, would be successfully defended or whether we might be successful in allocating that risk to others, or whether our insurance would be sufficient to cover liabilities resulting from such claims. Any claims successfully brought against us could adversely affect our financial condition, and if substantial and relating to our products or industry generally, could adversely affect our business as a whole.
Our expanding offering of private labeled products may have a negative impact on our relationship with our manufacturer partners.
Our product offering includes a growing number of our own proprietary products, which represented approximately 9% of our sales in fiscal year 2023. Our proprietary products often compete with other manufacturers' branded items that we offer. A manufacturer may choose to not sell its products to us, or may substantially increase the
price of products to us, in response to the competition created by the sales of our proprietary branded products. Either could have an adverse effect on our business and financial performance.
A significant portion of our product offerings, including a majority of our Ventev® products and products we acquire from our suppliers, are manufactured in foreign countries, making the price and availability of these products susceptible to international trade risks and other international conditions.
A significant portion of our products are manufactured in foreign countries, including China. The countries, specifically China, in which many of our products currently are manufactured or may be manufactured in the future are or could become subject to trade restrictions imposed by the U.S., including increased tariffs or quotas, embargoes and customs restrictions, which would increase the cost or could reduce the supply of products available to us, and could have a material adverse effect on our business, financial condition and results of operations. While we do not engage in any material business within either Ukraine or Russia, the ongoing conflict there could have far-reaching consequences in other countries that could affect our business.
There is also a concern that the imposition of additional tariffs by the United States could result in the adoption of tariffs by other countries as well. Such tariffs on imports from foreign countries, as well as changes in tax and trade policies, such as a border adjustment tax or disallowance of certain tax deductions for imported product, could materially increase our manufacturing costs, the costs of our imported products or our income tax expense, which would have a material adverse effect on our financial condition and results of operations. Tariffs imposed by China or other foreign countries on imports of our products could also adversely affect our international e-commerce sales. Any increase in manufacturing costs, the cost of our products or limitation on the amount of products we are able to purchase, could have a material adverse effect on our financial condition and results of operations. Unless we are able to sufficiently mitigate their effects as applicable to us, the persistence or increase of tariffs, may adversely affect us or our business.
Legislative or regulatory action could be taken that could limit our ability to use certain foreign suppliers to supply us with products.
Members of the U.S. Congress and certain regulatory agencies have raised concerns about American companies purchasing equipment and software from Chinese telecommunications companies, including concerns relating to alleged violations of intellectual property rights by Chinese companies and potential security risks posed by U.S. companies purchasing technical equipment and software from Chinese companies. In October 2012, the U.S. House of Representatives Permanent Select Committee on Intelligence issued a report asserting that network equipment manufactured by Chinese telecommunications companies poses a security threat to the United States and recommending the use of other network suppliers. The report also recommended that Congress consider adopting legislation to address these and other purported risks. Any such legislative or regulatory requirement that restricts us from purchasing or utilizing equipment or software from Chinese or other foreign companies with which we do or seek to do business, any determination by foreign companies upon which we rely to cease doing business in the United States, any determination by any of our suppliers or customers not to do business with us on account of actual or perceived business relationships that we may have with these suspect Chinese or other foreign companies, or any determination that we otherwise make that it is either necessary or advantageous for us to cease doing business with such foreign companies, could limit our product offerings, result in increased costs of goods and have a material adverse effect on our financial condition and results of operations.
Claims that our products infringe the proprietary rights of others could harm our business and cause us to incur significant costs.
Our industry has increasingly been subject to patent and other intellectual property rights litigation. We expect this trend to continue and accelerate and expect that we may be required to defend against this type of litigation, not only asserted against our own intellectual property rights, but also against the intellectual property of products which we have purchased for resale. Further, we may be obligated to indemnify and defend our customers if the products or services we supply to them are alleged to infringe a third party’s intellectual property rights. While we may be able to seek indemnification from our suppliers to protect our customers and us from such claims, there is no assurance that we will be successful in negotiating contractual terms with our suppliers to provide for such indemnification, or that we will otherwise
be successful in obtaining such indemnification or that we will be protected from such claims. We may also be prohibited from marketing products, could be forced to market products without desirable features, or could incur substantial costs to defend legal actions, including where third parties claim that we or suppliers who may or may not have indemnified us are infringing upon their intellectual property rights. In recent years, individuals and groups have begun purchasing intellectual property assets for the sole purpose of making claims of infringement and attempting to extract settlements from target companies. Even if we believe that such infringement claims are without merit, the claims can be time-consuming and costly to defend and divert management’s attention and resources away from our business. Claims of intellectual property infringement may require us to enter into costly settlements or pay costly damage awards, or face a temporary or permanent injunction prohibiting us from marketing or selling certain products or services, which could affect our ability to compete effectively. If an infringement claim is successful, we may be required to pay damages or seek royalty or license arrangements, which may not be available on commercially reasonable terms. Even if we have an agreement that indemnifies us against such costs, the indemnifying party may be unable or unwilling to uphold its contractual obligations to us.
We may be adversely affected by laws or regulations.
We are subject to various U.S. Federal, state and local, and non-U.S. laws and regulations. We cannot predict the substance or impact of pending or future legislation or regulations, or the application thereof. The introduction of new laws or regulations or changes in existing laws or regulations, or the interpretations thereof, could increase the cost of doing business for us or our customers or suppliers or restrict our actions and adversely affect our financial condition, operating results and cash flows. For example, annual disclosure and reporting requirements relating to the SEC’s conflict minerals rule require us to perform a reasonable country of origin inquiry and conduct further due diligence measures on our supply chain. There are costs and uncertainties associated with complying with these disclosure requirements, including for diligence to determine the sources of conflict minerals that we may find to be used in our products.
We may not be able to increase prices to fully offset inflationary pressures on costs, such as rising inventory, labor and distribution, and freight costs, which may impact our financial condition or results of operations.
