What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-12 compared with 2020-08-14 · 140 added, 132 removed, 211 unchanged (56% of the section changed)

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We are closely monitoring the impact of the 2019 novel coronavirus, or COVID-19, pandemic on all aspects of our business.

COVID-19 has resulted and will continue to result in significant economic disruption, which could also impact our business.

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 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.

While we did not incur significant disruptions to our operations during the three and nine months ended September 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.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers and shareholders.

For further information regarding the impact of COVID-19, see Item 1A.

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The Company’s sales, gross profit and results of operations have fluctuated and are expected to continue to fluctuate on a quarterly basis as a result of a number of factors, including but not limited to:

the condition of the software industry in general, shifts in demand for software products, pricing, level of extended payment terms sales transactions, industry shipments of new software products or upgrades, fluctuations in merchandise returns, adverse weather conditions that affect response, distribution or shipping, shifts in the timing of holidays and changes in the Company’s product offerings.

The Company’s operating expenditures are based on sales forecasts.

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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 $0.7 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.

Total dividends paid and shares repurchased were $0.7 million and $0.1 million during the three months ended September 30, 2020.

Total dividends paid and shares repurchased were $0.8 million and less than $0.1 million during the three months ended September 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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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.

Substantial risks and uncertainties unknown at this time could cause actual results to differ materially from those indicated by such forward-looking statements, including, but not limited to, the continued acceptance of the Company’s distribution channel by vendors and customers, the timely availability and acceptance of new products, product mix, market conditions, competitive pricing pressures, contribution of key vendor relationships and support programs, including vendor rebates and discounts, as well as factors that affect the software industry in general and other factors generally.

Currently, one of the most significant factors is the potential adverse effect of the current pandemic of COVID-19 on the Company, the global economy and financial markets.

Because these forward-looking statements are subject to risks and uncertainties, actual results could differ materially from those indicated by such forward-looking statements.

These risks and uncertainties include, but are not limited to, the continued acceptance of the Company’s distribution channel by vendors and customers, the timely availability and acceptance of new products, product mix, market conditions, competitive pricing pressures, contribution of key vendor relationships and support programs, including vendor rebates and discounts, as well as factors that affect the software industry in general and other factors generally.

Currently, one of the most significant factors is the potential adverse effect of the current COVID-19 pandemic on the Company, the global economy and financial markets.

The extent to which COVID-19 impacts the Company will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, including the impact on our reseller partners and the end customer markets they serve, among others.

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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 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.

Net sales increased 16%, or $8.5 million, to $60.9 million for the three months ended September 30, 2020 compared to $52.4 million for the same period in the prior year.

Gross profit increased 3%, or $0.1 million, to $7.2 million for the three months ended September 30, 2020 compared to $7.1 million for the same period in the prior year.

Selling, general and administrative (“SG&A”) expenses for the three months ended September 30, 2020 increased 21%, or $1.1 million, to $6.2 million for the three months ended September 30, 2020 compared to $5.1 million for the same period in the prior year.

Legal and financial advisory expenses, net – unsolicited bid and related matters for the three months ended September 30, 2020 were a recovery of $0.1 million compared to no expense for the same period in the prior year.

Acquisition related costs for the three months ended September 30, 2020 were $0.3 million compared to no expense for the same period in the prior year.

Net income for the three months ended September 30, 2020 was $0.5 million compared to $1.4 million for the same period in the prior year.

Diluted income per share for the three months ended September 30, 2020 was $0.13 compared to $0.32 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.

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.

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.

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

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

Six months ended

Nine months ended

Three months ended

September 30,

Cost of sales

Selling, general and administrative expenses

Legal and financial advisory expenses - unsolicited bid and related matters

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

Acquisition related costs

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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

Nine months ended

Three months ended

September 30,

Adjusted gross billings (Non-GAAP)

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

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.

During the three months ended September 30, 2020, gross profit increased 3%, or $0.1 million, to $7.2 million compared to $7.1 million for the same period in the prior year while effective margin decreased to 25.6% compared to 34.7% for the same period in the prior year.

