Eplus Inc: Form 10-Q for the period ended Sep 30, 2020

This discussion is intended to further the reader’s understanding of our consolidated financial condition and results of operations. It should be read in conjunction with the financial statements included in this quarterly report on Form 10-Q and our 2020 Annual Report. These historical financial statements may not be indicative of our future performance. This Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks described in Part I, Item 1A, “Risk Factors,” in our 2020 Annual Report., and in Part II, Item 1A. “Risk Factors” in this Report.

EXECUTIVE OVERVIEW

Business Description

We are a leading solutions provider that delivers actionable outcomes for organizations by using IT and consulting solutions to drive business agility and innovation. Leveraging our engineering talent, we assess, plan, deliver, and secure solutions comprised of leading technologies and consumption models aligned with our customers’ needs. Our expertise and experience enable ePlus to craft optimized solutions that take advantage of the cost, scale and efficiency of private, public and hybrid cloud in an evolving market. We also provide consulting, staffing, professional, managed, IT staff augmentation, and complete lifecycle management services including flexible financing and solutions in the areas of security, cloud, networking, data center, collaboration and emerging technologies. We have been in the business of selling, leasing, financing, and managing IT and other assets for more than 30 years.

Our primary focus is to deliver integrated solutions that address our customers’ business needs, leveraging the appropriate technologies, both on-premise and in the cloud. Our approach is to lead with advisory consulting to understand our customers’ needs, design, deploy and manage solutions aligned to their objectives. Underpinning the broader areas of Cloud, Security, Networking, Data Center and Collaboration are specific skills in orchestration and automation, application modernization, DevOps, data management, data visualization, analytics, network modernization, edge compute and other advanced and emerging technologies. These solutions are comprised of class leading technologies from partners such as Amazon Web Services, Arista Networks, Blue Coat, Check Point, Cisco Systems, Citrix, Commvault, Dell EMC, Extreme Networks, F5 Networks, Fortinet, Gigamon, HPE, Juniper Networks, Lenovo, Microsoft, NetApp, Nutanix, NVIDIA, Oracle, Palo Alto Networks, Proofpoint, Pure Storage, Qumulo, Rubrik, Splunk, Symantec and VMware, among many others. We possess top-level engineering certifications with a broad range of leading IT vendors that enable us to offer multi-vendor IT solutions that are optimized for each of our customers’ specific requirements. Our hosted, proprietary software solutions are focused on giving our customers more control over their IT supply chain, by automating and optimizing the procurement and management of their owned, leased, and consumption-based assets.

Our scale and financial resources have enabled us to continue investing in engineering and technology resources to stay current with emerging technology trends. Our expertise in core and emerging technologies, buttressed by our robust portfolio of consulting, professional, and managed services has enabled ePlus to remain a trusted advisor for our customers. In addition, we offer a wide range of consumption options including leasing and financing for technology and other capital assets. We believe our lifecycle approach offering of integrated solutions, services, financing, and our proprietary supply chain software, are unique in the industry. This broad portfolio enables us to deliver a unique customer experience that spans the continuum from fast delivery of competitively priced products, services, subsequent management and upkeep, through to end-of-life disposal services. This approach permits ePlus to deploy ever-more-sophisticated solutions enabling our customers’ business outcomes.

Our go-to-market strategy focuses primarily on diverse end-markets for middle market to large enterprises. For the trailing twelve-month period ended September 30, 2020, the percentage of revenue by customer end market within our technology segment includes technology industry 19%, telecommunications, media and entertainment 20%, state and local government and educational institutions (“SLED”) 16%, healthcare 15%, and financial services 13%. The majority of our sales were generated within the United States (“US”); however, we have the ability to support our customers nationally and internationally, including physical locations in the United Kingdom (“UK”) and India. Our technology segment accounts for 97% of our net sales, and 73% of our operating income, while our financing segment accounts for 3% of our net sales, and 27% of our operating income, for the six months ended September 30, 2020.

Impact of COVID-19 on Our Business Operations

The COVID-19 pandemic continues to have widespread, rapidly evolving, and unpredictable impacts on global society, economies, financial markets, and business practices. Federal, state and local governments and public health authorities have required and may in the future require measures to contain the virus, including social distancing, travel restrictions, border closures, limitations on public gatherings, work from home, supply chain logistical changes, and closure of non-essential businesses.

As COVID-19 impacts continue to expand across the country and globe, we have been adjusting our business activities for the safety of our employees and to best serve our customers in this rapidly evolving environment. We have implemented a flexible work from home strategy applicable to all offices and operational continuity plans to provide sufficient resources to continue supporting our customers. For employees who wish to return to the office, we have reopened our headquarters with limited capacity and required health and safety protocols in place. We plan to reopen our other offices using a phased approach but currently have not set a schedule to do so. Our configuration centers have remained open with our employees working in them following required health and safety protocols. In addition, we also have a procedure to review and approve employees’ business-related travel. Our managed service teams are distributed across the US with the ability to leverage technology to provide coverage while working from home. While we and many of our customers and vendor partners have restricted travel, we are leveraging video and other collaborative tools to continue to be responsive.

Our account relationship teams are actively engaging with our customers, to ensure they have the support needed in adjusting to changes in the business environment and government directives. In addition, we granted a limited number of customers temporary payment term extensions. Also, we are working closely with our vendor partners to address varying impacts on their supply chain to satisfy infrastructure needs. Certain of our vendor partners extended payment terms to us and our competitors.

We continue to execute against and adjust our business continuity plans to maximize our ability to support our employees and customers in concert with our partners. We have an internal resource page to support specific customer inquiries from security to collaboration to financing options. We remain committed to driving positive business outcomes.

The extent to which the COVID-19 pandemic impacts our business going forward will depend on numerous evolving factors we cannot reliably predict, including the duration and scope of the pandemic; governmental, business, and individuals' actions in response to the pandemic; and the impact on economic activity including the possibility of recession or financial market instability. These factors may adversely impact business, and government spending on technology as well as our customers' ability to pay for our products and services on an ongoing basis. This uncertainty also affects management’s accounting estimates and assumptions, which could result in greater variability in a variety of areas that depend on these estimates and assumptions. Refer to Part I, Item 1A, “Risk Factors,” in our 2020 Annual Report.

Key Business Metrics

Our management monitors a number of financial and non-financial measures and ratios on a regular basis to track the progress of our business. We believe that the most important of these measures and ratios include net sales, gross margin, operating income margin, net earnings, net earnings per common share, adjusted EBITDA, adjusted EBITDA margin, adjusted gross billings, and non-GAAP net earnings per share. We use a variety of operating and other information to evaluate the operating performance of our business, develop financial forecasts, make strategic decisions, and prepare and approve annual budgets.

