EPLUS INC 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The below 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 unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q and the audited consolidated financial statements included in our annual report on Form 10-K for the year ended March 31, 2024 (“2024 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 2024 Annual Report, as well as in our other filings with the SEC. EXECUTIVE OVERVIEW BUSINESS DESCRIPTION We are a leading solutions provider in the areas of security, cloud, networking, collaboration, artificial intelligence (“AI”), and emerging technologies to domestic and foreign organizations across all industry segments. We deliver actionable outcomes for organizations by using information technology (“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 us to craft optimized solutions that take advantage of the cost, scale, and efficiency of private, public and hybrid cloud services in an evolving market. As part of our solutions, we provide consulting, professional services, managed services, IT staff augmentation, and complete lifecycle management services in the areas of security, cloud, networking, collaboration, and emerging technologies. With our acquisition of Bailiwick Services, LLC (“Bailiwick”) on August 19, 2024, our professional services segment also includes projects supporting digital signage, EV charging solutions, loss prevention and security, store openings, and store closings. Additionally, we offer flexible financing for purchases from us and from third parties. We have been in the business of selling, leasing, financing, and managing IT and other assets for more than 30 years. Our primary focus is to deliver integrated solutions that address our customers’ business needs, leveraging the appropriate technologies, both on-premises and in the cloud. Our approach is to lead with advisory consulting to understand our customers’ needs, and then design, deploy, and manage solutions aligned to their objectives. Underpinning the broader areas of cloud, security, networking, and collaboration are specific skills in orchestration and automation, application modernization, DevSecOps, zero-trust architectures, data management, data visualization, analytics, network modernization, edge computing 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, Crowdstrike, Deepwatch, Dell EMC, F5 Networks, Foresite, Fortinet, Gigamon, HPE, Juniper Networks, Lenovo, Microsoft, NetApp, Nutanix, NVIDIA, Oracle, Palo Alto Networks, Proficio, Pure Storage, Rubrik, Splunk, Varonis, and VMware by Broadcom, among many others. We are an authorized reseller for thousands of vendors, which enables us to provide our customers with new and evolving IT solutions. Our employees 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 at the forefront of technology trends. Our expertise in core and emerging technologies, buttressed by our robust portfolio of consulting, professional, and managed services, has enabled us to remain a trusted advisor for our customers. With the addition of Bailiwick, we can support large scale multi-site retailers with professional and managed services relating to digital signage, EV charging solutions, loss prevention and security, store openings, and store closings. 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 and financing, asset management and our proprietary supply chain software, is unique in the industry. This broad portfolio enables us to deliver a customized customer experience that spans the continuum from fast delivery of competitively priced products and services to subsequent management and maintenance, and through to end-of-life disposal services. This approach permits us to deploy sophisticated solutions to enable our customers’ business outcomes. 29 Table of Contents Our go-to-market strategy focuses primarily on diverse end-markets for middle market to large enterprises. We serve customers in markets including telecom, media and entertainment, technology, state and local government and educational institutions (“SLED”), healthcare, retail, and financial services. We sell to customers in the United States (“US”), which account for most of our sales, and to customers in select international markets including the United Kingdom (“UK”), the European Union (“EU”), India, and Singapore. Our technology business segments accounted for 97% of our net sales and 71% of our operating income, while our financing business segment accounted for 3% of our net sales and 29% of our operating income, for the nine months ended December 31, 2024. BUSINESS TRENDS We believe the following key factors are impacting our business performance and our ability to achieve business results: • General economic concerns including inflation, tariffs, sanctions, rising interest rates, staffing shortages, remote work trends, and geopolitical concerns may impact our customers’ willingness to spend on technology and services. • We are experiencing pricing pressure and project delays within our enterprise accounts impacting our gross profit. Our financing quotes are generally indexed to market rates to enable us to change rates from time of quote to funding. Financing transactions funded with our cash flows, not debt, are subject to interest rate risk. If the market interest rate exceeds our internal rate of return, we may not fund the transaction to obtain the proceeds and lock in our profit on the transaction. Also, we are experiencing constriction of funds available for certain transactions and more stringent assessment of our financing arrangements from our lenders. Additionally, there is uncertainty as to how the change in the governmental administration will impact current and future transactions involving the US federal government. • Our customers’ top focus areas include AI, security, cloud solutions, hybrid work environments (work from home, work from anywhere, and return to office), as well as digital transformation and modernization. We have developed advisory services, assessments, solutions, and professional and managed services to meet these priorities and help our customers attain and maintain their desired outcome. • Modernizing legacy applications, data modernization, reducing operational complexity, securing workloads, the cost and performance of IT operations, and agility are changing the way companies are purchasing and consuming technology. These are fueling deployments of solutions on cloud, managed services and hybrid platforms and licensing models, which may include invoicing over the term of the engagement. • Rapid cloud adoption has led to customer challenges around increasing costs, security concerns, and skillset gaps. These challenges are consistent across all industries and business sizes. We have developed a Cloud Managed Services portfolio to address these needs, allowing our clients to focus on driving business outcomes via optimized and secure cloud platforms. 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 profit and margin, operating income margin, net earnings, and net earnings per common share, in each case based on information prepared in accordance with US GAAP, as well as the non-GAAP financial measures and ratios, including Adjusted EBITDA, Adjusted EBITDA margin, Non-GAAP: Net earnings and Non-GAAP: Net earnings per common share - diluted. 