As a distributor of over 50,000 products from over 300 manufacturers, the Company is subject to changes in inventory acquisition costs that the Company cannot control. Market variables, such as inflation of product costs, labor rates, and freight costs could increase, potentially causing the Company to be unable to manage its operating costs in a way that would enable it to leverage its revenue growth into higher net earnings. Our inability to pass on such cost increases to customers may adversely affect the Company’s gross profit and net income. Higher product prices may result in lower sales volumes and customers may seek alternative suppliers for their products.
RISKS RELATED TO OUR EXIT FROM THE RETAIL BUSINESS
The Inventory Purchase Agreement with Voice Comm imposes non-compete obligations on us and our affiliates.
Under the terms of the Inventory Purchase Agreement, the Company has agreed, on behalf of itself and its affiliates (including any owner of a majority of Tessco), not to compete with Voice Comm’s retail business as operated by the Company at closing, for a period of five years after the closing date. Tessco will, however, retain the ability to continue to supply retail products to its commercial customers; and other exceptions to the non-compete obligation allow Tessco to divest itself of Retail inventory not acquired by Voice Comm. The overall non-compete obligation may, however, be terminated early by us upon the occurrence of certain change in control events and the payment to Voice Comm of certain agreed upon amounts (approximately $5,000,000, initially), which diminish ratably over the five year non-compete period. This could make certain changes in control involving us more costly and therefore more difficult or less likely. Disagreements may arise between the parties as to the scope and meaning of the non-compete obligations and the various exceptions, which could be disruptive and subject us to claims for damages or specific performance of the non-compete obligations.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
A significant portion of our voting stock is controlled by our executive officers, directors and beneficial owners of 5% or more of our common stock.
Our executive officers, directors and beneficial owners of 5% or more of our common stock and their affiliates, in the aggregate, beneficially owned approximately 43% of our outstanding common stock as of March 26, 2023. Robert B. Barnhill, Jr., the Company’s founder and past CEO and Chairman, beneficially owned approximately 17% of our outstanding common stock as of March 26, 2023. Lakeview Investment & Trading Group, LLC (“Lakeview”) beneficially owned approximately 15% of our outstanding common stock as of March 26, 2023. These shareholders, and particularly if they decide to act together, have or would have the ability to significantly influence our business and activities, including the election of our directors and any significant corporate transaction requiring shareholder approval. Mr. Barnhill and Lakeview have each sought to exert influence on our business operations and Board of Directors in the past, and we expect that each will or may continue to do so.
Our business could be negatively impacted as a result of any future activism activities by Robert B. Barnhill, Jr., Lakeview Investment & Trading Group LLC and other activist investors.
As noted above, Mr. Robert B. Barnhill Jr. holds approximately 17% of our outstanding common stock and Lakeview holds approximately 15% of our outstanding common stock, and each have sought to exert influence on our business operations and Board of Directors, and we expect that each will or may continue to do so.
In September 2020, Mr. Barnhill and persons acting together with Mr. Barnhill initiated a consent solicitation to seek the consent of our stockholders holding at least a majority of our outstanding shares of common stock to, among other things, remove five members of our Board of Directors and replace them with four director candidates identified by Mr. Barnhill (the “Consent Solicitation”). Consents solicited during the Consent Solicitation were delivered to the Company on December 11, 2020.
The Consent Solicitation and the Company’s response to it resulted in significant distraction for management and significant costs to the Company. Continued pursuit or further activities by Lakeview or Mr. Barnhill, or by other activist shareholders, could result in yet additional distractions and costs and could lead to a materially adverse impact on our business or operating results.
Our quarterly financial results may fluctuate, which could lead to volatility in our stock price.
Our revenues and operating results have fluctuated from quarter to quarter in the past and may continue to do so in the future. As a result, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of our future performance. Fluctuations in our revenues and operating results could negatively affect the trading price of our stock. Most of our operating expenses, such as compensation expenses, generally do not vary directly with the amount of sales and are difficult to adjust in the short term. As a result, if sales in a particular quarter are below expectations for that quarter, we may not proportionately reduce operating expenses for that quarter, and therefore such a sales shortfall would have a disproportionate effect on our net income for the quarter. Therefore, our revenues and results of operations may, in the future, be below the expectations of analysts and investors, which could cause our stock price to decline. Factors that are likely to cause our revenue and operating results to fluctuate include the risk factors discussed throughout this section.
Without approval of our Board of Directors, it may be difficult for a third party to acquire control of the Company. This could affect the price of our common stock.
Certain provisions of our certificate of incorporation and bylaws, including advance notice bylaws, and applicable provisions of the Delaware General Corporation Law (“DGCL”) may each make it more difficult for or may prevent a third party from acquiring control of us or changing our Board of Directors and management. We are afforded the protections of Section 203 of the DGCL, which will prevent us from engaging in a business combination with a person who acquires at least 15% of our common stock for a period of three years from the date such person acquired such common stock, unless Board of Director or shareholder approval were obtained. Some believe that the provisions described above, as well as any resulting delay or prevention of a change of control transaction or changes in our Board of Directors
or management, could deter potential acquirers or prevent the completion of a transaction in which our shareholders could receive a substantial premium over the then current market price for their shares. We, on the other hand, believe that these provisions serve to protect our shareholders against abusive takeover tactics, to preserve and maximize the value of the Company for all shareholders, and to better ensure that each shareholder will be treated fairly in the event of an unsolicited offer to acquire the Company.
Potential uncertainty resulting from acquisition proposals and related matters may adversely affect our business.
In the past we have received, and in the future, we may receive proposals to acquire our company or our assets. As part of its regular activities, our Board of Directors considers and responds to such proposals on an occasional or regular basis, as the circumstances suggest, although public disclosure of such discussions may not be warranted or occur unless and until, if ever, circumstances dictate. The review and consideration of acquisition proposals and related matters could be expensive and require the expenditure of significant management time and personnel resources. Such proposals may also create uncertainty for our employees, customers and suppliers. Any such uncertainty could make it more difficult for us to retain key employees and hire new talent, and could cause our customers and suppliers to not enter into new arrangements with us or to terminate existing arrangements. Additionally, we and members of our Board of Directors could be subject to future lawsuits related to unsolicited proposals to acquire us. Any such future lawsuits could become time consuming and expensive.