These key indicators include financial information that is prepared in accordance with US GAAP and presented in our unaudited condensed consolidated financial statements as well as non-GAAP performance measurement tools. Generally, a non-GAAP financial measure is a numerical measure of a company’s performance or financial position that either excludes or includes amounts that are not normally included in the most directly comparable measure calculated and presented in accordance with US GAAP. Non-GAAP measures used by management may differ from similar measures used by other companies, even when similar terms are used to identify such measures.

Our key business metrics for the three- and six-month periods ended September 30, 2020, and 2019 are summarized in the following tables (dollars in thousands):

(1) Non-GAAP net earnings and non-GAAP net earnings per common share – diluted is based on net earnings calculated in accordance with GAAP, adjusted to exclude other income (expense), share based compensation, and acquisition and integration expenses, and the related tax effects.

We use non-GAAP net earnings per common share as a supplemental measure of our performance to gain insight into our operating performance. We believe that the exclusion of other income (expense), share-based compensation, and acquisition-related amortization expense in calculating non-GAAP net earnings per common share provides management and investors a useful measure for period-to-period comparisons of our business and operating results by excluding items that management believes are not reflective of our underlying operating performance. Accordingly, we believe that non-GAAP net earnings per common share provide useful information to investors and others to understand and evaluate our operating results. However, our use of non-GAAP information as analytical tools has limitations, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under GAAP. In addition, other companies, including companies in our industry, might calculate similar non-GAAP net earnings and non-GAAP net earnings per common share or similarly titled measures differently, which may reduce their usefulness as comparative measures.

(2) We define adjusted EBITDA as net earnings calculated in accordance with GAAP, adjusted for the following: interest expense, depreciation and amortization, share based compensation, acquisition and integration expenses, provision for income taxes, and other income (expense). Segment adjusted EBITDA is defined as operating income calculated in accordance with GAAP, adjusted for interest expense, share based compensation, acquisition and integration expenses, and depreciation and amortization. We consider the interest on notes payable from our financing segment and depreciation expense presented within cost of sales, which includes depreciation on assets financed as operating leases, to be operating expenses. As such, they are not included in the amounts added back to net earnings in the adjusted EBITDA calculation. We provide below a reconciliation of adjusted EBITDA to net earnings, which is the most directly comparable financial measure to this non-GAAP financial measure. Adjusted EBITDA margin is our calculation of adjusted EBITDA divided by net sales.

We use adjusted EBITDA as a supplemental measure of our performance to gain insight into our operating performance. We believe that the exclusion of other income in calculating adjusted EBITDA and adjusted EBITDA margin provides management and investors a useful measure for period-to-period comparisons of our business and operating results by excluding items that management believes are not reflective of our underlying operating performance. Accordingly, we believe that adjusted EBITDA and adjusted EBITDA margin provide useful information to investors and others to understand and evaluate our operating results. However, our use of adjusted EBITDA and adjusted EBITDA margin as analytical tools has limitations, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under GAAP. In addition, other companies, including companies in our industry, might calculate adjusted EBITDA and adjusted EBITDA margin or similarly titled measures differently, which may reduce their usefulness as a comparative measure.

(3) We define adjusted gross billings as our technology segment net sales calculated in accordance with US GAAP, adjusted to exclude the costs incurred related to sales of third-party maintenance, software assurance and subscription/SaaS licenses, and services. We have provided below a reconciliation of adjusted gross billings to technology segment net sales, which is the most directly comparable financial measure to this non-GAAP financial measure. The presentation of adjusted gross billings has been updated to align with net sales for our technology segment.

We use adjusted gross billings as a supplemental measure of our performance to gain insight into the volume of business generated by our technology segment, and to analyze the changes to our accounts receivable and accounts payable. Our use of adjusted gross billings as an analytical tool has limitations, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under US GAAP. In addition, other companies, including companies in our industry, might calculate adjusted gross billings or a similarly titled measure differently, which may reduce its usefulness as a comparative measure.

Consolidated Results of Operations

During the three months ended September 30, 2020, net sales increased 5.2%, or $21.5 million, to $433.1 million, as compared to $411.6 million for the same period in the prior fiscal year. Product sales for the three months ended September 30, 2020, increased 5.5% to $383.7 million, or an increase of $20.2 million from $363.5 million in the same period in the prior year. Services sales during the three months ended September 30, 2020, increased 2.8% to $49.4 million, or an increase of $1.4 million over prior year services sales of $48.1 million primarily due to an increase in managed services. The increase in products sales was due to a shift in mix of higher hardware and third-party software licenses sales which we recognize on a gross basis, and a lower proportion of sales of maintenance, software assurance, subscriptions/SaaS licenses, and services where we recognize revenue on a net basis. We saw increases in net sales from telecom, media and entertainment, SLED, financial services, and all the other categories of customers, which was partially offset by decreases in net sales from our technology customers, and a small decrease from health care customers, during the three months ended September 30, 2020, compared to the prior year.

For the six months ended September 30, 2020, net sales decreased 0.6%, or $4.8 million, to $788.1 million, compared to $792.9 million in the same period in the prior fiscal year. Product sales for the six months ended September 30, 2020, decreased 1.2%, or $8.2 million, to $690.9 million compared to $699.1 million in the same period in the prior year. Services sales during the six months ended September 30, 2020, increased 3.6%, or $3.4 million, to $97.2 million compared to prior year services sales of $93.8 million. The decrease in net sales was due to reductions in demand from the our customers in the technology and health care markets, which were mostly offset by increases in demand from our customers in the telecom, media and entertainment, SLED, financial services, and all other category of customers, during the six months ended September 30, 2020, compared to the prior year.

Adjusted gross billings increased 3.8%, or $22.0 million, to $601.1 million for the three months ended September 30, 2020, from $579.1 million for the same period in the prior fiscal year. There was an increase in adjusted gross billings from our customers in the telecom, media and entertainment, SLED, and health care customers which was partially offset by decreases in demand from the technology, financial services, and all the other categories of customers. For the six months ended September 30, 2020, adjusted gross billings increased 1.8%, or $20.1 million, to $1,147.5 million, from $1,127.4 million for the same period in the prior fiscal year. The increase in adjusted gross billings is due to higher demand from the same customer end markets that were previously identified for the increase in net sales with the exception of health care customers which declined for the six-month period.

