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 light emitting diode ("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 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, most 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 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.
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Our fiscal year ends on March 31 . We refer to our just completed fiscal year,
which ended on March 31, 2020 , as "fiscal 2020", and our prior fiscal year which
ended on March 31, 2019 as "fiscal 2019". Our fiscal first quarter of each
fiscal year ends on June 30 , our fiscal second quarter ends on September 30 , our
fiscal third quarter ends on December 31 and our fiscal fourth quarter ends on
March 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"), and Orion Distribution Services Division ("ODS"), and Orion
U.S. Markets Division ("USM").
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 , the last few weeks of our prior fiscal year, and continuing most significantly into the second quarter of fiscal 2021. During the third quarter of fiscal 2021, we experienced a rebound in business, with a full quarter of project installations for our largest customer, as well installations for a new large specialty retail customer, and no significant COVID-19 impacts. However, some customers continue to refrain from awarding new projects and potential future risks remain due to the COVID-19 pandemic. As a deemed essential business, we provide products and services to ensure energy and lighting infrastructure and we therefore have continued to operate throughout the pandemic. We have implemented a number of safety protocols, including limiting travel and restricting access to our facilities along with monitoring processes, physical distancing, physical barriers, enhanced cleaning procedures and requiring face coverings. As part of our 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 have begun to initially lessen in certain jurisdictions during fiscal 2021, 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 spikes of COVID-19 cases (including in and around our headquarters inManitowoc, Wisconsin and our office inJacksonville, Florida ), 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 our business, liquidity, capital resources or financial results, although the economic and regulatory impacts of COVID-19 significantly reduced our revenue and profitability in 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. In addition to 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:
• Executing and marketing our turnkey LED retrofit capabilities to large
national account customers.
• Continue our product innovation.
• Leverage our smart lighting systems to support internet of things
applications.
• Develop our maintenance service offerings.
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• Support the success of our ESCO and distribution sales channels.
We also may identify and pursue strategic acquisition candidates that would help support these initiatives.
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 tariffs imposed 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.
Major Developments in Fiscal 2021
During fiscal 2021, we executed multiple contract extensions 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 single 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. These installations resumed during the second quarter of fiscal 2021 and continued through the third quarter of fiscal 2021. We also completed several initial retrofit projects at facilities for a major global logistics company. This customer is expected to be a significant source of revenue as we move forward, although these installations are likely to occur more slowly than we had originally anticipated. We expect to work with the customer on a project-by-project basis, versus larger-scale multi-site commitments, which limits visibility on the timing of future revenue contributions. We also have been selected to work with another major logistics company that is also expected to be a significant source of revenue in the future. Additionally, we added a large specialty retail customer and are providing turnkey LED lighting retrofit solutions for a number of its stores. This project is expected to generate product and service revenue of at least$8 million during the second half fiscal 2021. We expect to retrofit additional stores for this customer in fiscal 2022. As ofDecember 31, 2020 andMarch 31, 2020 , Orion had a full valuation allowance recorded against its deferred tax assets. We will continue to evaluate the valuation allowance by considering changing facts and circumstances and may adjust our valuation allowance accordingly. Given our current earnings and potential future earnings, it is reasonably possible we will reverse a portion of our existing valuation allowance in the future. 26 --------------------------------------------------------------------------------
