EPLUS INC 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the financial condition and results of operations (“financial review”) of e Plus is intended to help investors understand our company and our operations. The financial review is provided as a supplement to, and should be read in conjunction with, the consolidated financial statements and the related notes included elsewhere in this report. For a discussion of results for the year ended March 31, 2020 compared to the results for the year ended March 31, 2019, see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the year ended March 31, 2020, filed with the Securities and Exchange Commission on May 22, 2020. EXECUTIVE OVERVIEW Business Description e Plus and its consolidated subsidiaries provide leading IT products and services, flexible leasing and financing solutions, and enterprise supply management to enable our customers to optimize their IT infrastructure and supply chain processes. We design, implement and provide IT solutions for our customers. We are focused primarily on specialized IT segments including data center infrastructure, networking, security, cloud and collaboration. Our solutions incorporate hardware and software products from multiple leading IT vendors. As our customers’ IT requirements have grown increasingly complex, we have evolved our offerings by investing in our professional and managed services capabilities and by expanding our relationships with existing and emerging key vendors. We continue to strengthen our relationships with vendors focused on emerging technologies, which have enabled us to provide our customers with new and evolving IT solutions. We are an authorized reseller of over 1,000 vendors, but primarily of approximately 100 vendors, including Arista Networks, Check Point, Cisco Systems, Dell EMC, F5 Networks, FireEye, Fortinet, Gigamon, Hewlett Packard Enterprise, HP Inc., Juniper, Lenovo, McAfee, NetApp, Nutanix, Oracle, Palo Alto Networks, Pure Storage, Splunk, VMware, among many others. We possess top-level engineering certifications with a broad range of leading IT vendors that enable us to offer IT solutions that are optimized for each of our customers’ specific requirements. Our proprietary software solutions allow our customers to procure, control and automate their IT solutions environment. COVID-19 The novel coronavirus (“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, safety-related modifications to workplaces, 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 along with other sales offices with limited capacity and with required health and safety protocols in place. We plan to reopen our other offices using a phased approach. 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. 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. 27 Table of Contents 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 including the impact of various mutations; governmental, business, and individuals’ actions in response to the pandemic; the efficacy of the vaccine, duration of the vaccination distribution, and demand by people to be inoculated; 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,” of this Annual Report on Form 10-K. Key Business Metrics Our management monitors several 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 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 excluded or 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. 28 Table of Contents Our key business metrics are as follows (dollars in thousands): Year Ended March 31, Consolidated 2021 2020 2019 Net sales $ 1,568,323 $ 1,588,404 $ 1,372,673 Gross profit $ 393,554 $ 391,191 $ 330,388 Gross margin 25.1 % 24.6 % 24.1 % Operating income margin 6.8 % 6.0 % 5.8 % Net earnings $ 74,397 $ 69,082 $ 63,192 Net earnings margin 4.7 % 4.3 % 4.6 % Net earnings per common share - diluted $ 5.54 $ 5.15 $ 4.65 Non-GAAP: Net earnings (1) $ 85,567 $ 82,167 $ 69,580 Non-GAAP: Net earnings per common share - diluted (1) $ 6.38 $ 6.13 $ 5.12 Adjusted EBITDA (2) $ 128,245 $ 119,359 $ 100,415 Adjusted EBITDA margin 8.2 % 7.5 % 7.3 % Technology Segment Net sales $ 1,507,954 $ 1,530,138 $ 1,329,520 Adjusted gross billings (3) $ 2,263,865 $ 2,227,885 $ 1,918,995 Gross profit $ 346,235 $ 340,588 $ 294,662 Gross margin 23.0 % 22.3 % 22.2 % Operating income $ 75,665 $ 62,155 $ 56,738 Adjusted EBITDA (2) $ 97,219 $ 85,840 $ 77,202 Financing Segment Net sales $ 60,369 $ 58,266 $ 43,153 Gross profit $ 47,319 $ 50,603 $ 35,726 Operating income $ 30,670 $ 33,124 $ 22,796 Adjusted EBITDA (2) $ 31,026 $ 33,519 $ 23,213 (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 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 in understanding and evaluating 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. 29 Table of Contents Year Ended March 31, 2021 2020 2019 GAAP: Earnings before tax $ 106,906 $ 95,959 $ 86,230 Share based compensation 7,167 7,954 7,244 Acquisition and integration expense 271 1,676 1,813 Acquisition related amortization expense 9,116 9,217 7,423 Other income (571 ) (680 ) (6,696 ) Non-GAAP: Earnings before provision for income taxes 122,889 114,126 96,014 GAAP: Provision for income taxes 32,509 26,877 23,038 Share based compensation 2,188 2,218 1,988 Acquisition and integration expense 78 490 522 Acquisition related amortization expense 2,730 2,487 1,916 Other income (143 ) (200 ) (1,702 ) Tax benefit on restricted stock (40 ) 87 672 Non-GAAP: Provision for income taxes 37,322 31,959 26,434 Non-GAAP: Net earnings $ 85,567 $ 82,167 $ 69,580 Year Ended March 31, 2021 2020 2019 GAAP: Net earnings per common share - diluted $ 5.54 $ 5.15 $ 4.65 Share based compensation 0.38 0.43 0.38 Acquisition and integration expense 0.01 0.09 0.09 Acquisition related amortization expense 0.48 0.51 0.40 Other income (0.03 ) (0.04 ) (0.35 ) Tax benefit on restricted stock - (0.01 ) (0.05 ) Total non-GAAP adjustments - net of tax $ 0.84 $ 0.98 $ 0.47 Non-GAAP: Net earnings per common share - diluted $ 6.38 $ 6.13 $ 5.12 (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. 