Tessco (TESS) 10-Q 2020 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 29, 2019 or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from        to

Commission File Number: 001-33938

TESSCO Technologies Incorporated

(Exact name of registrant as specified in its charter)

Delaware	52-0729657
(State or other jurisdiction of incorporation or organization)	(I.R.S Employer Identification No.)
11126 McCormick Road, Hunt Valley, Maryland	21031
(Address of principal executive offices)	(Zip Code)

(410) 229-1000

(Registrant’s telephone number, including area code)

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	TESS	Nasdaq Global Market

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

Yes ☑       No ☐

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

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

Large accelerated filer ☐	Accelerated filer ☑
Non-accelerated filer ☐	Smaller reporting company ☑	Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.☐

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

Yes ☐       No ☑

The number of shares of the registrant’s Common Stock, $0.01 par value per share, outstanding as of November 1, 2019, was 8,547,747.

TESSCO Technologies Incorporated

Index to Form 10-Q

Part I	FINANCIAL INFORMATION		Page
	Item 1.	Financial Statements.	3
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	17
	Item 4.	Controls and Procedures.	23
Part II	OTHER INFORMATION
	Item 1.	Legal Proceedings.	24
	Item 1A.	Risk Factors.	24
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	24
	Item 3.	Defaults Upon Senior Securities.	24
	Item 4.	Mine Safety Disclosures.	25
	Item 5.	Other Information.	25
	Item 6.	Exhibits.	26
	Signature		27

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

TESSCO Technologies Incorporated

Consolidated Balance Sheets

	September 29,		March 31,
	2019		2019
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	108,200	$	30,300
Trade accounts receivable		91,624,500		93,966,200
Product inventory, net		84,144,200		71,845,400
Prepaid expenses and other current assets		9,081,600		5,562,800
Total current assets		184,958,500		171,404,700
Property and equipment, net		13,875,700		15,003,500
Goodwill		11,677,700		11,677,700
Deferred tax assets		55,300		55,300
Lease asset - right of use		13,718,000		—
Other long-term assets		9,661,800		8,354,600
Total assets	$	233,947,000	$	206,495,800
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	72,745,000	$	73,059,700
Payroll, benefits and taxes		3,876,000		5,929,500
Income and sales tax liabilities		261,700		749,000
Accrued expenses and other current liabilities		3,204,900		2,652,400
Revolving line of credit		35,279,500		14,378,100
Lease liability, current		2,486,100		—
Total current liabilities		117,853,200		96,768,700
Lease liability		11,393,800		—
Long-term liabilities		821,800		939,900
Total liabilities		130,068,800		97,708,600
Shareholders’ equity:
Preferred stock, $0.01 par value per share, 500,000 shares authorized and no shares issued and outstanding		—		—
Common stock, $0.01 par value per share, 15,000,000 shares authorized, 14,307,895 shares issued and 8,531,900 shares outstanding as of September 29, 2019, and 14,190,027 shares issued and 8,468,529 shares outstanding as of March 31, 2019		101,000		99,800
Additional paid-in capital		64,504,000		62,666,400
Treasury stock, at cost, 5,775,995 shares as of September 29, 2019 and 5,721,498 shares as of March 31, 2019		(58,484,300)		(57,614,100)
Retained earnings		97,757,500		103,635,100
Total shareholders’ equity		103,878,200		108,787,200
Total liabilities and shareholders’ equity	$	233,947,000	$	206,495,800

See accompanying notes to unaudited consolidated financial statements.

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TESSCO Technologies Incorporated

Unaudited Consolidated Statements of Income

	Fiscal Quarters Ended				Six Months Ended
	September 29, 2019		September 30, 2018		September 29, 2019		September 30, 2018
Revenues	$	141,810,900	$	158,636,100	$	272,540,200	$	309,555,500
Cost of goods sold		115,491,600		127,241,400		220,957,400		247,462,700
Gross profit		26,319,300		31,394,700		51,582,800		62,092,800
Selling, general and administrative expenses		25,745,200		29,477,300		53,841,700		58,438,600
Restructuring charge		—		—		488,000		—
Income (loss) from operations		574,100		1,917,400		(2,746,900)		3,654,200
Interest expense, net		335,100		244,800		543,800		419,200
Income (loss) before provision for (benefit from) income taxes		239,000		1,672,600		(3,290,700)		3,235,000
Provision for (benefit from) income taxes		217,000		481,800		(819,900)		885,800
Net income (loss)	$	22,000	$	1,190,800	$	(2,470,800)	$	2,349,200
Basic earnings (loss) per share	$	—	$	0.14	$	(0.29)	$	0.28
Diluted earnings (loss) per share	$	—	$	0.14	$	(0.29)	$	0.27
Basic weighted-average common shares outstanding		8,518,326		8,429,678		8,506,247		8,420,293
Effect of dilutive options and other equity instruments		131,994		166,571		—		180,182
Diluted weighted-average common shares outstanding		8,650,320		8,596,249		8,506,247		8,600,475
Cash dividends declared per common share	$	0.20	$	0.20	$	0.40	$	0.40

See accompanying notes to unaudited consolidated financial statements.

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TESSCO Technologies Incorporated

