10-Q 1 wstg-20200930x10q.htm 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2020

OR

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

For the transition period from                      to                   

Commission File No. 000-26408

Wayside Technology Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware

13-3136104

(State or other jurisdiction of

(I.R.S. Employer Identification No.)

incorporation or organization)

4 Industrial Way West, Suite 300, Eatontown, New Jersey 07724

(Address of principal executive offices)

(732) 389-8950

Registrant’s Telephone Number

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

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common stock, $.01 par value

WSTG

The NASDAQ Global Market

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

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

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

Large Accelerated Filer

Accelerated Filer

Smaller Reporting Company

Non-Accelerated Filer

Emerging Growth Company

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No   

There were 4,362,197 outstanding shares of common stock, par value $.01 per share (“Common Stock”) as of November 5, 2020.


Wayside Technology Group, Inc. and Subsidiaries

Table of Contents

 

 

Page

 

 

 

 

PART I FINANCIAL INFORMATION

 

 

 

 

Item 1

Financial Statements (unaudited)

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019

3

 

 

 

 

Condensed Consolidated Statements of Earnings for the three and nine months ended September 30, 2020 and 2019 (unaudited)

4

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019 (unaudited)

5

 

Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019 (unaudited)

6

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)

7

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

35

 

 

 

Item 4.

Controls and Procedures

35

 

 

 

 

PART II OTHER INFORMATION

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37

 

 

 

Item 6.

Exhibits, Financial Statement Schedules

37

 

 

SIGNATURES

39

 

2


PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Wayside Technology Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share and per share amounts)

September 30,

December 31,

    

2020

    

2019

    

(Unaudited)

ASSETS

Current assets:

Cash and cash equivalents

$

40,296

$

14,984

Accounts receivable, net of allowances of $850 and $765, respectively

74,892

 

100,987

Inventory, net

3,138

 

2,760

Vendor prepayments

3,366

100

Prepaid expenses and other current assets

3,510

 

2,718

Total current assets

125,202

 

121,549

Equipment and leasehold improvements, net

1,028

 

1,215

Goodwill

3,999

Other intangibles, net

3,772

Right-of-use assets, net

1,643

1,792

Accounts receivable-long-term, net

388

 

1,358

Other assets

176

 

111

Deferred income tax assets

 

256

Total assets

$

136,208

$

126,281

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable and accrued expenses

$

91,455

$

78,364

Lease liability, current portion

428

383

Total current liabilities

91,883

 

78,747

Lease liability, net of current portion

1,926

2,189

Non-current liabilities

89

89

Deferred income tax liabilities

82

Total liabilities

93,980

81,025

Commitments and contingencies

Stockholders’ equity:

Common stock, $.01 par value; 10,000,000 shares authorized; 5,284,500 shares issued: 4,365,613 and 4,505,693 shares outstanding, respectively

53

 

53

Additional paid-in capital

31,720

 

32,874

Treasury stock, at cost, 918,887 and 778,807 shares, respectively

(14,668)

 

(13,256)

Retained earnings

26,405

 

26,715

Accumulated other comprehensive loss

(1,282)

 

(1,130)

Total stockholders’ equity

42,228

 

45,256

Total liabilities and stockholders' equity

$

136,208

$

126,281

The accompanying notes are an integral part of these condensed consolidated financial statements.

3


Wayside Technology Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings

(Unaudited)

(Amounts in thousands, except per share data)

Nine months ended

Three months ended

September 30,

September 30,

    

2020

    

2019

    

2020

    

2019

    

Net sales

$

180,124

$

147,897

$

60,919

$

52,363

Cost of sales

 

157,609

 

125,789

 

53,682

 

45,308

Gross profit

 

22,515

 

22,108

 

7,237

 

7,055

Selling, general, and administrative expenses

 

17,269

 

16,175

 

6,157

 

5,087

Legal and financial advisory expenses, net - unsolicited bid and related matters

1,752

(81)

Acquisition related costs

982

344

Income from operations

 

2,512

 

5,933

 

817

 

1,968

Other income:

Interest, net

 

105

 

416

 

19

 

118

Foreign currency transaction gain (loss)

211

39

(67)

(52)

Income before provision for income taxes

 

2,828

 

6,388

 

769

 

2,034

Provision for income taxes

 

881

 

1,624

 

239

 

589

Net income

$

1,947

$

4,764

$

530

$

1,445

Income per common share-Basic

$

0.44

$

1.06

$

0.13

$

0.32

Income per common share-Diluted

$

0.44

$

1.06

$

0.13

$

0.32

Weighted average common shares outstanding — Basic

 

4,306

 

4,415

4,218

 

4,428

Weighted average common shares outstanding — Diluted

 

4,306

 

4,415

 

4,218

 

4,428

Dividends paid per common share

$

0.51

$

0.51

$

0.17

$

0.17

The accompanying notes are an integral part of these condensed consolidated financial statements.

