# Eplus Inc: Form 10-Q for the period ended Jun 30, 2019

- Company: [Eplus Inc](/companies/plus.md) (CIK 1022408)
- Form: 10-Q
- Filed: 2019-08-08
- Accepted by EDGAR: Aug 7, 2019, 18:33 ET
- Period: 2019-06-30
- Accession: 0001140361-19-014491
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1022408/000114036119014491/form10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1022408/000114036119014491/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-04-01 to 2019-06-30 | $381.4m | us-gaap:Revenues |
| Cost of revenue | 3 months, 2019-04-01 to 2019-06-30 | $288.7m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2019-04-01 to 2019-06-30 | $92.6m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2019-04-01 to 2019-06-30 | $65.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-04-01 to 2019-06-30 | $22.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-04-01 to 2019-06-30 | $628.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-04-01 to 2019-06-30 | $6.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-04-01 to 2019-06-30 | $16.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-04-01 to 2019-06-30 | $1.20 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-04-01 to 2019-06-30 | $1.21 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-04-01 to 2019-06-30 | 13,457,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2019-04-01 to 2019-06-30 | −$87.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Share repurchases | 3 months, 2019-04-01 to 2019-06-30 | $13.3m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-06-30 | $35.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-06-30 | $626.2m | us-gaap:AssetsCurrent |
| Total assets | at 2019-06-30 | $874.8m | us-gaap:Assets |
| Current liabilities | at 2019-06-30 | $407.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-06-30 | $446.2m | us-gaap:Liabilities |
| Shareholders' equity | at 2019-06-30 | $428.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 61,754 characters.

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 2019 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 2019 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 *e*Plus 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 29 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, Check Point, Cisco Systems, Citrix, Commvault, Dell EMC, F5 Networks, Gigamon, HPE, Juniper Networks, Lenovo, Microsoft, NetApp, Nutanix, NVIDIA, Oracle, Palo Alto Networks, Pure Storage, Rubrik, Splunk, 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 *e*Plus 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 *e*Plus 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 June 30, 2019, the percentage of revenue by customer end market within our technology segment includes technology industry 21%, state and local government and educational institutions (“SLED”) 17%, financial services 15%, healthcare 15%, and telecommunications, media and entertainment 14%. 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 69% of our operating income, while our financing segment accounts for 3% of our net sales, and 31% of our operating income for the three months ended June 30, 2019.

### 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 are as follows (dollars in thousands):

| Consolidated | Three months ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Net sales | $381,372 | $356,532 |
| Gross profit | $92,639 | $80,703 |
| Gross margin | 24.3% | 22.6% |
| Operating income margin | 6.0% | 5.7% |
| Net earnings | $16,188 | $15,273 |
| Net earnings margin | 4.2% | 4.3% |
| Net earnings per common share - diluted | $1.20 | $1.12 |
| Non-GAAP: Net earnings (1) | $19,459 | $17,432 |
| Non-GAAP: Net earnings per common share - diluted (1) | $1.44 | $1.28 |
| Adjusted EBITDA (2) | $28,567 | $25,370 |
| Adjusted EBITDA margin | 7.5% | 7.1% |
| Purchases of property and equipment used internally | $1,249 | $1,180 |
| Purchases of equipment under operating leases | 269 | 450 |
| Total capital expenditures | $1,518 | $1,630 |
| Technology Segment |  |  |
| Net sales | $368,535 | $346,864 |
| Adjusted gross billings (3) | $548,363 | $482,301 |
| Gross profit | $81,811 | $72,783 |
| Gross margin | 22.2% | 21.0% |
| Operating income | $15,737 | $15,540 |
| Adjusted EBITDA (2) | $21,419 | $20,341 |
| Financing Segment |  |  |
| Net sales | $12,837 | $9,668 |
| Gross profit | $10,828 | $7,920 |
| Operating Income | $7,024 | $4,931 |
| Adjusted EBITDA (2) | $7,148 | $5,029 |

(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.

