ORION ENERGY SYSTEMS, INC. The following discussion and analysis of our financial condition and results of operations should be read together with our unaudited Condensed Consolidated Financial Statements and related notes included in this Form 10-Q, as well as our audited Consolidated Financial Statements and related notes included in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2019 .
Cautionary Note Regarding Forward-Looking Statements
Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, prospects, financial condition, assumptions or future events or performance are not historical facts and are "forward-looking statements" as that term is defined under the federal securities laws. These statements are often, but not always, made through the use of words or phrases such as "believe", "anticipate", "should", "intend", "plan", "will", "expects", "estimates", "projects", "positioned", "strategy", "outlook" and similar words. You should read the statements that contain these types of words carefully. Such forward-looking statements are subject to a number of risks, uncertainties and other factors that could cause actual results to differ materially from what is expressed or implied in such forward-looking statements. There may be events in the future that we are not able to predict accurately or over which we have no control. Potential risks and uncertainties include, but are not limited to, those discussed in "Part I, Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2019 . We urge you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We do not undertake any obligation to release publicly any revisions to such forward-looking statements to reflect events or uncertainties after the date hereof or to reflect the occurrence of unanticipated events.
Overview
We provide state-of-the-art light emitting diode ("LED") lighting, wireless
Internet of Things ("IoT") enabled control solutions, project engineering and
design and energy project management. We research, design, develop, manufacture,
market, sell, install, and implement energy management systems consisting
primarily of high-performance, energy-efficient commercial and industrial
interior and exterior lighting systems and related services. Our products are
targeted for applications in three primary market segments: commercial office
and retail, area lighting, and industrial applications, although we do sell and
install products into other markets. Virtually all of our sales occur within
North America .
Our lighting products consist primarily of LED lighting fixtures, many of which
include IoT enabled control systems. Our principal customers include large
national account end-users, electrical distributors and energy service companies
("ESCOs"). A substantial amount of our products are manufactured at our leased
production facility located in Manitowoc, Wisconsin . In addition, certain
products and components are sourced from third parties in order to provide
versatility in our product development and portfolio.
We have significant experience offering our comprehensive project management
services to national account customers to retrofit their multiple locations. Our
comprehensive services include initial site surveys and audits, utility
incentive and government subsidy management, engineering design, and project
management from delivery through to installation and controls integration.
We believe the market for LED lighting products and related services continues
to grow. Due to their size and flexibility in application, we also believe that
LED lighting systems can address opportunities for retrofit applications that
cannot be satisfied by other lighting technologies. Our LED lighting
technologies and related services have become the primary component of our
revenue as we continue to strive to be a leader in the LED market.
We generally do not have long-term contracts with our customers that provide us
with recurring revenue from period to period and we typically generate
substantially all of our revenue from sales of lighting systems and related
services to governmental, commercial and industrial customers on a
project-by-project basis. We also perform work under global services or product
purchasing agreements with major customers with sales completed on a purchase
order basis. The loss of, or substantial reduction in sales to, any of our
significant customers, or our current single largest customer, or the
termination or delay of a significant volume of purchase orders by one or more
key customers, could have a material adverse effect on our results of operations
in any given future period.
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-------------------------------------------------------------------------------- We typically sell our lighting systems in replacement of our customers' existing lighting fixtures. We call this replacement process a "retrofit". We frequently sell our products and services directly to our customers and in many cases we provide design and installation as well as project management services. We also sell our lighting systems on a wholesale basis, principally to electrical distributors and ESCOs to sell to their own customer bases. The gross margins of our products can vary significantly depending upon the types of products we sell, with gross margins typically ranging from 10% to 50%. As a result, a change in the total mix of our sales among higher or lower gross margin products can cause our profitability to fluctuate from period to period. Our fiscal year ends onMarch 31 . We refer to our current fiscal year which will end onMarch 31, 2020 as "fiscal 2020". We refer to our most recently completed fiscal year, which ended onMarch 31, 2019 , as "fiscal 2019", and our prior fiscal year which ended onMarch 31, 2018 as "fiscal 2018". Our fiscal first quarter of each fiscal year ends onJune 30 , our fiscal second quarter ends onSeptember 30 , our fiscal third quarter ends onDecember 31 , and our fiscal fourth quarter ends onMarch 31 . Reportable segments are components of an entity that have separate financial data that the entity's chief operating decision maker ("CODM") regularly reviews when allocating resources and assessing performance. Our CODM is our chief executive officer. We have three reportable segments: Orion Engineered Systems Division ("OES"),Orion Distribution Services Division ("ODS"), and OrionU.S. Markets Division ("USM").