Unaudited Consolidated Statements of Changes in Shareholders’ Equity

	Common Stock			Additional						Total
				Paid-in		Treasury		Retained		Shareholders’
	Shares	Amount		Capital		Stock		Earnings		Equity
Balance at March 31, 2019	8,468,529		99,800		62,666,400		(57,614,100)		103,635,100		108,787,200
Proceeds from issuance of stock	9,250		100		143,100		—		—		143,200
Treasury stock purchases	(10,488)		—		—		(189,100)		—		(189,100)
Non-cash stock compensation expense	41,256		400		338,500		—		—		338,900
Cash dividends paid	—		—		—		—		(1,702,600)		(1,702,600)
Net loss	—		—		—		—		(2,492,800)		(2,492,800)
Balance at June 30, 2019	8,508,547		100,300		63,148,000		(57,803,200)		99,439,700		104,884,800
Proceeds from issuance of stock	19,236		200		283,600		—		—		283,800
Treasury stock purchases	(44,009)		—		—		(681,100)		—		(681,100)
Non-cash stock compensation expense	—		—		391,800		—		—		391,800
Exercise of stock options	48,125		500		680,600		—		—		681,100
Cash dividends paid	—		—		—		—		(1,704,200)		(1,704,200)
Net income	—		—		—		—		22,000		22,000
Balance at September 29, 2019	8,531,899	$	101,000	$	64,504,000	$	(58,484,300)	$	97,757,500	$	103,878,200
Balance at April 1, 2018	8,396,537		99,000		60,611,900		(57,503,000)		104,843,700		108,051,600
Proceeds from issuance of stock	5,620		100		130,000		—		—		130,100
Treasury stock purchases	(6,332)		—		—		(111,100)		—		(111,100)
Non-cash stock compensation expense	26,257		200		320,300		—		—		320,500
Cash dividends paid	—				—		—		(1,684,200)		(1,684,200)
Net income	—				—		—		1,158,400		1,158,400
Balance at July 1, 2018	8,422,082		99,300		61,062,200		(57,614,100)		104,317,900		107,865,300
Proceeds from issuance of stock	17,446		200		282,400		—		—		282,600
Treasury stock purchases	—		—		—		—		—		—
Non-cash stock compensation expense	—		—		384,800		—		—		384,800
Cash dividends paid	—		—		—		—		(1,687,000)		(1,687,000)
Net income	—		—		—		—		1,190,800		1,190,800
Balance at September 30, 2018	8,439,528	$	99,500	$	61,729,400	$	(57,614,100)	$	103,821,700	$	108,036,500

See accompanying notes to unaudited consolidated financial statements.

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TESSCO Technologies Incorporated

Unaudited Consolidated Statements of Cash Flows

	Six Months Ended
	September 29, 2019		September 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(2,470,800)	$	2,349,200
Adjustments to reconcile net (loss) income to net cash used in operating activities:
Depreciation and amortization		2,074,600		1,838,000
Non-cash stock-based compensation expense		730,700		705,300
Change in other assets and other liabilities		16,500		666,400
Change in trade accounts receivable		2,341,700		(10,033,000)
Change in product inventory		(12,298,800)		(17,346,300)
Change in prepaid expenses and other current assets		(3,518,800)		(428,900)
Change in trade accounts payable		630,200		20,621,300
Change in payroll, benefits and taxes		(2,053,500)		(2,263,400)
Change in income and sales tax liabilities		(487,300)		(1,199,800)
Change in accrued expenses and other current liabilities		1,001,900		1,840,300
Net cash used in operating activities		(14,033,600)		(3,250,900)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment		(739,600)		(887,300)
Purchases of internal use software		(2,593,900)		(1,428,500)
Net cash used in investing activities		(3,333,500)		(2,315,800)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from revolving line of credit		20,901,400		8,906,000
Payments on debt		(2,300)		(13,600)
Proceeds from issuance of common stock		142,300		137,200
Cash dividends paid		(3,406,800)		(3,371,200)
Purchases of treasury stock and repurchases of stock from employees		(189,600)		(111,100)
Net cash provided by financing activities		17,445,000		5,547,300
Net increase (decrease) in cash and cash equivalents		77,900		(19,400)
CASH AND CASH EQUIVALENTS, beginning of period		30,300		19,400
CASH AND CASH EQUIVALENTS, end of period	$	108,200	$	—

See accompanying notes to unaudited consolidated financial statements.

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TESSCO Technologies Incorporated

Notes to Unaudited Consolidated Financial Statements

Note 1. Description of Business and Basis of Presentation

TESSCO Technologies Incorporated, a Delaware corporation (TESSCO, we, or the Company), architects and delivers innovative product and value chain solutions to support wireless systems. The Company provides marketing and sales services, knowledge and supply chain management, product-solution delivery and control systems utilizing extensive internet and information technology. Approximately 97% of the Company’s sales are made to customers in the United States. The Company takes orders in several ways, including phone, fax, online and through electronic data interchange. Almost all of the Company’s sales are made in United States Dollars.

In management’s opinion, the accompanying interim Consolidated Financial Statements of the Company include all adjustments, consisting only of normal, recurring adjustments, necessary for a fair presentation of the Company’s financial position for the interim periods presented. These statements are presented in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) and have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Certain information and footnote disclosures normally included in the Company’s annual financial statements have been omitted from these statements, as permitted under the applicable rules and regulations. The results of operations presented in the accompanying interim Consolidated Financial Statements are not necessarily representative of operations for an entire year. The information included in this Form 10-Q should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019.

Note 2. Recently Issued Accounting Pronouncements

Recently issued accounting pronouncements not yet adopted:

In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which amends the impairment model by requiring entities to use a forward-looking approach based on expected losses rather than incurred losses to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. This ASU is effective for periods beginning after December 15, 2019. The Company is currently evaluating the impact the adoption of this new standard will have on its Consolidated Financial Statements and will adopt the standard on the first day of the Company’s 2021 fiscal year.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other–Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for annual and interim periods of public entities beginning after December 15, 2019, with early adoption permitted. The Company is currently assessing the potential impact this ASU will have on the Company’s consolidated results of operations, financial position and cash flows.

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Recently issued accounting pronouncements adopted:

Effective April 1, 2019, the Company adopted the FASB issued ASU No. 2016-02, Leases. This ASU requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The ASU also requires additional qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases. The Company adopted this standard on the first day of the 2020 fiscal year, using a modified retrospective approach. This standard resulted in the Company recording a right-of-use asset and lease liability for all leases, but otherwise the standard did not have a material impact on the financial statements. Prior periods were not adjusted to reflect this change.

Effective April 1, 2019, the Company adopted the FASB issued ASU No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The new standard changes the classification of certain cash payments and receipts within the cash flow statement. Specifically, payments for debt prepayment or debt extinguishment costs, including third-party costs, premiums paid, and other fees paid to lenders that are directly related to the debt prepayment or debt extinguishment, excluding accrued interest, are now classified as financing activities. Previously, these payments were classified as operating expenses. Adoption of this standard did not have an impact on the Consolidated Financial Statements of the Company, included herein.