4


Wayside Technology Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(Amounts in thousands)

Nine months ended

Three months ended

September 30,

September 30,

    

2020

    

2019

    

2020

    

2019

    

Net income

$

1,947

$

4,764

$

530

$

1,445

Other comprehensive (loss) income:

Foreign currency translation adjustments

 

(152)

 

225

 

127

 

58

Other comprehensive (loss) income

 

(152)

 

225

 

127

 

58

Comprehensive income

$

1,795

$

4,989

$

657

$

1,503

The accompanying notes are an integral part of these condensed consolidated financial statements.

5


Wayside Technology Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(Amounts in thousands, except share amounts)

Accumulated

Additional

Other

Common Stock

Paid-In

Treasury

Retained

Comprehensive

   

Shares

   

Amount

   

Capital

   

Shares

   

Amount

   

Earnings

   

Loss

   

Total

Balance at January 1, 2020

 

5,284,500

$

53

$

32,874

 

778,807

$

(13,256)

$

26,715

$

(1,130)

$

45,256

Net income

836

836

Translation adjustment

(501)

(501)

Dividends paid

(775)

(775)

Share-based compensation expense

167

167

Restricted stock grants (net of forfeitures)

(1,080)

(63,810)

1,079

(1)

Treasury shares repurchased

2,059

(32)

(32)

Balance at April 1, 2020

 

5,284,500

$

53

$

31,961

 

717,056

$

(12,209)

$

26,776

$

(1,631)

$

44,950

Net income

581

581

Translation adjustment

222

222

Dividends paid

(740)

(740)

Share-based compensation expense

234

234

Restricted stock grants (net of forfeitures)

(813)

(48,068)

813

Treasury shares repurchased

264,039

(3,489)

(3,489)

Balance at July 1, 2020

 

5,284,500

53

31,382

 

933,027

(14,885)

26,617

(1,409)

41,758

Net income

530

530

Translation adjustment

127

127

Dividends paid

(742)

(742)

Share-based compensation expense

636

636

Restricted stock grants (net of forfeitures)

(298)

(17,605)

298

Treasury shares repurchased

3,465

(81)

(81)

Balance at September 30, 2020

 

5,284,500

$

53

$

31,720

 

918,887

$

(14,668)

$

26,405

$

(1,282)

$

42,228

Accumulated

Additional

Other

Common Stock

Paid-In

Treasury

Retained

Comprehensive

   

Shares

   

Amount

   

Capital

   

Shares

   

Amount

   

Earnings

   

Loss

   

Total

Balance at January 1, 2019

 

5,284,500

53

32,392

 

788,006

(13,447)

22,994

(1,419)

$

40,573

Net income

1,463

1,463

Translation adjustment

127

127

Dividends paid

(767)

(767)

Share-based compensation expense

165

165

Restricted stock grants (net of forfeitures)

(318)

(18,780)

318

Treasury shares repurchased

1,905

(20)

(20)

Balance at April 1, 2019

 

5,284,500

$

53

$

32,239

 

771,131

$

(13,149)

$

23,690

$

(1,292)

$

41,541

Net income

1,857

1,857

Translation adjustment

40

40

Dividends paid

(767)

(767)

Share-based compensation expense

169

169

Restricted stock grants (net of forfeitures)

59

3,500

(59)

Treasury shares repurchased

1,887

(24)

(24)

Balance at July 1, 2019

 

5,284,500

53

32,467

 

776,518

(13,232)

24,780

(1,252)

42,816

Net income

1,445

1,445

Translation adjustment

58

58

Dividends paid

(767)

(767)

Share-based compensation expense

287

287

Restricted stock grants (net of forfeitures)

(19)

(1,095)

19

Treasury shares repurchased

1,862

(22)

(22)

Balance at September 30, 2019

 

5,284,500

$

53

$

32,735

 

777,285

$

(13,235)

$

25,458

$

(1,194)

$

43,817

The accompanying notes are an integral part of these condensed consolidated financial statements.

6


Wayside Technology Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

Nine months ended

September 30,

    

2020

    

2019

    

Cash flows from operating activities

Net income

$

1,947

$

4,764

Adjustments to reconcile net income to net cash and cash equivalents provided by (used in) operating activities:

Depreciation and amortization expense

 

403

 

380

Provision for doubtful accounts

 

130

Deferred income tax expense

 

(53)

 

47

Share-based compensation expense

1,037

620

Amortization of discount on accounts receivable

(136)

(389)

Amortization of right-of-use assets

280

282

Change in fair value of contingent earn-out consideration

24

Changes in operating assets and liabilities:

Accounts receivable

 

36,608

 

(3,406)

Inventory

 

(235)

 

(881)

Prepaid expenses and other current assets

 

(225)

 

(231)

Vendor prepayments

(2,896)

2,984

Accounts payable and accrued expenses

 

(3,991)

 

(6,341)

Lease liability, net

(348)

(260)

Other assets and liabilities

 

(14)

 