RISKS RELATED TO THE MERGER AND MERGER AGREEMENT
Failure to complete the merger could negatively impact our stock price and the future business and financial results of the Company.
Our stock price may decline significantly if the merger is not completed.
If the merger is not completed, our ongoing business may be adversely affected and the Company will be subject to a number of risks, including the following:
|●||We may be required to pay a reverse termination fee of $4.0 million if the Merger Agreement is terminated under certain circumstances;|
|●||We will be required to pay certain costs relating to the merger, such as legal, accounting, financial advisor and printing fees whether or not the merger is completed;|
|●||Matters relating to the merger may require substantial commitments of time and resources by our management, which could otherwise have been devoted to other opportunities that may have been beneficial to us; and|
|●||Our customers, prospective customers, collaborators and other business partners and investors in general may view the failure to consummate the merger as a poor reflection on our business or prospects.|
We may not be able to effect the merger pursuant to the Merger Agreement. If we are unable to do so, we will incur substantial costs associated with withdrawing from the transaction.
In connection with the Merger Agreement, we have incurred substantial costs planning and negotiating the transaction. These costs include, but are not limited to, costs associated with employing and retaining third-party advisors who performed the financial, auditing and legal services required before we were able to enter into the Merger Agreement and which will continue as we seek to complete the transaction. If, for whatever reason, the transactions contemplated by the Merger Agreement fail to close, we will be responsible for these costs, which could adversely affect our liquidity and financial results.
If the merger anticipated by the Merger Agreement fails, it may be difficult to identify a new prospective target acquirer, negotiate and agree to new merger terms.
Researching, analyzing and negotiating with Lee Equity Partners, LLC, Twin Point Capital LLC and Alliance Corporation and affiliates with respect to the merger contemplated by the Merger Agreement required a substantial amount of time, and caused significant distraction for our officers and directors. Our ability to identify a new prospective acquirer may be negatively impacted by general market conditions, volatility in the capital and debt markets and the other risks described herein.
While the Merger Agreement is in effect, we are subject to certain interim covenants.
The Merger Agreement generally requires us to operate our business in the ordinary course, subject to certain exceptions, including as required by applicable law, pending consummation of the merger, and subjects us to customary interim operating covenants that restrict us, without approval (such approval not to be unreasonably conditioned, withheld, or delayed), from taking certain specified actions until the merger is completed or the Merger Agreement is terminated in accordance with its terms. These restrictions could prevent us from pursuing certain business opportunities that may arise prior to the consummation of the merger and may affect our ability to execute our business strategies and attain financial and other goals and may impact our financial condition, results of operations and cash flows.
The announcement and pendency of the merger could cause disruptions in our business, which could have an adverse effect on our business and financial results.
We have operated and, until the completion of the merger, will continue to operate independently. Uncertainty about the effect of the merger on employees, customers, distributors and suppliers may have an adverse effect on us. These uncertainties may impair our ability to retain and motivate key personnel and could cause customers, distributors, suppliers and others with whom we deal to seek to change existing business relationships which may materially and adversely affect our business. Moreover, integration efforts will also divert management attention and resources. These integration matters could have an adverse effect on Tessco.
Some of our non-employee directors and executive officers have interests in the merger that are different from, or in addition to, Tessco stockholders generally.
Certain of our non-employee directors and executive officers participate in arrangements that provide them with interests in the merger that are different from, or in addition to, the interests of our stockholders, including, among others, the acceleration of equity vesting. These interests, among others, may influence our executive officers and non-employee directors to support or approve the Merger. Our Board of Directors was aware of and considered these interests, among other matters, in evaluating and negotiating the Merger Agreement, approving the Merger Agreement and the merger, and recommending that the Merger Agreement be adopted by our stockholders.
Certain provisions of the Merger Agreement may discourage third parties from submitting alternative acquisition proposals.
The terms of the Merger Agreement prohibit us from soliciting alternative acquisition proposals or cooperating with persons making alternative acquisition proposals, except in limited circumstances when our Board of Directors determines in good faith that an alternative acquisition proposal is or is reasonably likely to result in a superior proposal and that failure to cooperate with the proponent of the proposal is reasonably likely to be inconsistent with our Board of Directors’ fiduciary duties. In addition, if we terminate the Merger Agreement under certain circumstances, including terminating because of a decision of ours to enter into an alternative acquisition agreement with respect to a superior proposal, we would be required to pay a termination fee of $4.0 million to Parent. This termination fee described above may discourage third parties from submitting alternative acquisition proposals to our stockholders, and may cause our Board of Directors to be less inclined to recommend an alternative acquisition proposal.
We may be subject to litigation relating to the Merger.
We may be subject to legal claims, including stockholder claims, related to the merger. Litigation is distracting and costly and subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include
monetary damages or other adverse effects. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on our business, financial position and results of operations, and the merger may not be completed and our stock price could decline significantly.
Item 1B. Unresolved Staff Comments.
Item 2. Properties.
Our corporate headquarters and primary distribution center, known as the Global Logistics Center (“GLC”), is located in a Company-owned 184,000 square-foot facility north of Baltimore City, in Hunt Valley, Maryland.
Our sales, marketing and administrative offices are located in 102,200 square feet of leased office space near the GLC, in Timonium, Maryland. The monthly rent payments range from $210,200 to $220,800 throughout the remaining lease term, which expires on December 31, 2025.
In addition, we lease 66,000 square feet of office and warehouse space adjacent to the GLC in Hunt Valley, Maryland. The monthly rent for this facility ranges from $43,000 to $47,000 throughout the remaining lease term, which expires on July 31, 2026, subject to our annual option to terminate.
West coast sales and fulfillment are facilitated by our Company-subsidiary owned 115,000 square-foot Americas Sales & Logistics Center (ALC) located in Reno, Nevada. The ALC is used to configure and fulfill product and supply chain solutions, provide disaster backup for the GLC, and allow for future growth of staffing and increased fulfillment capabilities.
Item 3. 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 4. Mine Safety Disclosures
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock has been publicly traded since September 28, 1994, and is now traded on the Nasdaq Global Market, under the symbol "TESS."