Consolidated gross profit for the three months ended September 30, 2020, decreased $4.1 million, or 3.9%, to $99.0 million, compared with $103.0 million in the same period in the prior year. Consolidated gross margins were 22.9% for the three months ended September 30, 2020, which is a decrease of 210 basis points compared to 25.0% for the same period in the prior fiscal year. The decrease in margins for the three-month period was due to a shift in product mix, as we sold a higher proportion hardware and third-party licenses which are recognized on a gross basis and therefore have lower product margins, and a lower proportion of our product mix was from third-party maintenance, software assurance and subscription/SaaS licenses, and services, which are recorded on a net basis, and were partially offset by slightly higher gross profit from of our financing segment. For the six months ended September 30, 2020, consolidated gross profit increased $1.8 million, or 0.9%, to $197.5 million, compared with $195.7 million for the same period in the prior fiscal year. Consolidated gross margins were 25.1% for the six months ended September 30, 2020, an increase of 40 basis points compared to 24.7% for the same period in the prior fiscal year. The increase in gross margin for the six-month period was due to a shift in product mix, as we sold a higher proportion of third-party maintenance, software assurance and subscription/SaaS licenses, and services. Also contributing to the gross margin improvement was higher service revenues, and higher post-contract revenue from of our financing segment.

Our operating expenses for the three months ended September 30, 2020, decreased 5.6% to $70.5 million, as compared to $74.7 million for the prior year period. The majority of this decrease reflects reductions in selling, general, and administrative expense of 5.2% or $3.6 million, to $66.9 million as compared to $70.5 million in the same period in the prior year, due in part to reductions in travel and entertainment, general office related expenses, employee salaries and benefits, which were partially offset by an increase in allowance for credit losses. Our prior year results benefit from having only incurred a partial quarter of salaries and benefits from employees acquired from ABS Technology. As of September 30, 2020, we had 1,497 employees, a decrease of 132 from 1,629 last year.

For the six months ended September 30, 2020, operating expenses decreased $0.5 million, or 0.3%, to $144.0 million, as compared to $144.5 million in the same period in the prior year. The decrease in operating expenses for the six months ended September 30, 2020, is due to the reductions in interest and financing costs, and depreciation and amortization expense. Selling, general, and administrative expense for the six months ended September 30, 2020, increased slightly to $136.4 million, with increases in salaries and benefits, variable compensation, and reserve for credit losses, offset almost entirely by reductions in general and administrative expense and acquisition related expenses.

Depreciation and amortization expense decreased $0.2 million for both the three and six months ended September 30, 2020. Interest and financing costs decreased $0.3 million and $0.4 million, for the three and six months ended September 30, 2020, respectively, due to a decrease in the average balance of non-recourse notes payable outstanding during the three and six months ended September 30, 2020, as compared to the prior year.

As a result, operating income for the three months ended September 30, 2020, increased $0.1 million, or 0.4%, to $28.5 million as compared to $28.4 million for the same period in the prior year. For the six months ended September 30, 2020, operating income increased $2.3 million, or 4.6%, to $53.5 million, as compared to $51.1 million for the same period in the prior year.

Our effective tax rate for the three and six months ended September 30, 2020, was 30.8%, compared with 29.1% and 28.9%, respectively, for the same periods in the prior year. The change in our effective tax rate was due to an adjustment to the federal benefit from state taxes.

Consolidated net earnings for the three months ended September 30, 2020, were $19.8 million, a decrease of 1.3%, or $0.3 million, over the prior year’s results, due to the decrease in gross profit, partially offset by a reduction in operating expenses. For the six months ended September 30, 2020, the consolidated net earnings were $37.2 million, an increase of 2.5%, or $0.9 million, compared to the prior year’s results, due to the increase in revenues and gross profit, and other income mostly offset by an increase the provision for income taxes.

Adjusted EBITDA decreased $1.8 million, or 5.2%, to $33.6 million and adjusted EBITDA margin decreased 90 basis points to 7.7% for the three months ended September 30, 2020, as compared to the prior year period of 8.6%. For the six months ended September 30, 2020, adjusted EBITDA increased $0.3 million, or 0.5%, to $64.3 million and the adjusted EBITDA margin increased 10 basis points to 8.2% as compared to the prior year period of 8.1% for the six months ended September 30, 2020, compared to the prior year period.

Diluted earnings per share decreased 2.0%, or $0.03, to $1.48 per share for the three months ended September 30, 2020, as compared to $1.51 per share for the three months ended September 30, 2019. Non-GAAP diluted earnings per share decreased 7.2%, or $0.13, to $1.68 for the three months ended September 30, 2020, as compared to $1.81 for the three months ended September 30, 2019. For the six months ended September 30, 2020, diluted earnings per share increased 2.6%, or $0.07, to $2.78 per share, as compared to $2.71 per share compared to the prior year period. Non-GAAP diluted earnings per share decreased 2.1%, or $0.07, to $3.19 for the six months ended September 30, 2020, as compared to $3.26 for the six months ended September 30, 2019.

Cash and cash equivalents increased $74.9 million or 86.8% to $161.1 million at September 30, 2020, as compared to $86.2 million as of March 31, 2020. The increase is primarily the result of the extension of payment terms by 30 days from certain vendor partners that deferred $76.3 million in payments and a payroll tax deferral under the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act that deferred $4.8 million in payments that will be paid in December 2021 and December 2022. Our cash on hand, funds generated from operations, amounts available under our credit facility, and the possible monetization of our investment portfolio have provided sufficient liquidity for our business.

The extent of the impact of COVID-19 is uncertain and may impact our liquidity position over the longer term. As credit markets have tightened as a result of COVID-19, we may have difficulty funding our financing transactions with lenders, which may result in the use of our cash or a decrease in financing originations.

Segment Overview

Our operations are conducted through two segments: technology and financing.

Technology Segment

The technology segment sells IT equipment and software and related services primarily to corporate customers, state and local governments, and higher education institutions on a nationwide basis, with geographic concentrations relating to our physical locations. The technology segment also provides Internet-based business-to-business supply chain management solutions for IT products.

Our technology segment derives revenue from the sales of new equipment and service engagements. Included in net sales are revenues derived from performing advanced IT professional and managed services that may be sold together with and integral to third-party products and software. Our service engagements are generally governed by statements of work and are primarily fixed price (with allowance for changes); however, some service agreements are based on time and materials.

Customers who purchase IT equipment and services from us may have customer master agreements, or CMAs, with our company, which stipulate the terms and conditions of the relationship. Some CMAs contain pricing arrangements, and most contain mutual voluntary termination clauses. Our other customers place orders using purchase orders without a CMA in place or with other documentation customary for the business. Often, our work with state and local governments is based on public bids and our written bid responses.