67

Net cash and cash equivalents provided by (used in) operating activities

 

32,531

 

(2,364)

Cash flows from investing activities

Purchase of equipment and leasehold improvements

 

(20)

 

(92)

Payment for acquisition, net of cash acquired

(1,141)

Net cash and cash equivalents used in investing activities

 

(1,161)

 

(92)

Cash flows from financing activities

Purchase of treasury stock

 

(3,602)

 

(66)

Borrowings under revolving credit facility

6,800

Repayments of borrowings under revolving credit facility

(6,800)

Dividends paid

 

(2,257)

 

(2,301)

Payments of deferred financing costs

(61)

Net cash and cash equivalents used in financing activities

 

(5,920)

 

(2,367)

Effect of foreign exchange rate on cash and cash equivalents

 

(138)

 

97

Net increase (decrease) in cash and cash equivalents

 

25,312

 

(4,726)

Cash and cash equivalents at beginning of period

 

14,984

 

14,883

Cash and cash equivalents at end of period

$

40,296

$

10,157

Supplementary disclosure of cash flow information:

Income taxes paid

$

2,167

$

1,982

The accompanying notes are an integral part of these condensed consolidated financial statements.

7


Wayside Technology Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2020

(Unaudited)

(Amounts in tables in thousands, except share and per share amounts)

1.           Basis of Presentation:

The accompanying unaudited condensed consolidated financial statements of Wayside Technology Group, Inc. and its subsidiaries (collectively, the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, as permitted by the rules and regulation of the Securities and Exchange Commission, the financial statements do not include all of the information and footnotes required by U.S. GAAP for complete audited financial statements.

The preparation of these condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, intangible assets, income taxes, stock-based compensation, evaluation of performance obligations and allocation of revenue to distinct items, contingencies and litigation. The Company bases its estimates on its historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. In the opinion of the Company’s management, all adjustments that are of a normal recurring nature, considered necessary for fair presentation of the results for the periods presented, have been included in the accompanying condensed consolidated financial statements. The Company’s actual results may differ from these estimates under different assumptions or conditions. The unaudited condensed consolidated statements of earnings for the interim periods are not necessarily indicative of results for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K filed with the Securities Exchange Commission for the year ended December 31, 2019.

The consolidated financial statements include the accounts of Wayside Technology Group, Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated.

2.           Recently Issued Accounting Standards:

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326)” ("ASU 2016-13"). ASU 2016-13 revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. Originally, ASU 2016-13 was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. In November 2019, FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).”  This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is planning to adopt this standard in the first quarter of fiscal 2023. The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-13 on its Consolidated Financial Statements, particularly its recognition of allowances for accounts receivable.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” as part of its initiative to reduce complexity in the accounting standards. The standard eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. Early adoption is permitted. The Company is currently evaluating the impact that this guidance will have upon its financial position and results of operations, if any.

8


3.         Foreign Currency Translation:

Assets and liabilities of the Company’s foreign subsidiaries have been translated using the end of the reporting period exchange rates, and related revenues and expenses have been translated at average rates of exchange in effect during the period. Foreign currency transaction gains and losses are recorded as income or expenses as amounts are settled. The net sales from our foreign operations for the three months ended September 30, 2020 and 2019 were $5.0 million and $4.2 million, respectively. The net sales from our foreign operations for the nine months ended September 30, 2020 and 2019 were $16.6 million and $13.6 million, respectively.

4.          Comprehensive Income:

Cumulative translation adjustments have been classified within accumulated other comprehensive loss, which is a separate component of stockholders’ equity in accordance with FASB ASC Topic 220, “Comprehensive Income.”

5.          Revenue Recognition:

The core principle of the revenue recognition criteria is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. This principle is achieved through applying the following five-step approach:

Identification of the contract, or contracts, with a customer — A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and, (iii) we determine that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer. The Company considers customer purchase orders, which in some cases are governed by master agreements or general terms and conditions of sale, to be contracts with customers. All revenue is generated from contracts with customers.

Identification of the performance obligations in the contract — Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, we apply judgment to determine whether promised goods or services are capable of being distinct in the context of the contract. If these criteria are not met the promised goods or services are accounted for as a single performance obligation.

Determination of the transaction price —The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer, net of sales taxes collected from customers, which are subsequently remitted to governmental entities. Net sales are recorded net of estimated discounts, rebates, and returns. Vendor rebates are recorded when earned as a reduction to cost of sales or inventory, as applicable.

Allocation of the transaction price to the performance obligations in the contract — If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price, or SSP, basis. We determine SSP based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through established standard prices, we use judgement and estimate the standalone selling price considering available information such as market pricing and pricing related to similar products. Contracts with a significant financing component are discounted to their present value at contract inception and accreted up to the expected payment amounts. These contracts generally offer customers extended payment terms of up to three years.

