TESSCO TECHNOLOGIES INC - Quarter Report: 2022 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

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FORM 10-Q

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Commission File Number: 001-33938

TESSCO Technologies Incorporated

(Exact name of registrant as specified in its charter)

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(410) 229-1000

(Registrant’s telephone number, including area code)

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

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

Yes ☑       No ☐

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

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

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

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

Yes ☐       No ☑

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The number of shares of the registrant’s Common Stock, $0.01 par value per share, outstanding as of October 24, 2022, was 9,205,508.

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TESSCO Technologies Incorporated

Index to Form 10-Q

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PART I. FINANCIAL INFORMATION

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Item 1. Financial Statements.

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TESSCO Technologies Incorporated

Unaudited Consolidated Balance Sheets

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See accompanying notes to unaudited consolidated financial statements.

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TESSCO Technologies Incorporated

Unaudited Consolidated Statements of Income (Loss)

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See accompanying notes to unaudited consolidated financial statements.

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TESSCO Technologies Incorporated

Unaudited Consolidated Statements of Changes in Shareholders’ Equity

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See accompanying notes to unaudited consolidated financial statements.

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TESSCO Technologies Incorporated

Unaudited Consolidated Statements of Cash Flows

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See accompanying notes to unaudited consolidated financial statements.

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TESSCO Technologies Incorporated

Notes to Unaudited Consolidated Financial Statements

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Note 1. Description of Business and Basis of Presentation

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TESSCO Technologies Incorporated, a Delaware corporation (TESSCO, we, or the Company), architects and delivers innovative product and value chain solutions to support wireless systems. The Company provides marketing and sales services, knowledge and supply chain management, product-solution delivery and control systems utilizing extensive internet and information technology. Approximately 98% of the Company’s sales are made to customers in the United States. The Company takes orders in several ways, including phone, fax, online and through electronic data interchange. Almost all of the Company’s sales are made in United States Dollars.

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In management’s opinion, the accompanying unaudited 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 unaudited 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 27, 2022, filed with SEC on May 26, 2022.

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On October 28, 2020, the Company entered into a definitive Inventory Purchase Agreement (the “Agreement”) which, at a closing held on December 2, 2020, resulted in the Company’s exit from its retail business through the sale to Voice Comm, LLC, a Delaware limited liability company (“Voice Comm”), of most of the Company’s retail inventory, the Ventev brand as it relates to mobile device accessory products, and certain other retail-related assets. The accompanying unaudited interim Consolidated Financial Statements for all periods presented reflect the results of the Retail segment as a discontinued operation. See Note 10, “Discontinued Operations”, for further information.

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Note 2. Recently Issued Accounting Pronouncements

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Recently issued accounting pronouncements not yet adopted:

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

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Note 3. Intangible Assets

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Intangible assets, net on our Consolidated Balance Sheets as of September 25, 2022, consists of capitalized software for internal use, indefinite-lived intangible assets, and an immaterial amount of costs capitalized for software to be sold. Capitalized software for internal use, net of accumulated amortization, was $35,213,800 and $29,463,100 as of September 25, 2022 and March 27, 2022, respectively. Amortization expense of capitalized software for internal use was $165,700 and $198,100 for the three months ended September 25, 2022 and September 26, 2021, respectively. Amortization expense of capitalized software for internal use was $355,200 and $395,200 for the six months ended September 25, 2022 and September 26, 2021, respectively. The Company continues to capitalize costs related to an ongoing information technology project, which will be amortized after the project has been completed and placed in-service. This project is expected to be completed during the fourth quarter of fiscal 2023.

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Indefinite-lived intangible assets were $795,400 as of September 25, 2022 and March 27, 2022.

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Note 4. Borrowings Under Revolving Credit Facility

On October 29, 2020, the Company entered into a Credit Agreement (the “Credit Agreement”) among the Company, the Company’s primary operating subsidiaries as co-borrowers, the Lender(s) party thereto from time to time, and Wells Fargo Bank, National Association (“Wells”), as Administrative Agent, swingline lender and an issuing bank. Terms used, but not defined, in this and the following paragraphs of this Note 4 have the meanings set forth in the Credit Agreement or the related Guaranty and Security Agreement. This facility replaced a previously existing credit facility among the Company and certain subsidiaries, the lenders party thereto (which included Wells) and Truist Bank (successor by merger to SunTrust Bank), as administrative agent. The discussion below is a summary and is qualified in its entirety by the actual terms of the Credit Agreement and related documents, including Amendment Nos. 1, 2, and 3, and references below to the Credit Agreement include such amendments, except where otherwise indicated.