As of May 19, 2022, the number of shareholders of record of the Company was 149. We estimate that the number of beneficial owners as of that date was approximately 2,373.
On July 28, 2009, we announced that our Board of Directors had decided to commence a cash dividend program and thereafter our Board of Directors declared dividends on a quarterly basis, through the fourth quarter of fiscal 2020. On April 28, 2020, the Board of Directors suspended Tessco’s dividend in an effort to further strengthen its cash position. Any future declaration of dividends and the establishment of any corresponding record and payment dates remains subject to further determination from time to time by the Board of Directors. The declaration and payment of future dividends will depend on many factors, including, but not limited to, our earnings, financial condition, business development needs and regulatory considerations, and is at the discretion of our Board of Directors. Our revolving credit facility may limit the amount of cash dividends that we may pay through the application of financial covenants and ratios that restrict dividend payments.
We withhold shares from our employees and directors from time to time to facilitate employees’ minimum federal and state tax withholdings related to vested performance stock units, restricted stock units, and exercised stock options. For fiscal years 2023 and 2022, the total value of shares withheld for taxes were $158,100 and $66,400, respectively.
The secured Revolving Credit Facility restricts our ability to pay dividends and to repurchase our shares. Assuming that no default exists, we may redeem or repurchase up to $2,000,000 of our shares in any 12 consecutive month period in connection with the payment or satisfaction of tax withholding obligations of participants under our equity compensation plans. We may pay dividends or effect redemptions provided that no default exists or will exist after giving effect to the dividend or repurchase, and the average Excess Availability is not less than $26,250,000 during the immediately preceding thirty-day period and after giving effect to the dividend or repurchase on a pro forma basis, and for each day of the thirty-day period not less than $17,430,000. Excess Availability is generally defined as Availability minus the aggregate amount of trade payables aged in excess of historical levels and all book overdrafts in excess of historical practices. At March 26, 2023 we had the ability to withhold or repurchase $2,000,000 in additional shares of our common stock during fiscal 2023, without violating this covenant.
The information required by Item 201(d) of Regulation S-K, pursuant to paragraph (a) of Item 5 of Form 10-K, is incorporated by reference to the information set forth under the caption “Equity Compensation Plan Information” in the Company’s Proxy Statement for the 2023 Annual Meeting of Shareholders, which is anticipated to be filed pursuant to Regulation 14A no later than one hundred twenty (120) days following the end of the fiscal year reported on.
Stock Performance Graph
The graph set forth below shows the value of an investment of $100 on April 1, 2018 in each of the Company’s common stock, the Russell 2000 Index and a peer group for the period of April 1, 2018 to March 26, 2023. The graph assumes that all dividends, if any, were reinvested.
TESSCO Technologies Incorporated
Peer Group (1)
(1) – The Peer Group consists of the following: ScanSource Inc., and W.W. Grainger Inc.
The peer group was selected based on a review of publicly available information about these companies and the Company’s determination that they are engaged in business similar to that of the Company. This group has been updated since prior years to remove two previously included peer group companies whose shares are no longer traded.
Item 6. [Reserved]
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the other sections of this Annual Report on Form 10-K, including Part I, “Item 1: Business” and Part II, “Item 8: Financial Statements and Supplementary Data”. The various sections of this MD&A contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing, including Part I, “Item 1A: Risk Factors.” Our actual results may differ materially from those described in any such forward-looking statement.
Business Overview and Environment
TESSCO Technologies Incorporated (“Tessco”, “we”, “our”, “us”, or the “Company”) architects and delivers innovative product and value chain solutions to support wireless systems. Although we sell products to customers in over 40 countries, approximately 98% of our sales are to customers in the United States. We have operations and office facilities in Timonium and 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. As a result of the disposal, the Consolidated Financial Statements for fiscal years 2021 and 2022 reflect the results of the Retail segment as a discontinued operation. The activity related to discontinued operations for fiscal year 2023 has been immaterial and therefore is included within results from continuing operations. We retain the Ventev® tradename for non-mobile device accessory products.
On April 11, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”), with Alliance USAcqCo 2, Inc., a Delaware corporation (“Parent”), and Alliance USAcqCo 2 Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”). Parent and Merger Sub are entities affiliated with Lee Equity Partners, LLC and Twin Point Capital LLC, which also own Alliance Corporation, a value-added distributor of equipment for the wireless industry, and GetWireless, LLC, a value-added distributor of cellular solutions that connect the Internet of Things (IoT). See Note 21, “Subsequent Events”, to our Consolidated Financial Statements included in this Annual Report on Form 10-K for further information.
As a result of changes in our management structure during fiscal 2022, we now operate as two reportable segments: Carrier and Commercial, for which we provide certain information. Carrier is generally comprised of customers responsible for building and maintaining the infrastructure system and provide airtime service to individual subscribers and Commercial includes value-added resellers, the government channel and private system operator markets. We previously operated as one segment in fiscal 2021 and identified a change to our reportable segments in the fourth quarter of fiscal 2022 as a result of changes in organizational structure.
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 broadband systems. Sales of traditional base station infrastructure products, such as base station radios, cable and transmission lines and antennas are in part dependent on capital spending in the wireless communications industry. Network systems products are used to build and upgrade computing and internet networks. 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. Inventory typically has a life cycle that tends to be tied to changes in regulation or technology and includes products typically used by business entities or governments.
The wireless communications distribution industry is competitive and fragmented, and is comprised of several national distributors. In addition, many manufacturers sell directly to end users. 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 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 offerings, our information technology systems, our large customer base and our purchasing relationships with more than 300 manufacturers provide us with a significant competitive advantage over new entrants to the market.