Recognition of revenue when, or as, we satisfy a performance obligation — The Company recognizes revenue when its performance obligations are complete, and control of the specified goods or services pass to the customer. The Company considers the following indicators in determining when control passes to the customer: (i) the Company has a right to payment for the product or service (ii) the customer has legal title to the product, (iii) the Company has transferred physical possession of the product (iv) the Customer has the significant risk and rewards of ownership of the product and (v) the customer has

9


accepted the product. Substantially all our performance obligations are satisfied at a point in time, as our obligation is to deliver a product or fulfill an order for a third party to deliver ongoing services, maintenance or support.

Disaggregation of Revenue

We generate revenue from the re-sale of third-party software licenses, subscriptions, hardware, and related service contracts. Finance fees related to sales are classified as interest income. The following table depicts the disaggregation of revenue according to revenue type and is consistent with how we evaluate our financial performance:

(Unaudited)

(Unaudited)

Nine months ended

Three months ended

Net sales:

September 30,

September 30,

September 30,

September 30,

2020

2019

2020

2019

Hardware, software and other products

$

165,951

$

133,482

$

56,370

$

47,508

Software - security & highly interdependent with support

5,839

5,417

2,059

1,798

Maintenance, support & other services

8,334

8,998

2,490

3,057

Net sales

$

180,124

$

147,897

$

60,919

$

52,363

Hardware, software and other products - Hardware product consists of sales of hardware manufactured by third parties. Hardware product is delivered from our warehouse or drop shipped directly from the vendor. Revenue from our hardware products is recognized on a gross basis, with the selling price to the customer as net sales, and the cost of the related product as cost of sales, upon transfer of control to the customer, as the Company is acting as a principal in the transaction. Control is generally deemed to have passed to the customer upon transfer of title and risk of ownership.

Software products consist of sales of perpetual and term software licenses for products developed by third party vendors, which are distinct from related maintenance and support. Software licenses are delivered via electronic license keys provided by the vendor to the end user. Revenue from the sale of software products is recognized on a gross basis, with the selling price to the customer as net sales, and the cost of the related product as cost of sales, upon transfer of control to our customers as the Company is a principal in the transaction. Control is deemed to have passed to the customer when they acquire the right to use or copy the software under license as substantially all product functionality is available to the customer at the time of sale. Other products include marketing revenues that are recorded on a gross basis as the Company is a principal in the arrangement.

Software maintenance and support, commonly known as software assurance or post contract support, consists of software updates and technical support provided by the software vendor to the licensor over a period. In cases where the software maintenance is distinct from the related software license, software maintenance is accounted for as a separate performance obligation. In cases where the software maintenance is not distinct from the related software license, it is accounted for as a single performance obligation with the related license. We utilize judgement in determining whether the maintenance is distinct from the software itself. This involves considering if the software provides its original intended functionality without updates, or is dependent on frequent, or continuous updates to maintain its functionality. See Allocation of the transaction price to the performance obligations in the contract above for a discussion of the allocation of maintenance and support costs when they are distinct from the related software licenses and Software - security and highly interdependent with support below for a discussion of maintenance and support costs when they are not distinct from the related software license.

Software - security and highly interdependent with support - Software - security and highly interdependent with support consists of sales of security subscriptions and other licensed software products whose functionality is highly interdependent with, and therefore not distinct from, related software maintenance. Delivery of the software license and related support over time is considered a single performance obligation of the third-party vendor for these products. The Company is an agent in these transactions, with revenue being recorded on a net basis when its performance obligation of processing a valid order between the supplier and customer contracting for the services is complete.

Maintenance, support and other services revenue - Maintenance, support and other services revenue consists of third-party post-contract support that is not critical or essential to the core functionality of the related licensed software, and, to a lesser extent, from third-party professional services, software as a service, and cloud subscriptions. Revenue from maintenance, support and other service revenues is recognized on a net basis, upon fulfillment of an order to the customer,

10


as the Company is an agent in the transaction, and its performance obligations are complete at the time a valid order between the parties is processed.

Costs to obtain and fulfill a contract - We pay commissions and related payroll taxes to sales personnel when customers are invoiced. These costs are recorded as selling general and administrative expenses in the period earned as all our performance obligations are complete within a short window of processing the order.

Contract balances - Accounts receivable is recorded at the invoiced amount, net of an allowance for doubtful accounts. A receivable is recognized in the period we deliver goods or provide services or when our right to consideration is unconditional. Payment terms on invoiced amounts are typically 30-75 days. The balance of accounts receivable, net of allowance for doubtful accounts as of September 30, 2020 and December 31, 2019 is presented in the accompanying Consolidated Balance Sheets. Accounts receivable-long-term result from product sales with extended payment terms that are discounted to their present values at the Company’s estimates of prevailing market rates at the time of the sale. The Company has determined that these amounts do not represent variable consideration as the amount earned is fixed. In subsequent periods, the accounts receivable is increased to the amounts due and payable by the customers through the accretion of interest income on the unpaid accounts receivable due in future years. The amounts due under these long-term accounts receivable due within one year are reclassified to the current portion of accounts receivable and are shown net of reserves. As our revenues are generally recognized at a point in time in the same period as they are billed, we have no deferred revenue balances. Provisions for doubtful accounts including long-term accounts receivable and returns are estimated based on historical write offs, sales returns and credit memo analysis which are adjusted to actual on a periodic basis.