30 Table of Contents We also 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. We use gross billings as an operational metric to assess the volume of transactions or market share for our technology business segments—product, professional services, and managed services—as well as to understand changes in our accounts receivable and accounts payable balances and our statement of cash flows. We believe our gross billings metrics will aid investors in the same manner to evaluate our business. 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 and operational 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 correspondingly not normally excluded or included in the most directly comparable measure calculated and presented in accordance with US GAAP. 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 reported under GAAP, as these measures used by management may differ from similar measures used by other companies, even when similar terms are used to identify such measures. In footnotes (1) and (2) of the tables that immediately follow the next paragraph are our reasons for using and presenting Adjusted EBITDA, Adjusted EBITDA margin, Non-GAAP: Net earnings and Non-GAAP: Net earnings per common share-diluted. 31 Table of Contents The following tables provide our key business metrics for our consolidated entity, our technology business segments- consisting of our product, professional services, and managed services segments- and our financing business segment (in thousands, except per share amounts): Three Months Ended December 31, Nine Months Ended December 31, Consolidated 2024 2023 2024 2023 Financial metrics Net sales $ 510,965 $ 509,055 $ 1,570,675 $ 1,670,841 Gross profit $ 140,885 $ 133,810 $ 423,357 $ 420,448 Gross margin 27.6 % 26.3 % 27.0 % 25.2 % Operating income margin 5.6 % 7.5 % 6.8 % 7.7 % Net earnings $ 24,133 $ 27,282 $ 82,782 $ 93,793 Net earnings margin 4.7 % 5.4 % 5.3 % 5.6 % Net earnings per common share - diluted $ 0.91 $ 1.02 $ 3.10 $ 3.52 Non-GAAP financial metrics Non-GAAP: Net earnings (1) $ 28,084 $ 31,546 $ 94,909 $ 106,399 Non-GAAP: Net earnings per common share - diluted (1) $ 1.06 $ 1.18 $ 3.56 $ 3.99 Adjusted EBITDA (2) $ 39,149 $ 46,189 $ 134,415 $ 153,636 Adjusted EBITDA margin (2) 7.7 % 9.1 % 8.6 % 9.2 % Technology business segments Financial metrics Net sales Product $ 379,472 $ 419,478 $ 1,226,397 $ 1,418,581 Professional services 69,497 40,044 168,676 113,870 Managed services 44,150 34,640 126,827 99,335 Total $ 493,119 $ 494,162 $ 1,521,900 $ 1,631,786 Gross profit Product $ 84,046 $ 91,919 $ 271,910 $ 308,059 Professional services 27,841 17,332 68,879 47,852 Managed services 13,160 11,015 38,333 31,006 Total $ 125,047 $ 120,266 $ 379,122 $ 386,917 Gross margin Product 22.1 % 21.9 % 22.2 % 21.7 % Professional services 40.1 % 43.3 % 40.8 % 42.0 % Managed services 29.8 % 31.8 % 30.2 % 31.2 % Total 25.4 % 24.3 % 24.9 % 23.7 % Operating income $ 16,930 $ 28,667 $ 76,287 $ 108,048 Non-GAAP financial metric Adjusted EBITDA (2) $ 27,498 $ 36,725 $ 103,803 $ 132,170 Operational metrics Gross billings (3) Networking $ 214,762 $ 251,322 $ 716,087 $ 839,638 Cloud 207,762 181,559 644,888 641,120 Security 190,808 189,476 506,256 480,159 Collaboration 22,381 23,180 102,074 97,111 Other 76,513 55,473 193,650 203,805 Product gross billings 712,226 701,010 2,162,955 2,261,833 Service gross billings 137,320 95,976 328,527 233,618 Total gross billings $ 849,546 $ 796,986 $ 2,491,482 $ 2,495,451 Financing business segment Financial metrics Net sales $ 17,846 $ 14,893 $ 48,775 $ 39,055 Gross profit $ 15,838 $ 13,544 $ 44,235 $ 33,531 Operating income $ 11,581 $ 9,380 $ 30,411 $ 21,194 Non-GAAP financial metric Adjusted EBITDA (2) $ 11,651 $ 9,464 $ 30,612 $ 21,466 (1) Non-GAAP: Net earnings and Non-GAAP: Net earnings per common share – diluted are based on net earnings calculated in accordance with US 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 and Non-GAAP: Net earnings per common share – diluted as supplemental measures of our performance to gain insight into our operating performance and performance trends. We believe that the exclusion of other income and acquisition-related amortization expense in calculating Non-GAAP: Net earnings and Non-GAAP: Net earnings per common share – diluted 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 and Non-GAAP: Net earnings per common share – diluted 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 US 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 – diluted or similarly titled measures differently, which may reduce their usefulness as comparative measures. Our acquisition related expenses for the three and nine months ended December 31, 2024 are related to our acquisition of Bailiwick. 32 Table of Contents The following table provides our calculation of Non-GAAP: Net earnings and Non-GAAP: Net earnings per common share – diluted (in thousands, except per share amounts): Three Months Ended December 31, Nine Months Ended December 31, 2024 2023 2024 2023 GAAP: Earnings before tax $ 32,161 $ 38,413 $ 113,000 $ 129,915 Share-based compensation 2,933 2,526 8,385 7,145 Acquisition related expenses 29 - 1,072 - Acquisition related amortization expense 5,983 3,856 14,180 11,348 Other income — net (3,650 ) (366 ) (6,302 ) (673 ) Non-GAAP: Earnings before provision for income taxes 37,456 44,429 130,335 147,735 GAAP: Provision for income taxes 8,028 11,131 30,218 36,122 Share-based compensation 734 733 2,263 2,005 Acquisition related expenses 7 - 300 - Acquisition related amortization expense 1,495 1,115 3,788 3,173 Other income — net (913 ) (106 ) (1,656 ) (190 ) Tax benefit (expense) on restricted stock 21 10 513 226 Non-GAAP: Provision for income taxes 9,372 12,883 35,426 41,336 Non-GAAP: Net earnings $ 28,084 $ 31,546 $ 94,909 $ 106,399 Three Months Ended December 31, Nine Months Ended December 31, 2024 2023 2024 2023 GAAP: Net earnings per common share - diluted $ 0.91 $ 1.02 $ 3.10 $ 3.52 Share-based compensation 0.08 0.07 0.23 0.19 Acquisition related expenses - - 0.03 - Acquisition related amortization expense 0.17 0.10 0.39 0.30 Other income —net (0.10 ) - (0.17 ) (0.01 ) Tax benefit (expense) on restricted stock - (0.01 ) (0.02 ) (0.01 ) Total non-GAAP adjustments - net of tax 0.15 0.16 0.46 0.47 Non-GAAP: Net earnings per common share - diluted $ 1.06 $ 1.18 $ 3.56 $ 3.99 (2 ) We define Adjusted EBITDA as net earnings calculated in accordance with US GAAP, adjusted for the following: interest expense, depreciation and amortization, share-based compensation, acquisition and integration expenses, provision for income taxes, and other income. Adjusted EBITDA presented for the technology business segments and the financing business segment is defined as operating income calculated in accordance with US 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 business 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. In the table below, we provide 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. 33 Table of Contents We use Adjusted EBITDA as a supplemental measure of our performance to gain insight into our operating performance and performance trends. 