Results of Continuing Operations
The following tables summarize the results of our continuing operations for fiscal years 2023, 2022 and 2021:
(Dollars in thousands, except per share data)
2022 to 2023
2021 to 2022
2022 to 2023
2021 to 2022
Total Gross Profit
Selling, general and administrative expenses
Loss from continuing operations before provision for income taxes
Provision for (benefit from) income taxes
Net loss from continuing operations
Diluted loss per share from continuing operations
Fiscal Year 2023 Compared to Fiscal Year 2022
As noted above, we exited our Retail business during fiscal year 2021 and activity related to the retail business for fiscal years 2022 and 2021 are presented as discontinued operations. Activity related to the retail business for fiscal year 2023 is immaterial and is included in continuing operations. The analysis below reflects activity and results from continuing operations only. Please refer to our Form 10-K for the fiscal year ended March 27, 2022 for a discussion of fiscal year ended March 28, 2021.
Revenues. Revenue for fiscal year 2023 increased by 8.3% as compared to fiscal year 2022. Revenues in our Carrier and Commercial segments increased by 7.4% and 8.9%, respectively. The increase in both Commercial and Carrier segment revenues was primarily attributable to gaining additional market share and increased customer pricing.
Cost of Goods Sold. Cost of goods sold for fiscal year 2023 increased by 6.3% as compared to fiscal year 2022. Cost of goods sold in our Carrier and Commercial segments increased by 3.8% and 8.5%, respectively. The increases were primarily due to increases in related revenues in both segments as discussed above.
Gross Profit. Gross profit increased by 16.7% in fiscal year 2023 as compared to fiscal year 2022. This compares to an increase in revenues of 8.3% in fiscal year 2023 as compared to fiscal year 2022. Gross profit margin in our Carrier and Commercial segments increased from 11.6% to 14.6% and from 24.1% to 24.4%, respectively. The increase in the Carrier segment was primarily due to a more favorable customer mix, while the margin growth in the Commercial segment was primarily a result of higher sales of Ventev® products and improved product and customer mix. As a result, overall gross profit margin increased from 18.7% in fiscal year 2022 to 20.1% in fiscal year 2023. Gross margins in both segments were also impacted by increased charges to our customers for Performance Delivery Guarantee (“PDG”) to offset increasing freight-out costs driven by global supply chain issues. Freight-out is included in Selling, general and administrative expenses in our Consolidated Statements of Income (Loss).
Our ongoing ability to earn revenues and gross profits from customers and suppliers looking to us for product and supply chain solutions is dependent upon a number of factors. The terms, and accordingly the factors, applicable to each relationship often differ. Among these factors are the strength of the customer’s or supplier’s business, the supply and demand for the product or service, including price stability, changing customer or supplier requirements, and our ability to support the customer or supplier and to continually demonstrate that we can improve the way they do business. In addition, the agreements or arrangements on which our customer and supplier relationships are based are typically of limited duration, typically do not include any obligation in respect of any specific product purchase or sale and are terminable by either party upon several months or otherwise short notice. Our customer relationships could also be affected by wireless carrier consolidation or global financial crisis, including the COVID-19 pandemic or other events beyond our control.
We account for inventory at the lower of cost or net realizable value and, as a result, write-offs/write-downs occur due to damage, deterioration, obsolescence, changes in prices, and other causes. These expenses were 2% or less of overall purchases for each of the last three fiscal years.
Selling, General and Administrative Expenses. Total selling, general and administrative expenses increased 14.3% during fiscal year 2023 as compared to fiscal year 2022. Total selling, general and administrative expenses as a percentage of revenues increased from 19.5% in fiscal year 2022 to 20.6% in fiscal year 2023. The following are descriptions of changes in significant components of selling, general, administrative expenses.
|●||Compensation and benefits expenses increased by $1.5 million in fiscal year 2023 as compared to fiscal year 2022, mainly due to an increase in employee headcount.|
|●||Corporate support expenses increased by $3.0 million in fiscal year 2023 as compared to fiscal year 2022, primarily attributable to $2.0 million increase in bad debt expense as a result of a significant reserve for one customer, and $0.8 million higher professional services in connection with the Agreement and Plan of Merger, as discussed further in Note 21 of the Consolidated Financial Statements included as part of this Annual Report on Form 10-K.|
|●||Information Technology expenses increased $5.0 million in fiscal year 2023 as compared to fiscal year 2022, primarily attributable to a $1.9 million increase in depreciation expenses related to the launch of our new|
|ERP system, as well as a $1.0 million increase in ERP expenses and a $0.6 million increase in general information technology costs.|
|●||Outbound freight expenses increased by $1.5 million in fiscal 2023 as compared to fiscal 2022, primarily attributable to the increase in revenues year-over-year and higher third-party freight carrier costs as a result of significantly higher inflationary impacts in the first half of fiscal 2023 attributable to global supply chain issues. As mentioned above, these higher freight expenses are largely passed on to customers through PDG charges.|
Interest, Net. Net interest expense increased from $0.9 million in fiscal year 2022 to $2.2 million in fiscal year 2023. The increase is primarily related to a higher average amount outstanding on our 2020 Revolving Credit Facility and interest rate inflation. Refer to Note 6 of the Consolidated Financial Statements included as part of this Annual Report on Form 10-K for additional information on our borrowings.
Income Taxes, Net Income and Diluted Earnings Per Share. The Company reported an income tax provision of $5,800 in fiscal year 2023 as compared to a benefit of $1.1 million in fiscal year 2022, which primarily related to a change in the tax accounting method in fiscal year 2022 for computer software development costs. This change was adopted during the third quarter of fiscal 2022 and reflected on the fiscal 2021 federal tax return. Net loss of $4.3 million in fiscal year 2023 increased from the net loss of $3.3 million in fiscal 2022, which is attributable to higher operating expenses in fiscal 2023 as compared to fiscal 2022. Diluted loss per share was ($0.47) for fiscal 2023 as compared to ($0.37) for fiscal 2022.
