What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-14 compared with 2020-05-08 · 137 added, 80 removed, 206 unchanged (51% of the section changed)

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The Company is organized into two reportable operating segments.

The “Lifeboat Distribution” segment distributes technical software and hardware to corporate resellers, value added resellers (VARs), consultants and systems integrators worldwide.

The “Climb Channel Solutions” segment (formerly Lifeboat Distribution) distributes technical software and hardware to corporate resellers, value added resellers (VARs), consultants and systems integrators worldwide.

The “TechXtend” segment is a value-added reseller of software, hardware and services for corporations, government organizations and academic institutions in the USA and Canada.

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In the first quarter of 2020, we took a number of precautionary measures designed to help minimize the risk of the spread of the virus to our employees, including temporarily closing our offices and requiring all employees to work remotely.

While we did not incur significant disruptions to our operations during the three months ended March 31, 2020 as a result of the COVID-19 pandemic, we are unable to predict the impact that the COVID-19 pandemic will have on our business, liquidity or results of operations at this time.

While we did not incur significant disruptions to our operations during the three months and six months ended June 30, 2020 as a result of the COVID-19 pandemic, we are unable to predict the impact that the COVID-19 pandemic will have on our business, liquidity or results of operations at this time.

This situation is changing rapidly, and additional impacts may arise that we are not aware of currently.

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We derive the majority of our net sales though the sale of third-party software licenses, maintenance and service agreements.

In our Lifeboat distribution segment, sales are impacted by the number of product lines we distribute, and sales penetration of those products into the reseller channel.

In our Climb Channel Solutions segment, sales are impacted by the number of product lines we distribute, and sales penetration of those products into the reseller channel.

In our TechXtend segment sales are generally driven by sales force effectiveness and success in providing superior customer service, competitive pricing, and flexible payment solutions to our customers.

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Historically we have sought to return value to investors through the payment of quarterly dividends and share repurchases.

Total dividends paid and shares repurchased were $0.8 million and less than $0.1 million during each of the three months ended March 31, 2020 and 2019, respectively.

Total dividends paid and shares repurchased were $0.7 million and $3.5 million, which includes 261,631 shares of our outstanding common stock repurchased for $3.5 million in accordance with the Settlement Agreement, during the three months ended June 30, 2020.

Total dividends paid and shares repurchased were $0.8 million and less than $0.1 million during the three months ended June 30, 2019, respectively.

The payment of future dividends and share repurchases is at the discretion of our Board of Directors and dependent on results of operations, projected capital requirements and other factors the Board of Directors may find relevant.

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The technology sector of the United States stock markets is subject to substantial volatility.

Numerous conditions which impact the technology sector or the stock market in general or the Company in particular, whether or not such events relate to or reflect upon the Company’s operating performance, could adversely affect the market price of the Company’s Common Stock.

Furthermore, the potential adverse effect of the current pandemic of COVID-19, fluctuations in the Company’s operating results, announcements regarding litigation, the loss of a significant vendor or customer, increased competition, reduced vendor incentives and trade credit, higher operating expenses, and other developments, could have a significant impact on the market price of our Common Stock.

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Statements in this report regarding future events or conditions, including but not limited to statements regarding industry prospects and the Company’s expected financial position, results of operations, business and financing plans, are forward-looking statements.

These statements can be identified by forward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” and “continue,” or similar words.

These statements can be identified by forward-looking words such as “may,” “will,” “plan,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” and “continue,” or similar words.

Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct.

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The Company operates in a rapidly changing business, and new risk factors emerge from time to time.

Management cannot predict every risk factor, nor can it assess the impact, if any, of all such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements.

Management cannot predict every risk factor, nor can it assess the impact, if any, of all such risk factors on the Company’s business or the

extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements.

Accordingly, forward-looking statements should not be relied upon as a prediction of actual results and readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.

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Financial Overview

Net sales increased 40%, or $17.7 million, to $62.6 million for the three months ended March 31, 2020 compared to $44.9 million for the same period in the prior year.

Gross profit increased 13%, or $1.0 million, to $8.2 million for the three months ended March 31, 2020 compared to $7.2 million for the same period in the prior year.

