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, 2020 .
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, 2020 . 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 LED lighting, wireless Internet of Things ("IoT")
enabled control solutions, 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 light emitting diode ("LED") lighting
fixtures, many of which include IoT enabled control systems. Our principal
customers include large national account end-users, federal and state government
facilities, large regional account end-users, electrical distributors,
electrical contractors and energy service companies ("ESCOs"). Currently,
substantially all of our products are manufactured at our leased production
facility located in Manitowoc, Wisconsin , although as the LED and related IoT
market continues to evolve, we are increasingly sourcing products and components
from third parties in order to provide versatility in our product development.
We have experienced recent success 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 controls 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 have become the primary component of our revenue as we continue to
strive to be a leader in the LED market.
In fiscal 2020, we began to successfully capitalize on our capability of being a
full service, turn-key provider of LED lighting and controls systems with
design, build, installation and project management services, including being
awarded a very large project for a major national account. As a result of this
success, we have begun to evolve our business strategy to focus on further
expanding the nature and scope of our products and services offered to our
customers. This further expansion of our products and services includes pursuing
projects to develop recurring revenue streams, including providing lighting and
24
--------------------------------------------------------------------------------
electrical maintenance services and utilizing control sensor technology to
collect data and assisting customers in the digitization of this data, along
with other potential services. We also plan to pursue the expansion of our IoT,
"smart-building" and "connected ceiling" and other related technology, software
and controls products and services that we offer to our customers. We currently
plan on investing significant time, resources and capital into expanding our
offerings in these areas with no expectation that they will result in us
realizing material revenue in the near term and without any assurance they will
succeed or be profitable. In fact, it is likely that these efforts will reduce
our profitability, at least in the near term, as we invest resources and incur
expenses to develop these offerings. While we intend to pursue these expansion
strategies organically, we also are actively exploring potential business
acquisitions which would more quickly add these types of expanded and different
capabilities to our product and services offerings. It is possible that one or
more of such potential acquisitions, if successfully completed, could
significantly change, and potentially transform, the nature and extent of our
business.
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 and control systems and
related services to governmental, commercial and industrial customers on a
project-by-project basis. We also perform work under master services or product
purchasing agreements with major customers with sales completed on an individual
purchase order basis. In addition, in order to provide quality and timely
service under our multi-location master retrofit agreements, we are required to
make substantial working capital expenditures and advance inventory purchases
that we may not be able to recoup if the agreements or a substantial volume of
purchase orders under the agreements are delayed or terminated. For example,
while we received a master retrofit agreement in January 2020 for approximately
$18-20 million in revenue from our largest customer, due to the closure of its
facilities to external activities because of the COVID-19 pandemic, this
customer deferred retrofit installations related to the project during March
2020 , thereby resulting in the deferral of our realization of expected revenue
during our fiscal 2020 fourth quarter. 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.
We typically sell our lighting systems in replacement of our customers' existing
fixtures. We call this replacement process a "retrofit". We frequently engage
our customer's existing electrical contractor to provide installation and
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 profits of our products can vary significantly depending upon the types of products we sell, with margins typically ranging from 10% to 50%. As a result, a change in the total mix of our sales among higher or lower margin products can cause our profitability to fluctuate from period to period.
Our fiscal year ends onMarch 31 . We refer to our just completed fiscal year, which ended onMarch 31, 2020 , as "fiscal 2020", and our prior fiscal year which ended onMarch 31, 2019 as "fiscal 2019". 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. Orion has three reportable segments: Orion Engineered Systems Division ("OES"), andOrion Distribution Services Division ("ODS"), and OrionU.S. Markets Division ("USM").
Major Developments in Fiscal 2020
During fiscal 2020, we executed on a series of master contracts for a major national account customer with our state-of-the-art LED lighting systems and wireless IoT enabled control solutions at locations nationwide. This one national account customer represented 74.1% of our total revenue in fiscal 2020 and was the primary driver for our growth over the prior year period. DuringMarch 2020 , this customer suspended our installations at a significant number of locations that were scheduled for installation during our fiscal 2020 fourth quarter and our fiscal 2021 first quarter. However, we now currently expect installations at this customer's locations to recommence during the second quarter of fiscal 2021. We expect further revenue 25 --------------------------------------------------------------------------------
opportunity with this national account customer in fiscal 2021 and beyond; however, due to the COVID-19 pandemic, the timing, and volume of revenue, including our ability to realize these potential revenue opportunities is uncertain.