Note 3. Stock-Based Compensation

The Company’s selling, general and administrative expenses for the fiscal quarter and six months ended September 29, 2019 includes $391,800 and $730,700, respectively, of non-cash stock-based compensation expense. The Company’s selling, general and administrative expenses for the fiscal quarter and six months ended September 30, 2018 includes $384,800 and $705,300, respectively, of non-cash stock-based compensation expense. Non-cash stock-based compensation expense is primarily related to our Performance Stock Units (PSUs), Restricted Stock Units (RSUs) and Stock Options, granted or outstanding under the Company’s Third Amended and Restated Stock and Incentive Plan (the “1994 Plan”) and 2019 Stock and Incentive Plan (the “2019 Plan” and together with the 1994 Plan, the “Plans”), which was approved at the Annual Meeting of Shareholders held on July 25, 2019. No additional awards may be granted under the 1994 Plan, although awards outstanding under the 1994 Plan remain outstanding and governed by its terms.

Performance Stock Units: The following table summarizes the activity under the Company’s PSU program under the Plans, for the first six months of fiscal 2020:

	Six Months	Weighted
	Ended	Average Fair
	September 29,	Value at Grant
	2019	Date (per unit)
Unvested shares available for issue under outstanding PSUs, beginning of period	98,306	$	14.55
PSUs Granted	51,616		15.93
PSUs Vested	(26,506)		14.07
PSUs Forfeited/Cancelled	(34,000)		15.81
Unvested shares available for issue under outstanding PSUs, end of period	89,416	$	15.01

During the first quarter of fiscal 2020, the Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) approved the grant of PSUs to select key employees, providing them with the opportunity to earn up to 45,500 shares of the Company’s common stock in the aggregate, depending upon whether certain earnings per share targets, and individual performance metrics, are satisfied, for fiscal year 2020. These not-yet-earned PSUs have only one measurement year (fiscal 2020), and assuming the performance

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metrics are met to a sufficient extent, the shares earned at the end of fiscal 2020 on the basis of that performance will vest in four equal installments beginning on or about May 15, 2020 and continuing on the same date in calendar 2021, 2022 and 2023, provided that the respective employee remains employed by the Company on each such date. Pursuant to the typical PSU award agreement, however, performance metrics are deemed met upon the occurrence of a change in control, and shares earned are issued earlier upon the occurrence of a change in control, or death or disability of the employee, or upon termination of the employee’s employment without cause or by the employee for good reason, as those terms are defined in the applicable PSU award agreement. In connection with his hiring as President and Chief Executive Officer on August 20, 2019, the Compensation Committee, with concurrence of the full Board of Directors, granted an additional PSU to Mr. Mukerjee, providing him with the opportunity to earn up to 6,116 shares of the Company’s common stock. This PSU was granted on the same terms as the PSUs granted in May 2019, except that this PSU was granted under the 2019 Plan and any shares earned pursuant to it on the basis of fiscal 2020 performance will vest in four equal installments beginning on the first anniversary of the commencement of the employment of Mr. Mukerjee and continue in calendar 2021, 2022 and 2023 on the same date as the other PSUs vest, provided that Mr. Mukerjee remains employed by the Company on each such date.

The PSUs cancelled during fiscal 2020 primarily related to the fiscal 2019 grant of PSUs, which also had a one-year measurement period (fiscal 2019). The PSUs were cancelled because the applicable fiscal 2019 performance targets were not fully attained. Per the provisions of the 1994 Plan, the shares related to these forfeited and cancelled PSUs were added back to the 1994 Plan and became available for future issuance under the 1994 Plan.

If all PSUs granted thus far in fiscal 2020 are assumed to be earned on account of the applicable performance metrics being fully met, or otherwise in accordance with terms of the applicable award agreement, total unrecognized compensation costs on these PSUs plus all earned but unvested PSUs would be approximately $0.9 million as of September 29, 2019, and would be expensed through fiscal 2023. To the extent the maximum number of PSUs granted in fiscal 2020 are not earned, stock-based compensation related to these awards will differ from this amount.

Restricted Stock Units: The Company has made annual RSU awards under the 1994 Plan to its non-employee directors over recent years. On May 10, 2019, the Compensation Committee approved the grant of an aggregate of 21,000 RSUs, ratably to the six non-employee directors, including the Chairman of the Board of the Company. These RSU awards provide for the issuance of shares of the Company’s common stock in four equal installments beginning on May 10, 2020 and continuing on the same date in 2021, 2022 and 2023, provided that the director remains associated with the Company on each such date (or meets other criteria as prescribed in the applicable award agreement).

On August 8, 2017, the Compensation Committee, with the concurrence of the full Board of Directors, approved the grant of an aggregate of up to 56,000 RSUs to several senior executives. The number of shares earned by a recipient is determined by multiplying the number of RSUs covered by the award by a fraction, the numerator of which is the cumulative amount of dividends (regular, ordinary and special) declared and paid, per share, on the Common Stock, over an earnings period of up to four years, and the denominator of which is $3.20. Subject to earlier issuance upon the occurrence of certain events (as described in the applicable award agreement), any earned shares are issued and distributed to the recipient upon the fourth anniversary of the award date. As of September 29, 2019, 8,000 of these 56,000 RSUs have been canceled due to employee departures, leaving 48,000 of the 56,000 RSUs outstanding. An additional 2,000 RSU’s with similar terms (but with a shorter earnings period) were awarded in fiscal 2019, and in connection with his hiring as our new President and Chief Executive Officer, the Company issued an additional RSU grant to Mr. Mukerjee under the 2019 Plan for

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19,000 shares and with similar terms (a four-year earning period and a denominator of $3.20).  As a result, an aggregate of 69,000 dividend-based RSUs currently remain outstanding.

As of September 29, 2019, there was approximately $0.9 million of total unrecognized compensation cost related to all outstanding RSUs, assuming all shares are earned. Unrecognized compensation costs are expected to be recognized ratably over a weighted average period of approximately three years.