Liquidity and Capital Resources
In summary, our cash flows were as follows (includes both continuing and discontinued operations):
Cash flow provided by (used in) operating activities
Cash flow provided by (used in) investing activities
Cash flow provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
We used $12.0 million of net cash from operating activities during fiscal year 2023. This outflow was primarily driven by a $7.5 million increase in accounts receivable and $17.4 million increase in inventory, partially offset by a $7.4 million increase in accounts payable and a $3.7 million decrease in income taxes receivable. The increase in accounts receivable is primarily attributable to higher sales volume in fiscal year 2023 as compared to fiscal 2022. The increase in inventory is primarily attributable to improvements in the supply chain and the resulting higher availability of some products, at the same time that the constrained availability of other products prevented the Company from shipping completed orders to customers. The decrease in income taxes receivable was primarily attributable to the Company receiving federal tax refunds in fiscal year 2023 associated with the CARES Act net operating loss carrybacks for prior tax years. The fluctuations in accounts receivable, inventory, and accounts payable were normal in the ordinary course of business due to timing changes in working capital balances, while the income tax receivable was attributable to receipt of federal tax refunds from prior tax years.
We used $2.5 million of net cash from operating activities during fiscal year 2022. This outflow was primarily driven by a $5.5 million increase in accounts receivable and $1.7 million increase in inventory, partially offset by a $2.5 million increase in accounts payable and a $3.0 million decrease in income taxes receivable. The increases in accounts receivable, inventory, and accounts payable were primarily attributable to an 11.8% increase in revenues in fiscal year 2022 as compared to fiscal year 2021. The decrease in income taxes receivable was attributable to the Company receiving federal tax refunds associated with the CARES Act net operating loss carrybacks. The fluctuations in accounts receivable,
inventory, and accounts payable were normal in the ordinary course of business due to timing changes in working capital balances, while the income tax receivable was attributable to receipt of federal tax refunds from prior tax years.
We used $0.7 million of net cash from operating activities during fiscal year 2021. This outflow was driven by net loss (net of depreciation and amortization, gain on the retail sale, and non-cash stock compensation expense), and a decrease in accounts payable partially offset by the decreases in accounts receivable and inventory. A decrease in deferred income tax assets was offset by an increase in income taxes receivable. Accounts receivable, inventory, and accounts payable decreased due to our exit of the Retail business during the third quarter of fiscal 2021.
Capital expenditures of $15.7 million in fiscal year 2023 increased from $9.5 million in fiscal year 2022 and increased from $11.9 million in fiscal year 2021. Fiscal year 2023, 2022 and 2021 capital expenditures were largely comprised of investments in information technology of $15.2 million, $9.5 million, and $11.4 million, respectively, primarily related to the replacement of our legacy ERP system with a modern ERP system. In fiscal year 2021, we generated $9.2 million in cash proceeds related to the sale of certain retail assets to Voice Comm.
Cash flows generated from financing activities in fiscal year 2023 were primarily related to net borrowings of $27.3 million from our line of credit. Cash flows generated from financing in fiscal year 2022 were primarily related to borrowings from our line of credit and $6.5 million in proceeds from the Company’s mortgage on its Reno, NV facility. Cash flows generated from financing in fiscal year 2021 were primarily related to borrowings from our line of credit.
On October 29, 2020, we entered into a 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. This Credit Agreement was amended and restated in its entirety on December 8, 2022, pursuant to Amendment No. 4 to Credit Agreement, discussed below (the Credit Agreement, as amended to date, the “Credit Agreement”). Terms used, but not defined, in this paragraph have the meanings set forth in the Credit Agreement or the related Guaranty and Security Agreement, and the description below refers to the Credit Agreement as of March 26, 2023 and without regard to subsequent events.
The Credit Agreement now provides for a senior secured asset- based revolving credit facility of up to $105 million (the “Revolving Credit Facility”), which matures on April 29, 2025. The Credit Agreement provides for a $10 million Availability Block, which is in effect at all times, and which effectively limits our borrowing capacity to a maximum amount of $95 million, further subject to Borrowing Base limitations and compliance with other terms. As of March 26, 2023, borrowings under the Revolving Credit Facility totaled $64.2 million; therefore, we then had $30.8 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 or referred to in Note 6 to our Consolidated Financial Statements included in this Annual Report on Form 10-K (“Note 6”). We do not now, nor do we expect in the near future to, meet the Fixed Charge Coverage Ratio (a covenant triggered if Excess Availability (without giving effect to the Availability Block) is less than the greater of (a) 15% of the Maximum Revolver Amount and (b) $15,750,000) and, therefore our current availability under the Revolving Credit Facility is limited to $89.3 million, subject also to the Borrowing Base limitations and compliance with other terms. Borrowings under the Credit Agreement are discussed in Note 6.
At the end of fiscal year 2023, we were in compliance with all required financial covenants applicable under our revolving credit facility with Wells Fargo Bank.
On December 30, 2021, TESSCO Reno Holding LLC (“Reno Holding”), an indirect wholly owned subsidiary and now owner of the Company‘s approximately 115,000 square foot operating facility located in Reno, Nevada (the “Reno Facility”), borrowed an aggregate sum of $6.5 million from Symetra Life Insurance Company. The indebtedness is evidenced by a Real Estate Note of Reno Holding (the “Note”) that provides for monthly payments of $47,858, bears interest at a fixed rate of 3.38% per annum for the first 5 years, is subject to adjustment after 5 years and again after 10 years, and matures in approximately 15 years. See Note 7 to our Consolidated Financial Statements included in this Annual Report on Form 10-K for additional discussion related to the Note.
Working capital (current assets less current liabilities) increased to $81.2 million as of March 26, 2023 as compared to $64.5 million as of March 27, 2022. Shareholders' equity was $73.1 million as of March 26, 2023, and $75.9 million as of March 27, 2022.
We believe that our existing cash, payments from customers, pending tax refunds and availability under our revolving credit facility (including any amendment or replacement thereof), or if needed, financing we believe would be available to us from other sources, will be sufficient to support our operations for at least the next twelve months. We expect to meet short-term liquidity needs through cash on our balance sheet and operating cash flow, supplemented by our revolving credit facility; and we expect to meet long-term liquidity needs through these same resources. If we were to undertake an acquisition or other major capital expenditures that require funds in excess of our existing sources of liquidity, we would look to sources of funding from additional credit facilities, debt and/or equity issuances. There can be no assurances that such additional future sources of funding, either to fund an acquisition or major capital expenditures, or to support our cash flow needs in the event of the termination of our existing revolving credit facility before it can be replaced with an asset-based facility, would be available on terms acceptable to us, if at all.