Impact of COVID-19 and Fiscal 2021 Outlook
The COVID-19 pandemic has disrupted business, trade, commerce, financial and credit markets, in theU.S. and globally. Our business has been adversely impacted by measures taken by government entities and others to control the spread of the virus beginning inMarch 2020 . As a deemed essential business, we provide products and services to ensure energy and lighting infrastructure and we therefore continue to operate throughout the pandemic. We have implemented a number of safety protocols, including limiting travel, restricting access to our facilities along with monitoring processes, physical distancing, physical barriers, enhanced cleaning procedures, and requiring face coverings. Nonetheless, we did experience a curtailment of activity beginning in the last few weeks of our 2020 fiscal year and continuing into fiscal 2021. As part of our recent response to the impacts of the COVID-19 pandemic, during the fourth quarter of fiscal 2020 we implemented a number of cost reduction and cash conservation measures, including reducing headcount. While certain restrictions began to initially lessen in certain jurisdictions during our fiscal 2021 first quarter, stay-at-home, face mask or lockdown orders remain in effect in others, with employees asked to work remotely if possible. Certain areas of the country have seen a spike of COVID-19 cases, which could result in renewed restrictions and lockdown orders. Some customers and projects are in areas where travel restrictions have been imposed, certain customers have either closed or reduced on-site activities, and timelines for the completion of several projects have been delayed, extended or terminated. These modifications to our business practices, including any future actions we take, may cause us to experience reductions in productivity and disruptions to our business routines. In addition, we are required to make substantial working capital expenditures and advance inventory purchases that we may not be able to recoup if the agreements or a substantial volume of purchase orders under the agreements are delayed or terminated as a result of COVID-19. At this time, it is not possible to predict the overall impact the COVID-19 pandemic will have on Orion's business, liquidity, capital resources or financial results, although we expect that the economic and regulatory impacts of COVID-19 will significantly reduce our revenue and profitability in at least the first half of fiscal 2021. If the COVID-19 pandemic becomes more pronounced in our markets or experiences a resurgence in markets recovering from the spread of COVID-19, or if another significant natural disaster or pandemic were to occur in the future, our operations in areas impacted by such events could experience further adverse financial impacts due to market changes and other resulting events and circumstances. The impact of COVID-19 has caused significant uncertainty and volatility in the credit markets. We rely on the credit markets to provide us with liquidity to operate and grow our businesses beyond the liquidity that operating cash flows provide. If our access to capital were to become significantly constrained or if costs of capital increased significantly due the impact of COVID-19, including volatility in the capital markets, a reduction in our credit ratings or other factors, then our financial condition, results of operations and cash flows could be adversely affected. In addition to the managing the adverse financial impact of the COVID-19 pandemic, our ability to achieve our desired revenue growth and profitability goals depends on our ability to effectively execute on the following key strategic initiatives. We may identify strategic acquisition candidates that would help support these 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. These turnkey services were the principal reason we achieved significant revenue growth in fiscal 2020 as we executed on our commitment to retrofit multiple locations for a major national account customer. Our success in the national account market segment centers on our turnkey design, engineering, manufacturing and project management capabilities, which represent a very clear competitive advantage for us among large enterprises seeking to benefit from the illumination benefits and energy savings of LED lighting across locations nationwide. Few LED lighting providers are organized to serve every step of a custom retrofit project in a comprehensive, non-disruptive and timely fashion, from custom fixture design and initial site surveys to final installations. Incrementally, we are also able to help customers deploy state-of-the-art control systems that provide even greater long-term value from their lighting system investments.
Looking forward, we are focused on continuing to successfully execute on existing national account opportunities while also actively pursuing new national account opportunities that leverage our customized, comprehensive turnkey project
26
--------------------------------------------------------------------------------
solutions, and expanding our addressable market with high-quality, basic
lighting systems to meet the needs of value-oriented customer segments served by
our other market channels. Given our unique value proposition, capabilities and
focus on customer service, we are optimistic about our business prospects and
working to build sales momentum with existing and new customers.