Managing Impacts of Tariffs and Trade Policies
There continues to be a debate regarding a wide range of policy options with respect to monetary, regulatory, and trade, amongst others, that theU.S. federal government has and may pursue, including the imposition of tariffs on certain imports. Certain sourced finished products and certain of the components used in our products are impacted by the imposed tariffs on imports from certain countries. Our efforts to mitigate the impact of added costs include sourcing from non-tariff impacted countries, value engineering our products to reduce cost and raising prices. We believe that these mitigation activities will assist to offset added costs, and we currently believe that such tariffs will have a limited adverse financial effect on our results of operations. Any future policy changes that may be implemented could have a positive or negative consequence on our financial performance depending on how the changes would influence many factors, including business and consumer sentiment.
Strategic Approach
We remain optimistic about our near-term and long-term financial performance.
Our ability to achieve our desired revenue growth and profitability goals
depends on our ability to effectively execute on the following key strategic
initiatives:
Focus on executing and marketing our turnkey LED retrofit capabilities to large
national account customers. We believe one of our competitive advantages is our
ability to deliver full turnkey LED lighting project capabilities starting with
energy audits and site assessments that lead to custom engineering and
manufacturing through to fully managed installations. These attributes coupled
with our superior customer service, high quality designs and expedited delivery
responsiveness have resulted in contracts to retrofit multiple locations for
multiple national account customers. We believe that these contracts will help
lead our growth momentum for the remainder of fiscal 2020 and beyond. We also
see the potential for maintenance and electrical services to be a component of
our recurring revenue going forward as our customers recognize our ability to
first deliver turnkey installations and then provide maintenance and other
electrical services to their facilities.
Support success of our ESCO and agent-driven distribution sales channels. We
continue to focus on building our relationships and product and sales support
for our ESCO and agent driven distribution channels. These efforts include an
array of product and sales training efforts as well as the development of new
products to cater to the unique needs of these sales channels.
Continued Product Innovation. We continue to innovate, developing lighting
fixtures and features that address specific customer requirements, while also
working to maintain a leadership position in energy efficiency, smart product
design and installation benefits. We also continue to deepen our capabilities in
the integration of smart lighting controls. Our goal is to provide
state-of-the-art lighting products with modular plug-and-play designs to enable
lighting system customization from basic controls to advanced IoT capabilities.
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Leveraging of our Smart Lighting Systems to Support Internet of Things
Applications. We believe we are ideally positioned to help customers to
efficiently deploy new IoT controls and applications by leveraging the "Smart
Ceiling" capabilities of our solid state lighting system. IoT capabilities can
include the management and tracking of facilities, personnel, resources and
customer behavior, driving both sales and lowering costs for our customers. As a
result, these added capabilities provide customers an even greater return on
investment from their lighting system and make us an even more attractive
partner.
Recent Developments
During fiscal 2019 and fiscal 2020, we signed a series of contracts to retrofit multiple locations for a major national account customer with our state-of-the-art LED lighting systems and wireless IoT enabled control solutions at locations nationwide. We currently expect total revenue from the customer to be approximately$130 million , dependent on purchase orders, a significant amount of which we expect to be recognized during fiscal 2020.