During the nine months ended September 30, 2020, gross profit increased 2%, or $0.4 million, to $22.6 million compared to $22.1 million for the same period in the prior year while effective margin decreased to 31.4% compared to 33.6% for the same period in the prior year.

Reconciliations of Non-GAAP Financial Measures

Six months ended

Nine months ended

Three months ended

September 30,

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

Nine months ended

Three months ended

September 30,

Net income reconciled to adjusted EBITDA:

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Share-based compensation

Legal and financial advisory expenses - unsolicited bid and related matters

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

Acquisition related costs

Adjusted EBITDA

We define adjusted EBITDA, as net income, plus provision for income taxes, depreciation, amortization, share-based compensation, interest, legal and financial advisory expenses – unsolicited bid and related matters and acquisition related costs.

We define adjusted EBITDA, as net income, plus provision for income taxes, depreciation, amortization, share-based compensation, interest, legal and financial advisory expenses, net – unsolicited bid and related matters and acquisition related costs.

We define effective margin as adjusted EBITDA as a percentage of gross profit.

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

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

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

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Net Sales and Adjusted Gross Billings

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.

Net sales for the three months ended September 30, 2020 increased 16%, or $8.5 million, to $60.9 million compared to $52.4 million for the same period in the prior year.

Adjusted gross billings for the three months ended September 30, 2020 increased 15%, or $21.9 million, to $171.0 million compared to $149.1 million for the same period in the prior year.

Climb Channel Solutions segment net sales for the three months ended September 30, 2020 increased 17%, or $8.2 million, to $57.0 million compared to $48.8 million for the same period in the prior year.

The increase in net sales was primarily due to sales from Interwork for the three months ended September 30, 2020 and increased sales from newer vendor

partner lines added in 2018 and 2019.

Adjusted gross billings for the Climb Channel Solutions segment for the three months ended September 30, 2020 increased 16%, or $22.5 million, to $165.7 million compared to $143.2 million for the same period in the prior year.

TechXtend segment net sales for the three months ended September 30, 2020 increased 8%, or $0.3 million, to $3.8 million compared to $3.5 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 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.

Adjusted gross billings for the TechXtend segment for the three months ended September 30, 2020 decreased 10%, or $0.6 million, to $5.3 million compared to $5.9 million for the same period in the prior year.

During the three months ended September 30, 2020, we relied on two key customers for a total of 34% of our net sales, with one of these customers accounting for 22% and the other customer accounting for 12% of our total net sales.

The Company had two major customers that accounted for 19% and 17%, respectively, of its total net sales during the three months ended September 30, 2019.

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.

Gross profit for the three months ended September 30, 2020 increased 3%, or $0.1 million, to $7.2 million compared to $7.1 million for the same period in the prior year.

Climb Channel Solutions segment gross profit for the three months ended September 30, 2020 increased 3%, or $0.2 million, to $6.6 million compared to $6.4 million for the same period in the prior year.

The increase in Climb Channel Solutions segment gross profit resulted primarily from increased sales from the acquisition of Interwork and other vendor partner lines discussed above, partially offset by higher early pay discounts and other rebates and discounts offered to our customers.

The increase in early pay discounts was impacted by a change in payment terms with one of our larger customers, which resulted in an early pay discount of approximately $0.4 million and a decrease in accounts receivable from the time the program was implemented of approximately $30 million (see Liquidity and Capital Resources below).

TechXtend segment gross profit for the three months ended September 30, 2020 remained consistent with the same period in the prior year at $0.7 million.

Customer rebates and discounts for the three months ended September 30, 2020 were $1.6 million compared to $0.9 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 second quarter of 2020.

Customer rebates and discounts vary based on terms of rebate and early pay discount programs offered to customers and timing of payments ultimately received from our customers.

Vendor rebates and discounts for the three months ended September 30, 2020 remained consistent with the same period in the prior year at $0.6 million.

Vendor rebates are dependent on programs offered by our vendors and in some cases reaching certain volume targets set by our vendors.

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

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Selling, General and Administrative 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.