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. For interior building applications, we have
recently launched an antimicrobial troffer fixture which supports the
suppression of bacteria, mold, fungi, and mildew, and are currently developing
an air circulation troffer to support improved air circulation. 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.
Leverage of Orion's 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 their Orion 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. 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. We plan to pursue the expansion of our IoT, "smart-building" and
"connected ceiling" and other related technology, software and controls products
and services that we offer to our customers. While we intend to pursue these
expansion strategies organically, we also are actively exploring potential
business acquisitions which would more quickly add these types of expanded and
different capabilities to our product and services offerings.
Develop Maintenance Service Offerings. We believe we can leverage our
construction management process expertise to develop a high-quality,
quick-response, multi-location maintenance service offering. Our experience with
large national customers and our large installed base of fixtures position us
well to extend a maintenance offering to historical customers, as well as to new
customers. Development of this recurring revenue stream is in the preliminary
stage, but we believe there is significant market opportunity.
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.
Managing Impacts of Tariffs and Trade Policies
The United States government has been implementing various monetary, regulatory, and trade importation restraints, penalties, and tariffs. Certain sourced finished products and certain of the components used in our products have been impacted by imposed tariffs onChina imports. Our efforts to mitigate the impact of added costs resulting from these government actions include a variety of activities, such as sourcing from non-tariff impacted countries and raising prices. If we are unable to successfully mitigate the impacts of these tariffs and other trade policies, our results of operations may be adversely affected. 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. 27 --------------------------------------------------------------------------------
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 June 30,
2020 2019 2020 2019
% % of % of
Amount Amount Change Revenue Revenue
Product revenue $ 9,701 $ 32,339 (70.0 )% 89.7 % 76.3 %
Service revenue 1,110 10,039 (88.9 )% 10.3 % 23.7 %
Total revenue 10,811 42,378 (74.5 )% 100.0 % 100.0 %
Cost of product revenue 7,229 23,825 (69.7 )% 66.9 % 56.2 %
Cost of service revenue 947 8,270 (88.5 )% 8.8 % 19.5 %
Total cost of revenue 8,176 32,095 (74.5 )% 75.6 % 75.7 %
Gross profit 2,635 10,283 (74.4 )% 24.4 % 24.3 %
General and administrative expenses 2,411 3,007 (19.8 )% 22.3 % 7.1 %
Sales and marketing expenses 1,854 2,706 (31.5 )% 17.1 % 6.4 %
Research and development expenses 415 411 1.0 % 3.8 % 1.0 %
(Loss) income from operations (2,045 ) 4,159 NM (18.9 )% 9.8 %
Other income 9 12 (25.0 )% 0.1 % 0.0 %
Interest expense (49 ) (136 ) (64.0 )% (0.5 )% (0.3 )%
Amortization of debt issue costs (61 ) (61 ) - (0.6 )% (0.1 )%
Interest income - 2 (100.0 )% 0.0 % 0.0 %
(Loss) income before income tax (2,146 ) 3,976 NM (19.9 )% 9.4 %
Income tax expense 73 8 NM 0.7 % 0.0 %
Net (loss) income $ (2,219 ) $ 3,968 NM (20.5 )% 9.4 %
* NM - Not Meaningful
Revenue. Product revenue decreased 70.0%, or $22.6 million , for the first
quarter of fiscal 2021 versus the first quarter of fiscal 2020. Service revenue
decreased 88.9%, or $8.9 million for the first quarter of fiscal 2021 versus the
first quarter of fiscal 2020. The decrease in product and service revenue was
primarily due to multiple projects put on hold as a result of COVID-19,
including the projects for one large national account customer which represented
77.0% of revenue in the first quarter of fiscal 2020, but less than 10% of
revenue in the first quarter of fiscal 2021 Sales to one customer accounted for
32.9% of total revenue in the first quarter of fiscal 2021. Total revenue
decreased by 74.5%, or $31.6 million , due to the items discussed above.