|  | Three months ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| GAAP: Earnings before tax | $22,716 | $20,568 |
| Share based compensation | 1,942 | 1,693 |
| Acquisition and integration expense | 401 | 416 |
| Acquisition related amortization expense | 2,187 | 1,764 |
| Other (income) expense | 45 | (97) |
| Non-GAAP: Earnings before provision for income taxes | 27,291 | 24,344 |
| GAAP: Provision for income taxes | 6,528 | 5,295 |
| Share based compensation | 559 | 483 |
| Acquisition and integration expense | 115 | 119 |
| Acquisition related amortization expense | 607 | 474 |
| Other (income) expense | 13 | (28) |
| Tax benefit on restricted stock | 10 | 569 |
| Non-GAAP: Provision for income taxes | 7,832 | 6,912 |
| Non-GAAP: Net earnings | $19,459 | $17,432 |
| GAAP: Net earnings per common share - diluted | $1.20 | 1.12 |
| Non-GAAP: Net earnings per common share - diluted | 1.44 | 1.28 |

|  | Three Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| GAAP: Net earnings per common share - diluted | $1.20 | $1.12 |
| Share based compensation | 0.10 | 0.09 |
| Acquisition and integration expense | 0.02 | 0.02 |
| Acquisition related amortization expense | 0.12 | 0.10 |
| Other (income) expense | - | (0.01) |
| Tax benefit on restricted stock | - | (0.04) |
| Total non-GAAP adjustments - net of tax | $0.24 | $0.16 |
| Non-GAAP: Net earnings per common share - diluted | $1.44 | $1.28 |

(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.

| Consolidated | Three Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Net earnings | $16,188 | $15,273 |
| Provision for income taxes | 6,528 | 5,295 |
| Share based compensation | 1,942 | 1,693 |
| Acquisition and integration expense | 401 | 416 |
| Depreciation and amortization | 3,463 | 2,790 |
| Other (income) expense | 45 | (97) |
| Adjusted EBITDA | $28,567 | $25,370 |
| Technology Segment |  |  |
| Operating income | $15,737 | $15,540 |
| Depreciation and amortization | 3,407 | 2,789 |
| Share based compensation | 1,874 | 1,596 |
| Acquisition and integration expense | 401 | 416 |
| Adjusted EBITDA | $21,419 | $20,341 |
| Financing Segment |  |  |
| Operating income | $7,024 | $4,931 |
| Depreciation and amortization | 56 | 1 |
| Share based compensation | 68 | 97 |
| Adjusted EBITDA | $7,148 | $5,029 |

(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.

|  | Three Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Technology segment net sales | $368,535 | $346,864 |
| Costs incurred related to sales of third-party maintenance, software assurance and subscription/Saas licenses, and services | 179,828 | $135,437 |
| Adjusted gross billings | $548,363 | $482,301 |

29

### Consolidated Results of Operations

During the three months ended June 30, 2019, net sales increased 7.0%, or $24.8 million, to $381.4 million, compared to the same period in the prior fiscal year. Product sales for the three months ended June 30, 2019 increased 4.0% to $335.6 million, or an increase of $12.8 million from $322.8 million in the prior year. Services sales during the three months ended June 30, 2019 increased 35.8% to $45.8 million, or an increase of $12.1 million over prior year services sales of $33.7 million. The increase in net sales was due to the acquisition of SLAIT Consulting, LLC in January 2019, as well as organic growth. The greatest increase in demand for products was from our customers in the telecom, media and entertainment, SLED, and healthcare industries; we experienced a small increase in demand from technology and financial services but had a reduction in demand from all other categories of customers, during the three months ended June 30, 2019 compared to the prior year.

Adjusted gross billings increased 13.7%, or $66.1 million, to $548.4 million for the three months ended June 30, 2019 from $482.3 million for the same period in the prior fiscal year. The increase in adjusted gross billings was due, in part, to the SLAIT acquisition, as well as higher demand from our current customers. This increase was offset by a shift in mix to third-party maintenance, software assurance, subscriptions/SaaS licenses, and services where we recognize revenue on a net basis. As a result, net sales increased by a smaller percentage than adjusted gross billings.

Consolidated gross profit for the three months ended June 30, 2019, rose 14.8% to $92.6 million, compared with $80.7 million for the three months ended June 30, 2018. Consolidated gross margins were 24.3% for the three months ended June 30, 2019, which is an increase of 170 basis points compared to 22.6% for the same period in the prior fiscal year. The increase in margins for the three-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 product margins, expanded gross profit and margins of our financing segment, and increased service revenues.

Our operating expenses for the three months ended June 30, 2019, increased 16.0% to $69.9 million, as compared to $60.2 million for the prior year period. The majority of this increase reflects increase in selling, general, and administrative expense of 15.5% or $8.8 million, due, in part to increases in variable compensation, software license and maintenance, as well as the operating expenses associated with the acquisition of SLAIT. As of June 30, 2019, we had 1,538 employees, an increase of 289, or 23.1%, from 1,249 last year. The increase includes 246 current employees are related to the acquisition of SLAIT, including the employees performing our staffing services. Depreciation and amortization expense increased $0.7 million, due to the SLAIT acquisition, and interest and financing costs increased $0.2 million, due to an increase in the average balance of non-recourse notes payable outstanding during the three months ended June 30, 2019, as compared to the prior year.