Results of Operations - Three Months Ended
The following table sets forth the line items of our Condensed Consolidated
Statements of Operations and as a relative percentage of our total revenue for
each applicable period, together with the relative percentage change in such
line item between applicable comparable periods (dollars in thousands, except
percentages):
Three Months Ended December 31,
2019 2018 2019 2018
% % of % of
Amount Amount Change Revenue Revenue
Product revenue $ 25,867 $ 13,952 85.4 % 75.5 % 85.6 %
Service revenue 8,382 2,339 258.4 % 24.5 % 14.4 %
Total revenue 34,249 16,291 110.2 % 100.0 % 100.0 %
Cost of product revenue 19,075 10,508 81.5 % 55.7 % 64.5 %
Cost of service revenue 6,900 1,613 327.8 % 20.1 % 9.9 %
Total cost of revenue 25,975 12,121 114.3 % 75.8 % 74.4 %
Gross profit 8,274 4,170 98.4 % 24.2 % 25.6 %
General and administrative expenses 2,662 2,269 17.3 % 7.8 % 13.9 %
Sales and marketing expenses 2,735 2,190 24.9 % 8.0 % 13.4 %
Research and development expenses 439 298 47.3 % 1.3 % 1.8 %
Income (loss) from operations 2,438 (587 ) NM 7.1 % (3.6 )%
Other income 2 31 (93.5 )% 0.0 % 0.2 %
Interest expense (38 ) (77 ) (50.6 )% (0.1 )% (0.5 )%
Amortization of debt issue costs (61 ) (31 ) 96.8 % (0.2 )% (0.2 )%
Interest income 2 2 - 0.0 % 0.0 %
Income (loss) before income tax 2,343 (662 ) NM 6.8 % (4.1 )%
Income tax expense 39 - NM 0.1 % -
Net income (loss) $ 2,304 $ (662 ) NM 6.7 % (4.1 )%
* NM - Not Meaningful
Revenue. Product revenue increased 85.4%, or $11.9 million , for the third
quarter of fiscal 2020 versus the third quarter of fiscal 2019. The increase in
product revenue was the result of higher sales volume through our national
account channel, and almost exclusively as a result of a major retrofit project
for multiple locations for one of our national account customers. Service
revenue increased 258.4%, or $6.0 million , due to higher sales volume through
our national account channel for the major retrofit project for one customer and
the timing of those project installations. In the third quarter of fiscal 2020,
sales to this one national account customer represented 72.3% of our total
revenue. Total revenue increased by 110.2%, or $18.0 million , due to the items
discussed above.
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-------------------------------------------------------------------------------- Cost of Revenue and Gross Margin. Cost of product revenue increased 81.5%, or$8.6 million , in the third quarter of fiscal 2020 versus the third quarter of fiscal 2019 due to the significant increase in our sales. Cost of service revenue increased 327.8% or$5.3 million , in the third quarter of fiscal 2020 versus the third quarter of fiscal 2019 due to the increase in sales. Gross margin decreased from 25.6% of revenue in fiscal 2019 to 24.2% in fiscal 2020, due to the change in customer sales mix and lower average margins on sales for the major retrofit project to one national account customer.
Operating Expenses
General and Administrative. General and administrative expenses increased 17.3%,
or
Sales and Marketing. Sales and marketing expenses increased 24.9%, or
Research and Development. Research and development expenses in the third quarter of fiscal 2020 increased 47.3%, or$0.1 million , compared to the third quarter of fiscal 2019, primarily due to higher employment costs.
Other Income. Other income in the third quarter of fiscal 2020 primarily represented product royalties received from licensing agreements for our patents.
Interest Expense. Interest expense in the third quarter of fiscal 2020 decreased by 50.6%, or$39 thousand , from the third quarter of fiscal 2019. The decrease in interest expense was primarily due to fewer sales of receivables in the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019. Amortization of debt issue costs. Amortization of debt issue costs in the third quarter of fiscal 2020 increased by$30 thousand from the third quarter of fiscal 2019. The increase in amortization of debt issue costs was due to the timing of the execution of our credit agreement. Interest Income. Interest income in the third quarter of fiscal 2020 remained relatively flat compared to the third quarter of fiscal 2019. Interest income relates to interest earned on sweep bank accounts. Income Taxes. Income tax expense increased$39 thousand , in the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019. Our income tax expense is due primarily to minimum state tax liabilities.