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. The presentation of Adjusted EBITDA has been changed from prior period presentations to include adjustments for expenses related to acquisitions such as legal, accounting, tax, and adjustments to the fair value of contingent purchase price consideration as well as stock compensation. 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 in understanding and evaluating 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 comparative measures. 30 Table of Contents Year Ended March 31, Consolidated 2021 2020 2019 Net earnings $ 74,397 $ 69,082 $ 63,192 Provision for income taxes 32,509 26,877 23,038 Share based compensation 7,167 7,954 7,244 Interest and financing costs 521 294 - Acquisition and integration expense 271 1,676 1,813 Depreciation and amortization 13,951 14,156 11,824 Other income (571 ) (680 ) (6,696 ) Adjusted EBITDA $ 128,245 $ 119,359 $ 100,415 Technology Segment Operating income $ 75,665 $ 62,155 $ 56,738 Depreciation and amortization 13,839 14,016 11,812 Share based compensation 6,923 7,699 6,839 Interest and financing costs 521 294 - Acquisition and integration expense 271 1,676 1,813 Adjusted EBITDA $ 97,219 $ 85,840 $ 77,202 Financing Segment Operating income $ 30,670 $ 33,124 $ 22,796 Depreciation and amortization 112 140 12 Share based compensation 244 255 405 Adjusted EBITDA $ 31,026 $ 33,519 $ 23,213 (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, 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. Year Ended March 31, 2021 2020 2019 Technology segment net sales $ 1,507,954 $ 1,530,138 $ 1,329,520 Costs incurred related to sales of third party maintenance, software assurance and subscription/Saas licenses, and services 755,911 697,747 589,475 Adjusted gross billings $ 2,263,865 $ 2,227,885 $ 1,918,995 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. Financial Summary During the year ended March 31, 2021, net sales decreased 1.3% to $1,568.3 million, or a decrease of $20.1 million compared to $1,588.4 million in the prior fiscal year. Product sales for the year ended March 31, 2021, decreased 2.1% to $1,366.2 million, or a decrease of $29.1 million compared to $1,395.3 million in the prior year. Services sales during the year ended March 31, 2021, increased 4.7% to $202.2 million, or an increase of $9.1 million, over prior year services sales of $193.1 million. The decrease in net sales was mostly due a change in product sales mix, with a greater portion in sales of third-party maintenance, software assurance, subscription/SaaS licenses, and services, for which the revenues and cost of sales are presented on a net basis. We had decreases in net sales to customers in the technology and healthcare markets, which were almost entirely offset by increases in net sales to customers in the telecom, media and entertainment, financial services, and a few smaller other categories of customers, during the year ended March 31, 2021, compared to the prior year. 31 Table of Contents Adjusted gross billings increased by 1.6%, or $36.0 million, to $2,263.9 million for the year ended March 31, 2021, compared to $2,227.9 million in the prior fiscal year. The increase in Adjusted gross billings was due to higher demand from our current customers, as well as from our acquisitions. Adjusted gross billings increased year over year while net sales decreased slightly due to a shift in mix to a higher proportion of third-party maintenance, software assurance, subscriptions/SaaS licenses, and services which we recognize revenue on a net basis. Consolidated gross profit increased 0.6%, to $393.6 million, compared to $391.2 million in the prior fiscal year due to higher margins. Consolidated gross margin increased 50 basis points to 25.1% for the year ended March 31, 2021, compared to 24.6% for the year ended March 31, 2020. The increase in gross margin was due to expanded gross profit and margins of our technology segment, due to a shift in revenue mix resulting from our continued focus on value added services for our customers, including the increase in sales of our professional and managed services, and sales of third-party maintenance agreements, software assurance, subscriptions/SaaS licenses, and services. The increase in gross margin was partially offset by lower margins in our finance segment due to gains on several large transactions in the prior year. For the year ended March 31, 2021, operating expenses decreased $8.7 million, or 2.9%, to $287.2 million, as compared to $295.9 million in the prior year. The decrease in operating expenses for the year ended March 31, 2021, was due to reductions in selling, general and administrative expenses, interest and financing costs, and depreciation and amortization expense. Selling, general, and administrative expense for the year, decreased $7.9 million, or 2.8%, to $271.3 million, due to decreases in travel and entertainment, advertising and marketing, employee fringe benefits, a reduction in acquisition related expense, general office related expenses, and salary expense, partially offset by an increase in variable compensation, and our provision for credit losses. As of March 31, 2021, we had 1,560 employees, a decrease of 1.1% from 1,579 as of March 31, 2020. Depreciation and amortization expense decreased by $0.2 million and interest and financing costs decreased $0.6 million, due to a decrease in the average balance of non-recourse and recourse notes payable outstanding during the year. Operating income increased $11.1 million, or 11.6%, to $106.3 million and operating margin increased by 80 basis points to 6.8%, as compared to the year ended March 31, 2020. The increase in operating earnings was due to a year over year reductions in selling, general and administrative expense and an increase in gross profit. Our effective tax rate for the year ended March 31, 2021, was 30.4%, compared to 28.0% for the same period in the prior year primarily due to non-deductible executive compensation. The higher effective tax rate had a negative effect on earnings for the year ended March 31, 2021. Net earnings for the year ended March 