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,
2020 2019 2020 2019
% % of % of
Amount Amount Change Revenue Revenue
Product revenue $ 31,929 $ 25,867 23.4 % 72.2 % 75.5 %
Service revenue 12,322 8,382 47.0 % 27.8 % 24.5 %
Total revenue 44,251 34,249 29.2 % 100.0 % 100.0 %
Cost of product revenue 23,203 19,075 21.6 % 52.4 % 55.7 %
Cost of service revenue 10,042 6,900 45.5 % 22.7 % 20.1 %
Total cost of revenue 33,245 25,975 28.0 % 75.1 % 75.8 %
Gross profit 11,006 8,274 33.0 % 24.9 % 24.2 %
General and administrative expenses 3,030 2,662 13.8 % 6.8 % 7.8 %
Sales and marketing expenses 3,120 2,735 14.1 % 7.1 % 8.0 %
Research and development expenses 391 439 (10.9 )% 0.9 % 1.3 %
Income from operations 4,465 2,438 83.1 % 10.1 % 7.1 %
Other income 12 2 500.0 % 0.0 % 0.0 %
Interest expense (1 ) (38 ) (97.4 )% (0.0 )% (0.1 )%
Amortization of debt issue costs (20 ) (61 ) (67.2 )% (0.0 )% (0.2 )%
Loss on debt extinguishment (90 ) - 100.0 % (0.4 )% -
Interest income - 2 (100.0 )% 0.0 % 0.0 %
Income before income tax 4,366 2,343 86.3 % 9.9 % 6.8 %
Income tax expense 51 39 30.8 % 0.1 % 0.1 %
Net income $ 4,315 $ 2,304 87.3 % 9.8 % 6.7 %
Revenue. Product revenue increased 23.4%, or $6.1 million , for the third quarter
of fiscal 2021 versus the third quarter of fiscal 2020. Service revenue
increased 47.0%, or $3.9 million , for the third quarter of fiscal 2021 versus
the third quarter of fiscal 2020. The increase in product and service revenue
was primarily due to an increase of installations from our existing large
national retail customer and a new large specialty retail customer. Sales to
these two customers accounted for 65.1% and 11.1% of total revenue,
respectively, in the third quarter of fiscal 2021.
Cost of Revenue and Gross Profit. Cost of product revenue increased 21.6%, or
$4.1 million , in the third quarter of fiscal 2021 versus the third quarter of
fiscal 2020 due to the increase in our sales. Cost of service revenue increased
45.5%, or $3.1 million , in the third quarter of fiscal 2021 versus the third
quarter of fiscal 2020 due to the significant increase in sales. Gross profit
percentage increased from 24.2% of revenue in the third quarter of fiscal 2020
to 24.9% in the third quarter of fiscal 2021, due primarily to an improvement in
product margin on customer sales mix, partially offset by increased service
revenues which have lower margins.
Operating Expenses
General and Administrative. General and administrative expenses increased 13.8%, or$0.4 million , in the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020. This comparative increase was primarily due to the timing of accruals for bonus expense and an increase in professional services costs.
Sales and Marketing. Sales and marketing expenses increased 14.1%, or
Research and Development. Research and development expenses decreased 10.9%, or$48 thousand , in the third quarter of fiscal 2021 compared to the third quarter of fiscal 2020. This comparative decrease was primarily due to the timing of research and development costs. 27 -------------------------------------------------------------------------------- Interest Expense. Interest expense in the third quarter of fiscal 2021 decreased by 97.4%, or$37 thousand , from the third quarter of fiscal 2020. The decrease in interest expense was primarily due to comparatively lower sales of receivables than in the prior year period. Loss on Debt Extinguishment. Loss on debt extinguishment in the third quarter of fiscal 2021 related to the write-off of fees incurred with respect to our prior credit facility, which was recognized upon execution of our new credit facility during the third quarter of fiscal 2021.
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,
%
2020 2019 Change
Revenues $ 36,669 $ 27,275 34.4 %
Operating income $ 4,820 $ 3,174 51.9 %
Operating margin 13.1 % 11.6 %
OES segment revenue in the third quarter of fiscal 2021 increased $9.4 million
from the third quarter of fiscal 2020 due primarily to a comparative increase in
installations for our existing large national retail customer and installations
for a new large specialty retail customer which led to higher operating income
in this segment.
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,
%
2020 2019 Change
Revenues $ 3,934 $ 3,634 8.3 %
Operating income (loss) $ 193 $ (206 ) NM*
Operating margin 4.9 % (5.7 )%
* NM - Not Meaningful
ODS segment revenue in the third quarter of fiscal 2021 increased 8.3%, or $0.3
million , compared to the third quarter of fiscal 2020, due to an increase in
volume through the channel which led to a corresponding increase in operating
income in this segment based on operating leverage.