As a result, operating income increased $2.3 million, or 11.2%, to $22.8 million and operating margin increased by 30 basis points to 6.0%, as compared to the three months ended June 30, 2018.

Consolidated net earnings for the three months ended June 30, 2019 were $16.2 million, an increase of 6.0%, or $0.9 million, over the prior year’s results, due to the increase in revenues and gross profit, partially offset by increased operating expenses. Our effective tax rate for the current quarter was 28.7%, compared with 25.7% in the prior year quarter.

Adjusted EBITDA increased $3.2 million, or 12.6%, to $28.6 million and adjusted EBITDA margin increased 40 basis points to 7.5% for the three months ended June 30, 2019, as compared to the prior year period of 7.1%.

Diluted earnings per share increased 7.1%, or $0.08, to $1.20 per share for the three months ended June 30, 2019, as compared to $1.12 per share for the three months ended June 30, 2018. Non-GAAP diluted earnings per share increased 12.5% to $1.44 for the three months ended June 30, 2019, as compared to $1.28 for the three months ended June 30, 2018.

Cash and cash equivalents decreased $44.2 million or 55.4% to $35.6 million at June 30, 2019, as compared to $79.8 million as of March 31, 2019. The decrease is primarily the result of share repurchases, investments in our financing portfolio, working capital required for the growth in our technology segment, and an increase in our cash conversion cycle, partially offset by cash flows from operations. 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.

### 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 Revenues

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, 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 post-term events.

We expect to continue to expand by opening new sales locations and hiring additional staff for specific targeted market areas in the near future whenever we can find both experienced personnel and desirable geographic areas. These investments may reduce our results from operations in the short term.

### CRITICAL ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with US GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances relating to various transactions had been different, or different assumptions were made, it is possible that alternative accounting policies would have been applied, resulting in a change in financial results. On an ongoing basis, we reevaluate our estimates, including those related to revenue recognition, residual values, vendor incentives, lease classification, goodwill and intangibles, and reserves for credit losses and income taxes specifically relating to uncertain tax positions. We base estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. For all such estimates, we caution that future events rarely develop exactly as forecasted, and therefore, these estimates may require adjustment.

Our 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 2019 Annual Report.

### SEGMENT RESULTS OF OPERATIONS

### The three months ended June 30, 2019, compared to the three months ended June 30, 2018

#### Technology Segment

The results of operations for our technology segment for the three months ended June 30, 2019 and 2018 were as follows (dollars in thousands):

| Net sales | Three Months Ended June 30, 2019 | 2018 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Product | $322,764 | $313,149 | $9,615 | 3.1% |
| Services | 45,771 | 33,715 | 12,056 | 35.8% |
| Total | 368,535 | 346,864 | 21,671 | 6.2% |
| Cost of sales |  |  |  |  |
| Product | 258,054 | 254,064 | 3,990 | 1.6% |
| Services | 28,670 | 20,017 | 8,653 | 43.2% |
| Total | 286,724 | 274,081 | 12,643 | 4.6% |
| Gross profit | 81,811 | 72,783 | 9,028 | 12.4% |
| Selling, general, and administrative | 62,667 | 54,454 | 8,213 | 15.1% |
| Depreciation and amortization | 3,407 | 2,789 | 618 | 22.2% |
| Operating expenses | 66,074 | 57,243 | 8,831 | 15.4% |
| Operating income | $15,737 | $15,540 | $197 | 1.3% |
| Adjusted gross billings | $548,363 | $482,301 | $66,062 | 13.7% |
| Adjusted EBITDA | $21,419 | $20,341 | $1,078 | 5.3% |

*Net sales*: Net sales for the three months ended June 30, 2019, were $368.5 million compared to $346.9 million during the three months ended June 30, 2018, an increase of 6.2% or $21.7 million, due to increases from our healthcare, telecom, media and entertainment industries, and all the other categories of customers, which was partially offset by a decrease in demand from technology, and financial services customers. Product sales increased 3.1% due to higher demand from our customers. Services revenues increased 35.8%, or $12.1 million due to an increase in staffing and professional and managed services some of which was from the SLAIT acquisition.