31, 2021, increased 7.7% to $74.4 million, as compared to $69.1 million for the year ended March 31, 2020. Net earnings for the year ended March 31, 2020 included other income of $1.0 million from payments received from distributions from various legal claims. Adjusted EBITDA for the year ended March 31, 2021, was $128.2 million, an increase of $8.9 million, or 7.4%, compared to the prior year. Adjusted EBITDA margin was 8.2% for the year ended March 31, 2021 an increase of 70 basis points over the prior year. For the year ended March 31, 2021, diluted earnings per share were $5.54, an increase of $0.39, or 7.6%, compared to the prior year of $5.15 per diluted share. Non-GAAP diluted earnings per share was $6.38 for fiscal year 2021, an increase of $0.25, or 4.1%, from $6.13 per diluted share in the prior year. Cash and cash equivalents increased $43.3 million, or 50.2%, to $129.6 million at March 31, 2021, compared to March 31, 2020. The increase is primarily the result of cash flows from operations , which was partially offset by an increase in working capital required for the growth in our technology segment, and an increase in our cash conversion cycle, investments in our financing portfolio, and the repurchase of shares of our common stock for $6.9 million. 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. 32 Table of Contents Technology Segment The technology segment derives revenue from sales of product, project-related advanced professional services, managed services and staff augmentation. The technology segment sells 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 information technology products. Customers who purchase IT equipment and services from us may have a customer master agreement (“CMA”) with our company, which stipulates 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. 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. We endeavor to minimize the cost of sales through incentive programs provided by vendors and distributors. The programs we qualify for 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 variable discounts applied against the list price, 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 and, 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 and in Canada, the UK, and several other European countries. 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 the sale of off-lease (used) equipment. We also recognize revenue from events that occur after the initial sale of a financial asset and remarketing fees from certain residual value investments. CRITICAL ACCOUNTING ESTIMATES Our consolidated financial statements have been prepared in accordance with US GAAP. Our significant accounting policies are described in Note 1 of the Notes to the Consolidated Financial Statements under “Organization and Summary of Significant Accounting Policies.” The accounting policies described below are significantly affected by critical accounting estimates. Such accounting policies require significant judgments, assumptions, and estimates, and actual results could differ materially from the amounts reported based on these policies. REVENUE RECOGNITION — When we enter contracts with customers, we are required to identify the performance obligations in the contract. We recognize most of our revenues from the sales of third-party products, third-party software, third-party maintenance, software support, and services, e Plus professional and managed services, and hosting e Plus proprietary software. Our recognition of revenue differs for each of these different types of performance obligations and identifying each performance obligation appropriately may require judgement. When a contract contains multiple distinct performance obligations, we allocate the transaction price to each performance obligation based on its relative standalone selling price. We determine standalone selling prices using expected cost-plus margin. When we finance sales of third-party software and third-party maintenance, software support, and services, we reduce the transaction price by the financing component. 33 Table of Contents We recognize revenue from sales of third-party products and third-party software at the point in time that control passes to the customer, which is typically upon delivery of the product to the customer. We perform an analysis to estimate the amount of sales in-transit at the end of the period and adjust revenue and the related costs to reflect only what has been delivered to the customer. This analysis is based upon an analysis of current quarter and historical delivery dates. We recognize revenue from sales of third-party maintenance, software support, and services when our customer and vendor accept the terms and conditions of the arrangement. On occasion, judgement is required to determine this point in time. We provide e Plus professional services under both time and materials and fixed price contracts. When services are provided on a time and materials basis, we recognize sales at agreed-upon billing rates as services are performed. When services are provided on a fixed fee basis, we recognize sales over time in proportion to our progress toward complete satisfaction of the performance obligation. Using this method requires a determination of the appropriate input or output method to measure progress. We most often measure progress based on costs incurred in proportion to total estimated costs, commonly referred to as the “cost-to-cost” method. When using this method, significant judgement may be required to estimate the total costs to complete the performance obligation. We typically recognize sales of e Plus managed services on a straight-line basis over the period services are provided. We recognize financing revenues from our investments in leases and notes receivable. We recognize interest income on our notes-receivable using the effective interest method. We classify our leases as either sales-type leases or operating leases. For sales-type leases, upon lease commencement, we recognize the present value of the lease payments and the residual