Orion Engineered Systems Division
Our OES segment develops and sells lighting products and provides construction
and engineering services for our commercial lighting and energy management
systems. OES provides engineering, design, lighting products and in many cases
turnkey solutions for large national accounts, governments, municipalities,
schools and other customers.
The following table summarizes our OES segment operating results (dollars in
thousands):
Three Months Ended December 31,
%
2019 2018 Change
Revenues $ 27,275 $ 6,802 301.0 %
Operating income $ 3,174 $ 33 9518.2 %
Operating margin 11.6 % 0.5 %
* NM - Not Meaningful
OES segment revenue in the third quarter of fiscal 2020 was $27.3 million , an
increase of $20.5 million from the third quarter of fiscal 2019, as a result of
the increase in volume of turnkey projects to one large national account
customer.
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OES segment operating income in the third quarter of fiscal 2020 was $3.2
million , an increase of $3.2 million from the third quarter of fiscal 2019. The
increase in the segment's operating income was the result of higher sales in
this segment, resulting in improved operating leverage.
Our ODS segment focuses on selling lighting products through manufacturer representative agencies and a network of North American broadline and electrical distributors and contractors.
The following table summarizes our ODS segment operating results (dollars in
thousands):
Three Months Ended December 31,
%
2019 2018 Change
Revenues $ 3,634 $ 6,102 (40.4 )%
Operating loss $ (206 ) $ (236 ) 12.7 %
Operating margin (5.7 )% (3.9 )%
* NM - Not Meaningful
ODS segment revenue decreased in the third quarter of fiscal 2020 by 40.4%, or
$2.5 million , compared to the third quarter of fiscal 2019, primarily due to a
decrease in sales volume through our distribution channel.
ODS segment operating loss in the third quarter of fiscal 2020 was relatively
flat, compared to the third quarter of fiscal 2019, reflecting lower allocated
costs.
Orion U.S. Markets Division
Our USM segment sells commercial lighting systems and energy management systems to the wholesale contractor markets. USM customers include ESCOs and contractors.
The following table summarizes our USM segment operating results (dollars in
thousands):
Three Months Ended December 31,
%
2019 2018 Change
Revenues $ 3,340 $ 3,387 (1.4 )%
Operating income $ 578 $ 569 1.6 %
Operating margin 17.3 % 16.8 %
* NM - Not Meaningful
USM segment revenue was relatively flat in the third quarter of fiscal 2020, compared to the third quarter of fiscal 2019.
USM segment operating income for the third quarter of fiscal 2020 was relatively flat, compared to the third quarter of fiscal 2019.
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Results of Operations - Nine Months Ended
The following table sets forth the line items of our Condensed Consolidated
Statements of Operations and as a relative percentage of our total revenue for
each applicable period, together with the relative percentage change in such
line item between applicable comparable periods (dollars in thousands, except
percentages):
Nine Months Ended December 31,
2019 2018 2019 2018
% % of % of
Amount Amount Change Revenue Revenue
Product revenue $ 93,778 $ 38,350 144.5 % 75.1 % 88.5 %
Service revenue 31,171 4,961 528.3 % 24.9 % 11.5 %
Total revenue 124,949 43,311 188.5 % 100.0 % 100.0 %
Cost of product revenue 68,778 29,599 132.4 % 55.0 % 68.3 %
Cost of service revenue 24,823 3,544 600.4 % 19.9 % 8.2 %
Total cost of revenue 93,601 33,143 182.4 % 74.9 % 76.5 %
Gross profit 31,348 10,168 208.3 % 25.1 % 23.5 %
General and administrative expenses 8,274 7,681 7.7 % 6.6 % 17.7 %
Sales and marketing expenses 8,359 6,903 21.1 % 6.7 % 15.9 %
Research and development expenses 1,240 1,057 17.3 % 1.0 % 2.4 %
Income (loss) from operations 13,475 (5,473 ) 346.2 % 10.8 % (12.6 )%
Other income 22 65 (66.2 )% 0.0 % 0.2 %
Interest expense (261 ) (335 ) 22.1 % (0.2 )% (0.8 )%
Amortization of debt issue costs (182 ) (31 ) 487.1 % (0.1 )% (0.1 )%
Interest income 5 8 (37.5 )% 0.0 % 0.0 %
Income (loss) before income tax 13,059 (5,766 ) 326.5 % 10.5 % (13.3 )%
Income tax expense 66 26 153.8 % 0.1 % 0.1 %
Net Income (loss) $ 12,993 $ (5,792 ) 324.3 % 10.4 % (13.4 )%
* NM - Not Meaningful
Revenue. Product revenue increased 144.5%, or $55.4 million , for the first nine
month of fiscal 2020 versus the first nine month of fiscal 2019. The increase in
product revenue was the result of higher sales volume through our national
account channel, and exclusively the result of a major retrofit project for
multiple locations for one of our national account customers. Service revenue
increased 528.3%, or $26.2 million , due to higher sales volume through our
national account channel for the major retrofit project for one customer and the
timing of those project installations. In the first nine months of fiscal 2020,
sales to this one national account customer represented 77.3% of our total
revenue. Total revenue increased by 188.5%, or $81.6 million , due to the items
discussed above.