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The Credit Agreement provides for a senior secured asset-based revolving credit facility of up to $80 million (the “2020 Revolving Credit Facility”), which matures on April 29, 2024. The 2020 Revolving Credit Facility includes a $5.0 million letter of credit sublimit and provides for the issuance of Swingline Loans. The applicable Credit Agreement also includes a provision permitting the Company, subject to certain conditions, to increase the aggregate amount of the commitments under the 2020 Revolving Credit Facility to an aggregate commitment amount of up to $125 million with optional additional commitments from then existing Lenders or new commitments from additional lenders, although no Lender is obligated to increase its commitment. Availability is determined in accordance with the Borrowing Base, which is generally 85% of Eligible Accounts minus the Dilution Reserve, plus a calculated value of Eligible Inventory aged less than 181 days plus the lesser of an Aged Inventory Cap (currently $2,500,000 and which reduces over time to $2,000,000) and a calculated value of Inventory aged more than 180 days minus a calculated Reserve, as further detailed and set forth in the Credit Agreement.

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Borrowings initially accrued interest from the applicable borrowing date:  (A) if a LIBOR Rate Loan, (i) if the Fixed Charge Coverage Ratio was less than 1.10:1.00, then the LIBOR Rate plus 2.25% or (ii) if the Fixed Charge Coverage Ratio was greater than or equal to 1.10:1.00, then the LIBOR Rate plus 2.00%; (B) if a Base Rate Loan, (i) if the Fixed Charge Coverage Ratio was less than 1.10:1.00, then the Base Rate plus 1.25% or (ii) if the Fixed Charge Coverage Ratio was greater than or equal to 1.10:1.00, then the Base Rate plus 1.00%. Pursuant to Amendment No. 3, the Base Rate Margin was changed and is now equal to 1.25% through December 31, 2022 and at all times thereafter that the Monthly Average Excess Availability for the most

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recently ended calendar month is less than 40% of the Maximum Revolver Amount, or 1.00%, if, after December 31, 2022, the Monthly Average Excess Availability is equal to or more than 40% of the Maximum Revolver Amount; and the LIBOR Rate Margin (or the Daily One Month LIBOR Rate Margin for LIBOR Rate Loans determined by reference to the Daily One Month LIBOR), is now equal to 2.25% through December 31, 2022 and at all times thereafter that the Monthly Average Excess Availability for the most recently ended calendar month is less than 40% of the Maximum Revolver Amount, or 2.00% if, after December 31, 2022, equal to or more than 40% of the Maximum Revolver Amount. The Credit Agreement previously contained a LIBOR floor of 0.25% so that if the LIBOR Rate is below 0.25%, then the LIBOR Rate will be deemed to be equal to 0.25% for purposes of the Credit Agreement, but that floor is now equal to 0.00%

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

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The Credit Agreement initially contained one financial covenant, a Fixed Charge Coverage Ratio, which under the terms of the Credit Agreement as initially established, was tested only if Excess Availability (generally, borrowing availability less the aggregate of trade payables and book overdrafts, each in excess of historical amounts) was less than the greater of (a) 16.7% of the maximum amount of the Credit Facility (at closing, $12,525,000) and (b) $12,500,000. The application of this covenant and the Excess Availability requirement have since been modified pursuant to Amendment No. 3 discussed below. In addition, the Credit Agreement contains provisions that could limit our ability to engage in specified transactions or activities, including (but not limited to) investments and acquisitions, sales of assets, payment of dividends, issuance of additional debt and other matters.

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Borrowings under the 2020 Revolving Credit Facility were initially used to pay all indebtedness outstanding under the previously existing credit facility among the Company and certain subsidiaries, the lenders party thereto and Truist Bank as administrative agent, and may be used for working capital and other general corporate purposes, and as further provided in, and subject to the applicable terms of, the Credit Agreement. As amended as discussed below, the 2020 Revolving Credit Facility currently provides for borrowings of up to $80.0 million. As of September 25, 2022, borrowings under the 2020 Revolving Credit Facility totaled $53.5 million and, therefore, the Company had $26.5 million available for borrowing, subject to the Borrowing Base limitation and compliance with the other applicable terms referenced here, including the Availability Block discussed below. The 2020 Revolving Credit Facility has no lockbox arrangement associated with it and, therefore the outstanding balance is classified as a long-term liability on the Consolidated Balance Sheet as of September 25, 2022. Accordingly, borrowings from and repayments to the Company’s current line of credit are reflected on a gross basis in the cash flows from financing activities in the Consolidated Statements of Cash Flows.