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

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

StockOptions: As summarized below, in the first six months of fiscal 2020, stock options for an aggregate of 135,000 shares of common stock were granted, all under the 1994 Plan. These stock options have exercise prices equal to the market price of the Company’s stock on the grant date, and the terms thereof provide for 25% vesting after one year and then 1/36 per month over the following three years, subject, however, to acceleration upon the occurrence of certain events, as described in the applicable award agreement. The grant date value of the Company’s stock options is determined using the Black-Scholes-Merton pricing model, based upon facts and assumptions existing at the date of grant.

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

The following tables summarize the pertinent information for outstanding options.

	Six Months	Weighted
	Ended	Average Fair
	September 29,	Value at Grant
	2019	Date (per unit)
Outstanding, beginning of period	591,500	$	2.30
Options Granted	135,000		3.91
Options Exercised	(48,125)		2.25
Outstanding, end of period	678,375		2.63
Vested and exercisable, end of period	339,145	$	2.22

				September 29, 2019
Grant Fiscal Year	Options Granted		Option Exercise Price	Options Outstanding	Options Exercisable
2020	135,000	$	18.03	135,000	-
2019	66,500	$	16.31	61,500	12,479
2018	230,000	$	15.12	131,250	62,708
2017	410,000	$	12.57	310,625	223,958
2016	100,000	$	22.42	40,000	40,000
Total				678,375	339,145

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Grant Fiscal Year	Expected Stock Price Volatility		Risk-Free Interest Rate		Expected Dividend Yield		Average Expected Term	Resulting Black Scholes Value
2020	36.21	%	2.70	%	4.44	%	4.0	$	3.91
2019	35.59	%	3.11	%	4.99	%	4.0	$	3.38
2018	32.63	%	1.96	%	5.34	%	4.0	$	2.57

As of September 29, 2019, there was approximately $0.9 million of total unrecognized compensation costs related to these options. These unrecognized compensation costs are expected to be recognized ratably over a period of approximately three years. 

Note 4. Borrowings Under Revolving Credit Facility

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

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

Borrowings under the Amended and Restated Credit Agreement initially accrue interest from the applicable borrowing date at an Applicable Rate equal to the Eurodollar Rate plus the Applicable Margin. The Eurodollar Rate is the rate per annum obtained by dividing (i) LIBOR by (ii) a percentage equal to 1.00 minus the Eurodollar Reserve Percentage. When the Applicable Rate is the Eurodollar Rate plus the Applicable Margin, the Applicable Margin is 1.50% if Average Availability is greater than or equal to $15 million, and 1.75% otherwise.  On September 29, 2019, the interest rate applicable to borrowings under the secured Revolving Credit Facility was 3.61%. Under certain circumstances, the Applicable Rate is subject to change at the Lenders’ option from the Eurodollar Rate plus the Applicable Margin to the Base Rate plus the Applicable Margin.  Following an Event of Default, in addition to changing the Applicable Rate to the Base Rate plus the Applicable Margin, the Lenders’ may at their option set the Applicable Margin at 0.50% if the Base Rate applies or 1.75% if the Eurodollar Rate applies, and increase the Applicable Rate by an additional 200 basis points.

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The Applicable Rate adjusts on the first Business Day of each calendar month.  The Company is required to pay a monthly Commitment Fee on the average daily unused portion of the secured Revolving Credit Facility provided for pursuant to the Amended and Restated Credit Agreement, at a per annum rate equal to 0.25%.

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

Borrowings may be used for working capital and other general corporate purposes, and as further provided in, and subject to the applicable terms of, the Amended and Restated Credit Agreement. As of September 29, 2019, borrowings under the secured Revolving Credit Facility totaled $35.3 million and, therefore, the Company had $39.7 million available for borrowing as of September 29, 2019, subject to the Borrowing Base limitation and compliance with the other applicable terms of the Amended and Restated Credit Agreement, including the covenants referenced above. The line of credit has a lockbox arrangement associated with it and therefore the outstanding balance is classified as a current liability on our balance sheet.  As of March 31, 2019, borrowings under the secured Revolving Credit Facility totaled $14.4 million and, therefore, the Company had $60.6 million available on its revolving line of credit facility as of March 31, 2019, again subject to the Borrowing Base limitation and compliance with the other applicable terms of the Amended and Restated Credit Agreement, including the covenants referenced above.

Note 5. Earnings Per Share

The Company presents the computation of earnings per share (“EPS”) on a basic and diluted basis. Basic EPS is computed by dividing net income by the weighted average number of shares outstanding during the reported period. Diluted earnings per share is computed similarly to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential additional common shares that were dilutive had been issued. Common shares are excluded from the calculation if they are determined to be anti-dilutive. At September 29, 2019, stock options with respect to 678,375 shares of common stock were outstanding, of which 229,000 were anti-dilutive. At September 30, 2018, stock options with respect to 574,000 shares of common stock were outstanding, of which 50,000 were anti-dilutive. There were no anti-dilutive PSUs or RSUs outstanding as of September 29, 2019 or September 30, 2018, respectively.

Note 6. Business Segments

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

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resellers and integrators, which results from the consolidation of our previously identified value-added resellers, government channels and private system operator markets, and reflects implementation over the 2019 fiscal year of an enhanced go-to-market strategy. This go-to-market strategy and the corresponding consolidation of these customer markets is designed to increase sales opportunities across the consolidated markets, as well as to provide better coverage to customers and to better align territories with supplier partners.

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

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

· Base Station Infrastructure - Base station infrastructure products are used to build, repair and upgrade wireless telecommunications systems. Products include base station antennas, cable and transmission lines, small towers, lightning protection devices, connectors, power systems, miscellaneous hardware, and mobile antennas. Base station infrastructure service offerings include connector installation, custom jumper assembly, site kitting and logistics integration.

· Network Systems - Network systems products are used to build and upgrade computing and internet networks.  Products include fixed and mobile broadband equipment, distributed antenna systems (DAS), wireless networking, filtering systems, two-way radios and security and surveillance products.  This product category also includes training classes, technical support and engineering design services. 