Cost of Revenue and Gross Margin. Cost of product revenue increased 132.4%, or
$39.2 million , in the first nine months of fiscal 2020 versus the first nine
months of fiscal 2019 due to the increase in sales. Cost of service revenue
increased 600.4% or $21.3 million , in the first nine months of fiscal 2020
versus the first nine months of fiscal 2019 due to the increase in sales. Gross
margin increased from 23.5% of revenue in fiscal 2019 to 25.1% in fiscal 2020,
due to our higher sales levels covering fixed costs.
Operating Expenses
General and Administrative. General and administrative expenses increased 7.7%, or$0.6 million , in the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019, primarily due to higher bonus and employment costs, partially offset by lower consulting and legal costs. 30 --------------------------------------------------------------------------------
Sales and Marketing. Sales and marketing expenses increased 21.1%, or
Research and Development. Research and development expenses increased 17.3%, or$0.2 million , in the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019. The increase was primarily due to higher employment costs. Other Income. Other income in the first nine months of fiscal 2020 primarily represented product royalties received from licensing agreements for certain of our patents. Interest Expense. Interest expense in the first nine months of fiscal 2020 decreased by 22.1%, or$0.1 million , from the first nine months of fiscal 2019. The decrease in interest expense in the first nine months of fiscal 2020 as compared to the first nine months of fiscal 2019 was due primarily to fewer sales of receivables partially offset by higher interest expense of increased borrowings under our revolving credit agreement. Amortization of debt issue costs. Amortization of debt issue costs in the first nine months of fiscal 2020 increased by$0.2 million from the first nine months of fiscal 2019. The increase in amortization of debt issue costs was due to the timing of the execution of our credit agreement.
Interest Income. Interest income in the first nine months of fiscal 2020 remained relatively flat compared to the first nine months of fiscal 2019. Interest income relates to interest earned on sweep bank accounts.
Income Taxes. Income tax expense increased 153.8%, or$40 thousand , in the first nine months of fiscal 2020 compared to the first nine months of fiscal 2019. Our income tax expense is due primarily to minimum state tax liabilities.
Orion Engineered Systems Division
The following table summarizes our OES segment operating results (dollars in
thousands):
Nine Months Ended December 31,
%
2019 2018 Change
Revenues $ 104,369 $ 15,168 588.1 %
Operating income (loss) $ 15,861 $ (1,944 ) NM
Operating margin 15.2 % (12.8 )%
* NM - Not Meaningful
OES segment revenue in the first nine months of fiscal 2020 was $104.4 million ,
an increase of $89.2 million from the first nine months of fiscal 2019, as a
result of the increase in volume of turnkey projects to one large national
account customer.
OES segment operating income in the first nine months of fiscal 2020 was $15.9
million , an increase of $17.8 million from an operating loss of $2.0 million in
the first nine months of fiscal 2019. The increase in the segment's operating
income was the result of significantly higher sales.