Orion
Our USM segment sells commercial lighting systems and energy management systems to the wholesale contractor markets. USM customers include ESCOs and contractors.
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The following table summarizes our USM segment operating results (dollars in
thousands):
Three Months Ended December 31,
%
2020 2019 Change
Revenues $ 3,648 $ 3,340 9.2 %
Operating income $ 731 $ 578 26.5 %
Operating margin 20.0 % 17.3 %
USM segment revenue in the third quarter of fiscal 2021 increased 9.2%, or $0.3
million , compared to the third quarter of fiscal 2020, primarily due to improved
engagement in this channel, resulting in a corresponding increase in operating
income.
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,
2020 2019 2020 2019
% % of % of
Amount Amount Change Revenue Revenue
Product revenue $ 61,890 $ 93,778 (34.0 )% 76.1 % 75.1 %
Service revenue 19,453 31,171 (37.6 )% 23.9 % 24.9 %
Total revenue 81,343 124,949 (34.9 )% 100.0 % 100.0 %
Cost of product revenue 44,834 68,778 (34.8 )% 55.1 % 55.0 %
Cost of service revenue 15,605 24,823 (37.1 )% 19.2 % 19.9 %
Total cost of revenue 60,439 93,601 (35.4 )% 74.3 % 74.9 %
Gross profit 20,904 31,348 (33.3 )% 25.7 % 25.1 %
General and administrative expenses 8,079 8,274 (2.4 )% 9.9 % 6.6 %
Sales and marketing expenses 7,306 8,359 (12.6 )% 9.0 % 6.7 %
Research and development expenses 1,230 1,240 (0.8 )% 1.5 % 1.0 %
Income from operations 4,289 13,475 (68.2 )% 5.3 % 10.8 %
Other income 56 22 154.5 % 0.1 % 0.0 %
Interest expense (51 ) (261 ) (80.5 )% (0.1 )% (0.2 )%
Amortization of debt issue costs (142 ) (182 ) (22.0 )% (0.2 )% (0.1 )%
Loss on debt extinguishment (90 ) - 100.0 % (0.2 )% -
Interest income - 5 (100.0 )% 0.0 % 0.0 %
Income before income tax 4,062 13,059 (68.9 )% 5.0 % 10.5 %
Income tax expense 52 66 (21.2 )% 0.1 % 0.1 %
Net Income $ 4,010 $ 12,993 (69.1 )% 4.9 % 10.4 %
Revenue. Product revenue decreased 34.0%, or $31.9 million , for the first nine
months of fiscal 2021 versus the first nine months of fiscal 2020. Service
revenue decreased 37.6%, or $11.7 million , for the first nine months of fiscal
2021 versus the first nine months of fiscal 2020. The decrease in product and
service revenue was primarily due to multiple projects put on hold during the
first half of fiscal 2021 as a result of COVID-19, including the projects for
one large national account customer which represented 77.3% of revenue in the
first nine months of fiscal 2020, and 55.7% of revenue in the first nine months
of fiscal 2021. The project installations for this large national account
customer resumed during the second quarter of fiscal 2021.
Cost of Revenue and Gross Profit. Cost of product revenue decreased 55.1%, or
$23.9 million , in the first nine months of fiscal 2021 versus the first nine
months of fiscal 2020 due to the significant decrease in our sales. Cost of
service revenue decreased 37.1%, or $9.2 million , in the first nine months of
fiscal 2021 versus the first nine months of fiscal 2020 due to the decrease in
sales. Gross profit percentage increased from 25.1% of revenue in the first nine
months of fiscal 2020 to 25.7% in fiscal 2021, due primarily to cost management
and a change in customer sales mix.