Refund liability – The Company records a refund liability for expected product returns with a corresponding asset for an amount representing any expected recovery from vendors regarding the return.

Principal versus agent considerations – The Company determines whether it is acting as a principal or agent in a transaction by assessing whether it controls a good or service prior to it being transferred to a customer, with control being defined as having the ability to direct the use of and obtain the benefits from the asset. The Company considers the following indicators, among others, in making the determination: 1) the Company is primarily responsible for fulfilling the promise to provide the promised good or service, 2) the Company has inventory risk, before or after the specified good or service has been transferred to the customer, and 3) the Company has discretion in establishing price for the specified good or service. Generally, we conclude that we are a principal in transactions where software or hardware products containing their core functionality are delivered to the customer at the time of sale and are agents in transactions where we are arranging for the provision of future performance obligations by a third party. As we enter into distribution agreements with third-party service providers, we evaluate whether we are acting as a principal or agent for each product sold under the agreement based on the nature of the product or service, and our performance obligations. Products for which there are significant ongoing third-party performance obligations include software maintenance, which includes periodic software updates and support, security software that is highly interdependent with maintenance, software as a service, cloud and third-party professional services. Sales of hardware, software and other products where we are a principal are recorded on a gross basis with the selling price to the customer recorded as sales and the cost of the product or software recorded as cost of sales. Sales where we are acting as an agent are recognized on a net basis at the date our performance obligations are complete. Under net revenue recognition, the cost paid to the vendor or third-party service provider is recorded as a reduction to sales, resulting in revenue being equal to the gross profit on the transaction.

Sales In-Transit – The Company performs an analysis of the number of days of sales in-transit to customers at the end of each reporting period based on an analysis of commercial delivery terms that include drop-shipment arrangements. This analysis is the basis upon which the Company estimates the amount of net sales in-transit at the end of the period and adjusts revenue and the related costs to reflect only what has been delivered to the customer.

11


The Company performs a weighted average analysis of the estimated number of days between order fulfillment and beginning of the renewal term for term licenses recorded on a gross basis to determine the amount of potential deferred net sales. Prior to the quarter ended September 30, 2020 it had been determined that this amount was not material. Due to increased sales of term licenses we have recorded an estimate of the impact of term license renewals fulfilled prior to commencement date during the three months ended September 30, 2020. In conjunction with this amount recorded in the current period, the Company also corrected within the current period a similar sales in-transit estimate amount that existed in the prior year.  As part of the Company’s analysis, it determined that there was an inconsequential impact to previously reported interim and annual financial statements and as such, no adjustments were required to be made to any prior period financial statements. 

6.            Acquisition:

On April 30, 2020, pursuant to a Stock Purchase Agreement dated April 20, 2020, CLIMB Channel Solutions (Canada) Inc. (“Buyer”), a newly-formed indirectly wholly-owned subsidiary of the Company completed the purchase of Interwork Technologies Inc., a Delaware corporation (“Interwork US”) and Interwork Technologies Inc., a corporation incorporated under the laws of the Province of Ontario, Canada (“Interwork Canada”). Buyer acquired Interwork US and Interwork Canada for an aggregate purchase price of $5 million Canadian dollar (equivalent to $3.6 million USD), subject to certain working capital adjustments, paid at closing plus a potential post-closing $1.1 million Canadian dollar (equivalent to $0.8 million USD) earn-out. The allocation of the purchase price was based upon the estimated fair value of Interwork US and Interwork Canada’s net tangible and identifiable intangible assets as of the date of the acquisition. The transaction was accounted for under the purchase method of accounting.

The Company incurred acquisition related costs of approximately $0.3 million and $1.0 million during the three and nine months ended September 30, 2020, respectively. These expenses relate to costs incurred in conjunction with the acquisition of Interwork US, Interwork Canada and CDF Group Limited (see Note 19) and are reflected in the accompanying three and nine months ended September 30, 2020 Condensed Consolidated Statements of Earnings.

The financial position and operating results of Interwork US and Interwork Canada are included in the Company’s condensed consolidated financial statements from the date of acquisition. The Company recorded net revenue for Interwork US and Interwork Canada of approximately $2.6 million and $6.3 million during the three and nine months ended September 30, 2020.