The following table summarizes our ODS segment operating results (dollars in
thousands):
Nine Months Ended December 31,
%
2019 2018 Change
Revenues $ 11,191 $ 20,202 (44.6 )%
Operating loss (691 ) (1,082 ) 36.1 %
Operating margin (6.2 )% (5.4 )%
* NM - Not Meaningful
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ODS segment revenue decreased in the first nine months of fiscal 2020 by 44.6%,
or $9.0 million , compared to the first nine months of fiscal 2019, primarily due
to a decrease in sales volume through our distribution channel.
ODS segment operating loss in the first nine months of fiscal 2020 was $(0.7
million) , a decrease of $0.4 million from an operating loss of $(1.1 million) in
the first nine months of fiscal 2019. The decrease in the operating loss in the
first nine months of fiscal 2020 as compared to the first nine months of fiscal
2019 was primarily due to the decrease in sales and related product costs.
Orion
The following table summarizes our USM segment operating results (dollars in
thousands):
Nine Months Ended December 31,
%
2019 2018 Change
Revenues $ 9,389 $ 7,941 18.2 %
Operating income $ 1,750 $ 793 120.7 %
Operating margin 18.6 % 10.0 %
* NM - Not Meaningful
USM segment revenue increased from the first nine months of fiscal 2019 by
18.2%, or $1.5 million . The increase in revenue during the first nine months of
fiscal 2020 compared to the third quarter of fiscal 2019 was due to an increase
in sales volume.
USM segment operating income for the first nine months of fiscal 2020 was $1.8
million , an increase of $1.0 million over the first nine months of fiscal 2019.
The increase in operating income in the first nine months of fiscal 2019 was due
primarily to the increase in sales volume.
Liquidity and Capital Resources
Overview
We had approximately$13.8 million in cash and cash equivalents as ofDecember 31, 2019 , compared to$8.7 million atMarch 31, 2019 . Our cash position increased as a result of our significantly increased net income, offset by working capital changes and the net repayment of$8.4 million on our revolving credit facility. During the third quarter of fiscal 2019, we listed our corporate office location inManitowoc, Wisconsin for sale or lease to increase our liquidity by attempting to divest a non-core asset. Because of the uncertainty of a sale of our building in the next 12 months, the building continues to be classified as held and used as ofDecember 31, 2019 . However, any sale of our building will likely result in a non-cash impairment charge, as the building is currently listed for below its net book value. Our future liquidity needs and forecasted cash flows are dependent upon many factors, including our relative revenue, gross margins, cash management practices, cost reduction initiatives, working capital management, capital expenditures, pending or future litigation results and cost containment measures. In addition, we tend to experience higher working capital costs when we increase sales from existing levels. 32 --------------------------------------------------------------------------------
Cash Flows
The following table summarizes our cash flows for the nine months ended
Nine Months Ended December 31,
2019 2018
Operating activities $ 14,275 $ (1,610 )
Investing activities (655 ) (196 )
Financing activities (8,587 ) (1,022 )Increase (decrease) in cash and cash equivalents $ 5,033
$ (2,828 )
Cash Flows Related to Operating Activities. Cash provided by (used in) operating activities primarily consisted of a net income (loss) adjusted for certain non-cash items, including depreciation, amortization of intangible assets, stock-based compensation, amortization of debt issue costs, provisions for reserves, and the effect of changes in working capital and other activities.
Cash provided by operating activities for the first nine months of fiscal 2020 was$14.3 million and consisted of our net income adjusted for non-cash expense items of$15.1 million and net cash used by changes in operating assets and liabilities of$0.8 million . Cash used by changes in operating assets and liabilities consisted primarily of a decrease of$3.0 million in Accounts payable, and a decrease of$1.3 million in Accrued expenses and other based on timing of invoice receipt and payment. Cash provided by changes in operating assets and liabilities consisted primarily of a decrease of$3.0 million in Revenue earned but not billed due to the timing on revenue recognition compared to invoicing, and$1.0 million in Inventory primarily due to the timing of anticipated fourth quarter sales. Cash used in operating activities for the first nine months of fiscal 2019 was ($1.6 million ) and consisted of a net loss adjusted for non-cash expense items of ($3.8 million ) and net cash provided by changes in operating assets and liabilities of$2.2 million . Cash used by changes in operating assets and liabilities consisted primarily of a decrease of$0.8 million in Revenue earned but not billed due to timing on revenue recognition compared to invoicing, and an increase in Inventory of$0.4 million on anticipated fourth quarter sales. Cash provided by changes in operating assets and liabilities consisted primarily of a decrease of$2.9 million in Accounts receivable due to lower sales and the timing of customer collections, and an increase of$0.6 million in Accounts payable based on timing of payments. Cash Flows Related to Investing Activities. Cash used in investing activities of ($0.7 million ) in the first nine months of fiscal 2020 consisted of purchases of property and equipment.