· Installation, Test and Maintenance - Installation, test and maintenance products are used to install, tune, maintain and repair 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 and replacement and component parts and supplies required by service technicians.  

· Mobile Device Accessories - Mobile device accessories include cellular phone and data device accessories such as replacement batteries, cases, speakers, mobile amplifiers, power supplies, headsets, mounts, car antennas, music accessories and data and memory cards. Retail merchandising displays, promotional programs, customized order fulfillment services and affinity-marketing programs, including private label internet sites, complement our mobile devices and accessory product offering.

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

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Segment activity for the second quarter and first six months of fiscal years 2020 and 2019 are as follows (in thousands):

	Three Months Ended
	September 29, 2019						September 30, 2018
	Commercial		Retail				Commercial		Retail
	Segment		Segment		Total		Segment		Segment		Total
Revenues
Public carrier	$	39,169	$	—	$	39,169	$	39,694	$	—	$	39,694
Value-added resellers and integrators		64,482		—		64,482		68,650		—		68,650
Retail		—		38,160		38,160		—		50,292		50,292
Total revenues	$	103,651	$	38,160	$	141,811	$	108,344	$	50,292	$	158,636
Gross Profit
Public carrier	$	4,860	$	—	$	4,860	$	4,780	$	—	$	4,780
Value-added resellers and integrators		15,324		—		15,324		16,912		—		16,912
Retail		—		6,135		6,135		—		9,703		9,703
Total gross profit	$	20,184	$	6,135	$	26,319	$	21,692	$	9,703	$	31,395
Directly allocable expenses		7,868		3,011		10,879		8,562		4,544		13,106
Segment net profit contribution	$	12,316	$	3,124		15,440	$	13,130	$	5,159		18,289
Corporate support expenses						15,201						16,616
Income before provision for income taxes					$	239					$	1,673

	Six Months Ended
	September 29, 2019						September 30, 2018
	Commercial		Retail				Commercial		Retail
	Segment		Segment		Total		Segment		Segment		Total
Revenues
Public carrier	$	72,655	$	—	$	72,655	$	80,054	$	—	$	80,054
Value-added resellers and integrators		129,676		—		129,676		134,197		—		134,197
Retail		—		70,209		70,209		—		95,304		95,304
Total revenues	$	202,331	$	70,209	$	272,540	$	214,251	$	95,304	$	309,555
Gross Profit
Public carrier	$	9,113	$	—	$	9,113	$	10,406	$	—	$	10,406
Value-added resellers and integrators		31,293		—		31,293		32,829		—		32,829
Retail		—		11,177		11,177		—		18,858		18,858
Total gross profit	$	40,406	$	11,177	$	51,583	$	43,235	$	18,858	$	62,093
Directly allocable expenses		17,438		6,026		23,464		16,643		8,353		24,996
Segment net profit contribution	$	22,968	$	5,151		28,119	$	26,592	$	10,505		37,097
Corporate support expenses						31,410						33,862
Income before provision for income taxes					$	(3,291)					$	3,235

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Supplemental revenue and gross profit information by product category for the second quarter and first six months of fiscal years 2020 and 2019 are as follows (in thousands):

	Three Months Ended
	September 29, 2019		September 30, 2018
Revenues
Base station infrastructure	$	71,473	$	75,515
Network systems		22,855		22,564
Installation, test and maintenance		7,240		8,891
Mobile device accessories		40,243		51,666
Total revenues	$	141,811	$	158,636
Gross Profit
Base station infrastructure	$	14,565	$	15,534
Network systems		3,463		3,561
Installation, test and maintenance		1,229		1,803
Mobile device accessories		7,062		10,497
Total gross profit	$	26,319	$	31,395

	Six Months Ended
	September 29, 2019		September 30, 2018
Revenues
Base station infrastructure	$	140,542	$	149,829
Network systems		45,407		45,341
Installation, test and maintenance		13,265		16,322
Mobile device accessories		73,326		98,063
Total revenues	$	272,540	$	309,555
Gross Profit
Base station infrastructure	$	29,086	$	31,250
Network systems		7,390		7,224
Installation, test and maintenance		2,313		3,276
Mobile device accessories		12,794		20,343
Total gross profit	$	51,583	$	62,093

Note 7. Leases

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

The lease for the Company’s office space located at 375 West Padonia Road, Timonium, Maryland, 21093, and which includes approximately 102,164 rentable square feet, had been scheduled to end in December 2020. In July 2019, the Company entered into an amendment to the lease agreement to extend the lease term to December 15, 2025. Under the terms of this amendment, the base rental rate during the extended lease term ranges from $200,071 to $220,841 per month.

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

		Three Months Ended
		September 29, 2019
Operating lease expense	$	852,200
		As of September 29, 2019
Maturities of discounted lease liabilities by fiscal year are as follow:
2020	$	1,526,663
2021		2,795,426
2022		2,661,758
2023		2,499,629
2024		2,543,508
Thereafter		4,592,305
Total		16,619,289
Less: present value discount		(2,739,389)
Present value of lease liabilities	$	13,879,900
Weighted-average discount rate:
Operating leases		4.0%

Note 8. Shares Withheld

The Company withholds shares of common stock from its employees and directors at their request, equal to the minimum federal and state tax withholdings or proceeds due to the Company related to vested PSUs, stock option exercises and vested RSUs. For the six months ended September 29, 2019 and September 30, 2018, the aggregate value of the shares withheld totaled $870,200 and $111,100, respectively.

Note 9. Concentration of Risk

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

For the fiscal quarter ended September 29, 2019, revenue from the Company’s largest customer accounted for 10.5% of total consolidated revenues. For the six months ended September 29, 2019 and the fiscal quarter and six months ended September 30, 2018, no customer accounted for more than 10% of total consolidated revenues.

For the fiscal quarter ended September 29, 2019, sales of products purchased from the Company’s largest wireless infrastructure supplier accounted for 21.9% of consolidated revenue. For the fiscal quarter ended September 30, 2018, sales of products purchased from the Company’s largest wireless infrastructure supplier accounted for 17.0% consolidated revenue. No other suppliers accounted for more than 10% of consolidated revenue.