Selling, general and administrative (“SG&A”) expenses for the three months ended March 31, 2020 remained consistent at $5.5 million with the same period in the prior year.

Legal and financial advisory expenses – unsolicited bid and related matters for the three months ended March 31, 2020 were $1.3 million compared to no expense for the same period in the prior year.

Acquisition related costs for the three months ended March 31, 2020 were $0.4 million compared to no expense for the same period in the prior year.

Net income for the three months ended March 31, 2020 was $0.8 million compared to $1.5 million for the same period in the prior year.

Diluted income per share for the three months ended March 31, 2020 was $0.18 compared to $0.32 for the same period in the prior year.

Net sales increased 12%, or $5.9 million, to $56.6 million for the three months ended June 30, 2020 compared to $50.7 million for the same period in the prior year.

Gross profit decreased 9%, or $0.7 million, to $7.1 million for the three months ended June 30, 2020 compared to $7.8 million for the same period in the prior year.

Selling, general and administrative (“SG&A”) expenses for the three months ended June 30, 2020 increased 2%, or $0.1 million, to $5.6 million for the three months ended June 30, 2020 compared to $5.5 million for the same period in the prior year.

Legal and financial advisory expenses – unsolicited bid and related matters for the three months ended June 30, 2020 were $0.5 million compared to no expense for the same period in the prior year.

Acquisition related costs for the three months ended June 30, 2020 were $0.2 million compared to no expense for the same period in the prior year.

Net income for the three months ended June 30, 2020 was $0.6 million compared to $1.9 million for the same period in the prior year.

Diluted income per share for the three months ended June 30, 2020 was $0.13 compared to $0.41 for the same period in the prior year.

Critical Accounting Policies and Estimates

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historical experience, aging of the accounts receivable, and specific information obtained by the Company on the financial condition and the current creditworthiness of its customers.

If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

At the time of sale, we record an estimate for sales returns based on historical experience.

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If actual market conditions are less favorable than those projected by management, additional inventory write-offs may be required.

Acquisition Accounting

We allocate the purchase price of an acquired business, using the acquisition method of accounting, to its tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values.

The excess purchase price over fair value of net assets acquired is recorded as goodwill.

Certain assumptions and judgements are used to estimate the fair value of acquired assets and liabilities.

We engage outside appraisal firms to assist in the fair value determination of identifiable intangible assets.

We may adjust the preliminary purchase price allocation, after the acquisition closing date and through the end of the measurement period of one year or less, as we finalize the valuation of acquired assets and liabilities.

Changes in estimates used in the preliminary purchase price allocation could have a material effect on the final valuation and result in changes to goodwill and intangible assets.

Additionally, if forecasts supporting the valuation of intangible assets or goodwill are not achieved, then an impairment charge could be recorded.

See further information on acquisition accounting in Notes 7 to the Consolidated Financial Statements in Item 1 of this report.

The Company considers future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance related to deferred tax assets.

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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.

The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

Early adoption is permitted.

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This comparison of financial results is not necessarily indicative of future results:

Six months ended

Three months ended

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We use a variety of operating and other information to evaluate the operating performance of our business, develop financial forecasts, make strategic decisions, and prepare and approve annual budgets.

These key indicators include financial information that is prepared in accordance with US GAAP and presented in our Consolidated Financial Statements as well as non-US GAAP performance measurement tools.

indicators include financial information that is prepared in accordance with US GAAP and presented in our Consolidated Financial Statements as well as non-US GAAP performance measurement tools.

Six months ended

Three months ended

Adjusted gross billings (Non-GAAP)

Gross profit - Lifeboat Distribution

Gross profit - Climb Channel Solutions

Gross profit - TechXtend

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We consider gross profit growth and effective margin to be key metrics in evaluating our business.

During the three months ended March 31, 2020, gross profit increased 13%, or $1.0 million, to $8.2 million compared to $7.2 million for the same period in the prior year while effective margin increased 700 basis points to 38.2% compared to 31.2% for the same period in 2019, reflecting the scalability in our business model.