Cash used in investing activities in the first nine months of fiscal 2019 consisted of purchases of property and equipment and additions to patents and licenses.
Cash Flows Related to Financing Activities. Cash used in financing activities of ($8.6 million ) in the first nine months of fiscal 2020. This use of cash consisted primarily of net repayments of ($8.4 million ) on our revolving credit facility. Cash used in financing activities of ($1.0 million ) in the first nine months of fiscal 2019. This use of cash consisted primarily of net repayments of ($0.6 million ) of our new and prior revolving credit facility and debt issue costs associated with our Credit Agreement (defined below) of ($0.4 million ).
Working Capital
Our net working capital as ofDecember 31, 2019 was$19.4 million , consisting of$42.7 million in current assets and$23.3 million in current liabilities. Our net working capital as ofMarch 31, 2019 was$14.0 million , consisting of$41.4 million in current assets and$27.3 in current liabilities. Our current Accounts receivable, net balance increased by$0.4 million from the fiscal 2019 year-end primarily due to higher sales to one national account customer and the timing of customer collections. Our Inventories, net decreased from the fiscal 2019 year-end by$1.2 million due primarily to the timing of project installations and anticipated fourth quarter sales. Our Accounts payable decreased$2.8 million due to the timing of purchases and payments during the quarter. Our Accrued expenses decreased from our fiscal 2019 year-end by$1.2 million due primarily to a decrease in accrued project costs due to timing of project installation and invoice receipt, offset by higher accrued commissions, as a result of higher sales. 33
-------------------------------------------------------------------------------- We generally attempt to maintain at least a three-month supply of on-hand inventory of purchased components and raw materials to meet anticipated demand, as well as to reduce our risk of unexpected raw material or component shortages or supply interruptions. Our Accounts receivable, Inventory and payables may increase to the extent our revenue and order levels increase.
Indebtedness
Revolving Credit Agreement
OnOctober 26, 2018 , we entered into a secured revolving Business Financing Agreement withWestern Alliance Bank , as lender (the "Credit Agreement"). OnJune 3, 2019 , we and certain of our subsidiaries entered into an amendment (the "First Amendment") to the Credit Agreement, which increased the maximum borrowing base credit available for certain of the customer receivables included in our borrowing base and provided for a borrowing base credit of up to$3.0 million based on inventory, in each case, subject to certain conditions. OnAugust 2, 2019 , we and certain of our subsidiaries entered into a second amendment (the "Second Amendment") to the Credit Agreement, which established a rent reserve in an amount equal to three months' rent payable at any leased location where we maintain inventory included in our borrowing base and provided for a reduction of the borrowing base credit that we may receive for inventory if we default under the lease for any such location. As of the date of the Second Amendment, this rent reserve equaled$0.1 million . OnNovember 21, 2019 , we entered into a third amendment (the "Third Amendment") to the Credit Agreement, which extended the maturity date fromOctober 26, 2020 toOctober 26, 2021 ; increased the sublimit under the Credit Agreement for advances under business credit cards from$1.5 million to$3 million ; created a new$2 million sublimit permitting entry into foreign currency forward contracts with the lender; expanded our ability to make capital expenditures and incur other debt from time to time; and permitted the lender to amend the financial covenant included in the Credit Agreement (which requires the maintenance of a certain amount of unrestricted cash on deposit with the lender at the end of each month) upon receipt of the our annual projections. The Credit Agreement, as amended, provides for a revolving credit facility (the "Credit Facility") that matures onOctober 26, 2021 . Borrowings under the Credit Facility are limited to$20.15 million subject to a borrowing base requirement based on eligible receivables and inventory. The Credit Agreement includes a$2.0 million sublimit for the issuance of letters of credit. As ofDecember 31, 2019 , our borrowing base was$14.7 million , and we had$0.8 million in borrowings outstanding which were included in non-current liabilities in the accompanying Condensed Consolidated Balance Sheets. As ofDecember 31, 2019 , we had no outstanding letters of credit leaving total additional borrowing availability of$13.9 million .