We endeavor to minimize our cost of sales through incentive programs provided by vendors and distributors. The programs for which we qualify are generally set by our reseller authorization level with the vendor. The authorization level we achieve and maintain governs the types of products we can resell as well as such items as pricing received, funds provided for the marketing of these products and other special promotions. These authorization levels are achieved by us through purchase volume, certifications held by sales executives or engineers and/or contractual commitments by us. The authorization levels are costly to maintain, and these programs continually change; therefore, there is no guarantee of future reductions of costs provided by these vendor consideration programs.

Financing Segment

Our financing segment offers financing solutions to corporations, governmental entities, and educational institutions nationwide, as well as internationally in the UK, Canada, Iceland, and Spain. The financing segment derives revenue from leasing IT and medical equipment and the disposition of that equipment at the end of the lease. The financing segment also derives revenues from the financing of third-party software licenses, software assurance, maintenance and other services.

Financing revenue generally falls into the following three categories:

• Portfolio income: Interest income from financing receivables and rents due under operating leases;
• Transactional gains: Net gains or losses on the sale of financial assets; and
• Post-contract earnings: Month-to-month rents; early termination, prepayment, make-whole, or buyout fees; and net gains on the sale of off-lease (used) equipment.

Our financing segment sells the equipment underlying a lease to the lessee or a third-party other than the lessee. These sales occur at the end of the lease term and revenues from the sales of such equipment are recognized at the date of sale. We also recognize revenue from events that occur after the initial sale of a financial asset and remarketing fees from certain residual value investments.

Fluctuations in Operating Results

Our results of operations are susceptible to fluctuations for a number of reasons, including, without limitation, customer demand for our products and services, supplier costs, changes in vendor incentive programs, interest rate fluctuations, decision to sell financial assets, general economic conditions, and differences between estimated residual values and actual amounts realized related to the equipment we lease. Operating results could also fluctuate as a result of a sale prior to the expiration of the lease term to the lessee or to a third-party or from other post-term events.

We expect to continue to expand by opening new sales locations and hiring additional staff for specific targeted market areas whenever we can find both experienced personnel and desirable geographic areas over the longer term, which may reduce our results from operations. COVID-19 may negatively affect market demand, which will likely lower our financial results, and may adversely impact our ability to expand. We are uncertain as to the extent and duration of the impact to the IT market demand for our products and services.

CRITICAL ACCOUNTING ESTIMATES

As disclosed in Note 2, “Recent Accounting Pronouncements,” we adopted a new credit loss standard on April 1, 2020. Under this new standard, we estimate an allowance for credit losses related to accounts receivable for future expected credit losses by using relevant information such as historical information, current conditions, and reasonable and supportable forecasts. The allowance is measured on a collective basis when similar risk characteristics exist, and a loss-rate for each group with similar risk characteristics is determined using historical credit loss experience as the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current conditions, as well as changes in forecasted macroeconomic conditions. Our allowance reflects the forecasted credit deterioration due to the COVID-19 pandemic.

Our other critical accounting estimates have not changed from those reported in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2020 Annual Report.

SEGMENT RESULTS OF OPERATIONS

The three and six months ended September 30, 2020, compared to the three and six months ended September 30, 2019

Technology Segment

The results of operations for our technology segment were as follows (dollars in thousands):

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Net sales: Net sales for the three months ended September 30, 2020, were $419.4 million compared to $397.7 million in the same period in the prior year, an increase of 5.4% or $21.6 million, due to increases in net sales to customers in the telecom, media and entertainment, SLED, financial services, and all the other customer categories, which was partially offset by a decrease in technology, and healthcare customer categories. Product sales increased 5.8%, or $20.3 million, to $369.9 million due to a shift in mix to sales of hardware and third-party licenses, partially offset by reductions in third-party maintenance, software assurance, subscriptions/SaaS licenses, and services where we recognize revenue on a net basis. Services revenues increased 2.8%, or $1.4 million to $49.4 million to due to an increase in managed services.

For the six months ended September 30, 2020, net sales decreased 0.7%, or $5.7 million to $760.6 million compared to $766.3 million during the same period in the prior year. Product sales for the six months ended September 30, 2020, decreased 1.3%, or $9.0 million to $663.4 million due to a higher proportion of sales from third party services that are recognized on a net basis, partially offset by the increase in services revenues by 3.6%, or $3.4 million, to $97.2 million compared to $93.8 million during the same period in the prior year.

Adjusted gross billings increased 3.8%, or $22.0 million, to $601.1 million for the three months ended September 30, 2020, from $579.1 million for the same period in the prior fiscal year. There was an increase in adjusted gross billings from our customers in the telecom, media and entertainment, SLED, and health care customers which was partially offset by decreases in demand from the technology, financial services, and all the other categories of customers. For the six months ended September 30, 2020, adjusted gross billings increased 1.8%, or $20.1 million, to $1,147.5 million, from $1,127.4 million for the same period in the prior fiscal year. The increase in adjusted gross billings is due to higher demand from the same customer end markets that were previously identified for the increase in net sales with the exception of health care customers which declined for the six-month period.

We rely on our vendors to fulfill a large majority of shipments to our customers. As of September 30, 2020, we had open orders of $389.7 million and deferred revenue of $77.1 million. As of September 30, 2019, we had open orders of $210.7 million and deferred revenues of $66.5 million.

We analyze net sales by customer end market and by vendor, as opposed to discrete product and service categories. The percentage of net sales by industry and vendor for the twelve-month periods ended September 30, 2020, and 2019 are summarized below:

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Our revenues by customer end market have remained consistent over the year with over 80% of our revenues generated from customers within the five end markets identified above. During the trailing twelve-month period ended September 30, 2020, we had an increase in the percentage total revenues from customers in the telecom, media and entertainment industry, and all other customer category, and decreases in the percentage of total revenues in the technology, SLED, and financial services markets. These changes were driven by changes caused by the COVID-19 pandemic, changes in customer buying cycles, and the timing of specific IT related initiatives, rather than the acquisition or loss of a customer or set of customers.

The majority of our revenues by vendor are derived from our top six suppliers, which, when combined, is a fairly constant percentage of over 60% of total revenues for the twelve-month periods ended September 30, 2020, and 2019. None of the vendors included within the “other” category exceeded 5% of total revenues.

Cost of sales: For the three months ended September 30, 2020, cost of sales increased 8.5%, or $26.0 million, due to a shift in product mix, as we sold a higher proportion of hardware and third-party software licenses which we recognize on a gross basis. Due to this shift in product mix, our gross margin decreased 220 basis points to 20.8% for the three months ended September 30, 2020, compared to 23.0% in the same period in the prior year. Cost of sales for the six months ended September 30, 2020, decreased 1.1% or $6.3 million which is in-line with the decrease in net sales. For the six months ended September 30, 2020, gross margin increased by 30 basis points to 22.9%, as compared to 22.6% for the prior year period; product margin also increased by 30 basis points to 20.8%, compared to 20.5% in the same period in the prior year. Vendor incentives earned as a percentage of sales decreased 70 basis points and 20 basis points for the three and six months ended September 30, 2020, respectively, resulting in an unfavorable impact on gross margin, as compared to same periods in the prior year.