During the six months ended June 30, 2020, gross profit increased 1%, or $0.2 million, to $15.3 million compared to $15.1 million for the same period in the prior year while effective margin increased 100 basis points to 34.1% compared to 33.1% for the same period in 2019, reflecting the scalability in our business model.

Reconciliations of Non-GAAP Financial Measures

Year ended March 31,

Six months ended

Three months ended

Reconciliation of net sales to adjusted gross billings (Non-GAAP):

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In addition, other companies, including companies in our industry, might calculate adjusted gross billings of product and services or similarly titled measures differently, which may reduce their usefulness as comparative measures.

Six months ended

Three months ended

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In addition, other companies, including companies in our industry, might calculate adjusted EBITDA, or similarly titled measures differently, which may reduce their usefulness as comparative measures.

Three Months Ended March 31, 2020 Compared to Three Months Ended March 31, 2019

Three Months Ended June 30, 2020 Compared to Three Months Ended June 30, 2019

On April 30, 2020 we completed the acquisition of Interwork Technologies Inc.

(“Interwork”) for a purchase price of $3.6 million, subject to certain working capital adjustments, and a potential earnout of $0.8 million payable approximately one year after the acquisition date.

The operating results of Interwork are included in our operating results effective May 1, 2020.

See further information on acquisition accounting in Note 6 to the Consolidated Financial Statements in Item 1 of this report.

Net Sales and Adjusted Gross Billings

Net sales for the three months ended March 31, 2020 increased 40%, or $17.7 million, to $62.6 million compared to $44.9 million for the same period in the prior year.

Adjusted gross billings for the three months ended March 31, 2020 increased 22%, or $31.2 million, to $173.1 million compared to $141.9 million for the same period in the prior year.

Net sales increased at a higher rate than adjusted gross billings due to a higher percentage of sales being derived from software

licenses and hardware, which is recorded on a gross basis, for the three months ended March 31, 2020, when compared to the same period in the prior year.

Lifeboat Distribution segment net sales for the three months ended March 31, 2020 increased $17.2 million, or 43%, to $57.3 million compared to $40.1 million for the same period in the prior year.

Adjusted gross billings for the Lifeboat Distribution segment for the three months ended March 31, 2020 increased $31.6 million, or 23%, to $165.9 million compared to $134.3 million for the same period in the prior year.

Net sales increased at a higher rate than adjusted gross billings due to a higher percentage of sales being derived from software licenses and hardware, which is recorded on a gross basis, for the three months ended March 31, 2020, when compared to the same period in the prior year.

The increase in adjusted gross billings was primarily due to sales from new vendor partners added in 2018 and 2019, as well as increased sales volume from our existing partnerships.

TechXtend segment net sales for the three months ended March 31, 2020 increased $0.5 million, or 11%, to $5.3 million compared to $4.8 million for the same period in the prior year.

Net sales for the three months ended June 30, 2020 increased 12%, or $5.9 million, to $56.6 million compared to $50.7 million for the same period in the prior year.

Adjusted gross billings for the three months ended June 30, 2020 increased 11%, or $16.1 million, to $158.7 million compared to $142.6 million for the same period in the prior year.

Climb Channel Solutions segment net sales for the three months ended June 30, 2020 increased 15%, or $6.9 million, to $54.2 million compared to $47.3 million for the same period in the prior year.

The increase in net sales was primarily due to sales from Interwork for the two months ended June 30, 2020 and incremental sales from new vendor

relationships added in 2018 and 2019.

These increases in sales were partially offset by a decline in sales from several of our larger established vendor partner lines.

Adjusted gross billings for the Climb Channel Solutions segment for the three months ended June 30, 2020 increased 13%, or $18.0 million, to $154.8 million compared to $136.8 million for the same period in the prior year.

TechXtend segment net sales for the three months ended June 30, 2020 decreased 29%, or $1.0 million, to $2.4 million compared to $3.4 million for the same period in the prior year.

Sales in our TechXtend segment may vary significantly from quarter to quarter based on the timing of IT spending decisions by our larger customers.

Adjusted gross billings for the TechXtend segment for the three months ended March 31, 2020 decreased $0.4 million, or 6%, to $7.2 million compared to $7.6 million for the same period in the prior year.