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 possible downturn in the global economy, caused in part by the COVID-19 pandemic among other factors. Anticipated capital expenditures, including amounts incurred but not yet paid in fiscal year 2023, for fiscal year 2024 are expected to range from $8 million to $10 million.
Reconciliation of Non-GAAP Measures
We believe that presenting certain non-GAAP financial measures may enhance an investor’s understanding of our financial performance. We further believe that these financial measures are useful in assessing our operating performance from period to period by excluding certain items that we believe are not representative of our core business. We also use certain of these financial measures for business planning purposes, including management incentives.
Accordingly, the below selected financial data includes certain non-GAAP financial measures we believe are commonly used by investors to evaluate our performance and that of our competitors. The use of EBITDA (earnings before interest, taxes, depreciation, and amortization) and Adjusted EBITDA (EBITDA, less stock compensation and goodwill impairment) should not be considered as an alternative to operating income (loss), net income (loss) or any other performance measures derived in accordance with U.S. GAAP as measures of operating performance, operating cash flows or liquidity.
Fiscal Years Ended
March 26, 2023
March 27, 2022
March 28, 2021
March 29, 2020
March 31, 2019
Net income (loss) from continuing operations
(Benefit from) provision for income taxes
Depreciation and amortization
The following tables reflect a summary of our contractual cash obligations and other commercial commitments as of March 26, 2023:
Payment Due by Fiscal Year
Revolving credit facility (1)
Current and long-term debt
Other long-term liabilities (2)
Total contractual cash obligations
|(1)||We are subject to a variable interest rate on the outstanding balance on our revolving credit facility and a 0.25% fee on the unused portion of our revolving credit facility. This balance includes projected variable interest payments based on there being no movement on the line from what was outstanding at March 26, 2023, with the variable payments based on a static rate of 6.9% on the outstanding balance and 0.25% related to the unused commitment fee.|
|(2)||Other Long-Term Liabilities reflected on the Consolidated Balance Sheet include amounts owed under a Supplemental Executive Retirement Plan.|
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our 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.
We have identified the policies below as critical to our business operations and the understanding of our results of operations:
Revenue Recognition. We account for revenue in accordance with Accounting Standard Codification (“ASC”) 606, Revenue from Contracts with Customers. We recognize revenue when control of promised goods is transferred to the customer. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for transferring the goods.
In most cases, shipments are made using Freight on Board (“FOB”) shipping terms. FOB destination terms are used for a portion of sales, and revenue for these sales is recorded when the product is received by the customer. Prices are always fixed at the time of sale. Historically, there have not been any material price concessions provided to customers, future discounts provided by the Company, or other incentives subsequent to a sale. The Company sells under normal commercial terms and, therefore, only records sales on transactions where collectability is reasonably assured. The Company recognizes revenues net of sales tax.
We recognize revenues from sales transactions containing sales returns provisions at the time of the sale. The potential for customer returns are considered a component of variable consideration under ASC 606 and it is therefore considered when estimating the transaction price for a sale. We use the most likely amount method to determine the amount of expected returns. The amount of expected returns is recognized as a refund liability, representing the obligation to return the customer’s consideration. The return asset is measured at the former carrying amount of the inventory, less any expected costs to recover the goods. Customers may have volume incentive rebate agreements, which are earned based on total purchases during a defined period. These rebates are included in the transaction price as a reduction to revenue at the time of the sale.
Our current and potential customers are continuing to look for ways to reduce their inventories and lower their total costs, including distribution, order taking and fulfillment costs, while still providing their customers excellent service. Some of these companies have turned to us to implement supply chain solutions, including purchasing inventory, assisting in demand forecasting, configuring, packaging, kitting and delivering products and managing customer and supplier relations, from order taking through cash collections. In performing these solutions, we assume varying levels of involvement in the transactions and varying levels of credit and inventory risk. As our offerings continually evolve to meet the needs of our customers, we constantly evaluate our revenue accounting based on the guidance set forth in accounting standards generally accepted in the United States. When applying this guidance in accordance with the FASB standard regarding revenue recognition for principal-agent considerations, we look at the following indicators: whether we are the primary obligor in the transaction; whether we have general inventory risk; whether we have latitude in establishing price; whether the customer holds us responsible for the acceptability of the product; whether the product returns are handled by us; and whether an obligation exists between the other parties and our customer. Each of our customer relationships is independently evaluated based on the above guidance and revenues are recorded on the appropriate basis. Based on a review of the factors above, in the majority of our sales relationships, we have concluded that we are the principal in the transaction, and we record revenues based upon the gross amounts earned and booked. However, we do have certain relationships where we are not the principal and we record revenues on a net fee basis, regardless of amounts billed (less than 2% of our total revenues for fiscal year 2023).
Allowance for Doubtful Accounts. We use estimates to determine the amount of the allowance for doubtful accounts necessary to reduce accounts receivable to their expected net realizable value. We estimate the amount of the required allowance by reviewing the status of past-due receivables and analyzing historical bad debt trends. Actual collection experience has not varied significantly from estimates, due primarily to credit policies, collection experience and our stability as it relates to our current customer base. Typical payments from commercial customers are due 30 days from the date of the invoice. We write-off receivables deemed to be uncollectible to the allowance for doubtful accounts. Accounts receivable balances are not collateralized by our customers.
Inventory Reserves. We establish inventory reserves for excess and obsolete inventory. We regularly review inventory to evaluate continued demand and identify any obsolete or excess quantities of inventory. We record a provision for the difference between the carrying value of excess and obsolete inventory and its estimated net realizable value. Estimated net realizable value is based on anticipated future product demand, market conditions and liquidation values. Actual results differing from these projections could have a material effect on our results of operations.
Income Taxes. We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. We regularly review our deferred tax assets for recoverability. This review is based on historical taxable income, projected future taxable income and the expected timing of the reversals of existing temporary differences. Based on this review, we have established a valuation allowance on the deferred tax assets that are not more likely than not realizable.