The Credit Agreement is secured by a security interest in substantially all of our and our subsidiaries' personal property.
Borrowings under the Credit Agreement generally bear interest at floating rates based upon the prime rate (but not less than 5.00% per year) plus an applicable margin determined by reference to our quick ratio (defined as the aggregate amount of unrestricted cash, unrestricted marketable securities and, with certain adjustments, receivables convertible into cash divided by the total current liabilities, including the obligations under the Credit Agreement). As ofDecember 31, 2019 , the applicable interest rate was 5.25%. Among other fees, we are required to pay an annual facility fee equal to 0.45% of the credit limit under the Credit Agreement due annuallyOctober 26 . The Credit Agreement requires us to maintain nine months' of "RML" as of the end of each month. For purposes of the Credit Agreement, RML is defined as, as of the applicable determination date, unrestricted cash on deposit with the lender plus availability under the Credit Agreement divided by an amount equal to, for the applicable trailing three-month period, consolidated net profit before tax, plus depreciation expense, amortization expense and stock-based compensation, minus capital lease principal payments, tested as of the end of each month. As ofDecember 31, 2019 , we were in compliance with this RML requirement. The Credit Agreement also contains customary events of default and other covenants, including certain restrictions on our ability to incur additional indebtedness, consolidate or merge, enter into acquisitions, pay any dividend or distribution on our stock, redeem, retire or purchase shares of our stock, make investments or pledge or transfer assets. If an event of default under the Credit Agreement occurs and is continuing, then the lender may cease making advances under the Credit Agreement and declare any outstanding obligations under the Credit Agreement to be immediately due and payable. In addition, if we become the subject of voluntary or involuntary proceedings under any bankruptcy or similar law, then any outstanding obligations under the Credit Agreement will automatically become immediately due and payable. 34 --------------------------------------------------------------------------------
Capital Spending
Our capital expenditures are primarily for general corporate purposes for our corporate headquarters and technology center, production equipment and tooling and for information technology systems. Our capital expenditures totaled$0.6 million and$0.2 million for the nine-month periods endedDecember 31, 2019 , and 2018, respectively. We plan to incur approximately$0.7 million in capital expenditures in fiscal 2020. We expect to finance these capital expenditures primarily through our existing cash, equipment-secured loans and leases, to the extent needed, long-term debt financing, or by using our available capacity under our Credit Agreement.
Backlog
Backlog represents the amount of revenue that we expect to realize in the future as a result of firm, committed purchase orders. Backlog totaled$19.2 million and$10.8 million as ofDecember 31, 2019 andMarch 31, 2019 , respectively. We generally expect our backlog to be recognized as revenue within one year.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Inflation
Our results from operations have not been, and we do not expect them to be, materially affected by inflation.
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of our consolidated financial statements requires us to make certain estimates and judgments that affect our reported assets, liabilities, revenue and expenses, and our related disclosure of contingent assets and liabilities. We re-evaluate our estimates on an ongoing basis, including those related to revenue recognition, inventory valuation, collectability of receivables, stock-based compensation, warranty reserves and income taxes. We base our estimates on historical experience and on various assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates. A summary of our critical accounting policies is set forth in the "Critical Accounting Policies and Estimates" section of our Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year endedMarch 31, 2019 . For the nine months endedDecember 31, 2019 , there were no material changes in our accounting policies.
Recent Accounting Pronouncements
For a complete discussion of recent accounting pronouncements, refer to Note 2
in the Condensed Consolidated Financial Statements included elsewhere in this
report.
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