Selling, general, and administrative: Selling, general, and administrative expenses of $62.6 million for the three months ended September 30, 2020, decreased by $4.6 million, or 6.9% from $67.2 million in the same period in the prior year. Salaries and benefits decreased $0.8 million, or 1.5% to $53.8 million, compared to $54.6 million during the same period in the prior year due to a decrease variable compensation and fringe benefits, more than offsetting an increase in salaries. Our prior year results benefit from having only incurred a partial quarter of salaries and benefits from employees acquired from ABS Technology. Our technology segment had 1,460 employees as of September 30, 2020, a decrease of 135 from 1,595 at September 30, 2019. For the six months ended September 30, 2020, selling, general, and administrative expenses decreased by $1.7 million, or 1.3%, to $128.1 million compared to $129.9 million in the same period in the prior year. Salaries and benefits increased $4.7 million, or 4.5% to $110.8 million, compared to $106.1 million during the same period in the prior year.

General and administrative expenses decreased $4.0 million, or 31.7%, to $8.7 million during the three months ended September 30, 2020, compared to $12.7 million in the same period in the prior year, due to a decrease in travel and entertainment expenses, advertising and marketing, professional fees, and other general office related expenses resulting in part from restrictions on travel due to the COVID-19 pandemic, and $1.1 million in lower acquisition related expenses than the prior year. For the six months ended September 30, 2020, general and administrative expenses decreased $6.8 million, or 28.9%, to $16.8 million. The decrease in selling, general and administrative expenses was primarily due to decrease in travel and entertainment expenses, advertising and marketing, professional fees, and other general office related expenses resulting from travel restrictions due in part to the COVID-19 pandemic, and $1.5 million in lower acquisition related expenses than the prior year.

Depreciation and amortization: Depreciation and amortization decreased $0.2 million, or 6.1%, to $3.3 million during the three months ended September 30, 2020, and decreased $0.1 million, or 1.9%, to $6.8 million for the six months ended September 30, 2020, compared to the prior year periods.

Interest and financing costs: Interest and financing costs were insignificant in the three months ended September 30, 2020, and $0.3 million for the six months ended September 30, 2020, compared to none in the same period in the prior year. This is due to $35.0 million in borrowings under the accounts receivable component of our Technology segment credit facility during the first quarter of the fiscal year.

Segment operating income: As a result of the foregoing, operating income was $21.3 million, an increase of $0.4 million, or 2.1%, for the three months ended September 30, 2020, as compared to $20.9 million in the same period in the prior year. For the six months ended September 30, 2020, operating income was $38.8 million, compared to $36.6 million for the same period in the prior year, an increase of $2.2 million, or 6.1%.

For the three months ended September 30, 2020, adjusted EBITDA was $26.3 million, a decrease of $1.5 million, or 5.4%, compared to $27.8 million in the same period in the prior year. Adjusted EBITDA was $49.4 million, an increase of $0.2 million, or 0.5%, for the six months ended September 30, 2020, compared to $49.2 million for the same period in the prior year.

Financing Segment

The results of operations for our financing segment were as follows (dollars in thousands):

Net sales: Net sales decreased by $0.1 million, or 0.9%, to $13.7 million for the three months ended September 30, 2020, as compared to prior year results due to a reduction in post contract earnings and portfolio earnings, which were mostly offset by higher other financing revenues and transactional gains. During the three months ended September 30, 2020, and 2019, we recognized net gains on sales of financial assets of $4.5 million and $4.1 million, respectively, and the fair value of assets received from these sales were $118.5 million and $95.1 million, respectively.

For the six months ended September 30, 2020, net sales increased to $27.5 million, an increase of $0.8 million, or 3.2% as compared to the same period in the prior year of $26.7 million due to higher other financing revenues and portfolio earnings, which were partially offset by lower post-contract earnings and transactional gains. During the six months ended September 30, 2020, and 2019, we recognized net gains on sales of financial assets of $7.0 million and $7.5 million, respectively, and the fair value of assets received from these sales were $191.7 million and $172.0 million, respectively. At September 30, 2020, we had $180.7 million in financing receivables and operating leases, compared to $188.2 million as of September 30, 2019, a decrease of $7.5 million, or 4.0%.

Cost of sales: Cost of sales decreased $0.4 million and $0.3 million for the three and six months ended September 30, 2020, respectively, which consists of depreciation expense from operating leases. Gross profit increased by 2.7% to $11.8 million, for the three months ended September 30, 2020, and increased by 5.4% to $23.5 million, for the six months ended September 30, 2020, as compared to the prior year periods.

Selling, general and administrative: For the three and six months ended September 30, 2020, selling, general, and administrative expenses increased by $1.0 million or 29.1%, and $1.8 million, or 27.3%, respectively, which was due primarily to an increase in allowance for credit losses of $0.8 million and $1.1 million for the three and six months ended September 30, 2020, as compared to the same periods in the prior year. Variable compensation also increased due to higher gross profit for both the three and six months ended September 30, 2020.

Interest and financing costs: Interest and financing costs decreased by 57.3% to $0.2 million for the three months ended September 30, 2020, and decreased by 53.7% to $0.6 million for the six months ended September 30, 2020, compared to the same periods in the prior year, due to a decrease in the average balance and interest rate on total notes payable outstanding. Total notes payable for the financing segment was $40.3 million as of September 30, 2020, a decrease of $45.7 million, or 53.1%, as compared to $86.0 million as of September 30, 2019. Our weighted average interest rate for non-recourse notes payable was 3.15% and 3.98%, as of September 30, 2020, and 2019, respectively.

Segment operating income: As a result of the foregoing, operating income and adjusted EBITDA both decreased $0.3 million or 4.4% and 4.3%, to $7.2 million and $7.3 million, respectively, for the three months ended September 30, 2020, over the prior year period. For the six months ended September 30, 2020, operating income and adjusted EBITDA both increased $0.1 million, respectively, or 0.7% and 0.5%, to $14.7 million and $14.8 million, respectively.

Consolidated

Other income: Other income increased to $0.2 million and $0.3 million due to the favorable foreign exchange rate during the three and six months ended September 30, 2020, respectively, compared to an expense of $40 thousand and $85 thousand due to the unfavorable foreign exchange rate in the three and six month periods in the prior year, respectively.