For the six months ended September 29, 2019, sales of products from the Company’s largest wireless infrastructure supplier accounted for 21.7% of consolidated revenue. For the six months ended September 30, 2018, sales of products from the Company’s largest wireless infrastructure supplier accounted for 15.6% of consolidated revenue. No other suppliers accounted for more than 10% of consolidated revenue.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. This commentary should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations from the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019.

Business Overview and Environment

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

The Company evaluates its business within two segments: commercial and retail. The commercial segment consists of the following customer markets:  (1) public carriers, that are generally responsible for building and maintaining the infrastructure system and provide airtime service to individual subscribers; and (2) value-added resellers and integrators, which results from the consolidation of our previously identified value-added resellers, government channels and private system operator markets, and reflects implementation over the 2019 fiscal year of an enhanced go-to-market strategy. This go-to-market strategy and the corresponding consolidation of these customer markets is designed to increase sales opportunities across the consolidated markets, as well as to provide better coverage to customers and to better align territories with supplier partners. The retail segment consists of the retail market which includes retailers, independent dealer agents and carriers.

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

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

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also be affected by wireless carrier consolidation or the overall global economic environment.

The wireless communications distribution industry is competitive and fragmented and is comprised of several national distributors. In addition, many manufacturers sell direct. Barriers to entry for distributors are relatively low, particularly in the mobile devices and accessories market, and the risk of new competitors entering the marketplace is high. Consolidation of larger wireless carriers has and will most likely continue to impact our current and potential customer base. Our ability to maintain customer and supplier relationships is subject to competitive pressures and challenges. We believe, however, that our strength in service, the breadth and depth of our product offering, our information technology system, industry experience and knowledge, and our large customer base and purchasing relationships with approximately 400 manufacturers, provide us with a significant competitive advantage over new entrants to the marketplace.

Results of Operations

Second Quarter of Fiscal Year 2020 Compared with Second Quarter of Fiscal Year 2019

Total Revenues. Revenues for the second quarter of fiscal 2020 decreased 10.6% compared with the second quarter of fiscal 2019. Revenues in our public carrier market, value-added resellers and integrators market and retail market decreased by 1.3%, 6.1% and 24.1%, respectively. The decline in the commercial segment was primarily due to a decrease in revenue in our value-added resellers and integrators market where we are not yet realizing the full benefits of our sales reorganization. The decline in the retail segment was driven by significantly lower revenues from one of our more significant retail customers following its acquisition during the fourth quarter of fiscal 2019, change in business model and subsequent transition of its business elsewhere, as well as ongoing overall market softness.

Total Gross Profit. Gross profit for the second quarter of fiscal 2020 decreased by 16.2% compared to the second quarter of fiscal 2019. This decrease was primarily due to lower sales volume combined with the impact of tariffs. Overall gross profit margin decreased from 19.8% in the second quarter of fiscal 2019 to 18.6% in the second quarter of fiscal 2020. Within our commercial segment, gross profit margin in our public carrier market increased from 12.0% to 12.4% due to changes in customer mix. Gross profit margin in our value-added resellers and integrators market decreased from 24.6% to 23.8%. This decline was due to a change in product mix, including lower sales of our higher margin Ventev products in the second quarter of fiscal 2020. Within our retail segment, gross profit margin decreased from 19.3% to 16.1% in the second quarter of fiscal 2020, compared to 2019, primarily due to the impact of tariffs.

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

Selling, General, Administrative and Restructuring Expenses. Total selling, general and administrative expenses decreased by $3.7 million for the second quarter of fiscal 2020, compared to the second quarter of fiscal 2019. Selling, general and administrative expenses as a percentage of revenues decreased from 18.6% for the second quarter of fiscal 2019, to 18.2% for the second quarter of fiscal 2020.

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The decrease in our selling, general and administrative expenses was primarily due to a decrease of $1.5 in freight expense, $1.0 million in compensation expense, $0.7 million in rewards expense, and $0.6 million in marketing expense, during the second quarter of fiscal 2020 as compared to the second quarter of fiscal 2019. These decreases were largely due to the decline in overall revenues.

We continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate reserve based on this evaluation. We also evaluate the credit worthiness of prospective and current customers and make decisions regarding extension of credit terms to such customers based on this evaluation. We had bad debt recovery, net of expense, of $107,900 and bad debt expense of $665,100 for the three months ended September 29, 2019 and September 30, 2018, respectively.

Interest, Net. Net interest expense increased from $244,800 for the second quarter of fiscal 2019 to $335,100 for the second quarter of fiscal 2020. Increased focus on business opportunities for sales to our public carrier customers has required us to maintain increased inventory levels, and at times has resulted in increased borrowings and interest expense under our secured Revolving Credit Facility (discussed in Note 4 to our Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q). We expect this higher level of interest expense to continue for at least the next several quarters.

Income Taxes, Net Income and Diluted Earnings per Share. The effective tax rate increased from 28.8% for the second quarter of fiscal 2019 to 90.8% for the second quarter of fiscal 2020. The increase in the effective tax rate is the result of permanent and other tax adjustments remaining consistent year over year while pre-tax income decreased year over year. The significant increase in rates is also due to a change in estimated fiscal year pre-tax earnings from the first quarter of fiscal 2020 to the second quarter of fiscal 2020, resulting in a significant adjustment in this quarter’s rate. Net income decreased 98.2% and diluted earnings per share decreased 100% for the second quarter of fiscal 2020, compared to the corresponding prior-year quarter.

First Six Months of Fiscal Year 2020 Compared with First Six Months of Fiscal Year 2019

Total Revenues. Revenues for the first six months of fiscal 2019 decreased 12.0% compared with the first six months of fiscal 2019. Revenues in our public carrier market, value-added resellers and integrators market and retail market decreased by 9.2%, 3.4% and 26.3%, respectively. The decline in the commercial segment was primarily due to the project-oriented nature of this business. Several large customers adjusted their forecasts or pushed out their product requirements from the first six months into the remainder of the fiscal year. The decline in the retail segment was driven by significantly lower revenues from one of our more significant retail customers following its acquisition during the fourth quarter of fiscal 2019, change in business model and subsequent transition of its business elsewhere, as well as ongoing overall market softness.