During the three months ended March 31, 2020, we relied on two key customers for a total of 41% of our net sales, with one of these customers accounting for 27% and the other customer accounting for 14% of our total net sales during the three months ended March 31, 2020.

The Company had two major customers that accounted for 26% and 18%, respectively, of its total net sales during the three months ended March 31, 2019.

The Company had two major vendors that accounted for 22% and 14%, respectively, of total purchases during the three months ended March 31, 2020 and 28% and 16%, respectively, of total purchases during the three months ended March 31, 2019.

Gross profit for the three months ended March 31, 2020 increased 13%, or $1.0 million, to $8.2 million compared to $7.2 million for the same period in the prior year.

Lifeboat Distribution segment gross profit for the three months ended March 31, 2020 increased 16%, or $1.0 million, to $7.2 million compared to $6.2 million for the same period in the prior year due to the sales growth discussed above.

TechXtend segment gross profit for the three months ended March 31, 2020 remained consistent at $1.0 million when compared to the same period in the prior year.

Vendor rebates and discounts for the three months ended March 31, 2020 were $1.0 million compared to $0.7 million for the same period in the prior year.

Adjusted gross billings for the TechXtend segment for the three months ended June 30, 2020 decreased 32%, or $1.9 million, to $3.9 million compared to $5.8 million for the same period in the prior year.

During the three months ended June 30, 2020, we relied on two key customers for a total of 47% of our net sales, with one of these customers accounting for 29% and the other customer accounting for 18% of our total net sales.

The Company had two major customers that accounted for 27% and 18%, respectively, of its total net sales during the three months ended June 30, 2019.

The Company had two major vendors that accounted for 16% and 10%, respectively, of total purchases during the three months ended June 30, 2020 and 22% and 15%, respectively, of total purchases during the three months ended June 30, 2019.

Gross profit for the three months ended June 30, 2020 decreased 9%, or $0.7 million, to $7.1 million compared to $7.8 million for the same period in the prior year.

Climb Channel Solutions segment gross profit for the three months ended June 30, 2020 decreased 7%, or $0.5 million, to $6.6 million compared to $7.1 million for the same period in the prior year.

The decrease in Climb Channel Solutions segment gross profit was impacted by three factors;

1) a decrease of approximately $0.4 million in income from non-routine items such as marketing events, rebates and early pay discounts, 2) early pay discounts of $0.3 million offered to a large customer in exchange for a change in payment terms (see Liquidity and Capital Resources section below), and 3) a decrease in sales from several of our larger established vendor lines discussed above.

TechXtend segment gross profit for the three months ended June 30, 2020 decreased 32%, or $0.2 million, to $0.5 million compared to $0.7 million for the same period in the prior year.

Customer rebates and discounts for the three months ended June 30, 2020 were $1.3 million compared to $0.8 million for the same period in the prior year.

This increase is primarily attributable to a change in payment terms with one of our larger customers during the three months ended June 30, 2020.

Customer rebates and discounts are dependent on reaching certain targets we set and timing of payments by our customers.

Vendor rebates and discounts for the three months ended June 30, 2020 were $0.9 million compared to $1.0 million for the same period in the prior year.

Vendor rebates are dependent on reaching certain targets set by our vendors.

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Selling, General and Administrative Expenses

SG&A expenses for the three months ended March 31, 2020 remained consistent at $5.5 million with the same period in the prior year.

SG&A expenses were 8.8% of net sales for the three months ended March 31, 2020, compared to 12.3% for the same period in the prior year.

The decrease as a percentage of net sales is primarily due to growth in net sales without a corresponding increase in SG&A expenses.

SG&A expenses for the three months ended June 30, 2020 increased 2%, or $0.1 million, to $5.6 million for the three months ended June 30, 2020 compared to $5.5 million for the same period in the prior year.

SG&A expenses were 9.8% of net sales for the three months ended June 30, 2020, compared to 10.8% for the same period in the prior year.

SG&A expenses include expenses from Interwork for the two months ended June 30, 2020.

Our intent is to integrate the administrative functions of the two organizations during the third and fourth quarter of 2020.