We account for income taxes under ASC 740, Income Taxes, to account for uncertainty in income taxes recognized in an enterprise’s financial statements. This standard prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Stock-Based Compensation. We record stock-based compensation in accordance with ASC 718, Compensation – Stock Compensation. We account for forfeitures as they occur rather than estimate expected forfeitures. The standard also requires stock awards granted or modified after the adoption of the standard that include both performance conditions and graded vesting to be amortized by an accelerated method rather than the straight-line method.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements.
Recent Accounting Pronouncements
A description of recently issued and adopted accounting pronouncements is contained in Note 2 to our Consolidated Financial Statements.
This Report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical facts contained herein, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements. These forward-looking statements may generally be identified by the use of the words “may,” “will,” “expects,” “anticipates,” “believes,” “estimates,” and similar expressions, but the absence of these words or phrases does not necessarily mean that a statement is not forward looking.
We have based these forward-looking statements on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short- and long-term business operations and objectives, and financial needs. Forward looking statements involve a number of risks and uncertainties. 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 described in Part I, Item IA “Risk Factors.” In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances included herein may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Consequently, the reader is cautioned to consider all forward-looking statements in light of the risks to which they are subject. Forward-looking statements include, but are not limited to, statements about:
|●||our expectations regarding the continuing impact of the COVID-19 pandemic on our business, operations, revenues, profits, customers or suppliers;|
|●||our ability to sustain or grow our customer base and market share;|
|●||our ability to sustain and grow our supplier relationships;|
|●||our expectations regarding the size and growth in markets;|
|●||the needs and demands of our customers and the production capacity of our suppliers;|
|●||trends in the wireless communications industry, our competitors and competing business models;|
|●||the execution of our business plans and strategies;|
|●||our ability to benefit from the disposition of our Retail business, including royalty revenues;|
|●||our ability to benefit from our Commercial and Carrier segments;|
|●||our liquidity and working capital requirements and ability to access capital;|
|●||our ability to secure, maintain and upgrade our information technology, telecommunications and e-commerce systems;|
|●||our ability to anticipate and navigate existing and changes in laws or regulations, including tariffs and trade restrictions, applicable to our business;|
|●||our ability to pass on cost increases from manufacturers to our customers;|
|●||our ability to enter into and perform contracts and to realize anticipated revenues or anticipated savings; and|
|●||our expectations regarding future revenues, expenses and profitability, and financial results generally;|
|●||our ability to meet expectations regarding the timing and completion of the merger;|
|●||our expectations regarding the occurrence of any event, change or other circumstance that would give rise to the termination of the Merger Agreement;|
|●||our ability to satisfy each of the conditions to the consummation of the merger contemplated by the Merger Agreement;|
|●||the disruption of management’s attention from ongoing business operations due to the merger;|
|●||our expectations regarding the effect of the announcement of the merger on the Company’s relationships with its customers, suppliers, and employees, as well as its operating results and business generally;|
|●||our ability to obtain stockholder approval of the Merger Agreement;|
|●||our expectations regarding the effects that any termination of the merger agreement may have on us and our business; and|
|●||the effect of limitations that the Merger Agreement places on our ability to operate our business or engage in strategic transactions as an alternative to the proposed merger.|
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. In addition, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. Any forward-looking statement made by us in this Annual Report speaks only as of the date on which it is made. We disclaim any duty to update any of these forward-looking statements after the date of this Annual Report to confirm these statements to actual results or revised expectations.
The above list should not be construed as exhaustive and should be read in conjunction with our other disclosures, including but not limited to the risk factors described in Part I, Item 1A of this Annual Report. Other risks may be described from time to time in our filings made under the securities laws. New risks emerge from time to time. It is not possible for our management to predict all risks.
Our internet web site 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. We have not incorporated herein by reference the information on our website, and it should not be considered a part of this filing.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Risk:
We are subject to market risk from changes in interest rates as it relates to our variable rate debt arrangements, which could be material if there are significant changes in borrowing rates. We have from time to time previously used interest rate swap agreements to modify variable rate obligations to fixed rate obligations, thereby reducing our exposure to interest rate fluctuations. Based on March 26, 2023 borrowing levels, a 1.0% increase or decrease in current market interest rates would not have a material effect on our Consolidated Statements of Income (Loss).
Foreign Currency Exchange Rate Risk:
We are exposed to an immaterial level of market risk from changes in foreign currency rates. Almost all of our sales are made in U.S. Dollars so we have an immaterial amount of foreign currency risk. Those sales not made in U.S. Dollars are made in Canadian Dollars.
Item 8. Financial Statements and Supplementary Data.
TESSCO TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
Consolidated Balance Sheets
Cash and cash equivalents
Trade accounts receivable, net
Product inventory, net
Income taxes receivable
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Income taxes receivable, non-current
Lease asset - right of use
Other long-term assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Trade accounts payable
Payroll, benefits and taxes
Sales tax liabilities
Accrued expenses and other current liabilities
Current portion of lease liability
Current portion of long-term debt
Total current liabilities
Deferred tax liabilities, net
Revolving line of credit
Non-current portion of lease liability
Other non-current liabilities
Common stock, $
Additional paid-in capital
Treasury stock, at cost,
Total shareholders’ equity
Total liabilities and shareholders’ equity
The accompanying Notes to the Consolidated Financial Statements are an integral part of these consolidated statements.
TESSCO TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
Consolidated Statements of Income (Loss)
Fiscal Year Ended
March 26, 2023
March 27, 2022
March 28, 2021
Cost of goods sold
Selling, general and administrative expenses
Operating income (loss)
Interest expense, net
Income (loss) from continuing operations before income taxes
Provision for (benefit from) income taxes
Net income (loss) from continuing operations
Income (loss) from discontinued operations, net of taxes
Net income (loss)
Basic income (loss) per share
Diluted income (loss) per share
Basic weighted-average common shares outstanding
Effect of dilutive options and other equity instruments
Diluted weighted-average common shares outstanding
The accompanying Notes to these Consolidated Financial Statements are an integral part of these consolidated statements.