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General and Administrative. General and administrative expenses decreased 2.4%, or$0.2 million , in the first nine months of fiscal 2021 compared to the first nine months of fiscal 2020, primarily due to lower employment and travel costs in response to the COVID-19 pandemic. Sales and Marketing. Sales and marketing expenses decreased 12.6%, or$1.1 million , in the first nine months of fiscal 2021 compared to the first nine months of fiscal 2020. This comparative decrease was primarily due to a decrease in commission expense on lower sales and lower travel costs in response to the COVID-19 pandemic, partially offset by start-up costs for our new business line, Orion Maintenance Services. Research and Development. Research and development expenses in the first nine months of fiscal 2021 remained relatively flat compared to the first nine months of fiscal 2020. Interest Expense. Interest expense in the first nine months of fiscal 2021 decreased by 80.5%, or$0.2 million , from the first nine months of fiscal 2020. The decrease in interest expense was primarily due to lower borrowing on our revolving credit facility and lower sales of receivables in the first nine months of fiscal 2021 compared to the first nine months of fiscal 2020.
Loss on debt extinguishment. Loss on debt extinguishment in the first nine months of fiscal 2021 related to the write-off of fees incurred with respect to our prior credit facility, upon execution of our new credit facility.
Orion Engineered Systems Division
The following table summarizes our OES segment operating results (dollars in
thousands):
Nine Months Ended December 31,
%
2020 2019 Change
Revenues $ 57,395 $ 104,369 (45.0 )%
Operating income $ 4,634 $ 15,861 (70.8 )%
Operating margin 8.1 % 15.2 %
OES segment revenue in the first nine months of fiscal 2021 decreased $47.0
million from the first nine months of fiscal 2020 due to multiple projects put
on hold as a result of COVID-19, including the projects for one large national
account customer that represented 77.3% of total revenue in the first nine
months fiscal 2020, and 55.7% of revenue in the first nine months of fiscal
2021. The project installations for this customer resumed during the second
quarter of fiscal 2021. This sales decrease led to a corresponding decrease in
operating income in this segment.
The following table summarizes our ODS segment operating results (dollars in
thousands):
Nine Months Ended December 31,
%
2020 2019 Change
Revenues $ 16,063 $ 11,191 43.5 %
Operating income (loss) 1,957 (691 ) NM*
Operating margin 12.2 % (6.2 )%
* NM - Not Meaningful
ODS segment revenue in the first nine months of fiscal 2021 increased 43.5%, or
$4.9 million , compared to the first nine months of fiscal 2020, primarily due to
sales to one customer who represented 6.8% of first nine months fiscal 2021
total revenue. This sales increase led to a corresponding increase in operating
income in this segment based on operating leverage.
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Orion
The following table summarizes our USM segment operating results (dollars in
thousands):
Nine Months Ended December 31,
%
2020 2019 Change
Revenues $ 7,885 $ 9,389 (16.0 )%
Operating income $ 1,128 $ 1,750 (35.5 )%
Operating margin 14.3 % 18.6 %
USM segment revenue in the first nine months of fiscal 2021 decreased 16.0%, or
$1.5 million , from the first nine months of fiscal 2020, primarily due to the
impact of COVID-19, and resulted in a corresponding decrease in operating income
in this segment based on operating leverage.
Liquidity and Capital Resources
Overview
We had approximately$12.3 million in cash and cash equivalents as ofDecember 31, 2020 , compared to$28.8 million atMarch 31, 2020 . Our cash position decreased primarily as a result of net payments of$10.1 million to reduce the principal balance of our prior credit agreement and the use of cash from operating activities of$5.6 million . 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.