Adjusted gross billings for the three months ended June 30, 2019 increased to $548.4 million, or 13.7%, from $482.3 million in the prior year. The increase in adjusted gross billings was due, in part, to the SLAIT acquisition as well as higher demand from our current customers. This increase was offset by a shift in mix to third-party maintenance, software assurance, subscriptions/SaaS licenses, and services where we recognize revenue on a net basis. As a result, net sales for the three months ended June 30, 2019 increased at a lower percentage than adjusted gross billings

We rely on our vendors to fulfill a large majority of shipments to our customers. As of June 30, 2019, we had open orders of $210.6 million and deferred revenue of $60.9 million. As of June 30, 2018, we had open orders of $168.7 million and deferred revenues of $59.9 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 are summarized below:

| Revenue by customer end market: | Twelve Months Ended June 30, 2019 | 2018 | Change |
| --- | ---: | ---: | ---: |
| Technology | 21% | 24% | (3%) |
| SLED | 17% | 17% | 0% |
| Financial Services | 15% | 15% | 0% |
| Healthcare | 15% | 14% | 1% |
| Telecom, Media & Entertainment | 14% | 14% | 0% |
| All others | 18% | 16% | 2% |
| Total | 100% | 100% |  |

| Revenue by vendor: | Twelve Months Ended June 30, 2019 | 2018 | Change |
| --- | ---: | ---: | ---: |
| Cisco Systems | 42% | 41% | 1% |
| NetApp | 4% | 4% | 0% |
| HP Inc. & HPE | 6% | 6% | 0% |
| Dell/EMC | 5% | 4% | 1% |
| Juniper Networks | 3% | 3% | 0% |
| Arista Networks | 4% | 4% | 0% |
| All others | 36% | 38% | (2%) |
| Total | 100% | 100% |  |

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 June 30, 2019, we had an increase in the percentage total revenues from customers in the health care and the all other customer category, which was partially offset by a decrease in the percentage of total revenues in the technology customer market. These changes were driven by changes in customer buying cycles and 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 Cisco Systems and Hewlett Packard companies, which, combined a fairly constant percentage of 48% and 47% of total revenues for the twelve-month periods ending June 30, 2019 and 2018, respectively. None of the vendors included within the “other” category exceeded 5% of total revenues.

*Cost of sales:* The 4.6% increase in cost of sales was due to the increase in service and product sales, partially offset by an improvement in gross margin on product sales, due to a shift in product mix, as we sold a higher proportion of third-party software assurance, maintenance and services, which are recognized on a net basis. Our gross margin increased 100 basis points to 22.2% for the three months ended June 30, 2019, compared to 21.2% in the same period in the prior year due to an increase in our services revenues and a shift in product mix, as we sold a higher proportion of third-party software assurance, maintenance and services for which the revenues are presented on a net basis. Vendor incentives earned as a percentage of sales decreased 40 basis points for the three months ended June 30, 2019, resulting in a negative impact on gross margin, as compared to same period in the prior year.

There are ongoing changes to the incentive programs offered to us by our vendors. Accordingly, if we are unable to maintain the level of vendor incentives we are currently receiving, gross margin may decrease.

*Selling, general, and administrative:* Selling, general, and administrative expenses of $62.7 million for the three months ended June 30, 2019, increased by $8.2 million, or 15.1% from $54.5 million the prior year. Salaries and benefits increased $6.2 million, or 13.6% to $51.5 million, compared to $45.3 million during the prior year due to increased employment levels with approximately 29.4% of this increase due to higher variable compensation related to the increase in gross profit. Our technology segment had 1,505 employees as of June 30, 2019, an increase of 299, or 24.8%, from 1,206 at June 30, 2018. This increase includes 246 of our current employees are related to the SLAIT acquisition, including the employees performing our staffing services. General and administrative expenses increased $2.0 million, or 22.5%, to $11.2 million during the three months ended June 30, 2019, compared to $9.1 million the prior year, due to higher software licenses and maintenance, office rent, travel expense, and other general expenses.

*Depreciation and amortization:* Depreciation and amortization increased $0.6 million, or 22.2%, to $3.4 million during the three months ended June 30, 2019 as compared to $2.8 million in the prior year, due to the acquisition of SLAIT in January 2019.

*Segment operating income:* As a result of the foregoing, operating income was $15.7 million, an increase of $0.2 million, or 1.3%, for the three months ended June 30, 2019 as compared to $15.5 million in the prior year period. For the three months ended June 30, 2019, adjusted EBITDA was $21.4 million, an increase of $1.1 million, or 5.3%, compared to $20.3 million in the prior year period.