The impact of the acquisition’s preliminary purchase price allocations on the Company’s consolidated balance sheet and the acquisition date fair value of the total consideration transferred were as follows. The Company is in the process of obtaining third-party valuations of certain intangible assets; thus the provisional measurements of intangible assets, goodwill and deferred income taxes are subject to change:

(in thousands)

Cash

$

1,009

Trade accounts receivable

9,534

Other current assets

628

Intangible assets

Vendor relationships (14-year weighted average useful life)

3,797

Non-compete (1-year useful life)

8

Goodwill

3,857

Other assets

117

Accounts payable and other current liabilities

(15,051)

Deferred income tax liabilities

(389)

Taxes payable

(600)

Net assets

$

2,910

12


(in thousands)

Supplementary information:

Cash paid to sellers

$

2,150

Contingent earn-out

760

Total purchase consideration

$

2,910

Cash paid to sellers

2,150

Cash acquired in acquisition

(1,009)

Net cash paid for acquisition

$

1,141

Intangible assets are comprised of approximately $3.8 million of vendor relationships with a weighted average amortization period of 13.7 years, representing the expected period of benefits, of which $2.3 million is deductible for Canadian income tax purposes. Goodwill, which was allocated to the Climb Channel Solutions segment, is the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined company and assembled workforce. Goodwill recognized as a result of the acquisition is not deductible for income tax purposes.

The purchase consideration includes approximately $0.8 million of potential earn-out consideration if certain targets are achieved, payable in cash. As of September 30, 2020, the Company reassessed the earn-out liability and increased the fair value of the earn-out liability by less than $0.1 million, with the adjustment recognized within selling, general and administrative expenses during the three and nine months ended September 30, 2020. The earn-out liability is included in accounts payable and accrued expenses as of September 30, 2020 as payment would be due in the third quarter of 2021.

The preliminary allocation of the purchase price for the acquisition was allocated based on information that is currently available. The Company's estimates and assumptions underlying the initial allocations is subject to the collection of information necessary to complete its allocations within the measurement period, which is up to one year from the acquisition date.

7.            Goodwill and Other Intangible Assets:

The following table summarizes the changes in the carrying amount of goodwill for the nine months ended September 30, 2020:

Balance at January 1, 2020

$

Acquisition of Interwork US and Interwork Canada

3,857

Translation adjustments

142

Balance September 30, 2020

$

3,999

Goodwill represents the premium paid over the fair value of the net tangible and intangible assets that are individually identified and separately recognized in business combinations. The change in our goodwill balance during the nine months ended September 30, 2020 relates to our acquisition of Interwork US and Interwork Canada, which has been allocated to the Climb Channel Solutions segment.

13


Information related to the Company’s other intangibles, net is as follows:

September 30, 2020

Gross Carrying Amount

Accumulated Amortization

Net Carrying Amount

Vendor relationships

$

3,888

$

121

$

3,767

Non-compete

8

3

5

Total

$

3,896

$

124

$

3,772

Other intangibles, net was zero as of December 31, 2019.

Vendor relationships are amortized between eleven to fifteen years. Non-compete is amortized over one year.

During the three and nine months ended September 30, 2020, the Company recognized total amortization expense for other intangibles, net of $0.1 million. There was no amortization expense for other intangibles, net during the three and nine months ended September 30, 2019. Amortization expense is included in selling, general and administrative expense.

Estimated future amortization expense of the Company’s other intangibles, net as of September 30, 2020 is as follows:

2020 (excluding the nine months ended September 30, 2020)

    

$

75

2021

 

294

2022

 

291

2023

 

291

2024

 

291

Thereafter

 

2,530

Total

$

3,772

8.            Right-of-use Asset and Lease Liability:

The Company has entered into operating leases for office and warehouse facilities, which have terms at lease commencement that range from 2 years to 11 years. The Company determines if an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets and lease expense for these leases is recognized on a straight-line basis over the lease term.

Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date of the lease based on the present value of the lease payments over the lease term. As our leases do not provide a readily determinable implicit rate, we use an incremental borrowing rate based on the information available at commencement date, including lease term, in determining the present value of future payments. The operating lease asset also includes any lease payments made and excludes lease incentives. Operating lease expense is recognized on a straight-line basis over the lease term and included in selling, general and administrative expenses.

14


Information related to the Company’s right-of-use assets and related lease liabilities were as follows:

(Unaudited)

Nine months ended

September 30,

2020

2019

Cash paid for operating lease liabilities

$

386

$

371

Right-of-use assets obtained in exchange for new operating lease obligations (1)

$

131

$

2,163

Weighted-average remaining lease term

6.3 years

7.4 years

Weighted-average discount rate

3.4%

3.4%

(1)During the nine months ended September 30, 2019, represents operating leases existing on January 1, 2019 and recognized as part of the Company’s adoption of ASU 2016-02.

Maturities of lease liabilities as of September 30, 2020 were as follows:

2020 (excluding the nine months ended September 30, 2020)

    

$

103

2021

 

473

2022

 

426

2023

 

462

2024

 

472

Thereafter

 

1,100

3,036

Less: imputed interest

(682)

Total lease liabilities

$

2,354

Lease liabilities, current portion

428

Lease liabilities, net of current portion

1,926

Total lease liabilities

$

2,354

9.            Fair Value:

The carrying amounts of financial instruments, including cash and cash equivalents, short-term accounts receivable and accounts payable approximated fair value at September 30, 2020 and December 31, 2019 because of the relative short maturity of these instruments. The Company’s accounts receivable long-term are discounted to their present value at prevailing market rates at the time of sale.