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

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

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Pursuant to a related Guaranty and Security Agreement, by and among the Company, the other borrowers under

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

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The 2020 Revolving Credit Facility also 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 twelve 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 $20,000,000 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 $13,280,000.  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.

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On September 25, 2022, the interest rate applicable to borrowings under the 2020 Revolving Credit Facility was 5.33%. The weighted average interest rate on borrowings under the Company’s Revolving Credit Facility for the second quarter of fiscal year 2023 was 4.71%. 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.

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Following an Event of Default, the Lenders may at their option increase the applicable per annum rate to a rate equal to two percentage points above the otherwise applicable rate and, with certain events of default, such increase is automatic, and, at the written election of the Agent or the Required Lenders at any time while an Event of Default exists, the Company will no longer have the option to request that revolving loans be based on the LIBOR Rate or the Daily One Month Libor Rate.

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Amendment No. 1

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Pursuant to Amendment No. 1 to Credit Agreement dated July 12, 2021 (“Amendment No. 1”), between Tessco and Wells, Wells agreed to a 25-basis point reduction in certain otherwise applicable rates and fees over an agreed period, and the Company and Wells agreed to, among others, certain changes related to the LIBOR rate option to simplify day-to-day management of the 2020 Revolving Credit Facility. These terms have since been further amended and, pursuant to Amendment No. 3 (as defined below), these interest rate terms have been superseded, with the methodology for determining the Applicable Margin now as discussed above.

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Amendment No. 2

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In anticipation of TESSCO Reno Holding, LLC (“Reno Holding”) entering into the Real Estate Note of Reno Holding (the “Note”), as discussed further in Note 5, the Company, TESSCO Inc. and our other operating subsidiaries, and Wells, entered into Amendment No. 2 to Credit Agreement and Consent dated December 29, 2021 (“Amendment No. 2”). Pursuant to Amendment No. 2, and subject to its terms and conditions, among

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other things, Wells consented to the Note, without requiring that Reno Holding become a borrower or guarantor under the Credit Agreement.

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Amendment No. 3

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On January 5, 2022, at the Company’s request, the Company and its operating subsidiaries, and Wells, entered into Amendment No. 3 to Credit Agreement and Amendment No. 1 to Guaranty and Security Agreement (“Amendment No. 3”), subject to the terms and conditions of which Wells agreed to increase the Commitment under the 2020 Revolving Credit Facility from $75 million to $80 million. Among the terms and conditions, the Company agreed to revert to the interest rate margins originally provided for under the terms of the 2020 Revolving Credit Facility (and which had previously been modified pursuant to Amendment No. 1 to Credit Agreement), as well as change to the methodology for determining the Applicable Margin, as discussed above, and agreed to a $10 million Availability Block for calendar year 2022, but was relieved of any Fixed Charge Coverage Ratio testing for the same period without regard to the amount of Excess Availability during that period. Commencing January 1, 2023, a $15 million Excess Availability requirement will be imposed unless a Fixed Charge Coverage Ratio of 1:1 is achieved. As of September 25, 2022, the Company does not currently meet the Fixed Charge Covenant Ratio. As a result, our availability under the Revolving Credit Facility for the remainder of calendar 2022 is $70 million after accounting for the Availability Block and will be reduced to $65 million on January 1, 2023 upon expiration of the Availability Block and anticipated re-imposition of the Excess Availability requirement, in each case subject to the Borrowing Base limitations and compliance with the other terms.

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Note 5. Debt

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On December 30, 2021, 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 (“Symetra”). The indebtedness is evidenced by 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. The Note and related obligations are secured by a Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing (the “Deed of Trust”) on the Reno Facility. The net proceeds from this borrowing transaction (the “Symetra Loan”) have since been applied to repayment of a portion of the revolving balance under the Company’s 2020 Revolving Credit Facility. An additional $250,000 is to be advanced under the Symetra Loan after roof and possible related repairs to the Reno Facility are satisfactorily completed. The Symetra Loan is limited recourse to the Reno Facility, with typical exceptions in which case it is recourse to Reno Holding, a special purpose entity formed by the Company to own the Reno Facility and related assets.