Total Gross Profit. Gross profit for the first six months of fiscal 2020 decreased by 16.9% compared to the first six months of fiscal 2019. This decrease was primarily due to lower sales volume combined with the impact of tariffs. Overall gross profit margin decreased from 20.1% in the first six months of fiscal 2019 to 18.9% in the first six months of fiscal 2020. Within our commercial segment, gross profit margin in our public carrier market and value-added resellers and integrators market decreased slightly from 13.0% to 12.5%, and 24.5% to 24.1%, respectively due to changes in customer mix. Within our retail segment, gross profit margin decreased from 19.8% to 15.9% in the first six months of fiscal 2020, compared to 2019, primarily due to the impact of tariffs and inventory write-offs.

As discussed above under the heading “Business Overview and Environment,” our ongoing ability to earn revenues and gross profits from customers and suppliers depends upon a number of factors which often differ for each relationship. Agreements or arrangements on which these relationships are based typically do not

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include any obligation in respect of any specific product purchase or sale, are of limited duration, and are terminable by either party upon relatively short notice. We have been affected from time to time in the past by the loss and changes in the business habits of significant customer and supplier relationships, and expect that we will again be so affected from time to time in the future.  

Selling, General, Administrative and Restructuring Expenses. Total selling, general and administrative expenses decreased by $4.6 million for the first six months of fiscal 2020, compared to the first six months of fiscal 2019. Selling, general and administrative expenses as a percentage of revenues increased from 18.9% for the first six months of fiscal 2019, to 19.8% for the first six months of fiscal 2020.

The decrease in our selling, general and administrative expenses was primarily due to a decrease of $1.5 million in freight expense, $1.5 million in compensation expense, and $1.4 million in rewards expense, during the first six months of fiscal 2020 as compared to the first six months of fiscal 2019. These decreases were largely due to the decline in overall revenues.

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

We continually evaluate the credit worthiness of our existing customer receivable portfolio and provide an appropriate reserve based on this evaluation. We also evaluate the credit worthiness of prospective and current customers and make decisions regarding extension of credit terms to such customers based on this evaluation. We incurred bad debt expense, net of recovery,  of $27,500 and $1,021,300 for the six months ended September 29, 2019 and September 30, 2018, respectively.

Interest, Net. Net interest expense increased from $419,200 for the first six months of fiscal 2019 to $543,800 for the first six months of fiscal 2020. Increased focus on business opportunities for sales to our public carrier customers has required us to maintain increased inventory levels, and at times has resulted in increased borrowings and interest expense under our secured Revolving Credit Facility (discussed in Note 4 to our Consolidated Financial Statements, included in this Quarterly Report on Form 10-Q). We expect this higher level of interest expense to continue for at least the next several quarters.

Income Taxes, Net Income and Diluted Earnings per Share. The effective tax rate decreased from 27.4% for the first six months of fiscal 2019 to 24.9% for the first six months of fiscal 2020. Net income decreased 205.2% and diluted earnings per share decreased 207.4% for the first six months of fiscal 2020, compared to the first six months of fiscal 2019.

Liquidity and Capital Resources

The following table summarizes our cash flows provided by or used in operating, investing and financing activities for the six months ended September 29, 2019 and September 30, 2018.

	Six Months Ended
	September 29, 2019		September 30, 2018
Cash flow used in operating activities	$	(14,033,500)	$	(3,250,900)
Cash flow used in investing activities		(3,333,600)		(2,315,800)
Cash flow provided by financing activities		17,445,000		5,547,300
Net increase (decrease) in cash and cash equivalents	$	77,900	$	(19,400)

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We used $14.0 million of net cash from operating activities for the first six months of fiscal 2020, compared with net cash used in operating activities of $3.3 million for the first six months of fiscal 2019. This fiscal 2020 outflow was driven by a net loss and an increase in inventory. Both current and potential opportunities within our public carrier business caused a significant investment in inventory.

Net cash used in investing activities of $3.3 million for the first six months of fiscal 2020 increased from cash used of $2.3 million for the first six months of fiscal 2019. Cash used in both periods was due to capital expenditures largely comprised of investments in information technology.

Net cash provided by financing activities was $17.4 million for the first six months of fiscal 2020, compared to $5.5 million provided in the first six months of fiscal 2019. We utilized our asset based secured Revolving Credit Facility during the first six months of fiscal 2020 and 2019, leading to a cash inflow of $20.9 million and $8.9 million, respectively, during those periods. We had cash outflows of $3.4 million during the first six months of both fiscal 2020 and fiscal 2019, due to cash dividends paid to shareholders.

On October 19, 2017, the Company and its primary operating subsidiaries, as co-borrowers, entered into an Amended and Restated Credit Agreement with SunTrust Bank, as Administrative Agent, and Wells Fargo Bank, National Association, as a lender (the “Amended and Restated Credit Agreement”), which amended and restated the terms of a previously established secured Revolving Credit Facility and which resulted in, among other modifications, an increase in the Company’s borrowing limit to up to $75 million, from the previous borrowing limit of up to $35 million.  In addition to increasing the borrowing limit, and among other modifications, the Amended and Restated Credit Agreement extended the applicable maturity date to October 19, 2021. As of September 29, 2019, borrowings under the secured Revolving Credit Facility totaled $35.3 million; therefore, we then had $39.7 million available, subject to the Borrowing Base limitations and compliance with the other applicable terms of the Amended and Restated Credit Agreement, including the financial and other covenants discussed in Note 4 to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Borrowings under the Amended and Restated Credit Agreement accrue interest at the rates, and the Company is required to pay a monthly commitment fee, as also discussed in Note 4 to our Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

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

We have made quarterly dividend payments to holders of our common stock since the third quarter of fiscal 2010. Our most recent quarterly cash dividend of $0.20 per share was paid in August 2019. On October 29, 2019, our Board declared a quarterly cash dividend in the amount of $0.20 per share, payable on November 27, 2019 to shareholders of record as of November 13, 2019.