10.           Balance Sheet Detail:

Equipment and leasehold improvements consist of the following:

    

(Unaudited)

September 30,

December 31,

2020

    

2019

Equipment

$

2,653

$

2,230

Leasehold improvements

 

1,307

 

1,289

 

3,960

 

3,519

Less accumulated depreciation and amortization

 

(2,932)

 

(2,304)

$

1,028

$

1,215

During the three months ended September 30, 2020 and 2019, the Company recorded depreciation and amortization expense of $0.1 million. During the nine months ended September 30, 2020 and 2019, the Company recorded depreciation and amortization expense of $0.3 million and $0.4 million, respectively. Depreciation and amortization expense is included in selling, general and administrative expense.

15


In limited circumstances, the Company offers extended payment terms to customers for periods of 12 to 48 months. The related customer receivables are classified as accounts receivable long-term and discounted to their present value at prevailing market rates at the time of sale. In subsequent periods, the accounts receivable is increased to the amounts due and payable by the customers through the accretion of interest income on the unpaid accounts receivable due in future years. The amounts under these long-term accounts receivable due within one year are reclassified to the current portion of accounts receivable. At times the Company sells receivables to a financial institution on a non-recourse basis for cash, less a discount. The net proceeds from such sales are included in the operating section of the statement of cash flows as changes in accounts receivable. Accounts receivable long term, net consists of the following:

(Unaudited)

September 30,

December 31,

2020

    

2019

Total amount due from customer

$

2,957

$

5,656

Less: unamortized discount

 

(76)

 

(194)

Less: current portion included in accounts receivable

 

(2,493)

 

(4,104)

$

388

$

1,358

The undiscounted cash flows to be received by the Company relating to these accounts receivable long-term expects to be $2.6 million and $0.4 million during the 12-month periods ending September 30, 2021 and 2022, respectively.

Accounts payable and accrued expenses consist of the following:

    

(Unaudited)

September 30,

December 31,

2020

    

2019

    

Trade accounts payable

$

85,255

$

73,310

Accrued expenses

 

6,200

 

5,054

$

91,455

$

78,364

11.            Credit Facility:

On November 15, 2017, the Company entered into a $20,000,000 revolving credit facility (the “Credit Facility”) with Citibank, N.A. (“Citibank”) pursuant to a Second Amended and Restated Revolving Credit Loan Agreement (the “Loan Agreement”), Second Amended and Restated Revolving Credit Loan Note (the “Note”), Second Amended and Restated Security Agreement and Second Amended and Restated Pledge and Security Agreement. On August 31, 2020, the Company entered into an amendment to the Credit Facility (the “Amended Credit Facility”) pursuant to a First Amendment to Second Amended and Restated Revolving Credit Loan Agreement and Other Loan Documents (collectively, the “Amended Loan Agreement”) and First Allonge to Second Amended and Restated Revolving Credit Loan Note (the “Amended Note”).

The Amended Credit Facility, which will continue to be used for working capital and general corporate purposes, matures on June 30, 2023, at which time the Company must pay all outstanding principal of all outstanding loans plus all accrued and unpaid interest, and any, fees, costs and expenses. In addition, the Company will pay regular monthly payments of all accrued and unpaid interest. The interest rate for any borrowings under the Amended Credit Facility is subject to change from time to time based on the changes in the LIBOR Rate, as defined in the Amended Loan Agreement (the “Index”). The Index was 2.50% at September 30, 2020. Interest on the unpaid principal balance of the Amended Note will be calculated using a rate of 1.75 percentage points over the Index. If the Index becomes unavailable during the term of the Amended Credit Facility, interest will be based upon the Benchmark Replacement (as defined in the Amended Loan Agreement) selected by Citibank after notifying the Company. The Amended Credit Facility is secured by the assets of the Company.

16


Among other affirmative covenants set forth in the Loan Agreement, which were not amended as part of the Amended Credit Facility, the Company must maintain (i) a minimum Debt Service Coverage Ratio (as defined in the Loan Agreement) of not less than 2.0 to 1.0, (ii) a maximum Leverage Ratio (as defined in the Loan Agreement) of at least 2.5 to 1.0, and (iii) a minimum Collateral Coverage Ratio (as defined in the Loan Agreement) of not less than 1.5 to 1.0. Additionally, the Loan Agreement contains negative covenants, which were not amended as part of the Amended Credit Facility, prohibiting, among other things, the creation of certain liens, the alteration of the nature or character of the Company’s business, and transactions with the Company’s shareholders, directors, officers, subsidiaries and/or affiliates other than with respect to (i) the repurchase of the issued and outstanding capital stock of the Company from the stockholders of the Company or (ii) the declaration and payment of dividends to the stockholders of the Company. The Company was in compliance with all such covenants at September 30, 2020 and December 31, 2019.