The Company expects that its SG&A expenses, as a percentage of net sales, may vary depending on changes in sales volume, as well as the levels of continuing investments in key growth initiatives.

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Legal and Financial Advisory Expenses – Unsolicited Bid and Related Matters

Legal and financial advisory expenses – unsolicited bid and related matters for the three months ended March 31, 2020 were $1.3 million compared to no expense for the same period in the prior year.

Legal and financial advisory expenses – unsolicited bid and related matters for the three months ended June 30, 2020 were $0.5 million compared to no expense for the same period in the prior year.

These expenses relate to the costs incurred in conjunction with the unsolicited bid and shareholder demand discussed below.

Acquisition Related Costs

Acquisition related costs for the three months ended March 31, 2020 were $0.4 million compared to no expense for the same period in the prior year.

These expenses relate to costs incurred in conjunction with the acquisition of Interwork Technologies discussed below.

For the three months ended March 31, 2020 and 2019, the Company recorded a provision for income taxes of $0.3 million and $0.5 million, respectively.

The effective tax rate for the three months ended March 31, 2020 and 2019 was 25.0%, respectively.

Acquisition related costs for the three months ended June 30, 2020 were $0.2 million compared to no expense for the same period in the prior year.

These expenses relate to costs incurred in conjunction with the acquisition of Interwork discussed below.

For the three months ended June 30, 2020 and 2019, the Company recorded a provision for income taxes of $0.4 million and $0.5 million, respectively.

The effective tax rate for the three months ended June 30, 2020 and 2019 was 38.4% and 22.8%, respectively.

The Company’s effective tax rate for the three months ended June 30, 2020 was impacted by limitations on the deductibility of certain facilitative acquisition related costs.

Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

Net Sales and Adjusted Gross Billings

Net sales for the six months ended June 30, 2020 increased 25%, or $23.7 million, to $119.2 million compared to $95.5 million for the same period in the prior year.

Adjusted gross billings for the six months ended June 30, 2020 increased 17%, or $47.4 million, to $331.8 million compared to $284.5 million for the same period in the prior year.

Net sales increased at a higher rate than adjusted gross billings due to a higher percentage of sales being derived from software licenses and hardware, which is recorded on a gross basis, for the six months ended June 30, 2020, when compared to the same period in the prior year.

Climb Channel Solutions segment net sales for the six months ended June 30, 2020 increased 28%, or $24.1 million, to $111.5 million compared to $87.4 million for the same period in the prior year.

The increase in net sales was primarily due to sales from new vendor partners added in 2018 and 2019 and the results of Interwork for the two months ended June 30, 2020.

Adjusted gross billings for the Climb Channel Solutions segment for the six months ended June 30, 2020 increased 18%, or $49.5 million, to $320.6 million compared to $271.1 million for the same period in the prior year.

TechXtend segment net sales for the six months ended June 30, 2020 decreased 5%, or $0.4 million, to $7.7 million compared to $8.1 million for the same period in the prior year.

Sales in our TechXtend segment may vary significantly from quarter to quarter based on the timing of IT spending decisions by our larger customers.

Adjusted gross billings for the TechXtend segment for the six months ended June 30, 2020 decreased 16%, or $2.1 million, to $11.2 million compared to $13.3 million for the same period in the prior year.

During the six months ended June 30, 2020, we relied on two key customers for a total of 47% of our net sales, with one of these customers accounting for 29% and the other customer accounting for 18% of our total net sales.

The Company had two major customers that accounted for 26% and 18%, respectively, of its total net sales during the six months ended June 30, 2019.

The Company had two major vendors that accounted for 19% and 10%, respectively, of total purchases during the six months ended June 30, 2020 and 25% and 15%, respectively, of total purchases during the six months ended June 30, 2019.

Gross profit for the six months ended June 30, 2020 increased 1%, or $0.2 million, to $15.3 million compared to $15.1 million for the same period in the prior year.

Climb Channel Solutions segment gross profit for the six months ended June 30, 2020 increased 4%, or $0.5 million, to $13.8 million compared to $13.3 million for the same period in the prior year.

The increase in Climb Channel Solutions segment gross profit resulted from sales growth attributable to new vendor partners and the acquisition of Interwork discussed above, partially offset by higher early pay discounts and lower sales from some established vendor partner lines.