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The principal maturities of debt outstanding at September 25, 2022, were as follows:

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Note 6. Earnings Per Share

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The Company presents the computation of earnings per share (“EPS”) on a basic and diluted basis. Basic EPS is computed by dividing net income by the weighted average number of shares outstanding during the reported period. Diluted EPS is computed similarly to basic EPS, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential additional common shares that were dilutive had been issued. Common shares are excluded from the calculation if they are determined to be anti-dilutive. The number of diluted weighted-average common shares was 9,179,239 for the three months ended September 25, 2022, and 9,173,418 for the six months ended September 25, 2022. At September 25, 2022, stock options with respect to 709,500 shares of common stock were outstanding, of which 614,500 were anti-dilutive and not included in diluted EPS because the stock options’ exercise price was greater than the average market price of the common shares. There were no anti-dilutive performance stock units (“PSUs”) or restricted stock units (RSUs”) outstanding as of September 25, 2022.

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Note 7. Business Segments

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The Company has two reportable segments, Carrier and Commercial, which are identified based on the information reviewed by the Chief Operating Decision Maker (“CODM”) and are consistent with how the business is managed. 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. Ventev®, the Company’s proprietary brand that manufactures products, is primarily included in the Commercial segment. There is a mix of products that the Company sells that are marketed to both segments, as well as certain product classes that primarily serve one segment. As a value-add distributor of products from over 300 manufacturers, the Company sells products across a large number of product groups and industries and, as a result, it is impracticable to provide segment information at the product group level. 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.

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Segment activity for the second quarter and first six months of fiscal years 2023 and 2022 are as follows (in thousands):

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The table below presents total assets by reportable segments. For the Carrier and Commercial segments, total assets are primarily comprised of accounts receivable.

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The CODM reviews segment results using Gross profit as the segment measure of profit or loss and the Company does not allocate expenses below Gross profit to the segments.

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Note 8. Shares Withheld

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The Company withholds shares of common stock from its employees and directors at their request, equal to the minimum federal and state tax withholdings or proceeds due to the Company related to vested PSUs, stock option exercises and vested RSUs. For the six months ended September 25, 2022 and September 26, 2021, the aggregate value of the shares withheld totaled $158,100 and $66,400, respectively.

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Note 9. Concentration of Risk

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

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For the three and six months ended September 25, 2022 and September 26, 2021, no customers accounted for more than 10% of consolidated revenues in any period.

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For the three months ended September 25, 2022 and September 26, 2021, sales of products purchased from the Company’s largest supplier accounted for 31.4% and 29.0% of revenue from continuing operations, respectively. No other suppliers accounted for more than 10% of consolidated revenues in either quarter.

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For the six months ended September 25, 2022 and September 26, 2021, sales of products purchased from the Company’s largest supplier accounted for 31.4% and 31.1% of revenue from continuing operations, respectively. No other suppliers accounted for more than 10% of consolidated revenues in either period.

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Note 10. Discontinued Operations

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At a closing on December 2, 2020, the Company sold most of its retail inventory, the Ventev brand as it relates to mobile device accessory products, and certain other retail-related assets to Voice Comm, LLC (“Voice Comm”). As part of the sale agreement, the Company is entitled to royalty payments of up to $3.0 million in the aggregate on the sale of Ventev branded products by Voice Comm over a four-year period after the closing.

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

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The accompanying unaudited interim Consolidated Financial Statements for all periods presented reflect the results of the Retail segment as a discontinued operation. The following table presents the financial results of the Retail segment for the three and six months ended September 25, 2022 and September 26, 2021:

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

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In our Consolidated Statements of Cash Flows, the cash flows from discontinued operations are not separately classified. Cash provided by operating activities from discontinued operations for the six months ended September 25, 2022 and September 26, 2021 was $0.6 million and $4.6 million, respectively.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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This commentary should be read in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 27, 2022, filed with the SEC on May 26, 2022.

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Business Overview and Environment

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TESSCO architects and delivers innovative product and value chain solutions to support wireless systems. Although we sell products to customers in many countries, approximately 98% of our sales are made to customers in the United States. We have operations and office facilities in Hunt Valley, Maryland, and Reno, Nevada.