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 US 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. The following table provides our calculations of Adjusted EBITDA (in thousands): Three Months Ended December 31, Nine Months Ended December 31, Consolidated 2024 2023 2024 2023 Net earnings $ 24,133 $ 27,282 $ 82,782 $ 93,793 Provision for income taxes 8,028 11,131 30,218 36,122 Share-based compensation 2,933 2,526 8,385 7,145 Depreciation and amortization 7,676 5,399 18,260 15,821 Acquisition related expenses 29 - 1,072 - Interest and financing costs - 217 - 1,428 Other income —net (3,650 ) (366 ) (6,302 ) (673 ) Adjusted EBITDA $ 39,149 $ 46,189 $ 134,415 $ 153,636 Technology business segments Operating income $ 16,930 $ 28,667 $ 76,287 $ 108,048 Share-based compensation 2,863 2,460 8,184 6,947 Depreciation and amortization 7,676 5,381 18,260 15,747 Acquisition related expenses 29 - 1,072 - Interest and financing costs - 217 - 1,428 Adjusted EBITDA $ 27,498 $ 36,725 $ 103,803 $ 132,170 Financing business segment Operating income $ 11,581 $ 9,380 $ 30,411 $ 21,194 Share-based compensation 70 66 201 198 Depreciation and amortization - 18 - 74 Adjusted EBITDA $ 11,651 $ 9,464 $ 30,612 $ 21,466 (3) Gross billings are the total dollar value of customer purchases of goods and services including shipping charges during the period, net of customer returns and credit memos, sales, or other taxes. Gross billings includes the transaction values for certain sales transactions that are recognized on a net basis, and, therefore, includes amounts that will not be recognized as revenue. CONSOLIDATED RESULTS OF OPERATIONS Net sales : Net sales for the three months ended December 31, 2024, increased 0.4%, to $511.0 million, or an increase of $1.9 million compared to $509.1 million in the same three-month period in the prior year. The increase in net sales was driven by higher service revenues from our technology business segments and higher revenue from our financing business segment, offset by lower product revenue in our technology business segments. For additional information, see the “Segment Results of Operations” below. 34 Table of Contents Net sales for the nine months ended December 31, 2024, decreased 6.0%, to $1,570.7 million, or a decrease of $100.1 million compared to $1,670.8 million in the same nine-month period in the prior year. The decrease in net sales was driven by lower product revenues offset by higher managed services and professional services revenue from our technology business segments, and higher revenues from our financing business segment. For additional information, see the “Segment Results of Operations” below. Gross profit : Gross profit for the three months ended December 31, 2024, increased 5.3%, to $140.9 million, compared to $133.8 million in the same three-month period in the prior year as increases in professional and managed services were partially offset by declines in product sales. Overall, gross margins were up by 130 basis points to 27.6%, primarily due to higher product margins led by a shift in product mix towards sales of third-party maintenance and subscriptions that are recognized on a net basis, partially offset by lower services margins. Gross profit for the nine months ended December 31, 2024, increased 0.7%, to $423.4 million, compared to $420.4 million in the same nine-month period in the prior year as increases in professional and managed services were partially offset by declines in product sales. Overall, gross margins were up by 180 basis points to 27.0% primarily due to higher product margins led by a shift in product mix towards sales of third-party maintenance and subscriptions that are recognized on a net basis, partially offset by lower service margins. Operating expenses : Operating expenses for the three months ended December 31, 2024, increased $16.6 million, or 17.3%, to $112.4 million, as compared to $95.8 million for the same three-month period in the prior year. Our increase in operating expenses was primarily due to an increase in salaries and benefits, general and administrative expenses, depreciation and amortization expenses, and provision for credit losses, offset by a slight decrease in interest and financing costs. Our increases in these categories for the three-month period December 31, 2024, compared to the same period in the prior year, were partially due to our acquisition of Bailiwick in August 2024. As of December 31, 2024, we had 2,291 employees, an increase of 20.8% from 1,897 as of December 31, 2023, largely due to our acquisition of Bailiwick in August 2024. For additional information, see the “Segment Results of Operations” below. Operating expenses for the nine months ended December 31, 2024, increased $25.5 million, or 8.7%, to $316.7 million, as compared to $291.2 million for the same nine-month period in the prior year. Our increase in operating expenses was primarily due to an increase in salaries and benefits, general and administrative expenses, acquisition related expenses, depreciation and amortization expenses, and share-based compensation, partially offset by a decrease in interest and financing costs. Our increases in these categories for the nine-month period ended December 31, 2024, compared to the same period in the prior year, were partially due to our acquisition of Bailiwick in August 2024. For additional information, see the “Segment Results of Operations” below. Operating income : As a result of the foregoing, operating income for the three months ended December 31, 2024, decreased $9.5 million, or 25.1%, to $28.5 million, as compared to $38.0 million for the same three-month period in the prior year, and operating income margin decreased by 190 basis points to 5.6%. As a result of the foregoing, operating income for the nine months ended December 31, 2024, decreased $22.5 million, or 17.4%, to $106.7 million, as compared to $129.2 million for the same nine-month period in the prior year, and operating income margin decreased by 90 basis points to 6.8%. Adjusted EBITDA for the three months ended December 31 , 2024, was $39.1 million, a decrease of $7.1 million, or 15.2%, compared to $46.2 million for the same three-month period in the prior year. Adjusted EBITDA margin for the three months ended December 31 , 2024, decreased 140 basis points to 7.7%, as compared to 9.1% for the three months ended December 31 , 2023. The decrease in Adjusted EBITDA margin was due to an increase in operating expenses, offset by an increase in gross profit. Adjusted EBITDA for the nine months ended December 31 , 2024, was $134.4 million, a decrease of $19.2 million, or 12.5%, compared to $153.6 million for the same nine-month period in the prior year. Adjusted EBITDA margin for the nine months ended December 31 , 2024, decreased 60 basis points to 8.6%, as compared to the nine months ended December 31 , 2023, of 9.2%. The decrease in Adjusted EBITDA margin was due to an increase in operating expenses, offset by an increase in gross profit. 35 Table of Contents Net earnings per common share—diluted for the three months ended December 31, 2024, decreased $0.11, or 10.8%, to $0.91 per share, as compared to $1.02 per share in the same three-month period in the prior year. Non-GAAP: Net earnings per common share—diluted for the three months ended December 31 , 2024, decreased $0.12, or 10.2%, to $1.06 per share, as compared to $1.18 per share for the three months ended December 31, 2023. Net earnings per common share—diluted for the nine months ended December 31, 2024, decreased $0.42, or 11.9%, to $3.10 per share, as compared to $3.52 per share in the same nine-month period in the prior year. Non-GAAP: Net earnings per common share—diluted for the nine months ended December 31, 2024, decreased $0.43, or 10.8%, to $3.56 per share, as compared to $3.99 per share for the nine months ended December 31, 2023. SEGMENT OVERVIEW TECHNOLOGY BUSINESS SEGMENTS Our technology business includes three segments: product, professional services, and managed services as further discussed below. ● Product segment: Our product segment consists of the sale of third-party hardware, third-party perpetual and subscription software, and third-party maintenance, software assurance, and other third-party services. The product segment also includes internet-based business-to-business supply chain management solutions for IT products. ● Professional services segment: Our professional services segment includes our advanced professional services to our customers that are performed under time and materials, fixed fee, or milestone contracts. Professional services include consulting, assessments, configuration, logistic services, training, staff augmentation services, and project management services. With the acquisition of Bailiwick, our professional services also include projects supporting digital signage, EV charging solutions, loss prevention and security, store openings, and store closings. ● Managed services segment: Our managed services segment includes our advanced managed services that encompass managing various aspects of our customers’ environments that are billed in regular intervals over a contract term, usually between three to five years. Managed services also include security solutions, storage-as-a-service, cloud hosted services, cloud managed services, and service desk services. We manage each technology business segment based on gross profit and manage the operating expenses associated with these segments in the aggregate as our technology business. Our technology business segments sell primarily to corporations and SLED institutions . Customers of our technology business may have a customer master agreement (“CMA”) with our company, which stipulates the terms and conditions of the commercial 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 in our product segment 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; therefore, there is no guarantee of future reductions of cost of sales provided by these vendor consideration programs. 36 Table of Contents FINANCING BUSINESS SEGMENT Our financing business segment offers financing solutions to corporations, government contractors in arrangements where the federal government is the end user, and SLED institutions in the US, which accounts for most of our transactions, and to corporations in select international markets including Canada, the UK, and the EU. Our financing business segment leases IT equipment, medical equipment, and other equipment, and sells the off-lease equipment at the end of the lease. Additionally, our financing business segment finances purchases 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. ● Post-contract earnings: Month-to-month rents; early termination, prepayment, make-whole, or buyout fees; and the sale of off-lease (used) equipment. FLUCTUATIONS IN OPERATING RESULTS Our operating results may fluctuate due to customer demand for our products and services, competitive customer pricing, supplier costs (including tariffs), product availability, changes in vendor incentive programs, interest rate fluctuations, currency fluctuations, the timing of sales of financial assets, general economic conditions, and differences between estimated residual values and actual amounts realized for leased equipment. We expect to continue to expand by hiring additional staff for specific targeted market areas and roles whenever we can find both experienced personnel and desirable geographic areas over the longer term, which may impact our operating results. 37 Table of Contents SEGMENT RESULTS OF OPERATIONS TECHNOLOGY BUSINESS SEGMENTS The results of operations for our technology business segments were as follows (in thousands): Three Months Ended December 31, Nine Months Ended December 31, 2024 2023 2024 2023 Financial metrics Net sales Product $ 379,472 $ 419,478 $ 1,226,397 $ 1,418,581 Professional services 69,497 40,044 168,676 113,870 Managed services 44,150 34,640 126,827 99,335 Total $ 493,119 $ 494,162 $ 1,521,900 $ 1,631,786 Gross Profit Product 84,046 91,919 271,910 308,059 Professional services 27,841 17,332 68,879 47,852 Managed services 13,160 11,015 38,333 31,006 Total 125,047 120,266 379,122 386,917 Selling, general, and administrative 100,441 86,001 284,575 261,694 Depreciation and amortization 7,676 5,381 18,260 15,747 Interest and financing costs - 217 - 1,428 Operating expenses 108,117 91,599 302,835 278,869 Operating income $ 16,930 $ 28,667 $ 76,287 $ 108,048 Key metrics & other information Gross billings $ 849,546 $ 796,986 $ 2,491,482 $ 2,495,451 Adjusted EBITDA $ 27,498 $ 36,725 $ 103,803 $ 132,170 Product margin 22.1 % 21.9 % 22.2 % 21.7 % Professional services margin 40.1 % 43.3 % 40.8 % 42.0 % Managed services margin 29.8 % 31.8 % 30.2 % 31.2 % Net sales by customer end market: Telecom, media & entertainment $ 126,201 $ 139,551 $ 352,624 $ 405,192 SLED 71,412 60,108 261,195 264,419 Technology 71,293 83,951 235,387 268,302 Healthcare 58,670 55,504 212,185 214,182 Financial services 46,217 38,816 130,701 174,391 All others 119,326 116,232 329,808 305,300 Total $ 493,119 $ 494,162 $ 1,521,900 $ 1,631,786 Net sales by type: Networking 181,367 209,936 602,883 723,760 Cloud 116,864 120,253 375,431 427,365 Security 53,919 58,822 143,133 156,504 Collaboration 8,391 13,608 47,278 53,647 Other 18,931 16,859 57,672 57,305 Total product $ 379,472 $ 419,478 $ 1,226,397 $ 1,418,581 Professional services 69,497 40,044 168,676 113,870 Managed services 44,150 34,640 126,827 99,335 Total $ 493,119 $ 494,162 $ 1,521,900 $ 1,631,786 38 Table of Contents Net sales : Net sales of the combined technology business segments for the three months ended December 31, 2024, decreased compared to the three months ended December 31, 2023, driven by decreased net sales to customers in telecom, media, and entertainment, and technology industries, partially offset by increased net sales to customers in SLED, healthcare, and financial service industries. Net sales of the combined technology business segments for the nine months ended December 31, 2024, decreased compared to the nine months ended December 31, 2023, driven by decreased net sales to customers in telecom, media, and entertainment, technology, SLED, healthcare, and financial service industries. Product segment sales for the three and nine months ended December 31, 2024, decreased compared to the same three- and nine-month periods in the prior year, due to lower sales of networking equipment, cloud, collaboration, and security products. Our decrease in net sales for the three months ended December 31, 2024, compared to the same period in the prior year, was due to a shift in product mix towards sales of third-party maintenance and subscriptions that are recognized on a net basis, partially offset by higher demand. Our decrease in net sales for the nine months ended December 31, 2024, compared to the same period in the prior year, was due to decreases in demand and a shift in product mix towards sales of third-party maintenance and subscriptions that are recognized on a net basis. These changes were driven by the timing of purchases by existing customers, which are determined by their buying cycles, and the timing of specific IT-related initiatives. Professional services segment sales for the three and nine months ended December 31, 2024, increased compared to the same three- and nine-month periods in the prior year, primarily due to increases in revenues from the acquisition of Bailiwick. Managed services segment sales for the three and nine months ended December 31, 2024, increased compared to the same three- and nine-month periods in the prior year, due to ongoing expansion of these service offerings, primarily related to ongoing growth in enhanced maintenance support, cloud services, and service desk services. Gross profit : Gross profit of the combined technology business segments for the three months ended December 31, 2024, increased compared to the three months ended December 31 , 2023, due to higher gross profits on professional and managed services, partially offset by lower gross profits on products. Gross margin increased for this period by 110 basis points to 25.4% due to higher gross margins on products due to a shift in product mix towards sales of third-party maintenance and subscriptions that are recognized on a net basis offset by lower gross margins on services. Gross profit of the combined technology business segments for the nine months ended December 31, 2024, decreased compared to the nine months ended December 31, 2023, due to a decrease in product sales, partially offset by an increase in professional and managed services sales. Gross margin increased for this period by 120 basis points to 24.9% due to higher product margins, partially offset by lower managed services and professional services margin. Product segment margin for the three and nine months ended December 31, 2024, increased by 20 and 50 basis points, respectively, compared to the same three- and nine-month period in the prior year due to a shift in product mix resulting in a higher proportion of sales of third-party maintenance and subscriptions which are recorded on a net basis partially offset by lower margins to certain enterprise customers. Professional services segment margin for the three and nine months ended December 31, 2024, decreased by 320 and 120 basis points, respectively, compared to the same three- and nine-month period in the prior year due to the addition of Bailiwick. Managed services segment margin for the three and nine months ended December 31, 2024, decreased by 200 and 100 basis points, respectively, from the same three- and nine-month period in the prior year due to higher third-party costs incurred for cloud services. Selling, general, and administrative : Selling, general, and administrative expenses for the technology business for the three and nine months ended December 31, 2024, increased compared to the three and nine months ended December 31, 2023, mainly due to increases in salaries and benefits. 39 Table of Contents Salaries and benefits for the three months ended December 31, 2024, increased $9.6 million, or 13.0%, to $83.5 million, as compared to $73.9 million for the same three-month period in the prior year, due to an increase of $8.2 million in salaries and benefits, mainly driven by increased headcount, and an increase of $1.0 million in variable compensation due to the increase in gross profit. Our technology business had an aggregate of 2,258 employees as of December 31, 2024, an increase of 395 from 1,863 employees as of December 31, 2023. We added 441 employees from our acquisition of Bailiwick. In total, we added 356 additional customer-facing employees in the technology business for the three months ended December 31, 2024, compared to the same three-month period in the prior year, of which 330 were professional services and technical support personnel. Salaries and benefits for the nine months ended December 31, 2024, increased $17.5 million, or 7.9%, to $239.4 million, as compared to $221.9 million for the same nine-month period in the prior year, due to an increase of $16.8 million in salaries and benefits, mainly driven by increased headcount, and an increase of $1.2 million in share-based compensation, partially offset by a decrease of $0.6 million in variable compensation because of the decrease in gross profit. General and administrative expenses for our technology business for the three months ended December 31 , 2024, increased $3.6 million, or 29.7%, to $15.7 million, as compared to $12.1 million for the same three-month period in the prior year, driven by increases in software, subscription and maintenance fees, advertising and marketing, travel and entertainment, and consulting fees. Our increases in these categories for the three-month period ended December 31, 2024, compared to the same period in the prior year, were partially due to our acquisition of Bailiwick in August 2024. General and administrative expenses for our technology business for the nine months ended December 31 , 2024, increased $4.5 million, or 11.3%, to $43.8 million, as compared to $39.3 million for the same nine-month period in the prior year. General and administrative expenses were higher mainly due to increases in software, subscription, and maintenance fees, warehouse and logistic fees, and office rent. Our increases in these categories for the nine-month period ended December 31, 2024, compared to the same period in the prior year, were partially due to our acquisition of Bailiwick in August 2024. Additionally, we incurred $1.1 million in acquisition related expenses due to our acquisition of Bailiwick during the nine-month period December 31, 2024, that represents an increase in general and administrative expenses for our technology business for the nine months ended December 31, 2024, compared to the same period in the prior year. Provision for credit losses for our technology business for the three months ended December 31, 2024, was $1.2 million. There was no provision for credit losses for the three months ended December 31, 2023. Our higher provision for credit losses for the three months ended December 31, 2024, was due to an increase in exposure to accounts with higher credit risk. Provision for credit losses for our technology business for the nine months ended December 31, 2024, was $1.5 million, as compared to $0.4 million for the same nine-month period in the prior year. Our higher provision for credit losses for the nine months ended December 31, 2024, was due to an increase in exposure to accounts with higher credit risk. Depreciation and amortization : Depreciation and amortization for our technology business for the three and nine months ended December 31, 2024, increased compared to the three and nine months ended December 31, 2023, primarily due to amortization from intangible assets acquired in the Bailiwick acquisition during the current nine-month period. Interest and financing costs : Interest and financing costs for our technology business for the three and nine months ended December 31 , 2024, decreased compared to the three and nine months ended December 31 , 2023, as we had no outstanding borrowings under our WFCDF Credit Facility as of December 31 , 2024. 40 Table of Contents FINANCING BUSINESS SEGEMENT The results of operations for our financing business segment were as follows (in thousands): Three Months Ended December 31, Nine Months Ended December 31, 2024 2023 2024 2023 Financial Metrics Portfolio earnings $ 4,466 $ 3,701 $ 13,491 $ 10,113 Transactional gains 8,477 8,107 24,272 16,335 Post-contract earnings 4,743 2,685 10,163 11,357 Other 160 400 849 1,250 Net sales $ 17,846 $ 14,893 $ 48,775 $ 39,055 Gross profit 15,838 13,544 44,235 33,531 Selling, general, and administrative 3,740 3,380 12,185 10,637 Depreciation and amortization - 18 - 74 Interest and financing costs 517 766 1,639 1,626 Operating expenses 4,257 4,164 13,824 12,337 Operating income $ 11,581 $ 9,380 $ 30,411 $ 21,194 Key metrics & other information Adjusted EBITDA $ 11,651 $ 9,464 $ 30,612 $ 21,466 Net sales : Net sales for the three months ended December 31, 2024, increased compared to the three months ended December 31, 2023, due to higher post-contract earnings, portfolio earnings, and transactional gains. Post-contract earnings increased due to higher proceeds from sales of off-lease equipment, offset by lower month-to-month rents. Portfolio earnings increased due to higher average investments outstanding as well as a higher average earnings rate. Transactional gains increased due to increased margins. Total proceeds from sales of financing receivables were $192.6 million and $422.1 million for the three months ended December 31, 2024, and 2023, respectively. Our proceeds from sales of financing receivables for the three months ended December 31, 2024, are lower than the same period in the prior year partially due to a few large transactions in the prior year period. Net sales for the nine months ended December 31, 2024, increased compared to the nine months ended December 31, 2023, due to higher portfolio earnings and transactional gains, offset by lower post-contract earnings. Portfolio earnings increased due to higher average investments outstanding as well as a higher average earnings rate. Transactional gains increased due to increased margins. Total proceeds from sales of financing receivables were $517.6 million and $704.3 million for the nine months ended December 31, 2024, and 2023, respectively. Our proceeds from sales of financing receivables for the nine months ended December 31, 2024, are lower than the same period in the prior year partially due to a few large transactions in the prior year period. Post-contract earnings decreased due to lower month-to-month rents, partially offset by higher proceeds from sales of off-lease equipment. Gross Profit : Gross profit for the three months ended December 31, 2024 , increased compared to the three months ended December 31 , 2023, primarily due to the net gain on sales of off-lease equipment. Gross profit for the nine months ended December 31, 2024 , increased compared to the nine months ended December 31 , 2023, due to the increase in transactional gains. Selling, general and administrative : Selling, general, and administrative expenses for the three months ended December 31, 2024, increased compared to the three months ended December 31, 2023, primarily due to an increase in provision for credit losses due to an increase in our exposure to accounts with a higher credit risk. Selling, general, and administrative expenses for the nine months ended December 31, 2024, increased compared to the nine months ended December 31, 2023, primarily due to an increase in variable compensation attributable to the increase in gross profit, and an increase in provision for credit losses due to an increase in our exposure to accounts with a higher credit risk. 41 Table of Contents Our financing business segment employed 33 people as of December 31, 2024, compared to 34 people as of December 31, 2023. Certain support functions for the financing business segment are shared resources with the technology business and expenses are allocated accordingly. Interest and financing costs : Interest and financing costs for the three months ended December 31 , 2024, decreased compared to the three months ended December 31 , 2023, due to lower average outstanding borrowings and lower interest rates. As of December 31 , 2024, our non-recourse notes payable decreased to $33.8 million from $48.4 million as of December 31 , 2023. Our weighted average interest rate for non-recourse notes payable was 6.40% and 6.64% as of December 31 , 2024, and 2023, respectively. Interest and financing costs for the nine months ended December 31 , 2024, remained flat compared to the nine months ended December 31 , 2023. CONSOLIDATED Other income-net : Other income for the three months ended December 31 , 2024, was $3.7 million, compared to $0.4 million for the three months ended December 31 , 2023. Higher other income was driven by increased interest income and foreign exchange gains recognized in the three-month period ended December 31, 2024, while foreign exchange losses were recognized for the same three-month period in the prior year. We had $1.8 million in interest income for the three months ended December 31, 2024, compared to $0.4 million for the three months ended December 31 , 2023. We had foreign exchange gains of $1.9 million for the three months ended December 31, 2024, primarily from gains in US dollar denominated cash deposits and receivables held by one of our entities in the UK, compared to foreign exchange losses of $0.1 million for the same three-month period in the prior year. Other income for the nine months ended December 31 , 2024, was $6.3 million, compared to $0.7 million for the nine months ended December 31 , 2023. Higher other income was driven by increased interest income and decreased foreign exchange losses. We had $6.7 million in interest income for the nine months ended December 31, 2024, compared to $1.1 million for the nine months ended December 31, 2023. We had foreign exchange losses of $0.4 million for the nine months ended December 31, 2024, compared to losses of $0.5 million for the same nine-month period in the prior year. Provision for income taxes : Our provision for income tax expense for the three and nine months ended December 31, 2024, was $8.0 million and $30.2 million, respectively, as compared to $11.1 million and $36.1 million for the same three-and nine-month periods in the prior year, respectively. Our effective income tax rates for the three and nine months ended December 31, 2024, were 25.0% and 26.7%, respectively, compared to 29.0% and 27.8% for the three and nine months ended December 31, 2023, respectively. Our effective tax rate was lower for the three and nine months ended December 31, 2024, as compared to the same three- and nine-month periods in the prior year, primarily due to lower state taxes. Net earnings : Net earnings for the three months ended December 31, 2024, were $24.1 million, a decrease of 11.5% or $3.2 million, as compared to $27.3 million for the same three-month period in the prior year. The net earnings decrease was due to a decrease in operating profits from our technology business, partially offset by an increase in other income, driven by increased interest income and foreign exchange gains, an increase in operating profits from our financing business segment, and a decrease in provision for income taxes. Net earnings for the nine months ended December 31, 2024, were $82.8 million, a decrease of 11.7% or $11.0 million, as compared to $93.8 million in the same nine-month period in the prior year. The net earnings decrease was due to a decrease in operating profits from our technology business, partially offset by an increase in other income, driven by increased interest income and foreign exchange gains, an increase in operating profits from our financing business segment, and a decrease in provision for income taxes. 