SG&A expenses for the three months ended September 30, 2020 increased 21%, or $1.1 million, to $6.2 million compared to $5.1 million for the same period in the prior year, primarily due to higher sales related salaries and commissions, higher stock compensation expense and higher professional fees related to our obligations as a public company.

SG&A expenses also include approximately $0.2 million of expenses from Interwork for the three months ended September 30, 2020, which we plan to phase out in the fourth quarter of 2020 as we complete the integration of our administrative organizations.

SG&A expenses were 10.3% of net sales for the three months ended September 30, 2020, compared to 9.7% for the same period in the prior year.

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 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.

Legal and Financial Advisory Expenses, Net – Unsolicited Bid and Related Matters

Legal and financial advisory expenses, net – unsolicited bid and related matters for the three months ended September 30, 2020 were a recovery of $0.1 million relating to reimbursement for insurance proceeds realized compared to no expense for the same period in the prior year.

Acquisition Related Costs

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

Acquisition related costs for the three months ended September 30, 2020 were $0.3 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 and CDF discussed below.

For the three months ended September 30, 2020 and 2019, the Company recorded a provision for income taxes of $0.2 million and $0.6 million, respectively.

The effective tax rate for the three months ended September 30, 2020 and 2019 was 31.1% and 29.0%, respectively.

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

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 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.

Net sales for the nine months ended September 30, 2020 increased 22%, or $32.2 million, to $180.1 million compared to $147.9 million for the same period in the prior year.

Adjusted gross billings for the nine months ended September 30, 2020 increased 16%, or $69.3 million, to $502.8 million compared to $433.5 million for the same period in the prior year.

Climb Channel Solutions segment net sales for the nine months ended September 30, 2020 increased 24%, or $32.4 million, to $168.6 million compared to $136.2 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 inclusion of net sales of Interwork for the five months ended September 30, 2020.

Adjusted gross billings for the Climb Channel Solutions segment for the nine months ended September 30, 2020 increased 17%, or $72.1 million, to $486.4 million compared to $414.3 million for the same period in the prior year.

TechXtend segment net sales for the nine months ended September 30, 2020 decreased 1%, or $0.1 million, to $11.6 million compared to $11.7 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.

Adjusted gross billings for the TechXtend segment for the nine months ended September 30, 2020 decreased 14%, or $2.8 million, to $16.4 million compared to $19.2 million for the same period in the prior year.

During the nine months ended September 30, 2020, we relied on two key customers for a total of 40% of our net sales, with one of these customers accounting for 26% and the other customer accounting for 14% of our total net sales.

The Company had two major customers that accounted for 24% and 20%, respectively, of its total net sales during the nine 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.

Gross profit for the nine months ended September 30, 2020 increased 2%, or $0.4 million, to $22.5 million compared to $22.1 million for the same period in the prior year.

Climb Channel Solutions segment gross profit for the nine months ended September 30, 2020 increased 3%, or $0.7 million, to $20.4 million compared to $19.7 million for the same period in the prior year.

The increase in Climb Channel Solutions segment gross profit resulted primarily from increased sales from the acquisition of Interwork and newer vendor lines discussed above, partially offset by higher early pay discounts and rebates offered to our customers.

The increase in early pay discounts was impacted by a change in payment terms with one of our larger customers, which resulted in an early pay discount of approximately $0.7 million and a decrease in accounts

receivable from the time the program was implemented of approximately $30 million (see Liquidity and Capital Resources below).

TechXtend segment gross profit for the nine months ended September 30, 2020 decreased 11%, or $0.3 million, to $2.1 million compared to $2.4 million for the same period in the prior year.

Customer rebates and discounts for the nine months ended September 30, 2020 were $4.0 million compared to $2.5 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 second quarter of 2020 and timing of payments from other larger customers.

Customer rebates and discounts vary based on terms of rebate and early pay discount programs offered to customers and timing of payments ultimately received from our customers.

Vendor rebates and discounts for the nine months ended September 30, 2020 were $2.5 million compared to $2.4 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 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.

SG&A expenses for the nine months ended September 30, 2020 increased 7%, or $1.1 million, to $17.3 million compared to $16.2 million for the same period in the prior year, primarily due to higher sales related salaries and commissions, higher stock compensation expense and higher professional fees related to our obligations as a public company.

