10-Q 1 brhc10040164_10q.htm 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from____ to ____.

Commission file number: 1-34167

ePlus inc.

(Exact name of registrant as specified in its charter)

Delaware
 
54-1817218
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

13595 Dulles Technology Drive, Herndon, VA 20171-3413
(Address, including zip code, of principal executive offices)

Registrant’s telephone number, including area code: (703) 984-8400

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

Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $.01 par value
PLUS
NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes    No

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

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

Large accelerated filer 
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
Emerging growth company

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   No
The number of shares of common stock outstanding as of August 1, 2022, was 26,891,568.



TABLE OF CONTENTS

ePlus inc. AND SUBSIDIARIES

Part I. Financial Information:
 
       
Item 1.
 
Financial Statements
 
       
    5
       
    6
       
    7
       
    8
       
    10
       
    11
       
Item 2.
  24
       
Item 3.
  39
       
Item 4.
  39
       
Part II. Other Information:
 
       
Item 1.
  40
       
Item 1A.
  40
       
Item 2.
  40
       
Item 3.
  40
       
Item 4.
  40
       
Item 5.
  41
       
Item 6.
  41
       
42

CAUTIONARY LANGUAGE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or “Exchange Act,” and are made in reliance upon the protections provided by such acts for forward-looking statements. Such statements are not based on historical fact but are based upon numerous assumptions about future conditions that may not occur. Forward-looking statements are generally identifiable by use of forward-looking words such as “may,” “should,” “would,” “intend,” “estimate,” “will,” “potential,” “possible,” “could,” “believe,” “expect,” “intend,” “plan,” “anticipate,” “project,” and similar expressions. Readers are cautioned not to place undue reliance on any forward-looking statements made by us or on our behalf. Forward-looking statements are made based upon information that is currently available or management’s current expectations and beliefs concerning future developments and their potential effects upon us, speak only as of the date hereof, and are subject to certain risks and uncertainties. We do not undertake any obligation to publicly update or correct any forward-looking statements to reflect events or circumstances that subsequently occur, or of which we hereafter become aware. Actual events, transactions and results may materially differ from the anticipated events, transactions, or results described in such statements. Our ability to consummate such transactions and achieve such events or results is subject to certain risks and uncertainties. Such risks and uncertainties include, but are not limited to, the matters set forth below:

national and international political instability fostering uncertainty and volatility in the global economy including exposure to fluctuation in foreign currency rates, interest rates, and inflation, including increases in our costs and price increases to our customers which may result in adverse changes in our gross profit;
significant and rapid inflation may cause price, wage, and interest rate increases, as well as increases in operating costs which may impact the arrangements that have pricing commitments over the term of the agreement;
significant adverse changes in, reductions in, or loss of one or more of our larger volume customers or vendors;
supply chain issues, including a shortage of IT products, may increase our costs or cause a delay in fulfilling customer orders, or increase our need for working capital, or completing professional services, or purchasing IT products or services needed to support our internal infrastructure or operations, resulting in an adverse impact on our financial results;
the duration and ongoing impact of the novel coronavirus (“COVID-19”) pandemic, including but not limited to the impact and severity of new variants, vaccine efficacy, and immunization rates, the closure of non-essential business and other associated governmental containment actions, and the increase in cyber-security attacks that have occurred while employees work remotely;
maintaining and increasing advanced professional services by recruiting and retaining highly skilled, competent personnel, and vendor certifications;
our dependence on key personnel to maintain certain customer relationships, and our ability to hire, train, and retain sufficient qualified personnel;
our ability to secure our own and our customers’ electronic and other confidential information, while maintaining compliance with evolving data privacy and regulatory laws and regulations;
Our ability to remain secure during a cybersecurity attack, including both disruptions in our or our vendors’ IT systems and data and audio communication networks;
reliance on third-parties to perform some of our service obligations to our customers, and the reliance on a small number of key vendors in our supply chain with whom we do not have long-term supply agreements, guaranteed price agreements, or assurance of stock availability;
the creditworthiness of our customers and our ability to reserve adequately for credit losses;
loss of our credit facility or credit lines with our vendors may restrict our current and future operations;
a possible decrease in the capital spending budgets of our customers or a decrease in purchases from us;
our ability to raise capital, maintain or increase as needed our lines of credit with vendors or floor planning facility, obtain debt for our financing transactions, or the effect of those changes on our common stock price;
reduction of vendor incentives provided to us;
changes in the Information Technology (“IT”) industry and/or rapid changes in product offerings, including the proliferation of the cloud, infrastructure as a service (“IaaS”), software as a service (“SaaS”) and platform as a service (“PaaS”);
our dependency on continued innovations in hardware, software, and services offerings by our vendors and our ability to partner with them;
future growth rates in our core businesses;
rising interest rates or the loss of key lenders or the constricting of credit markets;