#### Financing Segment

The results of operations for our financing segment for the three months ended June 30, 2019 and 2018 were as follows (dollars in thousands):

|  | Three Months Ended June 30, 2019 | 2018 | Change |  |
| --- | ---: | ---: | ---: | ---: |
| Net product sales | 12,837 | 9,668 | 3,169 | 32.8% |
| Cost of product sales | 2,009 | 1,748 | 261 | 14.9% |
| Gross profit | 10,828 | 7,920 | 2,908 | 36.7% |
| Selling, general, and administrative | 3,120 | 2,512 | 608 | 24.2% |
| Depreciation and amortization | 56 | 1 | 55 | 5500.0% |
| Interest and financing costs | 628 | 476 | 152 | 31.9% |
| Operating expenses | 3,804 | 2,989 | 815 | 27.3% |
| Operating income | $7,024 | $4,931 | $2,093 | 42.4% |
| Adjusted EBITDA | $7,148 | $5,029 | $2,119 | 42.1% |

*Net sales*: Net sales increased by $3.2 million, or 32.8%, to $12.8 million for the three months ended June 30, 2019, as compared to prior year results due to higher transactional gains, post contract earnings, and portfolio earnings, which partially were offset by lower other financing revenues. During the quarters ended June 30, 2019 and 2018, we recognized net gains on sales of financial assets of $3.3 million and $1.3 million, respectively, and the fair value of assets received from these sales were $69.9 million and $46.9 million, respectively.

At June 30, 2019, we had $169.5 million in financing receivables and operating leases, compared to $140.7 million as of June 30, 2018, an increase of $28.8 million, or 20.5%.

*Cost of sales:* Cost of sales increased $0.3 million for the three months ended June 30, 2019, which consists of depreciation expense from operating leases. Gross profit increased by 36.7% to $10.8 million, for the three months ended June 30, 2019 as compared to the prior year.

*Selling, general and administrative:* For the three months ended June 30, 2019, selling, general, and administrative expenses increased by $0.6 million or 24.2%, which was due primarily to an increase variable compensation due to higher gross profit.

Interest and financing costs increased by 31.9% to $0.6 million for the three months ended June 30, 2019, compared to the prior year, due to an increase in the average total notes payable outstanding over the three months ended June 30, 2018. Total notes payable were $72.9 million as of June 30, 2019, an increase of $18.3 million, or 33.6%, as compared to $54.6 million as of June 30, 2018. Our weighted average interest rate for non-recourse notes payable was 4.25% and 4.31%, as of June 30, 2019 and 2018, respectively.

*Segment operating income*: As a result of the foregoing, operating income and adjusted EBITDA both increased $2.1 million or 42.4% and 42.1%, to $7.0 million and $7.1 million, respectively, for the three months ended June 30, 2019, over the prior year period.

#### Consolidated

*Other income:* Other income (expense) decreased by $0.1 million due to reduction in interest income during the three months ended June 30, 2019, compared to the prior year period.

*Income taxes:* Our provision for income tax expense was $6.5 million for the three months ended June 30, 2019, as compared to $5.3 million for the same period in the prior year. Our effective income tax rates for the three months ended June 30, 2019 and 2018 were 28.7% and 25.7%, respectively. The change in our effective income tax rate was primarily due to a benefit received in the prior year for stock which vested during the quarter.

*Net earnings*: The foregoing resulted in net earnings of $16.2 million for the three months ended June 30, 2019, an increase of 6.0%, as compared to $15.3 million during the three months ended June 30, 2018.

Basic and fully diluted earnings per common share were $1.21 and $1.20, for the three months ended June 30, 2019, an increase of 6.1% and 7.1% as compared to $1.14 and $1.12, respectively, for the three months ended June 30, 2018.

Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for the three months ended June 30, 2019 was 13.4 million and 13.5 million, respectively. Weighted average common shares outstanding used in the calculation of the basic and diluted earnings per common share for the three months ended June 30, 2018 was 13.4 million and 13.6 million, respectively.

### LIQUIDITY AND CAPITAL RESOURCES

#### Liquidity Overview

Our primary sources of liquidity have historically been cash and cash equivalents, internally generated funds from operations, and borrowings, both non-recourse and recourse. We have used 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.

*e*Plus Technology, inc. and certain subsidiaries, part of our technology segment, finance their operations with funds generated from operations, and with a credit facility with 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.