Income taxes: Our provision for income tax expense was $8.8 million and $16.6 million for the three and six months ended September 30, 2020, as compared to $8.2 million and $14.8 million for the same periods in the prior year. Our effective income tax rates for both the three and six months ended September 30, 2020, was 30.8%, compared to 29.1% and 28.9% for the three and six months ended September 30, 2019. The change in our effective tax rate was due to an adjustment to the federal benefit from state taxes.

Net earnings: The foregoing resulted in net earnings of $19.8 million for the three months ended September 30, 2020, a decrease of $0.3 million, or 1.3%, as compared to $20.1 million of the same period in the prior year. For the six months ended September 30, 2020, net earnings were $37.2 million, an increase of $0.9 million, or 2.5%, as compared to $36.3 million in the same period in the prior year.

Basic and fully diluted earnings per common share was $1.48 for the three months ended September 30, 2020, a decrease of 2.0% as compared to $1.51 for both the basic and fully diluted earnings per common share for the same period in the prior year. For the six months ended September 30, 2020, basic and fully diluted earnings per common share were $2.79 and $2.78, an increase for both of 0.3%, as compared to $2.72 and $2.71, respectively, for the same period in the prior year.

Non-GAAP diluted earnings per share decreased 7.2% to $1.68 for the three months ended September 30, 2020, as compared to $1.81 for the three months ended September 30, 2019. Non-GAAP diluted earnings per share decreased 2.1% to $3.19 for the six months ended September 30, 2020, as compared to $3.26 for the six months ended September 30, 2019.

Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for the three months ending September 30, 2020 was $13.4 million and for the six months ended September 30, 2020 was $13.3 million and $13.4 million respectively. Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for both the three and six months ended September 30, 2019, was 13.3 million and 13.4 million.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity Overview

Our primary source of funding is cash from operations and borrowings which are accounted for as non-recourse and recourse notes payable. We use those funds to meet our capital requirements, which have historically consisted primarily of working capital for operational needs, capital expenditures, purchases of equipment for lease, payments of principal and interest on indebtedness outstanding, acquisitions and the repurchase of shares of our common stock.

ePlus Technology, inc. and certain of its subsidiaries, which are part of our technology segment, finance their operations with funds generated from operations, and with a credit facility with Wells Fargo Commercial Distribution Finance, LLC (“WFCDF”). This facility provides short-term capital for our technology segment. There are two components of the WFCDF credit facility: (1) a floor plan component, and (2) an accounts receivable component.

We believe that cash on hand and funds generated from operations, together with available credit under our credit facility, will be enough to finance our working capital, capital expenditures, and other requirements for at least the next year.

Our ability to continue to expand, both organically and through acquisitions, is dependent upon our ability to generate enough cash flow from operations or from borrowing or other sources of financing as may be required. While at this time we do not anticipate requiring any additional sources of financing to fund operations, if demand for IT products declines, or if our supply of products is delayed or interrupted, our cash flows from operations may be substantially affected.

The extent of the impact of COVID-19 is uncertain and may impact our liquidity position over the longer term. As credit markets have tightened as a result of COVID-19, we may have difficulty funding our financing transactions with lenders, which may result in the use of our cash or a decrease in financing originations.

Cash Flows

The following table summarizes our sources and uses of cash over the periods indicated (in thousands):

Cash flows from operating activities. We had $8.4 million provided by operating activities during the six months ended September 30, 2020, compared to $54.4 million used in operating activities for the six months ended September 30, 2019. See below for a breakdown of operating cash flows by segment (in thousands):

Technology Segment: In the six months ended September 30, 2020, our technology segment provided $44.4 million from operating activities primarily due to cash generated from earnings. Additionally, we had net borrowing on the floor plan component of our credit facility of $91.6 million which was partially offset by repayment of $35.0 million in borrowings under the accounts receivable component of our Technology segment credit facility. The net borrowing is primarily the result of extended payment terms from certain vendor partners that deferred $76.3 million in payments for an additional 30 days. The majority of these programs relate to COVID-19 and ended in October 2020. We use this facility to manage working capital needs. We present changes in this balance as financing activity in our consolidated statement of cash flows.

In the six months ended September 30, 2019, operating cash flows provided by our technology segment was $3.8 million as cash generated from earnings exceeding changes in working capital. In addition, cash provided by the accounts payable – floor plan facility was $13.6 million. Accounts payable – floor plan is a facility used to manage working capital needs and we are required to present changes in this balance as financing activity in our consolidated statement of cash flows.

To manage our working capital, we monitor our cash conversion cycle for our technology segment, which is defined as days sales outstanding (“DSO”) in accounts receivable plus days of supply in inventory (“DIO”) minus days of purchases outstanding in accounts payable (“DPO”). The following table presents the components of the cash conversion cycle for our Technology segment:

(1) Represents the rolling three-month average of the balance of trade accounts receivable-trade, net for our technology segment at the end of the period divided by adjusted gross billings for the same three-month period.

(2) Represents the rolling three-month average of the balance of inventory, net for our technology segment at the end of the period divided by cost of adjusted gross billings for the same three-month period.

(3) Represents the rolling three-month average of the combined balance of accounts payable-trade and accounts payable-floor plan for our technology segment at the end of the period divided by cost of adjusted gross billings for the same three-month period.

Our cash conversion cycle decreased to 21 days at September 30, 2020, compared to 23 days at September 30, 2019. Our standard payment term for customers is between 30-60 days; however, certain customer orders may be approved for extended payment terms. Our DPO increased 8 days. Invoices processed through our credit facility, or the A/P-floor plan balance, are typically paid within 45-60 days from the invoice date, while A/P trade invoices are typically paid within 30 days from the invoice date; however, certain of our suppliers temporarily increased our terms to 90 days. Our DSO increased 2 days due to an increase in sales during the quarter ended September 30, 2020, to customers with terms greater than or equal to net 60 days. The 4 day increase in DIO was due to an increase in average inventory balances of 45.1%, or $24.0 million, due to pending projects for our customers and some delays in receiving by our customers whose offices were temporarily closed due to COVID-19.

Financing Segment: In the six months ended September 30, 2020, our financing segment used $36.0 million from operating activities, primarily due to changes in financing receivables- net of $54.4 million, partially offset by earnings of $10.4 million and an increase in accounts payable trade of $13.0 million. In the six months ended September 30, 2019, our financing segment used $58.2 million from operating activities, primarily due to changes in financing receivables- net of $76.4 million. We recognize the change in financing receivables, including the issuance of financing receivables offset by repayments of financing receivables and the proceeds from the transfer of financing receivables, when we account for the transfer as a sale, as part of operating activities.