the possibility of goodwill impairment charges in the future;
adapting to meet changes in markets and competitive developments;
increasing the total number of customers using integrated solutions by up-selling within our customer base and gaining new customers;
managing a diverse product set of solutions in highly competitive markets with a number of key vendors;
increasing the total number of customers who use our managed services and professional services and continuing to enhance our managed services offerings to remain competitive in the marketplace;
performing professional and managed services competently;
our ability to implement comprehensive plans for the integration of sales forces, cost containment, asset rationalization, systems integration, and other key strategies;
exposure to changes in, interpretations of, or enforcement trends in, and customer and vendor actions in anticipation of or response to, legislation and regulatory matters;
domestic and international economic regulations uncertainty (e.g., tariffs, sanctions, and trade agreements);
our contracts may not be adequate to protect us, and we are subject to audit which we may not pass, and our professional and liability insurance policies coverage may be insufficient to cover a claim;
failure to comply with public sector contracts, or applicable laws or regulations;
maintaining our proprietary software and updating our technology infrastructure to remain competitive in the marketplace;
our ability to realize our investment in leased equipment;
our ability to successfully perform due diligence and integrate acquired businesses;
our ability to protect our intellectual property rights and successfully defend any challenges to the validity of our patents or allegations that we are infringing upon any third-party patents, and the costs associated with those actions, and, when appropriate, license required technology.

We cannot be certain that our business strategy will be successful or that we will successfully address these and other challenges, risks, and uncertainties. For a further list and description of various risks, relevant factors, and uncertainties that could cause future results or events to differ materially from those expressed or implied in our forward-looking statements, see Item 1A, “Risk Factors” and Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections contained elsewhere in this report, as well as other reports that we file with the Securities and Exchange Commission (“SEC”).

PART I. FINANCIAL INFORMATION

Item 1.
Financial Statements

e Plus inc. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)

 
June 30, 2022
   
March 31, 2022
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
 
$
83,488
   
$
155,378
 
Accounts receivable—trade, net
   
482,166
     
430,380
 
Accounts receivable—other, net
   
47,581
     
48,673
 
Inventories
   
246,873
     
155,060
 
Financing receivables—net, current
   
75,170
     
61,492
 
Deferred costs
   
34,104
     
32,555
 
Other current assets
   
15,961
     
13,944
 
Total current assets
   
985,343
     
897,482
 
                 
Financing receivables and operating leases—net
   
68,719
     
64,292
 
Deferred tax asset—net
   
5,054
     
5,050
 
Property, equipment, and other assets
   
45,888
     
45,586
 
Goodwill
   
126,378
     
126,543
 
Other intangible assets—net
   
24,768
     
27,250
 
TOTAL ASSETS
 
$
1,256,150
   
$
1,166,203
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
LIABILITIES
               
                 
Current liabilities:
               
Accounts payable
 
$
165,793
   
$
136,161
 
Accounts payable—floor plan
   
138,047
     
145,323
 
Salaries and commissions payable
   
32,490
     
39,602
 
Deferred revenue
   
100,637
     
86,469
 
Recourse notes payable—current
   
47,529
     
7,316
 
Non-recourse notes payable—current
   
19,873
     
17,070
 
Other current liabilities
   
29,603
     
28,095
 
Total current liabilities
   
533,972
     
460,036
 
                 
Recourse notes payable - long-term
   
3,878
     
5,792
 
Non-recourse notes payable - long-term
   
6,569
     
4,108
 
Other liabilities
   
35,443
     
35,529
 
TOTAL LIABILITIES
   
579,862
     
505,465
 
                 
COMMITMENTS AND CONTINGENCIES (Note 8)
   