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On December 2, 2020, we sold most of our Retail inventory and certain other retail-related assets to Voice Comm and exited the retail business. As a result of the disposal, the operating results of our former Retail segment have been included in Income (loss) from discontinued operations, net of taxes in the Consolidated Statements of Income (Loss) for all periods presented.

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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 providing airtime service to individual subscribers and Commercial includes value-added resellers, the government channel, and private system operator markets.

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We offer a wide range of products that are classified into three categories: base station infrastructure; network systems; and installation, test, and maintenance. Base station infrastructure products are used to build, repair, and upgrade wireless telecommunication networks. 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.

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The wireless communications distribution industry is competitive and fragmented, and is comprised of several national distributors. In addition, many manufacturers sell direct to end-user customers. 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 and depends upon a number of factors that often differ for each relationship. We believe, however, that our strength in service, the breadth and depth of our product offerings, our large customer base, and our purchasing relationships with approximately 300 manufacturers provide us with a significant competitive advantage over new entrants to the market.

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Results of Continuing Operations

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Second quarter of Fiscal Year 2023 Compared with Second quarter of Fiscal Year 2022

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Total Revenues. Revenues for the second quarter of fiscal 2023 increased 11.0% compared with the second quarter of fiscal 2022. Revenues in our Commercial segment increased 11.3%, and revenue in our Carrier segment increased 10.7%.  This increase in the Carrier segment was primarily due to gaining additional market share and increased customer pricing. The increase in Commercial segment revenues was primarily attributable to gaining additional market share, a more favorable product mix, and increased customer pricing.

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Cost of Goods Sold. Cost of goods sold for the second quarter of fiscal 2023 increased 8.6% compared with the second quarter of fiscal 2022. Cost of goods sold in our Commercial and Carrier segments increased by 8.2% and 8.9%, respectively. The increase in cost of goods sold in both segments was largely driven by changes in revenues, as discussed above.

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Total Gross Profit. Gross profit for the second quarter of fiscal 2023 increased by 22.2% compared to the second quarter of fiscal 2022. This increase was primarily due to increased revenues, a more favorable customer and product mix, and increased freight charged to customers. Overall gross profit margin increased from 18.2% in the second quarter of fiscal 2022 to 20.1% in the second quarter of fiscal 2023. Gross profit margin in our Carrier segment increased to 13.2% from 11.9% in the same quarter last year. Gross profit margin in our Commercial segment increased to 25.2% in the second quarter of fiscal 2023 from 23.1% in the same quarter last year. The gross margin improvement in the Carrier segment is primarily related to changes in customer and product mix. The gross margin increase in the Commercial segment is primarily attributable to product and customer mix, including higher sales of our higher margin Ventev^® products. Gross margins in both segments were positively impacted by higher freight charged to customers in response to and to partially offset increased freight costs incurred, which is included in selling, general, and administrative expenses.

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Selling, General and Administrative Expenses. Total selling, general and administrative expenses increased by 8.1% or $1,705,100 for the second quarter of fiscal 2023, compared to the second quarter of fiscal 2022. Selling, general and administrative expenses as a percentage of revenues decreased from 19.3% for the second quarter of fiscal 2022, to 18.8% for the second quarter of fiscal 2023.

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The increase in our selling, general and administrative expenses was primarily due to an increase of $0.7 million in corporate support expenses and an increase of $0.8 million in freight out. The corporate support expenses increase is attributable to higher professional services expense and higher recruiting expense for new talent acquisition. The increase in freight out is attributable to higher revenues and increased freight carrier costs as a result of inflationary impacts.

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Interest, Net. Net interest expense increased from $158,700 for the second quarter of fiscal 2022 to $383,400 for the second quarter of fiscal 2023. This increase is due to significantly higher interest rates in the second quarter of fiscal 2023 and an increase in the average amount outstanding under our 2020 Revolving Credit Facility during the second quarter of fiscal 2023 as compared to the prior year same quarter. In addition, capitalized interest increased from $137,100 in the second quarter of fiscal 2022 to $432,100 for the second quarter of fiscal 2023, which is attributable to higher interest expense and an increase in capital expenditures associated with our ongoing information technology project.