asset discounted using the rate implicit in the lease. When we are financing equipment provided by another dealer, we typically do not have any selling profit or loss arising from the lease. When we are the dealer of the equipment being leased, we typically recognize revenue in the amount of the lease receivable and cost of sales in the amount of the carrying value of the underlying asset minus the unguaranteed residual asset. We may need to use judgement to determine the fair value of the equipment. After the commencement date, we recognize interest income as part of net sales using the effective interest method. For operating leases, we recognize the underlying asset as an operating lease asset. We depreciate the asset on a straight-line basis to its estimated residual value over its estimated useful life. We recognize the lease payments over the lease term on a straight-line basis as part of net sales. We account for the transfer of financial assets as sales or secured borrowings. When a transfer meets all the requirements for sale accounting, we derecognize the financial asset and record a net gain or loss that is included in net sales. We utilize qualified attorneys to provide a true-sale-at-law opinion to support the conclusion that transferred financial assets have been legally isolated. RESIDUAL ASSETS — Our estimate for the residual asset in a lease is the amount we expect to derive from the underlying asset following the end of the lease term. Our estimates vary, both in amount and as a percentage of the original equipment cost, and depend upon several factors, including the equipment type, vendor’s discount, market conditions, lease term, equipment supply and demand, and new product announcements by vendors. We evaluate residual values for impairment on a quarterly basis. We do not recognize upward adjustments due to changes in estimates of residual values. GOODWILL — We test goodwill for impairment on an annual basis, as of October 1, and between annual tests if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Goodwill is tested for impairment at a level of reporting referred to as a reporting unit. In a qualitative assessment, we assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. A significant amount of judgment is involved in determining if an event representing an indicator of impairment has occurred between annual test dates. Such indicators may include: a significant decline in expected future cash flows; a sustained, significant decline in stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; the testing for recoverability of a significant asset group within a reporting unit; and reductions in revenue or profitability growth rates. In the quantitative impairment test, we compare the fair value of a reporting unit with its carrying amount, including goodwill. We estimate the fair value of each reporting unit using a combination of the income approach and market approaches. 34 Table of Contents The income approach incorporates the use of a discounted cash flow method in which the estimated future cash flows and terminal values for each reporting unit are discounted to a present value using a discount rate. Cash flow projections are based on management’s estimates of economic and market conditions which drive key assumptions of revenue growth rates, operating margins, capital expenditures and working capital requirements. The discount rate in turn is based on the specific risk characteristics of each reporting unit, the weighted average cost of capital and its underlying forecast. The market approach estimates fair value by applying performance metric multiples to the reporting unit’s prior and expected operating performance. The multiples are derived from comparable publicly traded companies with similar operating and investment characteristics as the reporting unit. The fair values determined by the market approach and income approach, as described above, are weighted to determine the fair value for each reporting unit. Although we have consistently used the same methods in developing the assumptions and estimates underlying the fair value calculations, such estimates are uncertain and may vary from actual results. VENDOR CONSIDERATION — We receive payments and credits from vendors and distributors, including consideration pursuant to volume incentive programs, and shared marketing expense programs. Many of these programs extend over one or more quarters’ sales activities. Different programs have different vendor/program specific goals to achieve. We recognize the rebates pursuant to volume incentive programs, when the rebate is probable and reasonably estimable, based on a systematic and rational allocation of the cash consideration offered to each of the underlying transactions that results in our progress towards earning the rebate. Should our actual performance be different from our estimates, we may be required to adjust our receivables. ALLOWANCE FOR CREDIT LOSSES — We maintain an allowance for credit losses related to our accounts receivable and financing receivables. We measure expected credit losses on a collective (pool) basis when similar risk characteristics exist. Prior to providing credit, we assign an internal rating for each customer’s credit quality based on the customer’s financial status, rating agency reports and other financial information. We review our internal ratings for each customer at least annually or when there is an indicator of a change in credit quality, such as a delinquency or bankruptcy. We estimate a loss rate for each pool using the historical loss rate as a basis and adjust for differences in asset specific risk and current conditions. Since the onset of COVID-19, we have recognized an increase in the allowance to reflect forecasted credit deterioration. Should our actual credit losses be different from our estimates, this will result in adjustments to credit losses that could adversely affect our operating results. INCOME TAXES — We make certain estimates and judgments in determining income tax expense for financial statement