Cash flows related to investing activities. In the six months ended September 30, 2020, we used $2.8 million from investing activities, consisting of $3.3 million for purchases of property, equipment and operating lease equipment offset by $0.5 million of proceeds from the sale of property, equipment, and operating lease equipment. In the six months ended September 30, 2019, we used $18.1 million from investing activities, consisting of $13.8 million for acquisitions, $4.9 million for purchases of property, equipment and operating lease equipment offset by $0.7 million of proceeds from the sale of property, equipment, and operating lease equipment.

Cash flows from financing activities. In the six months ended September 30, 2020, cash provided by financing activities was $69.7 million consisting of net borrowings on floor plan facility of $91.6 million, net borrowings of non-recourse and recourse notes payable of $18.1 million, which was partially offset by repayment of $35.0 million in borrowings under the accounts receivable component of our Technology segment credit facility and $4.5 million in repurchase of common stock.

In the six months ended September 30, 2019, cash provided by financing activities was $48.4 million, consisting of net borrowings of non-recourse and recourse notes payable of $49.2 million, net borrowings on floor plan facility of $13.6 million, and offset by $13.7 million in repurchase of common stock and $0.8 million paid to sellers of SLAIT as part of a working capital adjustment.

Our borrowing of non-recourse and recourse notes payable primarily arises from our financing segment when we transfer contractual payments due to us under lease and financing agreements to third-party financial institutions. When the transfers do not meet the requirements for a sale, the proceeds paid to us represent borrowings of non-recourse or recourse notes payable.

Non-Cash Activities. We transfer contractual payments due to us under lease and financing agreements to third-party financial institutions. As a condition of these agreements, certain financial institutions may request that the customer remit their contractual payments to a trust, rather than to us, and the trust pays the financial institution. Alternatively, the customer will make payments to us, and we will remit the payment to the financial institution. The economic impact to us under either structure is similar, in that the assigned contractual payments are paid by the customer and remitted to the lender. However, when our customer makes payments through a trust, such payments represent non-cash transactions. Also, in certain assignment agreements, we may direct the third-party financial institution to pay some of the proceeds from the assignment directly to the vendor or vendors that have supplied the assets being leased and or financed. In these situations, the portion of the proceeds paid directly to our vendors are non-cash transactions.

Secured borrowings – Financing segment

We may finance all or most of the cost of the assets that we finance for customers by transferring all or part of the contractual payments due to us to third-party financing institutions. When we account for the transfer as a secured borrowing, we recognize the proceeds as either recourse or non-recourse notes payable. Our customers are responsible for repaying the debt from a secured borrowing. The lender typically secures a lien on the financed assets at the time the financial assets are transferred and releases it upon collecting all the transferred payments. We are not liable for the repayment of non-recourse loans unless we breach our representations and warranties in the loan agreements. The lender assumes the credit risk and their only recourse, upon default by the customer, is against the customer and the specific equipment under lease. While we expect that the credit quality of our financing arrangements and our residual return history will continue to allow us to obtain such financing, such financing may not be available on acceptable terms, or at all. As a result of COVID-19, credit markets have tightened. Our lenders are more discerning and are taking longer to approve transactions. In addition, certain lenders have narrowed their demand to certain types of transactions and/or credit quality and excluding others. For example, some lenders have declined transactions that have longer terms or transactions with certain market segments. Therefore, we may no longer be able to transfer certain receivables to financial institutions which may result in investing our capital or declining the transaction.

Credit facility — Technology segment

Our subsidiary, ePlus Technology, inc., and certain of its subsidiaries have a financing facility from WFCDF to finance their working capital requirements for inventories and accounts receivable. There are two components of this facility: (1) a floor plan component; and (2) an accounts receivable component.

On May 15, 2020, we executed an amendment to the WFCDF credit facility that increased the aggregate limit of the two components, except during a temporary uplift, to $275.0 million. Additionally, we have an election to temporarily increase the aggregate limit to $350.0 million for a period of not less than 30 days, provided that all such periods shall not exceed 150 days in the aggregate in any calendar year. Further, the amendment increased the limit on the accounts receivable component of the WFCDF credit facility to $100.0 million, changed the interest rate to two percent (2.00%) plus the greater of one month LIBOR or seventy-five hundredths of one percent (0.75%), and modified certain restrictions on ePlus Technology, inc.’s ability to pay dividends to ePlus inc.

As of September 30, 2020, the limit of the two components of the credit facility was $275 million, and the accounts receivable component had a sub-limit of $100 million.

The WFCDF credit facility is secured by the assets of ePlus Technology, inc. and certain of its subsidiaries, and varies available borrowing based upon the value of their receivables and inventory. Additionally, the credit facility requires a guaranty of $10.5 million by ePlus inc.

The credit facility restricts the ability of ePlus Technology, inc. and certain of its subsidiaries to pay dividends to ePlus inc. unless their available borrowing meets certain thresholds. As of September 30, 2020, their available borrowing met the threshold such that there were no restricted net assets of ePlus Technology, inc.

The credit facility requires that financial statements of ePlus Technology, inc. and certain of its subsidiaries be provided within 45 days of each quarter and 90 days of each fiscal year end and requires that other operational reports be provided on a regular basis. Either party may terminate with 90 days’ advance notice.

The loss of the WFCDF credit facility, including during circumstances related to COVID-19, could have a material adverse effect on our future results as we currently rely on this facility and its components for daily working capital and liquidity for our technology segment and as an operational function of our accounts payable process.

Floor Plan Component. After a customer places a purchase order with us and after we have completed our credit review of the customer, we place an order for the equipment with one of our vendors. Generally, most purchase orders from us to our vendors are first financed under the floor plan component and reflected in “accounts payable—floor plan” in our consolidated balance sheets. Payments on the floor plan component are due on three specified dates each month, generally 30-60 days from the invoice date. In addition, certain suppliers have temporarily extended their repayment terms to us due to COVID-19. Most customer payments in our technology segment are remitted to our lockboxes. Once payments are cleared, the monies in the lockbox accounts are automatically and daily transferred to our operating account. On the due dates of the floor plan component, we make cash payments to WFCDF. Our borrowings and repayments under the floor plan component are included in “net borrowings (repayments) on floor plan facility” within cash flows from the financing activities in our consolidated statements of cash flows.

The respective floor plan component credit limits and actual outstanding balance payables for the dates indicated were as follows (in thousands):

On October 1, 2020, we elected to exercise the temporary increase in the aggregate limit of the WFCDF credit facility to $350.0 million for a period of not less than 30 days.

Accounts Receivable Component. ePlus Technology, inc. and certain of its subsidiaries have an accounts receivable component included within the WFCDF credit facility, which has a revolving line of credit. The outstanding balance under the accounts receivable component is recorded as recourse notes payable on our consolidated balance sheets. Our borrowings and repayments under the accounts receivable component are included in “borrowings of non-recourse and recourse notes payable” and “repayments of non-recourse and recourse notes payable”, respectively, within cash flows from the financing activities in our consolidated statements of cash flows.