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Income Taxes, Net Income and Diluted Earnings per Share. The Company reported an income tax benefit of $0.1 million in both the second quarter of fiscal 2022 and fiscal 2023, respectively. Net income of $1.2

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million in the second quarter of fiscal 2023 improved significantly from the net loss of $1.3 million in the second quarter of fiscal 2022. Diluted earnings per share was $0.13 for the second quarter of fiscal 2023, compared to a loss of $0.14 per share for the corresponding prior-year quarter.

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Discontinued Operations. Net loss from discontinued operations was less than $0.1 million for the second quarter of fiscal year 2023 compared to net income of $0.4 million for the second quarter of fiscal year 2022. See Note 10, “Discontinued Operations”, to our unaudited interim Consolidated Financial Statements included as part of this Quarterly Report on Form 10-Q, for further discussion.

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First Six Months of Fiscal Year 2023 Compared with First Six Months of Fiscal Year 2022

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Total Revenues. Revenues for the first six months of fiscal 2023 increased 9.0% compared with the first six months of fiscal 2022. Revenues in our Commercial segment increased 10.9%, and revenue in our Carrier segment increased 6.5%.  This increase in the Carrier segment was primarily due to gaining additional market share and increased customer pricing. The increase in Commercial segment revenues was primarily attributable to gaining additional market share, a more favorable product mix, and increased customer pricing.

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Cost of Goods Sold. Cost of goods sold for the first six months of fiscal 2023 increased 7.0% compared with the first six months of fiscal 2022. Cost of goods sold in our Commercial and Carrier segments increased by 9.1% and 4.6%, respectively. The increase in cost of goods sold in both segments was largely driven by changes in revenues, as discussed above.

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Total Gross Profit. Gross profit for the first six months of fiscal 2023 increased by 17.9% compared to the first six months of fiscal 2022. This increase was primarily due to increased revenues, a more favorable customer and product mix, and increased freight charged to customers. Overall gross profit margin increased from 18.5% in the first six months of fiscal 2022 to 20.0% in the first six months of fiscal 2023. Gross profit margin in our Carrier segment increased to 13.3% in the first six months of fiscal 2023 from 11.7% in the first six months of fiscal 2022. Gross profit margin in our Commercial segment increased to 25.0% in the first six months of fiscal 2023 from 23.7% in the first six months of fiscal 2022. The gross margin improvement in the Carrier segment is primarily related to changes in customer and product mix. The gross margin increase in the Commercial segment is primarily attributable to product and customer mix, including higher sales of our higher margin Ventev^® products. Gross margins in both segments were positively impacted by higher freight charged to customers in response to and to partially offset increased freight costs incurred, which is included in selling, general, and administrative expenses.

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Selling, General and Administrative Expenses. Total selling, general and administrative expenses increased by 6.3% or $2,669,600 for the first six months of fiscal 2023, compared to the first six months of fiscal 2022. Selling, general and administrative expenses as a percentage of revenues decreased from 20.0% for the first six months of fiscal 2022, to 19.5% for the first six months of fiscal 2023.

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The increase in our selling, general and administrative expenses was primarily due to an increase of $1.4 million in corporate support expenses and an increase of $1.1 million in freight out. The corporate support expenses increase is attributable to higher professional services expense and higher recruiting expense for new talent acquisition. The increase in freight out is attributable to higher revenues and increased freight carrier costs as a result of inflationary impacts.

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Interest, Net. Net interest expense increased from $372,400 for the first six months of fiscal 2022 to $642,800 for the first six months of fiscal 2023. This increase is due to significantly higher interest rates in the first six

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months of fiscal 2023 and an increase in the average amount outstanding under our 2020 Revolving Credit Facility during the first six months of fiscal 2023 as compared to the first six months of fiscal 2022. In addition, capitalized interest increased from $347,600 in the first six months of fiscal 2022 to $705,300 for the first six months of fiscal 2023, which is attributable to higher interest expense and an increase in capital expenditures associated with our ongoing information technology project.

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Income Taxes, Net Income and Diluted Earnings per Share. The Company reported an income tax benefit of $0.1 million in the first six months of fiscal 2023 as compared to a benefit of $37,200 in the first six months of fiscal 2022. Net income of $0.7 million in the first six months of fiscal 2023 improved significantly from the net loss of $3.5 million in the first six months of fiscal 2022. Diluted earnings per share was $0.07 for the first six months of fiscal 2023, compared to a loss of $0.39 per share for the first six months of fiscal 2022.