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.

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We believe that our existing cash, payments from customers and availability under our secured Revolving Credit Facility will be sufficient to support our operations for at least the next twelve months. To minimize interest expense, our policy is to apply excess available cash to reduce the balance outstanding from time to time on our secured Revolving Credit Facility.  Our increased focus over the past several quarters on business opportunities for sales to our public carrier customers led to the recent expansion of our secured Revolving Credit Facility, and has at times resulted in increased borrowings and dependence on that facility. We expect this trend to continue, although at present we have no plans for any further expansion of the facility.  If we were to undertake an acquisition or other major capital purchases that require funds in excess of existing sources of liquidity, we would look to sources of funding from additional credit facilities, debt and/or equity issuances. As of September 29, 2019, we do not have any material capital expenditure commitments.

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

Recent Accounting Pronouncements 

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

Critical Accounting Policies and Estimates

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

For a detailed discussion on our critical accounting policies, please refer to our Annual Report on Form 10-K for the fiscal year ended March 31, 2019.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements.

Forward-Looking Statements

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

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Quarterly Report on Form 10-Q, and other periodic reports filed with the SEC, under the heading “Risk Factors” and otherwise. Consequently, the reader is cautioned to consider all forward-looking statements in light of the risks to which they are subject.

We are not able to identify or control all circumstances that could occur in the future that may adversely affect our business and operating results. Without limiting the risks that we describe in our periodic reports and elsewhere, among the risks that could lead to a materially adverse impact on our business or operating results are the following: termination or non-renewal of limited duration agreements or arrangements with our vendors and affinity partners that are typically terminable by either party upon several months or otherwise relatively short notice; loss of significant customers or relationships, including affinity relationships; loss of customers either directly or indirectly as a result of consolidation among large wireless service carriers and others within the wireless communications industry; the strength of our customers', vendors' and affinity partners' business; increasingly negative or prolonged adverse economic conditions, including those adversely affecting consumer confidence or consumer or business spending, or otherwise adversely affecting our vendors or customers, including their access to capital or liquidity or our customers’ demand for, or ability to fund or pay for, our products and services; our dependence on a relatively small number of suppliers and vendors, which could hamper our ability to maintain appropriate inventory levels and meet customer demand; changes in customer and product mix that affects gross margin; effect of “conflict minerals” regulations on the supply and cost of certain of our products; failure of our information technology system or distribution system; system security or data protection breaches; technology changes in the wireless communications industry, or technological failures, which could lead to significant inventory obsolescence and/or our inability to offer key products that our customers demand; third-party freight carrier interruption; increased competition, including from manufacturers or national and regional distributors of the products we sell and the absence of significant barriers to entry which could result in pricing and other pressures on profitability and market share; our relative bargaining power and inability to negotiate favorable terms with our vendors and customers; our inability to access capital and obtain financing as and when needed; claims against us for breach of the intellectual property rights of third parties; product liability claims; our inability to protect certain intellectual property, including systems and technologies on which we rely; our inability to hire or retain our key professionals, management and staff; and the possibility that, for unforeseen reasons, we may be delayed in entering into or performing, or may fail to enter into or perform, anticipated contracts or may otherwise be delayed in realizing or fail to realize anticipated revenues or anticipated savings.

Available Information

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

Item 4. Controls and Procedures.

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

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procedures required by Rules 13a-15(b) or 15d-15(b) of the Exchange Act, the Company’s management, including the CEO and CFO, have concluded that, as of the end of the period covered by this quarterly report, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. During the period covered by this quarterly report, there have been no changes to the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Lawsuits and claims are filed against us from time to time in the ordinary course of business. We do not believe that any lawsuits or claims currently pending against the Company, individually or in the aggregate, are material, or will have a material adverse effect on our financial condition or results of operations. In addition, from time to time, we are also subject to review from federal and state taxing authorities in order to validate the amounts of income, sales and/or use taxes which have been claimed and remitted. Currently, our California sales tax returns for the period January 1, 2016 through December 31, 2018 and Illinois sales tax returns for the period March 1, 2018 through July 31, 2018 are under examination by applicable taxing authorities.

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

Item 1A. Risk Factors.

There have been no material changes from the risk factors as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019. Nevertheless, information that we have disclosed or will disclose from time to time in our public filings (including this Quarterly Report on Form 10-Q and other periodic reports filed under the Exchange Act) may provide additional data or information relative to our previously disclosed risk factors. We are not able to identify or control all circumstances that could occur in the future that may adversely affect our business and operating results. Additional risks and uncertainties that management is not aware of or focused on, or that management currently deems immaterial may also adversely affect our business, financial position and results of operations.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

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Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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Item 6. Exhibits.  

(a) Exhibits:

31.1.1*	Certification of Chief Executive Officer required by Rule 13a–14(a) or 15d–14(a) of the Securities Exchange Act of 1934, as amended pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2.1*	Certification of Chief Financial Officer required by Rule 13a–14(a) or 15d–14(a) of the Securities Exchange Act of 1934, as amended pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1.1*	Certification of periodic report by Chief Executive Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2.1*	Certification of periodic report by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.1*	The following financial information from TESSCO Technologies, Incorporated’s Quarterly Report on Form 10-Q for the quarter ended September 29, 2019 formatted in XBRL: (i) Consolidated Statement of Income for the three and six months ended September 29, 2019 and September 30, 2018; (ii) Consolidated Balance Sheet at September 29 and March 31, 2019; (iii)  Consolidated Statement of Cash Flows for the six months ended September 29 and September 30, 2018; and (iv) Notes to Consolidated Financial Statements.

*Filed herewith

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Signature

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

		TESSCO Technologies Incorporated
Date:   November 8, 2019
	By:	/s/ Aric M. Spitulnik
		Aric Spitulnik
		Chief Financial Officer
		(principal financial and accounting officer)

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