SG&A expenses were 9.7% of net sales for the nine months ended September 30, 2020, compared to 10.9% for the same period in the prior year.

SG&A expenses include approximately $0.3 million of expenses from Interwork for the five months ended September 30, 2020.

We anticipate completing the integration of the administrative functions of the two organizations during the 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.

Legal and Financial Advisory Expenses, Net – Unsolicited Bid and Related Matters

Legal and financial advisory expenses, net – unsolicited bid and related matters for the nine months ended September 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.

Acquisition related costs for the nine months ended September 30, 2020 were $1.0 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 and CDF discussed below.

For the nine months ended September 30, 2020 and 2019, the Company recorded a provision for income taxes of $0.9 million and $1.6 million, 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 nine months ended September 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 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.

On August 23, 2019, the Company received another unsolicited offer from SKK and N&W, proposing to acquire the Company for $16.38 per share (the “August 23 Proposal”), which reflected an approximate 18.1% premium over the Company’s closing stock price one day earlier, and requesting members of the Board and management to enter into voting and support agreements in connection with the execution of a definitive merger agreement.

The August 23 Proposal, similar to 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.

On July 15, 2019 and August 23, 2019, the Company received letters from Shepherd Kaplan Krochuk, LLC (“SKK”) and North & Webster SSG, LLC (“N&W”) announcing an unsolicited bid to acquire the Company.

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

On November 27, 2019, SKK, N&W, and Messrs.

Shepherd, Kaplan, Krochuk and Kidston (collectively, the “SKK 13D Group”) entered into a Joint Filing Agreement and filed a Schedule 13D with the SEC, disclosing an aggregate 5.8% ownership stake in the Company.

Shepherd, Kaplan, Krochuk and Kidston (collectively, the “SKK 13D Group”) entered into a Joint Filing Agreement and filed a Schedule 13D with the SEC, disclosing an aggregate 5.8%

ownership stake in the Company.

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.

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.

On December 20, 2019, Mr.

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McCauley, Delynn Copley, Dennis M.

Crowley, III and Nilesh Shah at the Meeting (the “Nomination Notice”).

On December 23, 2019, the SKK 13D Group filed Amendment No.

2 to its Schedule 13D disclosing the Nomination Letter and stating that it sought to engage in discussions with the Company’s management and Board about its composition, the Company’s financial position and other means of enhancing stockholder value, including the potential sale of the Company.

Nynens filed Amendment No.

3 to his Schedule 13D, disclosing and stating the same.

On January 22, 2020, the Company received a letter from one of its stockholders demanding that the Board investigate and bring an action against Mr.

Nynens for breaches of certain restrictive covenants contained in his Separation and Release Agreement, dated May 11, 2018 (the “Nynens Separation Agreement”), including his covenant not to seek future employment with the Company (the “Shareholder Derivative Demand”).

Crowley, III and Nilesh Shah at the Meeting.

On February 11, 2020, after considering the proposals with its financial advisers, the Board responded to SKK and N&W that the expired proposal received on December 10, 2019 would not have been in the best interests of the Company’s stockholders because it undervalues the Company, and did not serve as a basis for further diligence or discussion.

On February 14, 2020, after conducting an investigation, and in response to the Shareholder Derivative Demand, the Company filed a lawsuit (the “Lawsuit”) against Mr.

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 to commit these breaches.

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

On January 22, 2020, the Company received a letter from one of its stockholders demanding that the Board investigate and bring an action against Mr.

Nynens for breaches of certain restrictive covenants contained in his Separation and Release Agreement, dated May 11, 2018, including his covenant not to seek future employment with the Company.

As a result, the Company filed a lawsuit (the “Lawsuit”) against Mr.

Nynens, SKK, and N&W in the Superior Court of New Jersey Monmouth County, on February 14, 2020.

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 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.

Nynens’ 261,631 shares of the Company’s common stock, par value $0.01 per share (“Common Stock”) owned, of record or beneficially, as of the Effective Date, at a price set by calculating the volume-weighted average price of such shares trading on the NASDAQ Global Market for the ten trading days ending on the close of the trading day immediately preceding the Effective Date, and with each party paying for its own fees and expenses.