     
 
                 
STOCKHOLDERS’ EQUITY
               
                 
Preferred stock, $0.01 per share par value; 2,000 shares authorized; none outstanding
   
-
     
-
 
Common stock, $0.01 per share par value; 50,000 shares authorized; 26,893 outstanding at June 30, 2022 and 26,886 outstanding at March 31, 2022
   
271
     
270
 
Additional paid-in capital
   
161,253
     
159,480
 
Treasury stock, at cost, 258 shares at June 30, 2022 and 130 shares at March 31, 2022
   
(13,958
)
   
(6,734
)
Retained earnings
   
530,185
     
507,846
 
Accumulated other comprehensive income—foreign currency translation adjustment
   
(1,463
)
   
(124
)
Total Stockholders’ Equity
   
676,288
     
660,738
 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
 
$
1,256,150
   
$
1,166,203
 

See Notes to Unaudited Consolidated Financial Statements.

ePlus inc. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)

 
Three Months Ended June 30,
 
   
2022
   
2021
 
             
Net sales
           
Product
 
$
395,250
   
$
361,057
 
Services
   
63,109
     
55,592
 
Total
   
458,359
     
416,649
 
Cost of sales
               
Product
   
304,210
     
277,227
 
Services
   
40,626
     
33,910
 
Total
   
344,836
     
311,137
 
                 
Gross profit
   
113,523
     
105,512
 
                 
Selling, general, and administrative
   
76,767
     
68,775
 
Depreciation and amortization
   
3,210
     
3,926
 
Interest and financing costs
   
363
     
359
 
Operating expenses
   
80,340
     
73,060
 
                 
Operating income
   
33,183
     
32,452
 
                 
Other income (expense)
   
(2,153
)
   
123
 
                 
Earnings before tax
   
31,030
     
32,575
 
                 
Provision for income taxes
   
8,691
     
9,057
 
                 
Net earnings
 
$
22,339
   
$
23,518
 
                 
Net earnings per common share—basic
 
$
0.84
   
$
0.88
 
Net earnings per common share—diluted
 
$
0.84
   
$
0.87
 
                 
Weighted average common shares outstanding—basic
   
26,513
     
26,666
 
Weighted average common shares outstanding—diluted
   
26,685
     
26,882
 

See Notes to Unaudited Consolidated Financial Statements.

ePlus inc. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

 
Three Months Ended June 30,
 
   
2022
   
2021
 
             
NET EARNINGS
 
$
22,339
   
$
23,518
 
                 
OTHER COMPREHENSIVE INCOME, NET OF TAX:
               
                 
Foreign currency translation adjustments
   
(1,339
)
   
66
 
                 
Other comprehensive income (loss)
   
(1,339
)
   
66
 
                 
TOTAL COMPREHENSIVE INCOME
 
$
21,000
   
$
23,584
 

See Notes to Unaudited Consolidated Financial Statements.

ePlus inc. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

 
Three Months Ended June 30,
 
   
2022
   
2021
 
Cash flows from operating activities:
           
Net earnings
 
$
22,339
   
$
23,518
 
                 
Adjustments to reconcile net earnings to net cash used in operating activities:
               
Depreciation and amortization
   
4,472
     
6,082
 
Provision for credit losses
   
698
     
(261
)
Share-based compensation expense
   
1,773
     
1,735
 
Payments from lessees directly to lenders—operating leases
   
-
     
(32
)
Gain on disposal of property, equipment, and operaing lease equipment
   
(224
)
   
(148
)
Changes in:
               
Accounts receivable
   
(53,556
)
   
(68,641
)
Inventories-net
   
(92,678
)
   
(7,800
)
Financing receivables—net
   
(20,574
)
   
193
 
Deferred costs and other assets
   
(4,177
)
   
61
 
Accounts payable-trade
   
30,376
     
(15,393
)
Salaries and commissions payable, deferred revenue, and other liabilities
   
8,608
     
(4,450
)
Net cash used in operating activities
   
(102,943
)
   
(65,136
)
                 
Cash flows from investing activities:
               
Proceeds from sale of property, equipment, and operating lease equipment
   
85
     
843
 
Purchases of property, equipment and operating lease equipment
   
(1,777
)
   
(6,994
)
Net cash used in investing activities
   
(1,692
)
   
(6,151
)
                 
Cash flows from financing activities:
               
Borrowings of non-recourse and recourse notes payable
   
49,256
     
3,199
 
Repayments of non-recourse and recourse notes payable
   
(3,645
)
   
(4,819
)
Repurchase of common stock
   
(7,224
)
   
(3,807
)
Net borrowings (repayments) on floor plan facility
   
(7,276
)
   
40,921
 
Net cash provided by financing activities
   
31,111
     
35,494
 
                 
Effect of exchange rate changes on cash
   
1,634
     
71
 
                 
Net increase in cash and cash equivalents
   
(71,890
)
   
(35,722
)
                 
Cash and cash equivalents, beginning of period
   
155,378
     
129,562
 
                 
Cash and cash equivalents, end of period
 
$
83,488
   
$
93,840
 

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - continued
(in thousands)

 
Three Months Ended June 30,
 
   
2022
   
2021
 
Supplemental disclosures of cash flow information:
           
Cash paid for interest
 
$
341
   
$
519
 
Cash paid for income taxes
 
$
7,532
   
$
7,275
 
Cash paid for amounts included in the measurement of lease liabilities
 
$
1,226
   
$
1,182
 
                 
Schedule of non-cash investing and financing activities:
               
Proceeds from sale of property, equipment, and leased equipment
 
$
183
   
$
978
 
Purchases of property, equipment, and operating lease equipment
 
$
(63
)
 
$
(2,619
)
Borrowing of non-recourse and recourse notes payable
 
$
7,267
   
$
-
 
Repayments of non-recourse and recourse notes payable
 
$
-
   
$
(32
)
Vesting of share-based compensation
 
$
9,215
   
$
7,493
 
Repurchase of common stock
  $ -     $ (304 )
New operating lease assets obtained in exchange for lease obligations
 
$
34
   
$
-
 

See Notes to Unaudited Consolidated Financial Statements.

ePlus inc. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)

 
Three Months Ended June 30, 2022
 
   
Common Stock
   
Additional
Paid-In
   
Treasury
   
Retained
   
Accumulated
Other
Comprehensive
       
   
Shares
   
Par Value
   
Capital
   
Stock
   
Earnings
   
Income
   
Total
 
Balance, March 31, 2022
   
26,886
   
$
270
   
$
159,480
   
$
(6,734
)
 
$
507,846
   
$
(124
)
 
$
660,738
 
Issuance of restricted stock awards
   
135
     
1
     
-
     
-
     
-
     
-
     
1
 
Share-based compensation
   
-
     
-
     
1,773
     
-
     
-
     
-
     
1,773
 
Repurchase of common stock
   
(128
)
   
-
     
-
     
(7,224
)
   
-
     
-
     
(7,224
)
Net earnings
   
-
     
-
     
-
     
-
     
22,339
     
-
     
22,339
 
Foreign currency translation adjustment
   
-
     
-
     
-
     
-
     
-
     
(1,339
)
   
(1,339
)
Balance, June 30, 2022
   
26,893
   
$
271
   
$
161,253
   
$
(13,958
)
 
$
530,185
   
$
(1,463
)
 
$
676,288
 

 
Three Months Ended June 30, 2021
 
   
Common Stock
   
Additional
Paid-In
   
Treasury
   
Retained
   
Accumulated
Other
Comprehensive
       
   
Shares
   
Par Value
   
Capital
   
Stock
   
Earnings
   
Income
   
Total
 
Balance, March 31, 2021
   
27,006
   
$
145
   
$
152,366
   
$
(75,372
)
 
$
484,616
   
$
655
   
$
562,410
 
Issuance of restricted stock awards
   
156
     
1
     
-
     
-
     
-
     
-
     
1
 
Share-based compensation
   
-
     
-
     
1,735
     
-
     
-
     
-
     
1,735
 
Repurchase of common stock
   
(90
)
   
-
     
-
     
(4,111
)
   
-
     
-
     
(4,111
)
Net earnings
   
-
     
-
     
-
     
-
     
23,518
     
-
     
23,518
 
Foreign currency translation adjustment
   
-
     
-
     
-
     
-
     
-
     
66
     
66
 
Balance, June 30, 2021
   
27,072
   
$
146
   
$
154,101
   
$
(79,483
)
 
$
508,134
   
$
721
   
$
583,619
 

See Notes to Unaudited Consolidated Financial Statements.

ePlus inc. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF BUSINESS — Our company was founded in 1990 and is a Delaware corporation. ePlus inc. is sometimes referred to in this Quarterly Report on Form 10-Q as “we,” “our,” “us,” “ourselves,” or “ePlus.” ePlus inc. is a holding company that through its subsidiaries provides information technology solutions that enable organizations to optimize their IT environment and supply chain processes. We also provide consulting, professional, and managed services and complete lifecycle management services including flexible financing solutions. We focus on selling to medium and large enterprises in North America, the United Kingdom (“UK”), and other European countries.

BASIS OF PRESENTATION — The unaudited consolidated financial statements include the accounts of ePlus inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The accounts of businesses acquired are included in the unaudited consolidated financial statements from the dates of acquisition.

INTERIM FINANCIAL STATEMENTS — The unaudited consolidated financial statements for the three months ended June 30, 2022, and 2021, were prepared by us and include all normal and recurring adjustments that, in the opinion of management, are necessary for a fair presentation of our financial position, results of operations, changes in comprehensive income, and cash flows for such periods. Operating results for the three months ended June 30, 2022, and 2021, are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year ended March 31, 2023, or any other future period. These unaudited consolidated financial statements do not include all disclosures required by the accounting principles generally accepted in the United States (“US GAAP”) for annual financial statements. Our audited consolidated financial statements are contained in our annual report on Form 10-K for the year ended March 31, 2022 (“2022 Annual Report”), which should be read in conjunction with these interim consolidated financial statements.

USE OF ESTIMATES — The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Estimates are used when accounting for items and matters including, but not limited to, revenue recognition, residual values, vendor consideration, lease classification, goodwill and intangible assets, allowance for credit losses, inventory obsolescence, and the recognition and measurement of income tax assets and other provisions and contingencies. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates.

CONCENTRATIONS OF RISK — A substantial portion of our sales are products from Cisco Systems, which were 35% of our technology segment’s net sales for the three months ended June 30, 2022, and 42% for the three months ended June 30, 2021.

SIGNIFICANT ACCOUNTING POLICIES — The significant accounting policies used in preparing these Consolidated Financial Statements were applied on a basis consistent with those reflected in our Consolidated Financial Statements for the year ended March 31, 2022.

STOCK SPLIT — On December 13, 2021, we completed a two-for-one stock split in the form of a stock dividend. References made to outstanding shares or per share amounts in the accompanying financial statements and disclosures have been retroactively adjusted for this stock split.

2.
REVENUES

CONTRACT BALANCES

Accounts receivable – trade consists entirely of amounts due from contracts with customers. In addition, we had $57.1 million and $47.5 million of receivables from contracts with customers included within financing receivables as of June 30, 2022, and March 31, 2022, respectively. The following table provides the balance of contract liabilities from contracts with customers (in thousands):

 
June 30, 2022
   
March 31, 2022
 
Current (included in deferred revenue)
 
$
100,092
   
$
85,826
 
Non-current (included in other liabilities)
 
$
30,574
   
$
30,086
 

Revenue recognized from the beginning contract liability balance was $24.9 million and $21.5 million for the three months ended June 30, 2022, and 2021, respectively.

PERFORMANCE OBLIGATIONS

The following table includes revenue expected to be recognized in the future related to performance obligations, primarily non-cancelable contracts for ePlus managed services, that are unsatisfied or partially unsatisfied at the end of the reporting period (in thousands):

Remainder of the year ending March 31, 2023
 
$
43,194
 
Year ending March 31, 2024
   
24,954
 
Year ending March 31, 2025
   
9,466
 
Year ending March 31, 2026
   
2,510
 
Year ending March 31, 2027 and thereafter
   
986
 
Total remaining performance obligations
 
$
81,110
 

The table does not include the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less, and (ii) contracts where we recognize revenue at the amount that we have the right to invoice for services performed.

3.
FINANCING RECEIVABLES AND OPERATING LEASES

Our financing receivables and operating leases consist primarily of leases of IT and communication equipment and notes receivable from financing customer purchases of third-party software, maintenance, and services. Our leases often include elections for the lessee to purchase the underlying asset at the end of the lease term. Often, our leases provide the lessee a bargain purchase option.

The following table provides the profit recognized for sales-type leases at their commencement date, including modifications that are recognized on a net basis, for the three months ended June 30, 2022, and 2021 (in thousands):

 
Three months ended June 30,
 
   
2022
   
2021
 
Net sales
 
$
4,983
   
$
3,817
 
Cost of sales
   
4,067
     
3,365
 
Gross profit
 
$
916
   
$
452
 

The following table provides interest income in aggregate on our sales-type leases and lease income on our operating leases for the three  months ended June 30, 2022, and 2021 (in thousands):

 
Three months ended June 30,
 
   
2022
   
2021
 
Interest income on sales-type leases
 
$
861
   
$
1,290
 
Lease income on operating leases
 
$
4,582
   
$
5,210
 

FINANCING RECEIVABLES—NET

The following tables provide a disaggregation of our financing receivables – net (in thousands):

June 30, 2022
 
Notes
Receivable
   
Lease
Receivables
   
Financing
Receivables
 
Gross receivables
 
$
88,178
   
$
51,103
   
$
139,281
 
Unguaranteed residual value (1)
   
-
     
9,233
     
9,233
 
Unearned income
   
(3,346
)
   
(4,996
)
   
(8,342
)
Allowance for credit losses (2)
   
(792
)
   
(913
)
   
(1,705
)
Total, net
 
$
84,040
   
$
54,427
   
$
138,467
 
Reported as:
                       
Current
 
$
52,547
   
$
22,623
   
$
75,170
 
Long-term
   
31,493
     
31,804
     
63,297
 
Total, net
 
$
84,040
   
$
54,427
   
$
138,467
 

  (1)
Includes unguaranteed residual values of $5,607 thousand that we retained after selling the related lease receivable.
(2)
Refer to Note 6, “Allowance for Credit Losses” for details.

March 31, 2022
 
Notes
Receivable
   
Lease
Receivables
   
Financing
Receivables
 
Gross receivables
 
$
80,517
   
$
38,788
   
$
119,305
 
Unguaranteed residual value (1)
   
-
     
9,141
     
9,141
 
Unearned income
   
(2,728
)
   
(3,604
)
   
(6,332
)
Allowance for credit losses (2)
   
(708
)
   
(681
)
   
(1,389
)
Total, net
 
$
77,081
   
$
43,644
   
$
120,725
 
Reported as:
                       
Current
 
$
45,415
   
$
16,077
   
$
61,492
 
Long-term
   
31,666
     
27,567
     
59,233
 
Total, net
 
$
77,081
   
$
43,644
   
$
120,725
 

(1)
Includes unguaranteed residual values of $6,424 thousand that we retained after selling the related lease receivable.
(2)
Refer to Note 6, “Allowance for Credit Losses” for details.

OPERATING LEASES—NET

Operating leases—net represents leases that do not qualify as sales-type leases. The components of the operating leases—net are as follows (in thousands):

 
June 30,
2022
   
March 31,
2022
 
Cost of equipment under operating leases
 
$
14,322
   
$
13,044
 
Accumulated depreciation
   
(8,900
)
   
(7,985
)
Investment in operating lease equipment—net (1)
 
$
5,422
   
$
5,059
 

(1)
Amounts include estimated unguaranteed residual values of $1.8 million and $1.7 million as of June 30, 2022, and March 31, 2022, respectively.

TRANSFERS OF FINANCIAL ASSETS

We enter into arrangements to transfer the contractual payments due under financing receivables and operating lease agreements, which are accounted for as sales or secured borrowings.

For transfers accounted for as a secured borrowing, the corresponding investments serve as collateral for non-recourse notes payable. As of June 30, 2022, and March 31, 2022, we had financing receivables of $29.0 million and $21.1 million, respectively, and operating leases of $1.8 million and $2.0 million, respectively, which were collateral for non-recourse notes payable. See Note 7, Credit Facility and Notes Payable.

For transfers accounted for as a sale, we derecognize the carrying value of the asset transferred plus any liability and recognize a net gain or loss on the sale, which are presented within net sales in the consolidated statement of operations. During the three months ended June 30, 2022, and 2021, we recognized net gains of $1.8 million and $3.2 million, respectively, and total proceeds from these sales were $52.5 million and $75.3 million, respectively.

When we retain servicing obligations in transfers accounted for as sales, we allocate a portion of the proceeds to deferred revenue, which is recognized as we perform the services. As of June 30, 2022, and March 31, 2022, we had deferred revenue of $0.4 million and $0.5 million, respectively, for servicing obligations.

In a limited number of transfers accounted for as sales, we indemnified the assignee if the lessee elects to early terminate the lease. As of June 30, 2022, and March 31, 2022, the total potential payments that could result from these indemnities is immaterial.

4.
LESSEE ACCOUNTING

We lease office space for periods up to six years. We recognize our right-of-use assets as part of property, equipment, and other assets. We recognize the current and long-term portions of our lease liability as part of other current liabilities and other liabilities, respectively. We recognized rent expense as part of selling, general and administrative expenses. We recognized rent expense of $1.3 million for both the three months ended June 30, 2022, and June 30, 2021.

5.
GOODWILL AND OTHER INTANGIBLE ASSETS

GOODWILL

The following table summarizes the changes in the carrying amount of goodwill for the three months ended June 30, 2022 (in thousands):

 
Three months ended June 30, 2022
 
   
Goodwill
   
Accumulated
Impairment
Loss
   
Net
Carrying
Amount
 
Beginning balance
 
$
135,216
   
$
(8,673
)
 
$
126,543
 
Foreign currency translations
   
(165
)
   
-
     
(165
)
Ending balance
 
$
135,051
   
$
(8,673
)
 
$
126,378
 

Goodwill represents the premium paid over the fair value of the net tangible and intangible assets that are individually identified and separately recognized in business combinations. Our entire balance as of June 30, 2022, relates to our technology segment, which we also determined to be one reporting unit. The change in our goodwill balance during the three months ended June 30, 2022, is due solely to foreign currency translation.

We test goodwill for impairment on an annual basis, as of the first day of our third fiscal quarter, 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 value. In our annual test as of October 1, 2021, we performed a qualitative assessment of goodwill and concluded that, more likely than not, the fair value of our technology reporting unit continued to substantially exceed its carrying value.

OTHER INTANGIBLE ASSETS

Our other intangible assets consist of the following on June 30, 2022, and March 31, 2022 (in thousands):

 
June 30, 2022
   
March 31, 2022
 
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Carrying
Amount
   
Gross
Carrying
Amount
   
Accumulated
Amortization
   
Net
Carrying
Amount
 
Customer relationships & other intangibles
 
$
77,041
   
$
(54,101
)
 
$
22,940
   
$
77,224
   
$
(52,087
)
 
$
25,137
 
Capitalized software development
   
10,517
     
(8,689
)
   
1,828
     
10,517
     
(8,404
)
   
2,113
 
Total
 
$
87,558
   
$
(62,790
)
 
$
24,768
   
$
87,741
   
$
(60,491
)
 
$
27,250
 

Customer relationships and other intangibles are generally amortized between 5 to 10 years. Capitalized software development is generally amortized over 5 years.

Total amortization expense for customer relationships and other intangible assets was $2.2 million and $2.7 million for the three months ended June 30, 2022, and June 30, 2021, respectively.


6.
ALLOWANCE FOR CREDIT LOSSES

The following table provides the activity in our allowance for credit losses for the three months ended June 30, 2022, and 2021 (in thousands):

   
Accounts
Receivable
   
Notes
Receivable
   
Lease
Receivables
   
Total
 
Balance April 1, 2022
 
$
2,411
   
$
708
   
$
681
   
$
3,800
 
Provision for credit losses
   
382
     
84
     
232
   
698
 
Write-offs and other
   
(65
)
   
-
   
-
   
(65
)
Balance June 30, 2022
 
$
2,728
   
$
792
   
$
913
   
$
4,433
 

   
Accounts
Receivable
   
Notes
Receivable
   
Lease
Receivables
   
Total
 
Balance April 1, 2021
 
$
2,064
   
$
1,212
   
$
1,171
   
$
4,447
 
Provision for credit losses
   
(40
)
   
77
     
(298
)
   
(261
)
Write-offs and other
   
(22
)
   
-
     
-
     
(22
)
Balance June 30, 2021
 
$
2,002
   
$
1,289
   
$
873
   
$
4,164
 

We evaluate our customers using an internally assigned credit quality rating “CQR”. The CQR categories of our financing receivables are:

High CQR: This rating includes accounts with excellent to good business credit, asset quality and capacity to meet financial obligations. Loss rates in this category are generally less than 1%.

Average CQR: This rating includes accounts with average credit risk that are more susceptible to loss in the event of adverse business or economic conditions. Loss rates in this category are generally in the range of 2% to 10%.

Low CQR: This rating includes accounts that have marginal credit risk such that the customer’s ability to make repayment is impaired or may likely become impaired. The loss rates in this category in the normal course are generally in the range of 10% to 100%.
 
The following table provides the amortized cost basis of our financing receivables by CQR and by credit origination year as of June 30, 2022 (in thousands):

   
Amortized cost basis by origination year ending March 31,
                   
 
2023
   
2022
   
2021
   
2020
   
2019
   
2018
   
Total
   
Non-recourse
debt (2)
   
Net credit
exposure
 
Notes receivable:
                                                     
High CQR
 
$
22,785
   
$
18,879
   
$
24,314
   
$
969
   
$
158
   
$
3
   
$
67,108
   
$
(24,331
)
 
$
42,777
 
Average CQR
   
7,471
     
6,784
     
2,671
     
746
     
52
     
-
     
17,724
     
(8,280
)
   
9,444
 
Low CQR
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
30,256
   
$
25,663
   
$
26,985
   
$
1,715
   
$
210
   
$
3
   
$
84,832
   
$
(32,611
)
 
$
52,221
 
                                                                         
Lease receivables:
                                                                       
High CQR
 
$
14,828
   
$
9,539
   
$
4,209
   
$
1,809
   
$
731
   
$
44
   
$
31,160
   
$
(3,531
)
 
$
27,629
 
Average CQR
   
6,654
     
9,029
     
2,334
     
473
     
39
     
44
     
18,573
     
(188
)
   
18,385
 
Low CQR
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
 
Total
 
$
21,482
   
$
18,568
   
$
6,543
   
$
2,282
   
$
770
   
$
88
   
$
49,733
   
$
(3,719
)
 
$
46,014
 
                                                                         
Total amortized cost (1)
 
$
51,738
   
$
44,231
   
$
33,528
   
$
3,997
   
$
980
   
$
91
   
$
134,565
   
$
(36,330
)
 
$
98,235
 

(1)
Unguaranteed residual values of $5,607 thousand that we retained after selling the related lease receivable is excluded from amortized cost.
(2)
Transfers consist of receivables that have been transferred to third-party financial institutions on a non-recourse basis.


The following table provides the amortized cost basis of our financing receivables by CQR and by credit origination year as of March 31, 2022 (in thousands):

   
Amortized cost basis by origination year ending March 31,
                   
 
2022
   
2021
   
2020
   
2019
   
2018
   
2017
   
Total
   
Transfers
(2)
   
Net credit
exposure
 
                                                       
Notes receivable:
                                                     
High CQR
 
$
35,264
   
$
28,005
   
$
1,297
   
$
345
   
$
2
   
$
4
   
$
64,917
   
$
(30,274
)
  $
34,643  
Average CQR
   
8,922
     
2,976
     
758
     
213
     
3
     
-
     
12,872
     
(4,763
)
    8,109  
Low CQR
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
-
      -  
Total
 
$
44,186
   
$
30,981
   
$
2,055
   
$
558
   
$
5
   
$