reporting purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which principally arise from differences in the timing of recognition of revenue and expense for tax and financial statement reporting purposes. We also must analyze income tax reserves, as well as determine the likelihood of recoverability of deferred tax assets and adjust any valuation allowances accordingly. Considerations with respect to the recoverability of deferred tax assets include the period of expiration of the tax asset, planned use of the tax asset, and historical and projected taxable income as well as tax liabilities for the tax jurisdiction to which the tax asset relates. Valuation allowances are evaluated periodically and will be subject to change in each future reporting period as a result of changes in one or more of these factors. The calculation of our tax liabilities also involves considering uncertainties in the application of complex tax regulations. We recognize liabilities for uncertain income tax positions based on our estimate of whether, and the extent to which, additional taxes will be required. BUSINESS COMBINATIONS — We account for business combinations using the acquisition method. For each acquisition, we recognize most assets acquired, and liabilities assumed at their fair values at the acquisition date. Our valuations of certain assets acquired, including customer relationships and trade names, and certain liabilities assumed, such as performance obligations, involve significant judgement and estimation. Additionally, our determination of the purchase price may include an estimate for the fair value of contingent consideration. We utilize independent valuation specialists to assist us in determining the fair value of certain assets and liabilities. Our valuations utilize significant estimates, such as forecasted revenues and profits. Changes in our estimates could significantly impact the value of certain assets and liabilities. RECENT ACCOUNTING PRONOUNCEMENTS The information set forth in Note 2 , “Recent Accounting Pronouncements” to the accompanying Consolidated Financial Statements included in Part II, Item 8 of this Form 10-K is incorporated herein by reference. 35 Table of Contents RESULTS OF OPERATIONS The Year Ended March 31, 2021 Compared to the Year Ended March 31, 2020 Technology Segment The results of operations for our technology segment for the years ended March 31, 2021 and 2020 were as follows (in thousands): Year Ended March 31, 2021 2020 Change Net sales Product $ 1,305,789 $ 1,337,022 $ (31,233 ) (2.3 %) Services 202,165 193,116 9,049 4.7 % Total 1,507,954 1,530,138 (22,184 ) (1.4 %) Cost of sales Product 1,036,627 1,069,110 (32,483 ) (3.0 %) Services 125,092 120,440 4,652 3.9 % Total 1,161,719 1,189,550 (27,831 ) (2.3 %) Gross profit 346,235 340,588 5,647 1.7 % Selling, general, and administrative 256,210 264,123 (7,913 ) (3.0 %) Depreciation and amortization 13,839 14,016 (177 ) (1.3 %) Interest and financing costs 521 294 227 77.2 % Operating expenses 270,570 278,433 (7,863 ) (2.8 %) Operating income $ 75,665 $ 62,155 $ 13,510 21.7 % Adjusted gross billings $ 2,263,865 $ 2,227,885 $ 35,980 1.6 % Adjusted EBITDA $ 97,219 $ 85,840 $ 11,379 13.3 % Net sales: Net sales for the year ended March 31, 2021, decreased by $22.2 million, or 1.4%, to $1,508.0 million due to a decrease in net sales to our customers in technology, healthcare, and all the other category of customers, partially offset by increases in net sales to our customers in the telecom, media and entertainment, financial services, and SLED sectors. Product sales decreased 2.3%, or $31.2 million, to $1,305.8 million and services revenues increased 4.7%, or $9.0 million, to $202.2 million due to an increase in managed services for the year ended March 31, 2021, as compared to the prior year. Adjusted gross billings increased to $2,263.9 million, or 1.6%, from $2,227.9 million in the prior year. The increase in Adjusted gross billings was due to our acquisition of Systems Management and Planning, Inc. (“SMP ”) and an increase in organic demand from our customers in the telecom, media and entertainment, SLED, financial services, and smaller other categories of customers. Despite the increase in Adjusted gross billings, we had a decrease in net sales due a shift in mix to more third-party maintenance, software assurance, subscriptions/SaaS licenses, and services for which we recognize revenue on a net basis. 36 Table of Contents We analyze sales by customer end market and by manufacturer. The percentage of net sales by industry and vendor are summarized below: Twelve Months Ended March 31, 2021 2020 Change Revenue by customer end market: Technology 17 % 21 % (4 %) Telecom, Media & Entertainment 25 % 19 % 6 % SLED 16 % 16 % 0 % Healthcare 13 % 15 % (2 %) Financial Services 13 % 13 % 0 % All others 16 % 16 % 0 % Total 100 % 100 % Twelve Months Ended March 31, 2021 2020 Change Revenue by vendor: Cisco Systems 36 % 40 % (4 %) NetApp 4 % 4 % 0 % HP Inc. & HPE 4 % 5 % (1 %) Dell/EMC 7 % 6 % 1 % Juniper Networks 6 % 4 % 2 % Arista Networks 3 % 5 % (2 %) All others 40 % 36 % 4 % Total 100 % 100 % Our revenues by customer end market have remained consistent over the prior year, with over 80% of our sales being generated from customers within the five end markets specified above. In fiscal year 2021, we had an increase in the percentage total revenues from customers in the telecom, media and entertainment industry, and decreases in the percentage of total revenues in the technology, and, healthcare industry. These changes were driven by 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 percentage of sales revenues for SLED, financial services, and the all other category remained constant year over year The majority of our revenues by vendor are derived from our top six suppliers, which, when combined, is a fairly constant percentage of 60% or more of total revenues for the twelve-month periods ended March 31, 2021, and 2020. Cost of sales: The 2.3% decrease in cost of sales was due to the decrease in product sales and a change in