Cost of Revenue and Gross Profit. Cost of product revenue decreased 69.7%, or
$16.6 million , in the first quarter of fiscal 2021 versus the first quarter of
fiscal 2020 due to the significant decrease in our sales. Cost of service
revenue decreased 88.5% or $7.3 million , in the first quarter of fiscal 2021
versus the first quarter of fiscal 2020 due to the decrease in sales. Gross
profit increased from 24.3% of revenue in the first quarter of fiscal 2020 to
24.4% in fiscal 2021, due to the change in customer sales mix.
Operating Expenses
General and Administrative. General and administrative expenses decreased 19.8%,
or
Sales and Marketing. Sales and marketing expenses decreased 31.5%, or
Research and Development. Research and development expenses in the first quarter
of fiscal 2021 remained relatively flat compared to the first quarter of fiscal
2020.
28
--------------------------------------------------------------------------------
Other Income. Other income in the first quarter of fiscal 2021 primarily represented product royalties received from licensing agreements for our patents.
Interest Expense. Interest expense in the first quarter of fiscal 2021 decreased by 64.0%, or$0.1 million , from the first quarter of fiscal 2020. The decrease in interest expense was primarily due to lower borrowing on our revolving credit facility in the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020. Amortization of debt issue costs. Amortization of debt issue costs in the first quarter of fiscal 2021 remained flat compared to the first quarter of fiscal 2020. Interest Income. Interest income in the first quarter of fiscal 2021 remained relatively flat compared to the first quarter of fiscal 2020. Interest income relates to interest earned on sweep bank accounts. Income Taxes. Income tax expense increased$0.1 million , in the first quarter of fiscal 2021 compared to the first quarter of fiscal 2020. 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 June 30,
%
2020 2019 Change
Revenues $ 2,256 $ 34,787 (93.5 )%
Operating (loss) income $ (1,850 ) $ 4,856 NM
Operating margin (82.0 )% 14.0 %
* NM - Not Meaningful
OES segment revenue in the first quarter of fiscal 2021 was $2.3 million , a
decrease of $32.5 million from the first quarter of fiscal 2020, due to multiple
projects put on hold as a result of COVID-19, including the projects to one
large national account customer that represented 77.0% of total revenue in the
first quarter fiscal 2020.
OES segment operating loss in the first quarter of fiscal 2021 was $1.9 million ,
a decrease of $6.7 million from operating income of $4.9 million in the first
quarter of fiscal 2020. The decrease in the segment's operating income was the
result of significantly lower sales in this segment, resulting in unfavorable
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 June 30,
%
2020 2019 Change
Revenues $ 6,629 $ 3,704 79.0 %
Operating income (loss) $ 752 $ (337 ) 323.1 %
Operating margin 11.3 % (9.1 )%
* NM - Not Meaningful
29
--------------------------------------------------------------------------------
ODS segment revenue in the first quarter of fiscal 2021 was
ODS segment operating income in the first quarter of fiscal 2021 was
Orion
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 June 30,
%
2020 2019 Change
Revenues $ 1,926 $ 3,887 (50.5 )%
Operating income $ 81 $ 901 (91.0 )%
Operating margin 4.2 % 23.2 %
* NM - Not Meaningful
USM segment revenue in the first quarter of fiscal 2021 was
USM segment operating income in the first quarter of fiscal 2021 was$0.1 million , a decrease of 91.0%, or$0.8 million , from the first quarter of fiscal 2020. The decrease in the segment's operating income was the result of significantly lower sales in this segment, resulting in unfavorable operating leverage.