As of March 31, 2020, there was an outstanding balance for the accounts receivable component of $35.0 million. As of September 30, 2020, there was no outstanding balance for the accounts receivable component. As of September 30, 2020, and March 31, 2020, the maximum credit limit was $100.0 million and $50.0 million, respectively. We may maintain a balance on the accounts receivable component to assist in mitigating risk arising from COVID-19.

Performance Guarantees

In the normal course of business, we may provide certain customers with performance guarantees, which are generally backed by surety bonds. In general, we would only be liable for the amount of these guarantees in the event of default in the performance of our obligations. We are in compliance with material performance obligations under all service contracts for which there is a performance guarantee, and we believe that any liability incurred in connection with these guarantees would not have a material adverse effect on our consolidated statements of operations.

Off-Balance Sheet Arrangements

As part of our ongoing business, we do not participate in transactions that generate relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K, or other contractually narrow or limited purposes. As of September 30, 2020, we were not involved in any unconsolidated special purpose entity transactions.

Adequacy of Capital Resources

The continued implementation of our business strategy will require a significant investment in both resources and managerial focus. In addition, we may selectively acquire other companies that have attractive customer relationships and skilled sales and/or engineering forces. We may also open offices in new geographic areas, which may require a significant investment of cash. We may also acquire technology companies to expand and enhance the platform of bundled solutions to provide additional functionality and value-added services. We may continue to use our internally generated funds to finance investments in leased assets or investments in notes receivables due from our customers. These actions may result in increased working capital needs as the business expands. As a result, we may require additional financing to fund our strategy, implementation, potential future acquisitions, and working capital needs, which may include additional debt and equity financing. The impacts of COVID-19 may limit or eliminate our access to capital. While the future is uncertain, we do not believe our credit facility will be terminated by the lender or us. Our lending partners in our financing segment have tightened credit availability and are more discerning in their approval process. However, currently we have funding resources available for our transactions.

Inflation

For the periods presented herein, inflation has been relatively low, and we believe that inflation has not had a material effect on our results of operations.

Potential Fluctuations in Quarterly Operating Results

Our future quarterly operating results and the market price of our common stock may fluctuate. In the event our revenues or earnings for any quarter are less than the level expected by securities analysts or the market in general, such shortfall could have an immediate and significant adverse impact on the market price of our common stock. Any such adverse impact could be greater if any such shortfall occurs near the time of any material decrease in any widely followed stock index or in the market price of the stock of one or more public equipment leasing and financing companies, IT resellers, software competitors, or our major customers or vendors.

Our quarterly results of operations are susceptible to fluctuations for a number of reasons, including, but not limited to the worldwide impacts from COVID-19, currency fluctuations, reduction in IT spending, any reduction of expected residual values related to the equipment under our leases, the timing and mix of specific transactions, the reduction of manufacturer incentive programs, and other factors. Quarterly operating results could also fluctuate as a result of our sale of equipment in our lease portfolio to a lessee or third-party at the expiration of a lease term or prior to such expiration, and the transfer of financial assets. Sales of equipment and transfers of financial assets may have the effect of increasing revenues and net income during the quarter in which the sale occurs and reducing revenues and net income otherwise expected in subsequent quarters. See Part I, Item 1A, “Risk Factors,” in our 2020 Annual Report.

We believe that comparisons of quarterly results of our operations are not necessarily meaningful and that results for one quarter should not be relied upon as an indication of future performance.

Our cash flow may be adversely affected by the risks related to the COVID-19 pandemic, which may result in delays in the collections of our accounts receivables or non-payment.

Although a substantial portion of our liabilities are non-recourse, fixed-interest-rate instruments, we utilize lines of credit and other financing facilities that are subject to fluctuations in short-term interest rates. Our non-recourse instruments, which are denominated in US dollars, were entered for other than trading purposes and bear interest at a fixed rate. Because the interest rate on these instruments is fixed, changes in interest rates will not directly impact our cash flows. Financing transactions funded with our cash flows, not debt, and may be subject to interest rate risk. If the market interest rate exceeds our internal rate of return, we may not fund the transaction to obtain the proceeds. Borrowings under the WFCDF facility bear interest at a market-based variable rate. As of September 30, 2020, the aggregate fair value of our recourse and non-recourse borrowings approximated their carrying value.

We have transactions in foreign currencies, primarily in British Pounds, Euros, and Indian Rupees. There is a potential for exposure to fluctuations in foreign currency rates resulting primarily from the translation exposure associated with the preparation of our consolidated financial statements. In addition, we have foreign currency exposure when transactions are not denominated in our subsidiary’s functional currency. To date, our foreign operations are insignificant in relation to total consolidated operations, and we believe that potential fluctuations in currency exchange rates will not have a material effect on our financial position.

The UK referendum (“Brexit”) to leave the European Union could impact revenue items, cost items, tax, goodwill impairments and liquidity, among others. The most obvious immediate impact is the effect of foreign exchange fluctuations on revenue and cost items. We have determined that our foreign currency exposure for our UK operations is insignificant in relation to total consolidated operations, and we believe those potential fluctuations in currency exchange rates and other Brexit-related economic and operational risks will not have a material effect on our results of operations and financial position.

We evaluate Brexit-related developments on a regular basis to determine if such developments are anticipated to have a material impact on the Company’s results on operations and financial position.

We lease assets in foreign countries, including Canada, the UK and several other European countries. As a lessor, we lease assets for amounts denominated in British Pounds, Euros, and Canadian dollars. As our foreign operations have been smaller compared to our domestic operations, we believe that potential fluctuations in currency exchange rates will not have a material effect on our financial position.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures, or “disclosure controls,” as defined in the Exchange Act Rule 13a-15(e). Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this quarterly report, is recorded, processed, summarized and reported within the periods specified in the SEC’s rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our disclosure controls include some, but not all, components of our internal control over financial reporting. Based upon that evaluation, our CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2020.

Changes in Internal Control Over Financial Reporting.

There have not been any changes in our internal control over financial reporting during the quarter ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including our CEO and CFO, do not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system cannot provide absolute assurance due to its inherent limitations; it is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. A control system also can be circumvented by collusion or improper management override. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of such limitations, disclosure controls and internal control over financial reporting cannot prevent or detect all misstatements, whether unintentional errors or fraud. However, these inherent limitations are known features of the financial reporting process; therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

There has not been any material change in the risk factors previously disclosed in Part I, Item 1A of our 2020 Annual Report.