As of June 30, 2019, the facility had an aggregate limit of $250 million for the two components, and the accounts receivable component had a sub-limit of $50 million, which bears interest assessed at a rate of the One Month LIBOR plus two- and one-half percent. We have an election beginning July 1 in each year to temporarily increase the aggregate limit of the two components to $325.0 million ending the earlier of 90 days following the election or October 31 of that same year.

After a customer places a purchase order with us and we have completed our credit review, 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. On the due date of the invoices financed by the floor plan component, the invoices are paid by the accounts receivable component of the credit facility. The balance of the accounts receivable component is then reduced by payments from our available cash. The outstanding balance under the accounts receivable component is recorded as recourse notes payable on our consolidated balance sheets. There was no outstanding balance at June 30, 2019 or June 30, 2018, while the maximum credit limit was $50.0 million and $30.0 million, respectively. The borrowings and repayments under the floor plan component are reflected as “net borrowings (repayments) on floor plan facility” in the cash flows from financing activities section of our consolidated statements of cash flows.

Most customer payments in our technology segment are remitted to our lockboxes. Once payments are cleared, the monies in the lockbox accounts are automatically transferred to our operating account on a daily basis. On the due dates of the floor plan component, we make cash payments to WFCDF. These payments from the accounts receivable component to the floor plan component and repayments from our cash are reflected as “net borrowings on floor plan facility” in the cash flows from financing activities section of our consolidated statements of cash flows. We engage in this payment structure to minimize our interest expense and bank fees in connection with financing the operations of our technology segment.

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

Our ability to continue to fund our planned growth, both internally and externally, is dependent upon our ability to generate sufficient cash flow from operations or to obtain additional funds through equity or debt financing, or from 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.

#### Cash Flows

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

|  | Three Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(87,394) | $(49,032) |
| Net cash used in investing activities | (1,226) | (31,815) |
| Net cash provided by financing activities | 44,327 | 20,037 |
| Effect of exchange rate changes on cash | 81 | 92 |
| Net Decrease in Cash and Cash Equivalents | $(44,212) | $(60,718) |

*Cash flows from operating activities*. We used $87.4 million in from operating activities during the three months ended June 30, 2019, compared to $49.0 million for the three months ended June 30, 2018. See below for a breakdown of operating cash flows by segment (in thousands):

|  | Three Months Ended June 30, 2019 | 2018 |
| --- | ---: | ---: |
| Technology segment | $(42,072) | $(42,497) |
| Financing segment | (45,322) | (6,535) |
| Net cash used in operating activities | $(87,394) | $(49,032) |

Technology Segment: In the three months ended June 30, 2019, our technology segment used $42.1 million from operating activities due to changes in working capital exceeding cash generated from earnings. Partially offsetting the cash used in operations were changes in the accounts payable - floor plan balance of $19.9 million. The 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.

In the three months ended June 30, 2018, our technology segment used $42.5 million from operating activities due to changes in working capital exceeding cash generated from earnings. Partially offsetting the cash used in operations were changes in the accounts payable - floor plan balance of $17.5 million.

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:

|  | As of June 30, 2019 | 2018 | 2017 |
| --- | ---: | ---: | ---: |
| (DSO) Days sales outstanding (1) | 53 | 53 | 48 |
| (DIO) Days inventory outstanding (2) | 11 | 10 | 19 |
| (DPO) Days payable outstanding (3) | (40) | (41) | (42) |
| Cash conversion cycle | 24 | 22 | 25 |

(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 increased to 24 days at June 30, 2019, compared to 22 days at June 30, 2018, resulting from a 1 day increase in DIO and a 1 day decrease in DPO. Our DIO as of June 30, 2019, was primarily impacted by an increase in average inventory balances of 19.4%, or $9.1 million, while adjusted gross cost of goods sold for the same period increased 13.9%. The remaining change in our cash conversion cycle is due to DPO timing of payments.

Financing Segment: In the three months ended June 30, 2019, our financing segment used $45.3 million from operating activities, primarily due to changes in financing receivables- net of $58.2 million. In the three months ended June 30, 2018, our financing segment used $6.5 million from operating activities, primarily due to changes in working capital. In this period, which we elected not to update using the transition option available when we adopted ASC 842, changes in financing receivables not sourced through us are reflected in cash flows from investing activities. With the adoption of ASC 842, for periods beginning after April 1, 2019, 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 three months ended June 30, 2019, we used $1.2 million from investing activities, consisting of $1.5 million for purchases of property, equipment and operating lease equipment offset by $0.3 million of proceeds from the sale of property, equipment, and operating lease equipment.