product sales mix, with a greater portion from sales of third-party maintenance, software assurance, subscription/SaaS licenses, and services, for which the revenues and cost of sales are presented on a net basis, and with a greater portion from services revenue, for which we have higher profit margins. Gross profit : Gross profit increased 1.7%, to $346.2 million, compared to $340.6 million in the prior fiscal year due to higher margins. Gross margin on product sales increased 60 basis points to 20.6% due a shift in product mix to a greater proportion of sales of third-party maintenance, software assurance, subscription/SaaS licenses, and services. The gross margin on services increased 50 basis points to 38.1%. for the year ended March 31, 2021, due to the increase in managed services, as compared to the prior year. Vendor incentives earned as a percentage of sales for the year ended March 31, 2021 declined by 30 basis points, which has a negative effect on gross margin, as compared to the prior year. Selling, general, and administrative expenses: Selling, general, and administrative expenses of $256.2 million for the year ended March 31, 2021, decreased by $7.9 million, or 3.0% compared to the prior year, due to decreases in travel and entertainment, advertising and marketing, acquisition related expense, and general office related expenses, partially offset by an increase in variable compensation. Salaries and benefits, including variable compensation, increased $2.8 million or 1.3% to $221.8 million, compared to $219.0 million during the prior year, due to higher variable compensation a result of the increase in gross profit. Our technology segment had 1,526 employees as of March 31, 2021, which is a decrease of 17, or 1.1%, from 1,543 at March 31, 2020. We added 102 employees on December 31, 2020 due to our acquisition of SMP. Our overall decrease of 17 employees from March 31, 2020 to March 31, 2021 was primarily attributable to an overall decrease of 14 positions in sales and marketing. 37 Table of Contents General and administrative expenses, excluding acquisition related expense and provision for credit losses, decreased $9.3 million, or 21.7%, to $33.6 million during the year ended March 31, 2021, compared to $42.9 million the prior year. Contributing to the year over year decrease in general and administrative expense were reductions in travel and entertainment, advertising and marketing, and general office related expenses. Some of the reduction in general and administrative expense was driven by changes as a result of the COVID-19 pandemic and management cost reduction efforts. Acquisition related expenses in the year ended March 31, 2021 were $1.4 million lower than the prior year expense which included adjustments to contingent consideration related to a previous acquisition of $1.4 million. Depreciation and amortization expense: Depreciation and amortization expense decreased $0.2 million, or 1.3%, to $13.8 million during the fiscal year ended March 31, 2021, compared to $14.0 million in the prior year. Interest and financing costs: Interest and financing costs were $0.5 million for the year ended March 31, 2021, compared to $0.3 million in the prior year. Segment earnings : As a result of the foregoing, operating income increased $13.5 million, or 21.7%, to $75.7 million for the year ended March 31, 2021, compared to $62.2 million in the prior year and Adjusted EBITDA increased 13.3% to $97.2 million for the year ended March 31, 2021, compared to $85.8 million in the prior year. Financing Segment The results of operations for our financing segment for the years ended March 31, 2021, and 2020 were as follows (in thousands): Year Ended March 31, 2021 2020 Change Net sales $ 60,369 $ 58,266 $ 2,103 3.6 % Cost of sales 13,050 7,663 5,387 70.3 % Gross profit 47,319 50,603 (3,284 ) (6.5 %) Selling, general, and administrative 15,053 15,059 (6 ) (0.0 %) Depreciation and amortization 112 140 (28 ) (20.0 %) Interest and financing costs 1,484 2,280 (796 ) (34.9 %) Operating expenses 16,649 17,479 (830 ) (4.7 %) Operating income $ 30,670 $ 33,124 $ (2,454 ) (7.4 %) Adjusted EBITDA $ 31,026 $ 33,519 $ (2,493 ) (7.4 %) Net sales : Net sales increased by $2.1 million, or 3.6%, to $60.4 million for the year ended March 31, 2021. The increase was due to higher post contract earnings, portfolio earnings, and other financing revenues, partially offset by gains on several significant transactions in the prior year. Post-contract earnings increased by $4.4 million to $23.8 million as compared to $19.4 million in the prior year due to gain on the sale of equipment at the end of leases. Portfolio earnings increased $1.8 million to $16.5 million, due to increases in sales-type lease earnings and notes receivable earnings over the prior fiscal year. Other financing revenues increased $3.2 million to $5.6 million, compared to the prior year primarily due to higher profit being recognized upon the extension of certain operating leases where the modified leases were determined to be sales-type leases. Transactional gains decreased $7.3 million to $14.5 million compared to the prior year which had a high volume of sales of financing receivables, particularly with government-related customers. T otal proceeds from sales of financing receivables were $364.0 million and $593.7 million for the years ended March 31, 2021, and 2020, respectively . Cost of sales : Cost of sales, which consists of depreciation expense from operating leases and cost of off-lease equipment sales , increased 70.3%, or $5.4 million, to $13.1 million for the year ended March 31, 2021, as compared to the prior year, due to an increase in the cost of off-lease equipment sales of $4.4 million and increase in operating lease depreciation of $0.9 million. Gross profit decreased 6.5%, or $3.3 million, to $47.3 million primarily due to gains on several significant transactions in the prior year. Selling, general, and administrative expenses: Selling, general, and administrative expenses were $15.1 million for both the years ended March 31, 2021 and 2020. Increases in our provision for credit losses of $0.4 million and variable compensation of $0.3 million, were offset by reductions in general and administrative expense of $0.6 million and salaries and benefits of $0.1 million, for the year ended March 31, 2021 as compared to the prior year. Our financing segment employed 34 people as of March 31, 2021, compared to 36 employees as of March 31, 2020, a decrease of 5.6%. Certain support functions for the financing segment are outsourced to the technology segment. 