Cash Flows
The following table summarizes our cash flows for the nine months ended
Nine Months Ended December 31,
2020 2019
Operating activities $ (5,644 ) $ 14,275
Investing activities (701 ) (655 )
Financing activities (10,127 ) (8,587 )
(Decrease) increase in cash and cash equivalents
$ 5,033 Cash Flows Related to Operating Activities. Cash (used in) provided by operating activities primarily consists of net 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 nine months of fiscal 2021 was$5.6 million and consisted of our net income adjusted for non-cash expense items of$6.2 million and net cash used in changes in operating assets and liabilities of$11.8 million . Cash used by operating assets and liabilities consisted primarily of an increase in accounts receivable of$13.2 million due to higher sales and the timing of collections, and an increase in inventory of$4.2 million on anticipated fourth quarter sales. Cash provided by changes in operating assets and liabilities consisted primarily of an increase in accrued expenses and other of$6.6 million due to timing of billing for completed projects. 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$2.9 million in accounts payable, and a decrease in accrued expenses and other of$1.3 million due to the timing of payments. Cash provided by changes in operating assets and liabilities consisted primarily of a decrease of$2.9 million in revenue earned but not billed and a decrease in inventories of$1.0 million . 31 --------------------------------------------------------------------------------
Cash Flows Related to Investing Activities. Cash used in investing activities of
Cash used in investing activities of
Cash Flows Related to Financing Activities. Cash used in financing activities of$10.1 million in the first nine months of fiscal 2021 consisted primarily of net repayments of$10.0 million on our Prior Credit Agreement.
Cash used in financing activities was
Working Capital
Our net working capital as ofDecember 31, 2020 was 23.3 million, consisting of$56.7 million in current assets and$33.4 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$13.3 million from the fiscal 2020 year-end primarily due to higher sales and the timing of customer collections. Our inventories, net increased from the fiscal 2020 year-end by$4.0 million due primarily to anticipated project installations for a large national account customer and new large specialty retail customer. Our accrued expenses increased from our fiscal 2020 year-end by$6.7 million due primarily to an increase in accrued project costs. 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
OnDecember 29, 2020 , we entered into a new Loan and Security Agreement (the "Credit Agreement") withBank of America, N.A ., as lender (the "Lender"). The Credit Agreement replaced our existing$20.15 million secured revolving credit and security agreement dated as ofOctober 26, 2018 , as amended, with WesternAlliance Bank, National Association , as lender (the "Prior Credit Agreement"). The replacement of the Prior Credit Agreement with the Credit Agreement provides us with increased financing capacity and liquidity to fund our operations and implement our strategic plans. The Credit Agreement provides for a five-year$25.0 million revolving credit facility (the "Credit Facility") that matures onDecember 29, 2025 . Borrowings under the Credit Facility are subject to a borrowing base requirement based on eligible receivables, inventory and cash. As ofDecember 31, 2020 , the borrowing base supports the full availability of the Credit Facility. As ofDecember 31, 2020 , no amounts were borrowed under the Credit Facility.
The Credit Agreement is secured by a first lien security interest in substantially all of our assets.
Borrowings under the Credit Agreement are permitted in the form of LIBOR or prime rate-based loans and generally bear interest at floating rates plus an applicable margin determined by reference to our availability under the Credit Agreement. Among other fees, we are required to pay an annual facility fee of$15,000 and fee of 25 basis points on the unused portion of the Credit Facility. The Credit Agreement includes a springing minimum fixed cost coverage ratio of 1.0 to 1.0 when excess availability under the Credit Facility falls below the greater of$3.0 million or 15% of the committed facility. Currently, the required springing minimum fixed cost coverage ratio is not required. 32 -------------------------------------------------------------------------------- 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. We did not incur any early termination fees in connection with the termination of the Prior Credit Agreement, but did recognize a loss on debt extinguishment of$0.1 million on the write-off of unamortized debt issue costs related to the Prior Credit Agreement. Also, due to the timing of the banking transition, we had$0.3 million of cash which was restricted for covering obligations on our outstanding credit card balances. The Prior Credit Agreement was scheduled to mature onOctober 26, 2021 . 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$0.7 million and$0.6 million for the nine month periods endedDecember 31, 2020 , and 2019, respectively. Due to the uncertainty of the COVID-19 impact on our business, we do not have a committed capital expenditure plan 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$21.8 million and$19.2 million as ofDecember 31, 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 endedDecember 31, 2020 , there were no material changes in our accounting policies. 33
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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.
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