In the three months ended June 30, 2018, we used $31.8 million from investing activities, including $1.6 million for purchases of property, equipment and operating lease equipment. In this period, which we elected not to update using the transition option available when we adopted ASC 842, cash used in investing activities also included net cash outflows related to financing receivables of $31.2 million, consisting of the issuance of financing receivables of $49.4 million, purchases of assets to be leased or financed of $7.2 million, and was partially offset by cash proceeds from the repayment of financing receivables of $15.6 million, and the sale of financing receivables of $9.8 million.

*Cash flows from financing activities*. In the three months ended June 30, 2019, cash provided by financing activities was $44.3 million consisting of net borrowings of non-recourse and recourse notes payable of $38.0 million, net borrowings on floor plan facility of $19.9 million, and offset by $13.3 million in repurchase of common stock and $0.3 million paid to sellers of SLAIT as part of a working capital adjustment.

In the three months ended June 30, 2018, cash provided by financing activities was $20.0 million consisting of net borrowings of non-recourse and recourse notes payable of $12.9 million, and net borrowing on floor plan facility of $17.5 million, and partially offset by cash used for the repurchase of common stock of $9.8 million, and repayment of financing of acquisitions of $0.5 million.

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 and recourse notes payable.

#### Non-Cash Activities

We assign contractual payments due to us under lease and financing agreements to third-party financial institutions. As a condition to the assignment agreement, 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 to through a trust, such payments represent non-cash transactions.

In addition, in certain assignment agreements, we may direct the third-party financial institution to pay some of the proceeds from the assignment of 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.

#### Liquidity and Capital Resources

We may utilize non-recourse notes payable to finance approximately 80% to 100% of the purchase price of the assets being leased or financed by our customers. Any balance of the purchase price remaining after non-recourse funding and any upfront payments received from the customer (our equity investment in the equipment) must generally be financed by cash flows from our operations, the sale of the equipment leased to third-parties, or other internal means. Although 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.

The financing necessary to support our lease and financing activities has been provided by our cash and non-recourse borrowings. We monitor our exposure closely. We are able to obtain financing through our traditional lending sources using primarily non-recourse borrowings from third-party banks and finance companies. Non-recourse financings are loans whose repayment is the responsibility of a specific customer, although we may make representations and warranties to the lender regarding the specific contract or have ongoing loan servicing obligations. Under a non-recourse loan, we borrow from a lender an amount based on the present value of the contractually committed payments at a fixed rate of interest, and the lender secures a lien on the financed assets. When the lender is fully repaid, the lien is released, and all further proceeds are ours. 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 the lender’s only recourse, upon default, is against the customer and the specific equipment.

At June 30, 2019, our non-recourse notes payable increased 50.0% to $72.9 million, as compared to $48.6 million at March 31, 2019. There were no recourse notes payable as of June 30, 2019, compared to $28 thousand as of March 31, 2019.

Whenever desirable, we arrange for equity investment financing, which includes selling lease payments, including the residual portions, to third-parties and financing the equity investment on a non-recourse basis. We generally retain customer control and operational services and have minimal residual risk. We usually reserve the right to share in remarketing proceeds of the equipment on a subordinated basis after the investor has received an agreed-to return on its investment.

#### Credit Facility — Technology

Our subsidiary, *e*Plus Technology, inc., and certain subsidiaries. has a financing facility from WFCDF to finance its 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. This facility has full recourse to *e*Plus Technology, inc. and certain subsidiaries. and is secured by a blanket lien against all its assets, such as chattel paper, receivables and inventory. As of June 30, 2019, the facility had an aggregate limit of the two components of $250.0 million with an accounts receivable sub-limit of $30.0 million.

On July 27, 2017, we executed an amendment to the WFCDF credit facility that temporarily increased the aggregate limit of the two components from $250.0 million to $325.0 million from the date of the agreement through October 31, 2017 and provides us an election beginning July 1 in each subsequent year to similarly temporarily increase the aggregate limit of the two components to $325.0 million ending the earlier of 90 days following the date of election and October 31 of that same year. On July 31, 2019, we elected to temporarily increase the aggregate limit to $325.0 million.

Availability under the facility may be limited by the asset value of equipment we purchase or accounts receivable and may be further limited by certain covenants and terms and conditions of the facility. These covenants include but are not limited to a minimum excess availability of the facility and *e*Plus Technology, inc.’s minimum earnings before interest, taxes, depreciation and amortization. We were in compliance with these covenants as of June 30, 2019. Interest on the facility is assessed at a rate of the One Month LIBOR plus two- and one-half percent if the payments are not made on the three specified dates each month. The facility also requires that financial statements of *e*Plus Technology, inc. and certain subsidiaries. be provided within 45 days of the end of each quarter and 90 days of each fiscal year end and other operational reports be provided on a regular basis. Either party may terminate the credit facility with 90 days advance written notice.