TechXtend segment gross profit for the six months ended June 30, 2020 decreased 15%, or $0.3 million, to $1.5 million compared to $1.8 million for the same period in the prior year.

Customer rebates and discounts for the six months ended June 30, 2020 were $2.4 million compared to $1.6 million for the same period in the prior year.

This increase is attributable to a change in payment terms with one of our larger

customers during the three months ended June 30, 2020 and timing of payments from other larger customers.

Customer rebates and discounts are dependent on reaching certain targets we set and timing of payments by our customers.

Vendor rebates and discounts for the six months ended June 30, 2020 were $1.9 million compared to $1.7 million for the same period in the prior year.

Vendor rebates are dependent on reaching certain targets set by our vendors.

The Company monitors vendor rebate levels, competitive pricing, and gross profit margins carefully.

We anticipate that price competition in our market will continue in both of our business segments.

Selling, General and Administrative Expenses

SG&A expenses for the six months ended June 30, 2020 increased 1%, or $0.1 million, to $11.1 million compared to $11.0 million for the same period in the prior year.

SG&A expenses were 9.3% of net sales for the six months ended June 30, 2020, compared to 11.5% for the same period in the prior year.

SG&A expenses include expenses from Interwork for the two months ended June 30, 2020.

Our intent is to integrate the administrative functions of the two organizations during the third and fourth quarter of 2020.

The Company expects that its SG&A expenses, as a percentage of net sales, may vary depending on changes in sales volume, as well as the levels of continuing investments in key growth initiatives.

We plan to continue to expand our investment in business development, sales and marketing to maximize our market penetration.

Legal and Financial Advisory Expenses – Unsolicited Bid and Related Matters

Legal and financial advisory expenses – unsolicited bid and related matters for the six months ended June 30, 2020 were $1.8 million compared to no expense for the same period in the prior year.

These expenses relate to the costs incurred in conjunction with the unsolicited bid and shareholder demand discussed below.

Acquisition Related Costs

Acquisition related costs for the six months ended June 30, 2020 were $0.6 million compared to no expense for the same period in the prior year.

These expenses relate to costs incurred in conjunction with the acquisition of Interwork discussed below.

For the six months ended June 30, 2020 and 2019, the Company recorded a provision for income taxes of $0.6 million and $1.0 million, respectively.

The effective tax rate for the six months ended June 30, 2020 and 2019 was 31.2% and 23.8%, respectively.

The Company’s effective tax rate for the six months ended June 30, 2020 was impacted by limitations on the deductibility of certain facilitative acquisition related costs.

Unsolicited Bid and Shareholder Demand

On July 15, 2019, the Company received a letter from SKK and N&W announcing an unsolicited bid to acquire the Company for $14.37 per share (the “July 15 Proposal”), which reflected an approximate 32.8% premium over the Company’s adjusted closing stock price on July 12, 2019, one trading day earlier.

On July 15, 2019, the Company received a letter from Shepherd Kaplan Krochuk, LLC (“SKK”) and North & Webster SSG, LLC (“N&W”) announcing an unsolicited bid to acquire the Company for $14.37 per share (the “July 15 Proposal”), which reflected an approximate 32.8% premium over the Company’s adjusted closing stock price on July 12, 2019, one trading day earlier.

The July 15 Proposal was subject to a number of contingencies, including the need for SKK and N&W to secure financing to complete a transaction.

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Also on November 27, 2019, Mr.

Nynens entered into an agreement with SKK and N&W (the “November 27 Agreement”), granting SKK an irrevocable proxy to vote his shares of Common Stock (i) in favor of any acquisition proposal by SKK, (ii) against any third-party acquisition, and (iii) as directed by SKK with respect to the election of directors nominated by persons other than the Company.

of directors nominated by persons other than the Company.

The November 27 Agreement also provides that, upon the consummation of the acquisition by an SKK-controlled entity of up to 100% of the outstanding capital stock of the Company, Nynens be appointed as Executive Chairman of the Company at an annual base salary of $250,000 in addition to stock option grants or comparable equity awards representing three percent (3%) of the outstanding equity of the Company, and for a minimum term of three (3) years.