At September 30, 2020 and December 31, 2019, the Company had no borrowings outstanding under the Credit Facility.

12.          Earnings Per Share:

Our basic and diluted earnings per share are computed using the two-class method in accordance with ASC 260. The two-class method is an earnings allocation that determines net income per share for each class of common stock and participating securities according to their participation rights in dividends and undistributed earnings or losses. Non-vested restricted stock awards that include non-forfeitable rights to dividends are considered participating securities. Per share amounts are computed by dividing net income available to common shareholders by the weighted average shares outstanding during each period. Diluted and basic earnings per share are the same because the restricted shares are the only potentially dilutive security.

A reconciliation of the numerators and denominators of the basic and diluted per share computations follows:

(Unaudited)

(Unaudited)

Nine months ended

Three months ended

September 30,

September 30,

    

2020

    

2019

    

2020

    

2019

    

Numerator:

Net income

$

1,947

$

4,764

$

530

$

1,445

Less distributed and undistributed income allocated to participating securities

59

98

16

25

Net income attributable to common shareholders

1,888

4,666

514

1,420

Denominator:

 

 

 

Weighted average common shares (Basic)

 

4,306

 

4,415

 

4,218

 

4,428

 

 

 

Weighted average common shares including assumed conversions (Diluted)

 

4,306

 

4,415

 

4,218

 

4,428

Basic net income per share

$

0.44

$

1.06

$

0.13

$

0.32

Diluted net income per share

$

0.44

$

1.06

$

0.13

$

0.32

13.        Major Customers and Vendors:

The Company had two major vendors that accounted for 21% and 12%, respectively, of total purchases during the three months ended September 30, 2020 and 22% and 18%, respectively, of total purchases during the three months ended September 30, 2019. The Company had two major vendors that accounted for 20% and 9%, respectively, of total purchases during the nine months ended September 30, 2020 and 24% and 16%, respectively, of total purchases during the nine months ended September 30, 2019.

17


The Company had two major customers that accounted for 22% and 12%, respectively, of its net sales during the three months ended September 30, 2020 and 19% and 17%, respectively, of its net sales during the three months ended September 30, 2019. The Company had two major customers that accounted for 26% and 14%, respectively, of its net sales during the nine months ended September 30, 2020 and 24% and 20%, respectively, of its net sales during the nine months ended September 30, 2019. These same customers accounted for 19% and 11%, respectively, of total net accounts receivable as of September 30, 2020 and 43% and 12%, respectively, of total net accounts receivable as of December 31, 2019.

14.          Income Taxes:

The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. The Company believes that it has appropriate support for the income tax positions it takes and expects to take on its tax returns, and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.

The effective tax rate for the three months ended September 30, 2020 and 2019 was 31.1% and 29.0%, respectively. The effective tax rate for the nine months ended September 30, 2020 and 2019 was 31.1% and 25.4%, respectively. The Company’s effective tax rate for the three and nine months ended September 30, 2020 was impacted by limitations on the deductibility of certain facilitative acquisition related costs.

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The primary impact to the Company’s financial statements as a result of the CARES Act was the deferral of US corporate income tax payments from the second quarter of 2020 to the third quarter of 2020.

15.          Stockholders’ Equity and Stock Based Compensation:

The 2012 Stock-Based Compensation Plan (the “2012 Plan”) authorizes the grant of Stock Options, Stock Units, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Bonuses and other equity-based awards. The total number of shares of the Company’s common stock, par value $0.01 per share (“Common Stock") initially available for award under the 2012 Plan was 600,000, which was increased to 1,000,000 shares by shareholder approval at the Company’s 2018 Annual Meeting in June 2018. As of September 30, 2020, the number of shares of Common Stock available for future award grants to employees, officers and directors under the 2012 Plan is 384,164.

During the nine months ended September 30, 2020, the Company granted a total of 134,165 shares of Restricted Stock to directors, officers and employees. These shares of Restricted Stock vest immediately or over time in sixteen equal quarterly installments. During the nine months ended September 30, 2020, a total of 4,682 shares of Restricted Stock were forfeited.

During the nine months ended September 30, 2019, the Company granted a total of 32,905 shares of Restricted Stock to directors, officers and employees. These shares of Restricted Stock vest immediately or over time in sixteen equal quarterly installments. During the nine months ended September 30, 2019, a total of 16,530 shares of Restricted Stock were forfeited.

A summary of nonvested shares of Restricted Stock awards outstanding under the 2012 Plan as of September 30, 2020, and changes during the nine months then ended is as follows:

Weighted

 

Average Grant

Date

 

Shares

Fair Value

 

Nonvested shares at January 1, 2020

 

63,922

$

14.94

Granted in 2020

 

134,165

 

14.31

Vested in 2020

 

(56,737)