42 Table of Contents Basic earnings per common share and diluted earnings per common share for the three months ended December 31 , 2024, were both $0.91, a decrease of 10.8%, as compared to $1.02 for both basic earnings per common share and diluted earnings per common share, for the three months ended December 31 , 2023. Basic earnings per common share and diluted earnings per common share for the nine months ended December 31 , 2024, were $3.12 and $3.10, respectively, a decrease of 11.6% and 11.9%, respectively, as compared to $3.53 and $3.52 for our basic earnings per common share and diluted earnings per common share, respectively, for the nine months ended December 31 , 2023. Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share were 26.5 million and 26.6 million, respectively, for the three months ended December 31, 2024. Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share were 26.6 million and 26.7 million, respectively, for the three months ended December 31, 2023. Weighted average common shares outstanding used in the calculation of basic and diluted earnings per common share for the nine months ended December 31, 2024, and 2023, were both 26.6 million and 26.7 million, respectively. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY OVERVIEW We finance our operations through funds generated from operations and through borrowings. We use those funds to meet our capital requirements, which have historically consisted primarily of working capital for operational needs, capital expenditures, purchases of equipment for lease, payments of principal and interest on indebtedness outstanding, acquisitions and the repurchase of shares of our common stock. Our borrowings in our technology business segments are through our WFCDF Credit Facility. Our borrowings in our financing business segment are primarily through secured borrowings that involve transferring all or part of the contractual payments due to us to third-party financing institutions. We believe that cash on hand and funds generated from operations, together with available credit under our credit facility, will be enough to finance our working capital, capital expenditures, and other requirements for at least the next year. Our ability to continue to expand, both organically and through acquisitions, is dependent upon our ability to generate enough cash flow from operations or from borrowing or other sources of financing as may be required. While at this time we do not anticipate requiring any additional sources of financing to fund operations, if demand for IT products declines, or if our supply of products is delayed or interrupted, our cash flows from operations may be substantially affected. CASH FLOWS The following table summarizes our sources and uses of cash for the nine months ended December 31, 2024, and 2023 (in thousands): Nine Months Ended December 31, 2024 2023 Net cash provided by operating activities $ 141,198 $ 143,492 Net cash used in investing activities (127,314 ) (55,838 ) Net cash used in financing activities (13,426 ) (48,651 ) Effect of exchange rate changes on cash (405 ) 74 Net increase in cash and cash equivalents $ 53 $ 39,077 43 Table of Contents Cash flows from operating activities : We had cash provided by operating activities of $141.2 million during the nine months ended December 31, 2024, compared to cash provided by operating activities of $143.5 million for the nine months ended December 31, 2023. See below for a breakdown of operating cash flows by business (in thousands): Nine Months Ended December 31, 2024 2023 Technology business segments $ 180,685 $ 150,030 Financing business segment (39,487 ) (6,538 ) Net cash provided by operating activities $ 141,198 $ 143,492 Technology business : For the nine months ended December 31, 2024 , our combined technology business segments provided $180.7 million from operating activities primarily due to net earnings, decreases in accounts receivable and inventory, offset by decreases in accounts payable. For the nine months ended December 31, 2023, our combined technology business segments had cash provided by operating activities of $150.0 million primarily due to net earnings and increases in accounts payable – trade and salaries and commissions payable, offset by increases in our accounts receivable. To manage our working capital, we monitor our cash conversion cycle for our technology business segments, 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 business segments: As of December 31, 2024 2023 (DSO) Days sales outstanding (1) 62 71 (DIO) Days inventory outstanding (2) 13 27 (DPO) Days payable outstanding (3) (43 ) (44 ) Cash conversion cycle 32 54 (1) Represents the rolling three-month average of the balance of trade accounts receivable-trade, net for our technology business segments at the end of the period divided by gross billings for the same three-month period. (2) Represents the rolling three-month average of the balance of inventory, net for our technology business segments at the end of the period divided by the direct cost of products and services billed to our customers 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 business segments at the end of the period divided by the direct cost of products and services billed to our customers for the same three-month period. Our cash conversion cycle decreased to 32 days as of December 31, 2024, as compared to 54 days as of December 31, 2023. Our standard payment term for customers is between 30-60 days; however, certain customer orders may be approved for extended payment terms. Our DSO decreased 9 days to 62 days as of December 31, 2024, compared to 71 days as of December 31, 2023, reflecting lower sales to customers with terms greater than or equal to net 60 days. Our DIO decreased to 13 days as of December 31, 2024, compared to 27 days as of December 31, 2023 due to lower inventory balances. Our DPO decreased by 1 day as of December 31, 2024. 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 around 30 days from the invoice date. Financing business segment : For the nine months ended December 31, 2024, our financing business segment used $39.5 million from operating activities, primarily due to changes in financing receivables, offset by net earnings and increases in accounts payable. For the nine months ended December 31, 2023, our financing business segment used $6.5 million from operating activities, primarily due to an increase in financing receivables, offset by net earnings and an increase in accounts payable-trade. 