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Nynens, SKK, and N&W in the Superior Court of New Jersey Monmouth County, asserting claims against Mr.

Nynens for alleged breaches of the Nynens Separation Agreement, including for violating his covenant not to seek future employment with the Company, and claims for tortious interference against SKK

and N&W for inducing Mr.

Nynens for alleged breaches of the Nynens Separation Agreement, including for violating his covenant not to seek future employment with the Company, and claims for tortious interference against SKK and N&W for inducing Mr.

Nynens to commit these breaches.

In connection with its claims, the Company sought monetary damages, injunctive relief and a declaratory judgment.

On April 16, 2020 (the “Effective Date”), the Company entered into a Settlement Agreement (the “Agreement”) with Mr.

On April 16, 2020 (the “Effective Date”), the Company entered into a Settlement Agreement (the “Settlement Agreement”) with Mr.

Nynens, SKK, N&W, and each of Dennis Crowley, David Shepherd, David Kaplan, Timothy Krochuk and Samuel Kidston (collectively with SKK and N&W, the “SKK Parties”).

Pursuant to the Agreement, the Company agreed to voluntarily dismiss the Lawsuit with prejudice, and it did so on April 21, 2020.

Pursuant to the Settlement Agreement, the Company agreed to voluntarily dismiss the Lawsuit with prejudice, and it did so on April 21, 2020.

The Company also agreed to purchase all of Mr.

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Nynens did so on April 16, 2020.

On April 23, 2020, the Company completed the purchase of 261,631 shares of common stock, representing approximately 5.8% of the issued and outstanding common stock of the Company, for a purchase price of $3.5 million in accordance with the Settlement Agreement.

On April 23, 2020, the Company purchased all of Nynens’ 261,631 shares of Common Stock at $13.19 per share pursuant to the Settlement Agreement, representing approximately 5.8% of the issued and outstanding Common Stock of the Company, for an aggregate purchase price of $3.5 million.

Acquisition of Interwork Technologies

On April 20, 2020, CLIMB Channel Solutions (Canada) Inc.

(“Buyer”), a newly-formed indirect subsidiary of the Company, entered into a Stock Purchase Agreement (the “SPA”) with Interwork Group, Inc.

(“Seller”), Interwork Technologies Inc., a Delaware corporation (“Interwork US”), Interwork Technologies Inc., a corporation incorporated under the laws of the Province of Ontario, Canada (“Interwork Canada”), and Firepower Equity Inc.

On April 30, 2020, Buyer completed the acquisition of Interwork US and Interwork Canada.

Pursuant to the SPA, Buyer acquired Interwork US and Interwork Canada for an aggregate purchase price of $5 million Canadian dollar paid at closing plus a potential post-closing $1.1 million Canadian dollar earn-out.

The SPA contains customary representations, warranties and covenants.

The SPA also contains indemnification obligations of both Buyer and Seller, subject to certain limitations, and covenants regarding the conduct of each party prior to closing.

On April 30, 2020, pursuant to a Stock Purchase Agreement dated April 20, 2020, CLIMB Channel Solutions (Canada) Inc.

(“Buyer”), a newly-formed indirect 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.

Liquidity and Capital Resources

Our cash and cash equivalents decreased to $11.6 million as of March 31, 2020 compared to $15.0 million as of December 31, 2019.

The decrease in cash and cash equivalents was primarily the result of $2.4 million of cash and cash equivalents used in operating activities and $0.8 million of cash used for dividends.

Net cash and cash equivalents used in operating activities for the three months ended March 31, 2020 was $2.4 million, comprised primarily of net income adjusted for non-cash items of $1.3 million, offset by changes in operating assets and liabilities of $3.7 million.

Net cash and cash equivalents used in changes in working capital were the result the timing of vendor payments and customer payments.

During the first quarter of 2020, we extended payment terms on a $3.4 million receivable from one of our customers who was impacted by COVID-19, contributing to the change in working capital.

We are receiving weekly payments on the account and expect to be paid in full during the second quarter of 2020.