38 Table of Contents Interest and financing costs: Interest and financing costs decreased by $0.8 million, or 34.9%, to $1.5 million for the year ended March 31, 2021, as compared to the prior year. Our total notes payable for the financing segment increased as of March 31, 2021, to $56.1 million from $37.8 million for the prior year, although our average balance of notes payable outstanding during the year was lower than during the year ended March 31, 2020. Our weighted average interest rate for our non-recourse notes payable was 3.35% as of March 31, 2021, compared to 3.84% for March 31, 2020. Segment earnings : As a result of the foregoing, operating income decreased $2.5 million, or 7.4%, to $30.7 million for the year ended March 31, 2021, as compared to the prior year. Adjusted EBITDA decreased $2.5 million, or 7.4%, to $31.0 million for the year ended March 31, 2021, as compared to the prior year. Consolidated Other income: Other income and expense during the year ended March 31, 2021, was income of $0.6 million and included foreign exchange rate gain of $0.5 million and interest income of $0.1 million. Other non-operating income of $0.7 million for the prior year included $1.0 million from payments received from distributions from various legal claims and interest income of $0.1 million, partially offset by foreign exchange rate loss of $0.4 million. Income taxes: Our effective income tax rates for the years ended March 31, 2021, and 2020 were 30.4% and 28.0%, respectively. The increase in our effective income tax rate is primarily due to non-deductible executive compensation. Net earnings: Net earnings were $74.4 million for the year ended March 31, 2021, an increase of 7.7% or $5.3 million as compared to $69.1 million in the prior fiscal year. The net earnings increase was due primarily to the increase in operating profits from our technology segment, partially offset by lower financing segment profits and the higher tax rate in the current year compared to the year ended March 31, 2020. Basic and fully diluted earnings per common share for the year ended March 31, 2021, were $5.58 and $5.54, and increased 7.7% and 7.6% over the prior year, respectively. Basic and fully diluted earnings per common share were $5.18 and $5.15, respectively, for the year ended March 31, 2020. Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for both the years ended March 31, 2021 and 2020, were 13.3 million and 13.4 million, respectively. 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 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, which are 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. 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, to borrow, 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. 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. 39 Table of Contents Cash Flows The following table summarizes our sources and uses of cash for the years ended March 31, 2021, and 2020 (in thousands): Year Ended March 31, 2021 2020 Net cash provided by (used in) operating activities $ 129,507 $ (74,174 ) Net cash used in investing activities (35,756 ) (20,339 ) Net cash provided by (used in) financing activities (49,802 ) 100,634 Effect of exchange rate changes on cash (617 ) 294 Net increase in cash and cash equivalents $ 43,332 $ 6,415 Cash flows from operating activities Our operating activities provided $129.5 million during the year ended March 31, 2021, compared to using $74.2 million during the year ended March 31, 2020. The following table provides a breakdown of operating cash flows by segment for the years end March 31, 2021, and 2020 (in thousands): Year Ended March 31, 2021 2020 Technology segment $ 153,332 $ (15,812 ) Financing segment (23,825 ) (58,362 ) Net cash provided by (used in) operating activities $ 129,507 $ (74,174 ) Technology Segment : During the year ended March 31, 2021, operating cash flows provided by our technology segment were $153.3 million due to cash generated from earnings and changes in working capital. Cash used by the accounts payable – floor plan facility was $34.4 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. During the year ended March 31, 2020, operating cash flows used by our technology segment was $15.8 million as cash generated from earnings were exceeded by changes in working capital. In addition, cash provided by the accounts payable – floor plan facility was $11.3 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 March 31, 2021 2020 (DSO) Days sales outstanding (1) 69 71 (DIO) Days inventory outstanding (2) 15 11 (DPO) Days payable outstanding (3) (47 ) (45 ) Cash conversion cycle 37 37 (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. 