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Discontinued Operations. Net income from discontinued operations was $0.2 million for the first six months of fiscal year 2023 compared to $0.9 million for the first six months of fiscal year 2022. See Note 10, “Discontinued Operations”, to our unaudited interim Consolidated Financial Statements included as part of this Quarterly Report on Form 10-Q, for further discussion.

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Liquidity and Capital Resources

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The following table summarizes our cash flows provided by or used in operating, investing and financing activities for the six months ended September 25, 2022 and September 25, 2021.

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Net cash used in operating activities was $6.2 million for the first six months of fiscal 2023, compared with net cash used in operating activities of $10.3 million for the first six months of fiscal 2022. Net cash used in operating activities in fiscal 2023 was primarily attributable to an increase in accounts receivable of $9.3 million and an increase in inventory of $14.6 million, offset by a decrease in income taxes receivable of $3.7 million and an increase in accounts payable of $13.7 million. Net cash used in operating activities in fiscal 2022 was primarily attributable to a net loss of $2.5 million, an increase in accounts receivable of $7.1 million, an increase in inventory of $3.2 million and a decrease in accounts payable of $1.0 million, offset by a decrease in income taxes receivable of $4.2 million.

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Net cash used in investing activities was $8.5 million for the first six months of fiscal 2023, compared to net cash provided by investing activities of $3.8 million in the first six months of fiscal 2022. Fiscal 2023 and fiscal 2022 cash outflow is primarily attributable to the Company’s investments in information technology.

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Net cash provided by financing activities was $16.2 million for the first six months of fiscal 2023, compared to net cash provided by financing activities of $15.0 million for the first six months of fiscal 2022. Fiscal 2023 and fiscal 2022 cash inflow is primarily attributable to the Company’s utilization of the 2020 Revolving Credit Facility

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On October 29, 2020, we entered into a Credit Agreement (the “Credit Agreement”) among the Company, the Company’s primary operating subsidiaries as co-borrowers, the 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. 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 refers to the Credit Agreement as in effect at fiscal quarter ended September 25, 2022 and without regard to subsequent events. The Credit Agreement, as amended, provides for a senior secured asset- based revolving credit facility of up to $80 million (the “Revolving Credit Facility”), which matures on April 29, 2024. As of September 25, 2022, borrowings under the secured 2020 Revolving Credit Facility totaled $53.5 million; therefore, we then had $26.5 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 4 to our unaudited interim Consolidated Financial Statements included in this Quarterly Report on Form 10-Q (“Note 4”). We do not now, nor do we expect in the near future to, meet the Fixed Charge Coverage Ratio and, therefore our current availability under the Revolving Credit Facility is limited to $70 million and will be reduced to $65 million on January 1, 2023, in each case subject to the Borrowing Base limitations and compliance with the other terms. Borrowings under the Credit Agreement accrue interest at the rates as discussed in Note 4.

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We believe that our existing cash, payments from customers and current and anticipated future availability under the secured Revolving Credit Facility will be sufficient to support our operations for at least the next twelve months. We are, however, focused on the pending reimposition of the Excess Availability requirement under our Revolving Credit Facility, and the corresponding decrease in availability to $65 million, which, as discussed above is expected to occur on January 1, 2023. The $11.8 million increase in outstanding borrowings in the second quarter of fiscal 2023 as compared to the first quarter of fiscal 2023 is largely due to a $6.4 million cash outflow from investing activities in the second quarter of fiscal 2023 that is primarily related to the Company’s ongoing information technology project implementation, and a $4.4 million increase in accounts receivable balance from the first quarter of fiscal 2023 to the second quarter. Although we are working to reduce these values, we nevertheless expect these levels to remain elevated for the remainder of the current fiscal year. That, together with re-imposition of the Excess Availability requirement after January 1, 2023 and elevated inventory levels that will persist into the second half of the year, is expected to limit additional borrowings under our Revolving Credit Facility in the second half of fiscal 2023. We have engaged in initial discussions with our lender in an effort to maintain or increase our current borrowing availability, although no assurances can be given that we will be successful in these efforts or that an inability to borrow yet additional amounts, if needed, will not adversely affect our business or financial results.