During the second quarter of 2020, we expect to implement a change in the payment terms with one of our large customers.

The impact of this change in payment terms is expected to result in a reduction of our accounts receivable and corresponding increase in cash of approximately $25 million during the second quarter of 2020.

This change in terms will also have the impact of reducing our net sales and gross profit by approximately $0.4 million per quarter, however, we believe the additional liquidity will improve our return on invested capital and provide us greater flexibility in pursuing our strategic objectives.

On April 22, 20020 the Company purchased 261,631 shares of its outstanding common stock at $13.19 per share, representing approximately 5.8% of its issued and outstanding shares for $3.5 million in accordance with the Settlement Agreement.

On April 20, 2020, the Company entered into the SPA to purchase Interwork US and Interwork Canada for an aggregate purchase price of $5 million Canadian dollar payable at closing (subject to adjustment) plus a potential post-closing $1.1 million Canadian dollar earn-out (the “Interwork Acquisition”).

Our cash and cash equivalents increased to $45.0 million as of June 30, 2020 compared to $15.0 million as of December 31, 2019.

The increase in cash and cash equivalents was primarily the result of $36.4 million of cash and cash equivalents provided by operating activities resulting from a change in payment terms with one of our customers, offset by $3.5 million of cash used to purchase treasury stock, $1.5 million of cash used for dividends and $1.1 million of cash used for an acquisition.

Net cash and cash equivalents used in operating activities for the six months ended June 30, 2020 was $36.4 million, comprised primarily of net income adjusted for non-cash items of $2.3 million and changes in operating assets and liabilities of $34.1 million.

Net cash and cash equivalents used in changes in working capital were the result the timing of customer payments.

During the second quarter of 2020, we implemented a change in the payment terms with one of our large customers.

The impact of this change in payment terms resulted in a reduction of our accounts receivable and corresponding increase in cash during the second quarter of 2020.

This change in terms also had the impact of reducing our net sales and gross profit by approximately $0.3 million for the three and six months ended June 30, 2020, however, we believe the additional liquidity will improve our return on invested capital and provide us greater flexibility in pursuing our strategic objectives.

Net cash and cash equivalents used in investing activities during the six months ended June 30, 2020 primarily consisted of payments for an acquisition.

On April 30, 2020, the Company completed the purchase of 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 Company financed the acquisition from existing capital resources.

On April 30, 2020, the Company completed the acquisition of Interwork US and Interwork Canada.

Net cash and cash equivalents used in investing activities during the three months ended March 31, 2020 was minimal.

Net cash and cash equivalents used in financing activities during the three months ended March 31, 2020 was $0.8 million, primarily comprised of dividend payments on our Common Stock.

Net cash and cash equivalents used in financing activities during the six months ended June 30, 2020 was $5.0 million, primarily comprised of the purchase of treasury stock of $3.5 million and dividend payments on our Common Stock of $1.5 million.

On April 23, 2020, the Company purchased 261,631 shares of its outstanding common stock at $13.19 per share, representing approximately 5.8% of its issued and outstanding shares for $3.5 million in accordance with the Settlement Agreement.

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 (the “Security Agreement”) and Second Amended and Restated Pledge and Security Agreement (the “Pledge Agreement”).

(“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.

The Credit Facility, which will be used for working capital and general corporate purposes, matures on August 31, 2020, at which time the Company must pay all outstanding principal of all outstanding loans plus all accrued and unpaid interest, and any interest, fees, costs and expenses, if any.

As of March 31, 2020, no borrowings were outstanding under the Credit Facility.

As of June 30, 2020, no borrowings were outstanding under the Credit Facility.

We anticipate that our working capital needs will increase as we invest in the growth of our business.

We believe that the funds held in cash and cash equivalents and our unused borrowings under our Credit Facility will be sufficient to fund our working capital and cash requirements for at least the next 12 months.

Contractual Obligations as of March 31, 2020

Smaller reporting companies are not required to provide the information required by this item.

Foreign Exchange

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Off-Balance Sheet Arrangements

As of March 31, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

As of June 30, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Quantitative and Qualitative Disclosures about Market Risk

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What changed 10-Q

Item 2. Management’s Discussion and Analysis