40 Table of Contents (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, product and services for the same three-month period. Our standard payment term for customers is between 30-60 days; however, certain customers or orders may be approved for extended payment terms. Our DSOs for the quarters ended March 31, 2021 and 2020 were greater than our standard payment terms primarily due to a significant proportion of sales in those quarters to customers with payment terms greater than or equal to net 60 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. Our cash conversion cycle remained at 37 days for March 31, 2021 compared to 37 days for March 31, 2020 as a 4 day increase in DIO was offset by a 2 day decrease in DSO and a 2 day increase in DPO from March 31, 2020 to March 2021. Financing Segment : During the year ended March 31, 2021, our financing segment used $23.8 million from operating activities, primarily due to the issuance of new financing receivables. During the year ended March 31, 2020, our financing segment used $58.4 million from operating activities, primarily due to the issuance of new financing receivables. Cash flows related to investing activities During the year ended March 31, 2021, we used $35.8 million from investing activities, consisting of $27.0 million for our acquisition of SMP and $11.5 million for purchases of property, equipment and operating lease equipment, and offset by $2.8 million of proceeds from the sale of property, equipment, and operating lease equipment. During the year ended March 31, 2020, we used $20.3 million from investing activities, consisting of $15.0 million for acquisitions and $7.0 million for purchases of property, equipment and operating lease equipment, and offset by $1.7 million of proceeds from the sale of property, equipment, and operating lease equipment. Cash flows from financing activities During the year ended March 31, 2021, we used $49.8 million from financing activities. We had net repayments on the accounts receivable component of our credit facility of $35.0 million, offset by net borrowings of non-recourse and recourse notes payable of $27.1 million by our financing segment. Contributing to cash outflows was net repayments on floor plan facility of $34.4 million, repurchase of common stock of $6.9 million, and payments to payoff contingent consideration agreements and hold backs from prior fiscal year acquisitions of $0.6 million. During the year ended March 31, 2020, cash provided by financing activities was $100.6 million, consisting of net borrowings of non-recourse and recourse notes payable of $74.5 million by our financing segment, net borrowings on the accounts receivable component of our credit facility of $35.0 million, net borrowings on floor plan facility of $11.3 million, and offset by $14.4 million in repurchase of common stock and $5.8 million in payments of contingent consideration for acquisitions. Our borrowing of non-recourse and recourse notes payable primarily arises from our financing segment when we transfer contractual payments due to us under 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 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. 41 Table of Contents 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 Within our technology segment, 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 March 31, 2020, we executed an additional amendment to the WFCDF credit facility that temporarily increased the aggregate limit of the two components from $250.0 million to $300.0 million through May 5, 2020. Similarly, the amendment temporarily increased the limit on the accounts receivable component of the WFCDF credit facility to $75.0 million through April 14, 2020. 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 March 31, 2021, 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. Our borrowing availability under the credit facility varies based upon the value of the receivables and inventory of ePlus Technology, inc. and certain of its subsidiaries. The WFCDF credit facility is secured by the assets of ePlus Technology, inc. and certain of its subsidiaries. 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 March 31, 2021, 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. 42 Table of Contents 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): Maximum Credit Limit at March 31, 2021 Balance as of March 31, 2021 Maximum Credit Limit at March 31, 2020 Balance as of March 31, 2020 $ 275,000 $ 98,653 $ 300,000 $ 127,416 Accounts receivable component e Plus 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, 2021, we did not have any outstanding balance under the accounts receivable component of the WFCDF credit facility. The maximum credit limit under this facility was $100.0 million. As of March 31, 2020, we had $35.0 million outstanding under the accounts receivable component of the WFCDF credit facility and a maximum credit limit of $75.0 million. We may from time to time 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 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 March 31, 2021, and 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 forces. We may also start offices or warehouses 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. As a result, we may require additional financing to fund our strategy, implementation and potential future acquisitions, 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 financial segment have tightened credit availability and are more discerning in their approval process. However, currently we have funding resources available for our transactions. 43 Table of Contents 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, major customers or vendors of ours. 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, pricing discounts offered by manufacturers at their year ends, and other factors. Quarterly operating results could also fluctuate as a result of our sale of equipment in our lease portfolio at the expiration of a lease term or prior to such expiration, to a lessee or to a third-party 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” herein. 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. Contractual Obligations Our estimated future undiscounted payments under contractual obligations that existed as of March 31, 2021 (in thousands): Payments Due by Period Total Less than 1 year 1-3 years 3-5 years More than 5 years Non-recourse notes payable (1) $ 56,520 $ 50,709 $ 5,169 $ 642 $ - Recourse notes payable 19,158 5,577 13,581 - - Operating lease obligations 9,413 4,006 4,489 918 - Hosted software 8,054 2,840 3,765 1,449 - Total $ 93,145 $ 63,132 $ 27,004 $ 3,009 $ - (1) Our customers are responsible for repaying the debt from a secured borrowing accounted for as non-recourse debt. The lender assumes the credit risk and generally their only recourse, upon default by the customer, is against the customer and the specific equipment under lease. 44 Table of Contents