We are not, and do not believe that we are reasonably likely to be, in breach of the WFCDF credit facility. In addition, we do not believe that the covenants of the WFCDF credit facility materially limit our ability to undertake financing. In this regard, the covenants apply only to our subsidiary, *e*Plus Technology, inc. and certain subsidiaries. This credit facility is secured by the assets of only *e*Plus Technology, inc. and certain subsidiaries. and the guaranty as described below.

The WFCDF credit facility requires a guaranty of $10.5 million by *e*Plus inc. The guaranty requires *e*Plus inc. to deliver its annual audited financial statements by a certain date. We have delivered the annual audited financial statements for the year ended March 31, 2019, as required. The loss of the WFCDF credit facility 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

Purchases by *e*Plus Technology, inc. and certain subsidiaries. including computer technology products, software, maintenance and services are in part financed through a floor plan component in which interest expense for the first thirty to sixty days, in general, is not charged. The floor plan liabilities are recorded as accounts payable—floor plan on our consolidated balance sheets, as they are normally repaid within the fifteen to sixty-day time frame and represent assigned accounts payable originally generated with the manufacturer/distributor. In some cases, we are able to pay invoices early and receive a discount, but if the fifteen to sixty-day obligation is not paid timely, interest is then assessed at stated contractual rates.

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

| Maximum Credit Limit at June 30, 2019 | Balance as of June 30, 2019 | Maximum Credit Limit at March 31, 2019 | Balance as of March 31, 2019 |
| ---: | ---: | ---: | ---: |
| $250,000 | $136,013 | $250,000 | $116,083 |

#### Accounts Receivable Component

*e*Plus Technology, inc. and certain subsidiaries. has an accounts receivable component included within the WFCDF credit facility, which has a revolving line of credit. On the due date of the invoices financed by the floor plan component, the invoices are paid by the accounts receivable component of the credit facility. The balance of the accounts receivable component is then reduced by payments from our available cash. The outstanding balance under the accounts receivable component is recorded as recourse notes payable on our consolidated balance sheets. There was no balance outstanding for the accounts receivable component at June 30, 2019, or March 31, 2019, while the maximum credit limit was $50.0 million for both periods.

#### 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 the 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 June 30, 2019, 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.

### 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 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 2019 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.

## Market risk

As filed, 3,040 characters.

A substantial portion of our liabilities are non-recourse, fixed-interest-rate instruments, which were aligned with the customer financing rate creating an interest rate spread that is our profit. Should we not fund these transactions with debt at inception and interest rates rise above our interest rate with our customer, we may not be able to fund the transaction without reduced profit or a loss, thus inhibiting our ability to generate proceeds from the transaction. We utilize our lines of credit and other financing facilities that are subject to fluctuations in short-term interest rates. These instruments, which are generally denominated in US dollars, were entered into for other than trading purposes and, with the exception of amounts drawn under the WFCDF facility, 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. Borrowings under the WFCDF facility bear interest at a market-based variable rate. As of June 30, 2019, 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 to leave the European Union (“Brexit”) could impact revenue items, cost items, tax, immigration, trade, goodwill impairments and liquidity, among others. The most obvious immediate impact is the effect of foreign exchange fluctuations on revenue and cost items. 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 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 have assets in the UK, Canada, Iceland, and Spain. As a lessor, we have entered into lease contracts and non-recourse, fixed-interest-rate financing denominated in British Pounds, Canadian Dollars, Icelandic Krona, and Euros. To date, our foreign operations have been insignificant, and we believe that potential fluctuations in currency exchange rates will not have a material effect on our financial position.

## Controls and procedures

As filed, 2,723 characters.

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 June 30, 2019.

#### Changes in Internal Control Over Financial Reporting.

There have not been any changes in our internal control over financial reporting during the quarter ended June 30, 2019, 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.

## Risk factors

As filed, 125 characters.

There has not been any material change in the risk factors previously disclosed in Part I, Item 1A of our 2019 Annual Report.

Filed Aug 8, 2019.
Source: SEC EDGAR, the filing index for accession 0001140361-19-014491. Last ingested by Listed: Nov 6, 2026, 17:13 ET. No prices; not investment advice.