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To minimize interest expense, our policy is to apply excess available cash to reduce the balance outstanding from time to time on our secured Revolving Credit Facility.  Our increased focus over the past several years on business opportunities for sales to our Carrier customers led to the recent expansion of our borrowing limits, as now reflected in the secured Revolving Credit Facility, and has at times resulted in increased borrowings and dependence on that facility. If we were to undertake an acquisition or other major capital purchases that require funds in excess of existing sources of liquidity, we would look to sources of funding from additional credit facilities, debt and/or equity issuances. As of September 25, 2022, we do not have any material capital expenditure commitments.

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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

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indebtedness is evidenced by a Real Estate Note (“Note”) of Reno Holding 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 5 to our unaudited interim Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional discussion related to the Note.

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

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Recent Accounting Pronouncements  

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

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Critical Accounting Policies and Estimates

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

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For a detailed discussion on our critical accounting policies, please refer to our Annual Report on Form 10-K for the fiscal year ended March 27, 2022, filed with the SEC on May 26, 2022.

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Off-Balance Sheet Arrangements

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We have no material off-balance sheet arrangements.

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Forward-Looking Statements

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

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

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reports and elsewhere, among the risks that could lead to a materially adverse impact on our business or operating results are the following: the impact and results of any new or continued activism activities by activist investors; termination or non-renewal of limited duration agreements or arrangements with our suppliers, which are typically terminable by either party upon several months or otherwise relatively short notice; loss of significant customers, suppliers or other relationships, or reduction of customer business or product availability; loss of customers or suppliers either directly or indirectly as a result of consolidation among large wireless service carriers and others within the wireless communications industry; deterioration in the strength of our customers' or suppliers' business; negative or adverse economic conditions, including those adversely affecting consumer confidence or consumer or business spending or otherwise adversely impacting our suppliers or customers, including their access to capital or liquidity, or our customers' demand for, or ability to fund or pay for, the purchase of our products and services; our dependence on a relatively small number of suppliers, which could hamper our ability to maintain appropriate inventory levels and meet customer demand; changes in customer and product mix that affect gross margin; effect of “conflict minerals” regulations on the supply and cost of certain of our products; failure of our information technology system or distribution system; our inability to maintain or upgrade our technology or telecommunication systems without undue cost, incident or delay; system security or data protection breaches and exposure to cyber-attacks, and the cost associated with ongoing efforts to maintain cyber-security measures and to meet applicable compliance standards; damage or destruction of our distribution or other facilities; prolonged or otherwise unusual quality or performance control problems; technology changes in the wireless communications industry or technological failures, which could lead to significant inventory obsolescence or devaluation and/or our inability to offer key products that our customers demand; third-party freight carrier interruption; increased competition from competitors, including manufacturers or national and regional distributors of the products we sell and the absence of significant barriers to entry which could result in pricing and other pressures on profitability and market share; our relative bargaining power and inability to negotiate favorable terms with our suppliers and customers; our inability to access capital and obtain or retain financing as and when needed; transitional and other risks associated with acquisitions of companies that we may undertake in an effort to expand our business; claims against us for breach of the intellectual property rights of third parties; product liability claims; our inability to protect certain intellectual property, including systems and technologies on which we rely; our inability to hire or retain for any reason our key professionals, management and staff; health epidemics or pandemics or other outbreaks or events, or national or world events or disasters beyond our control; changes in political and regulatory conditions, including tax and trade policies; and the possibility that, for unforeseen or other reasons, we may be delayed in entering into or performing, or may fail to enter into or perform, anticipated contracts or may otherwise be delayed in realizing or fail to realize anticipated revenues or anticipated savings.

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Available Information

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

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Item 4. Controls and Procedures.

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The Company’s management, with the participation of the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of the end of the period covered by this quarterly report. Controls and

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procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of these controls and procedures required by Rules 13a-15(b) or 15d-15(b) of the Exchange Act, the Company’s management, including the CEO and CFO, have concluded that, as of the end of the period covered by this quarterly report, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to the Company’s management, including the Company’s CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. During the period covered by this quarterly report, there have been no changes to the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

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There are no material pending legal proceedings in which we or our subsidiaries is a party or in which any of our or their property is the subject.

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

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None.

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Item 3. Defaults Upon Senior Securities.

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None.

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Item 4. Mine Safety Disclosures.

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Not applicable.

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Item 5. Other Information.

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None.

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Item 6. Exhibits.

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