Liquidity and Capital Resources
Overview
We had approximately$10.8 million in cash and cash equivalents as ofJune 30, 2020 , compared to$28.9 million atMarch 31, 2020 . Our cash position decreased primarily as a result of payments of$10.0 million to reduce our revolving credit facility and use of cash from operating activities of$7.7 million . 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 ofJune 30, 2020 . 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 profits, 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. 30 --------------------------------------------------------------------------------
Cash Flows
The following table summarizes our cash flows for the three months ended
Three Months Ended June 30,
2020 2019
Operating activities $ (7,709 ) $ 1,996
Investing activities (244 ) (200 )
Financing activities (10,014 ) (295 )
(Decrease) increase in cash and cash equivalents $ (17,967 ) $ 1,501
Cash Flows Related to Operating Activities. Cash (used in) provided by operating
activities primarily consists of net (loss) income 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 used in operating activities for the first three months of fiscal 2021 was
$7.7 million and consisted of our net loss adjusted for non-cash expense items
of $0.8 million and net cash used in changes in operating assets and liabilities
of $6.2 million . Cash used in operating assets and liabilities consisted
primarily of a decrease of $7.4 million in Accounts payable and Accrued expenses
and other based on timing of invoice receipt and payment, and an increase in
inventory of $2.6 million based on timing of purchases committed prior to the
impact of COVID-19. Cash provided by changes in operating assets and liabilities
consisted primarily of a net decrease of $3.6 million in Accounts receivable and
Revenue earned but not billed due to the timing on collections compared to
decreased sales.
Cash provided by operating activities for the first three months of fiscal 2020
was $2.0 million and consisted of net income adjusted for non-cash expense items
of $4.7 million and net cash used by changes in operating assets and liabilities
of $2.7 million . Cash used by changes in operating assets and liabilities
consisted primarily of an increase of $9.2 million in Accounts receivable due to
higher sales and the timing of collections, and an increase in Inventory of $1.6
million on anticipated second quarter sales. Cash provided by changes in
operating assets and liabilities consisted primarily of an increase of $7.1
million in Accounts payable and $0.8 million in Accrued expenses other based on
timing of payments.
Cash Flows Related to Investing Activities. Cash used in investing activities of
$0.2 million in the first three months of fiscal 2021 consisted primarily of
purchases of property and equipment.
Cash used in investing activities of
Cash Flows Related to Financing Activities. Cash used in financing activities of$10.0 million in the first three months of fiscal 2021 consisted primarily of repayments of$10.0 million on our revolving credit facility.
Cash used in financing activities of
Working Capital
Our net working capital as ofJune 30, 2020 was$16.9 million , consisting of$36.5 million in current assets and$19.6 million in current liabilities. Our net working capital as ofMarch 31, 2020 was$27.8 million , consisting of$55.0 million in current assets and$27.2 in current liabilities. Our current Accounts receivable, net balance increased by$4.7 million from the fiscal 2020 year-end primarily due to collections and sequentially lower first quarter sales. Our Inventories, net increased from the fiscal 2020 year-end by$2.6 million due primarily to purchases committed to prior to the impact of COVID-19. Our Accounts payable decreased$6.2 million from our fiscal 2020 year-end due to the timing of purchases and payments during the quarter. Our Accrued expenses decreased from our fiscal 2020 year-end by$1.4 million due primarily to a decrease in accrued employee costs, including commissions. 31 -------------------------------------------------------------------------------- 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 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 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 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") maturing 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, as amended, includes a$2.0 million sublimit for the issuance of letters of credit. As ofJune 30, 2020 , our borrowing base was$6.5 million , and we had no borrowings outstanding. As ofJune 30, 2020 , we had no outstanding letters of credit leaving total additional borrowing availability of$6.5 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 ofJune 30, 2020 , 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 ofJune 30, 2020 , 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. 32 --------------------------------------------------------------------------------
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$0.2 million and$0.2 million for the three month periods endedJune 30, 2020 , and 2019, respectively. Due to the uncertainty of the COVID-19 impact on our business, we are not currently providing capital expenditure external guidance for fiscal 2021; however, we expect to finance current year 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$15.9 million and$18.6 million as ofJune 30, 2020 andMarch 31, 2020 , respectively. We generally expect our backlog to be recognized as revenue within one year, although the COVID-19 pandemic may extend this time period.
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, 2020 . For the three months endedJune 30, 2020 , there were no material changes in our accounting policies.
Recent Accounting Pronouncements
For a complete discussion of recent accounting pronouncements, refer to Note 3
in the Condensed Consolidated Financial Statements included elsewhere in this
report.
33
--------------------------------------------------------------------------------
© Edgar Online, source