44 Table of Contents Cash flows related to investing activities : For the nine months ended December 31, 2024, we used $127.3 million in investing activities, consisting of $124.9 million for the acquisition of Bailiwick, and $4.7 million for purchases of property, equipment and operating lease equipment offset by $2.3 million of proceeds from the sale of property, equipment, and operating lease equipment. For the nine months ended December 31, 2023, we used $55.8 million in investing activities, consisting of $48.6 million for the acquisition of NSG, and $7.7 million for purchases of property, equipment and operating lease equipment, partially offset by $0.5 million of proceeds from the sale of property, equipment, and operating lease equipment. Cash flows from financing activities : For the nine months ended December 31, 2024, we used $13.4 million in financing activities, consisting of cash used to repurchase outstanding shares of our common stock of $33.5 million and $2.3 million paid to the sellers of Peak Resources, Inc. (“Peak”) based on adjustments to a final determination of total net assets delivered in our January 2024 acquisition of Peak, partially offset by net borrowings of non-recourse and recourse notes payable of $8.1 million, net borrowings on the floor plan component of our credit facility of $10.6 million, and proceeds of issuances of common stock to employees under an employee stock purchase plan of $3.6 million. For the nine months ended December 31, 2023, we used $48.7 million in financing activities, consisting of $58.1 million in net repayments on the floor plan component of our WFCDF Credit Facility and $9.8 million to repurchase outstanding shares of our common stock, partially offset by $16.2 million in net borrowings of non-recourse and recourse notes payable, and $3.0 million in proceeds of issuances of common stock to employees under an employee stock purchase plan. Other than recourse borrowings under our WFCDF Credit Facility, our borrowing of recourse and non-recourse notes payable primarily arises from our financing business 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 recourse or non-recourse notes payable. Non-cash activities : We transfer contractual payments due to us under lease and financing agreements to third-party financial institutions. 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 or financed. In these situations, the portion of the proceeds paid directly to our vendors are non-cash transactions. SECURED BORROWINGS 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 its 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. Interest rates have been rising and may continue to rise. To preserve our expected internal rate of return, we generally quote rates that are indexed. Some of our lenders will not commit to rates for a length of time, resulting in exposure to us if the rates rise and we cannot pass such exposure to the customer. CREDIT FACILITY We finance the operations of our subsidiaries e Plus Technology, inc., e Plus Technology Services, inc. and SLAIT Consulting, LLC (collectively, the “Borrowers”) in our technology business segments through a credit facility with WFCDF. The WFCDF Credit Facility has a floor plan facility and a revolving credit facility. 45 Table of Contents Please refer to Note 8 , “Notes Payable and Credit Facility” to the accompanying Consolidated Financial Statements included in “Part I, Item 1. Financial Statements” for additional information concerning our WFCDF Credit Facility. Floor plan facility : We finance most purchases of products for sale to our customers through the floor plan facility. Once our customer places a purchase order with us and we have approved their credit, we place an order for the desired products with one of our vendors. Our vendors are generally paid by the floor plan facility and our liability is reflected in “accounts payable—floor plan” in our consolidated balance sheets. Most customer payments to us are remitted to our lockbox accounts. Once payments are cleared, the monies in the lockbox accounts are automatically and daily transferred to our operating account. We pay down the floor plan facility on three specified dates each month, generally 45-60 days from the invoice date. 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. As of December 31, 2024, and March 31, 2024, we had a maximum credit limit, including the revolving credit facility, of $500.0 million, and an outstanding balance on the floor plan facility of $115.7 million and $105.1 million, respectively. On our balance sheet, our liability under the floor plan facility is presented as part of accounts payable – floor plan. Revolving credit facility : Our borrowings and repayments under the revolving credit facility 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 December 31, 2024, and March 31, 2024, we did not have any outstanding balance under the revolving credit facility. The maximum credit limit under this facility was $200.0 million as of both December 31, 2024, and March 31, 2024. 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, or other contractually narrow or limited purposes. As of December 31, 2024, 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 facilities in new geographic areas, which may require a significant investment of cash. We may also acquire technology companies to expand and enhance our geographic footprint, or the platform of bundled solutions to provide additional functionality and value-added services. We may require additional capital due to increases in inventory to accommodate our customers’ IT installation schedules. We may continue to use our internally generated funds to finance investments in leased assets or investments in notes receivable 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. While the future is uncertain, we do not believe our WFCDF Credit Facility will be terminated by WFCDF or us. Additionally, while our lending partners in our financing business segment continue to be discerning in their approval processes, we currently have funding resources available for our transactions. 46 Table of Contents 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 currency fluctuations, reduction in IT spending, shortages of product from our vendors due to material shortages, 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 2024 Annual Report, as supplemented in subsequently filed reports, and in Part II, Item 1A. “Risk Factors” in this Quarterly 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. CRITICAL ACCOUNTING ESTIMATES As disclosed in Note 2 , “Recent Accounting Pronouncements,” we adopted a new standard on accounting for contract assets and contract liabilities from contracts with customers in a business combination in the second quarter of our fiscal year 2023. Under this new standard, we apply Accounting Standards Codification Topic 606, Contracts with Customers, to recognize and measure contract assets and contract liabilities from contracts with customers. Other than this change, 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 2024 Annual Report.