As of the Effective Date, Mr.

Nynens and the SKK Parties agreed to terminate November 27 Agreement and did so on April 16, 2020.

Further, the SKK Parties agreed to terminate the Joint Filing Agreement, dated November 27, 2019, by and between Mr.

Nynens and the SKK Parties, and did so on April 16, 2020.

Additionally, as of the Effective Date, Mr.

Pursuant to the Settlement Agreement, the Company agreed to voluntarily dismiss the Lawsuit with prejudice, and to purchase all of Mr.

Nynens’ 261,631 shares of the Common Stock owned, of record or beneficially, as of the Effective Date, at fair market value, as defined in the agreement.

Nynens and the SKK Parties terminated the November 27 Agreement and the Joint Filing Agreement.

Additionally, Mr.

Nynens agreed to withdraw the notice of intent to nominate director candidates for election at the 2020 annual meeting of stockholders of the Company, submitted by Mr.

Nynens on December 20, 2019, and to cease all solicitation of proxies and other activities in connection with such annual meeting, and Mr.

Nynens did so on April 16, 2020.

Nynens on December 20, 2019, and to cease all solicitation of proxies and other activities in connection with such annual meeting.

For further information, see the Current Report on Form 8-K filed by the Company on April 17, 2020.

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

The Company incurred approximately $1.8 million in legal and advisory expenses, net during the nine months ended September 30, 2020 related to the above matter.

In connection with this, the Company made certain claims for reimbursement under its insurance policies.

During the three months ended September 30, 2020, reimbursement for insurance proceeds realized totaling $0.1 million has been recorded, while any potential additional insurance proceeds reimbursed under these policies as of September 30, 2020 have not been recorded as they have not been realized.

Interwork Technologies

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

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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.

CDF Group Limited

On November 6, 2020, Wayside Technology UK Holdings Limited (“Buyer”), a private limited company under the laws of England and Wales and a newly-incorporated, wholly-owned subsidiary of the Company, entered into a Share Purchase Agreement (“SPA”) and purchased the entire share capital of CDF Group Limited, a private limited company under the laws of England and Wales, for an aggregate purchase price of approximately £13.3 million (equivalent to approximately $17.4 million USD), subject to certain working capital and other adjustments.

The SPA contains customary English warranties and covenants, a guaranty by the Company of the performance by Buyer of its obligations under the SPA and customary indemnification obligations of Seller, subject to certain customary limitations and insurance caps.

Liquidity and Capital Resources

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.

Our cash and cash equivalents increased to $40.3 million as of September 30, 2020 compared to $15.0 million as of December 31, 2019.

The increase in cash and cash equivalents was primarily the result of $32.5 million of cash and cash equivalents provided by operating activities resulting from a change in payment terms with one of our customers, offset by $3.6 million of cash used to purchase treasury stock, $2.3 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 operating activities for the nine months ended September 30, 2020 was $32.5 million, comprised primarily of net income adjusted for non-cash items of $3.7 million and changes in operating assets and liabilities of $28.8 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.

The impact of this change in payment terms resulted in a reduction of our accounts receivable and corresponding increase in cash of approximately $30 million from the date the program was implemented.

This change in terms also had the impact of reducing our net sales and gross profit by approximately $0.4 million and $0.7 million for the three and nine months ended September 30, 2020, respectively, 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 nine months ended September 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.

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 November 6, 2020, the Company entered into the SPA to purchase CDF Group Limited for an aggregate purchase price of £13.3 million (equivalent to approximately $17.4 million USD), subject to certain working capital and other adjustments.

Net cash and cash equivalents used in financing activities during the nine months ended September 30, 2020 was $5.9 million, primarily comprised of the purchase of treasury stock of $3.6 million and dividend payments on our Common Stock of $2.3 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.

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(“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 June 30, 2020, no borrowings were outstanding under the Credit Facility.

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 (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.

As of September 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.

Foreign Exchange

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Off-Balance Sheet Arrangements

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.

As of September 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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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis