What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2021-03-16 compared with 2020-03-04 · 16 added, 330 removed, 51 unchanged (87% of the section changed)

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

Shares of our Common Stock, par value $0.01, trade on The NASDAQ Global Market under the symbol “WSTG”.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table sets forth information, as of December 31, 2019, regarding securities authorized for issuance upon the exercise of stock options and vesting of restricted stock under all the Company’s equity compensation plans.

The following table sets forth information, as of December 31, 2020, regarding securities authorized for issuance upon the exercise of stock options and vesting of restricted stock under all the Company’s equity compensation plans.

Number of Securities Remaining Available

24 unchanged sentences

December 1, 2020 - December 31, 2020

Includes 1,522 shares surrendered to the Company by employees to satisfy individual tax withholding obligations upon vesting of previously issued shares of Restricted Stock.

(1) Represents 3,416 shares surrendered to the Company by employees to satisfy individual tax withholding obligations upon vesting of previously issued shares of Restricted Stock.

These shares are not included in the Common Stock repurchase program referred to in footnote (3) below.

Average price paid per share reflects the closing price of the Company’s Common Stock on the business date the shares were surrendered by the employee stockholder to satisfy individual tax withholding obligations upon vesting of Restricted Stock or the price of the Common Stock paid on the open market purchase, as applicable.

(2) Average price paid per share reflects the closing price of the Company’s Common Stock on the business date the shares were surrendered by the employee stockholder to satisfy individual tax withholding obligations upon vesting of Restricted Stock or the price of the Common Stock paid on the open market purchase, as applicable.

(3) On December 3, 2014, the Board of Directors of the Company approved an increase of 500,000 shares of Common Stock to the number of shares of Common Stock available for repurchase under its repurchase plans.

2 unchanged sentences

The Common Stock repurchase program does not have an expiration date.

(4) On December 14, 2020, the Board of Directors of the Company approved and the Company entered into a written purchase plan intended to comply with the requirements of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “Plan”).

Purchases involving shares of the Company’s Common Stock under the Plan may take place commencing December 14, 2020, and the Plan shall terminate upon the first to occur of (i) 100,000 shares of Common Stock under this Plan have been purchased, or (ii) the close of the Nasdaq Stock Market on July 30, 2021.

Selected Financial Data

1 unchanged sentence

and its Subsidiaries.

You should read the selected consolidated financial and other data below in conjunction with our Consolidated Financial Statements and the related notes in Part II, Item 8, and with “Item 7.

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

included elsewhere in this Form 10-K.

The following table includes Non-US GAAP measures, for which we provided a reconciliation of net income excluding separation expenses, net of taxes to net income, as well as the related amounts per share, which are the most directly comparable measure of accounting principles generally accepted in the United States of America (“US GAAP”), in the footnotes below.

We use net income excluding separation expense as a supplemental measure of our performance to gain insight into comparison of our businesses profitability when compared to the prior year.

Our use of net income excluding separation expenses, net of taxes has limitations, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under US GAAP.

In addition, other companies, including companies in our industry, might calculate separation expenses net of taxes, or similarly titled measures differently, which may reduce their usefulness as comparative measures.

The selected financial data for the years ended December 31, 2019, 2018, 2017 and 2016 reflects our adoption of ASC 606 –

Revenue from Contracts with Customers (“ASC 606”).

Effective January 1, 2018, we adopted ASC 606 using the full retrospective method, which requires us to recast our historical financial information to reflect the adoption as of the earliest reporting period presented, which was for the year ended December 31, 2016.

There was no impact to gross profit from the adoption.

We have not adjusted the selected financial data for the year ended December 31, 2015.

You should read the selected consolidated financial and other data below in conjunction with our Consolidated Financial Statements and the related notes in Part II, Item 8, and with “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K.

Year Ended December 31,

(Amounts in thousands, except per share amounts)

Reflects Impact of ASC 606 Adoption

Consolidated Statement of Operations Data:

Net sales - (1)

Consolidated Statement of Earnings Data:

Cost of sales

Selling, general and administrative expenses (1)

Separation expenses

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

Acquisition related costs

Amortization and depreciation expense

Income from operations

5 unchanged sentences

shares outstanding:

Net income excluding separation expenses, net of tax (Non-GAAP) - (2)

Diluted earnings per share excluding separation expenses, net of tax (Non-GAAP) - (3)

There was no impact to gross profit from the adoption.

We have not adjusted the selected financial data for the year ended December 31, 2015.

For the year ended December 31, 2019, excludes $0.1 million in expenses related to a separation and release agreement the Company entered into with its former President, Chief Executive Officer and member of the Board on May 24, 2019, consisting of $0.1 million in cash payments.

For the year ended December 31, 2018, excludes $2.0 million in expenses related to a separation and release agreement the Company entered into with its former Chairman and Chief Executive Officer upon his resignation on May 11, 2018, consisting of $1.7 million in accelerated vesting of restricted stock and $0.8 million in cash payments, net of $0.4 million in tax benefits.

See table in Part II, Item 7 of this Form 10K for reconciliation of net income to net income excluding separation expense, net of tax (Non-GAAP).

For the year ended December 31, 2019, excludes $0.01 per share in expenses related to a separation and release agreement the Company entered into with its former President, Chief Executive Officer and member of the Board on May 24, 2019, consisting of $0.01 per share of separation expenses.

For the year ended December 31, 2018, excludes $0.45 per share in expenses related to a separation and release agreement the Company entered into with its former Chairman of the Board, President and Chief Executive Officer on May 11, 2018, consisting of $0.55 per share of separation expenses, net of $0.10 per share in tax benefits.

The selected financial data as of December 31, 2019, 2018 and 2017 reflects our adoption of ASC 606.

We have not adjusted the selected financial data as of December 31, 2016 and 2015.

(1) For the year ended December 31, 2019, includes $0.1 million in expenses related to a separation and release agreement the Company entered into with its former President, Chief Executive Officer and member of the Board on May 24, 2019, consisting of $0.1 million in cash payments.

For the year ended December 31, 2018, includes $2.0 million in expenses related to a separation and release agreement the Company entered into with its former Chairman and Chief Executive Officer upon his resignation on May 11, 2018, consisting of $1.7 million in accelerated vesting of restricted stock and $0.8 million in cash payments.

(Amounts in thousands, except per share amounts)

2 unchanged sentences

Working capital

Total stockholders’

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

The following management’s discussion and analysis of the Company’s financial condition and results of operations should be read in conjunction with the Company’s Consolidated Financial Statements and the Notes thereto.

This discussion and analysis contains, in addition to historical information, forward-looking statements that involve risks and uncertainties.

Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain risks and uncertainties, including those set forth under the heading “Risk Factors”

and elsewhere in this report.

Our Company is an IT channel company, primarily selling software and other third-party IT products and services through two reportable operating segments.

Through our “Lifeboat Distribution”

segment we sell products and services to corporate resellers, value added resellers (VARs), consultants and systems integrators worldwide, who in turn sell these products to end users.

Through our “TechXtend Segment”

we act as a value-added reseller, selling computer software and hardware developed by others and provide technical services directly to end user customers in the USA and Canada.

We offer an extensive line of products from leading software vendors and tools for virtualization/cloud computing, security,

networking, storage and infrastructure management, application lifecycle management and other technically sophisticated domains as well as computer hardware.

We market these products through creative marketing communications, including our web sites, local and on-line seminars, webinars, social media, direct e-mail, and printed materials.

We have subsidiaries in the United States, Canada and the Netherlands, through which sales are made.

Factors Influencing Our Financial Results

We derive most 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, product lifecycle competitive, and demand characteristics of the products which we are authorized to distribute.

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.

Our sales are also impacted by external factors such as levels of IT spending and customer demand for products we distribute.

We sell in a competitive environment where gross product margins have historically declined due to competition and changes in product mix towards products where no delivery of a physical product is required.

In addition, we grant discounts, allowances, and rebates to certain customers, which may vary from period to period, based on volume, payment terms and other criteria.

To date, we have been able to implement cost efficiencies such as the use of drop shipments, electronic ordering (“EDI”) and other capabilities to be able to operate our business profitably as gross margins have declined.

We evaluate the profitability of our business based on return on invested capital and effective margin (see management’s discussion and analysis below).

Selling, general and administrative expenses are comprised mainly of employee salaries, commissions and other employee related expenses, facility costs, costs to maintain our IT infrastructure, public company compliance costs and professional fees.

We monitor our level of accounts payable, inventory turnover and accounts receivable turnover which are measures of how efficiently we utilize capital in our business.

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, 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.

If sales do not meet expectations in any given quarter, operating results may be materially adversely affected.

Dividend Policy and Share Repurchase Program.

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

Total dividends paid and the dollar value of shares repurchased were $3.1 and $0.1 million for the year ended December 31, 2019, respectively, and $3.1 and $1.0 million for the year ended December 31, 2018, respectively.

The payment of future dividends 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.

Stock Volatility.

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, 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.

Financial Overview

Net sales increased 15%, or $27.4 million, to $208.8 million for the year ended December 31, 2019, compared to $181.4 million for the same period in 2018.

Gross profit increased 11%, or $3.1 million, to $30.0 million for the year ended December 31, 2019, compared to $26.9 million for the same period in 2018.

Selling, general and administrative (“SG&A”) expenses increased 5%, or $1.1 million, to $21.4 million for the year ended December 31, 2019, compared to $20.3 million for the same period in 2018.

Separation expenses were $0.1 million for the year ended December 31, 2019 compared to $2.4 million for the same period in 2018.

Net income increased 92%, or $3.2 million, to $6.8 million for the year ended December 31, 2019 compared to $3.5 million for the same period in 2018.

Weighted Average diluted shares outstanding increased by 1% from the prior year.

Income per diluted share increased 94% to $1.51 for the year ended December 31, 2019 compared to $0.78 for the same period in 2018.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s Consolidated Financial Statements that have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).

The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, investments, intangible assets, income taxes, stock-based compensation, contingencies and litigation.

The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may differ from these estimates.

The Company believes the following critical accounting policies used in the preparation of its Consolidated Financial Statements affect its more significant judgments and estimates.

The Company utilizes judgment regarding performance obligations inherent in the products for services it sells including, whether ongoing maintenance obligations performed by third party vendors are distinct from the related software licenses, and allocation of sales prices among distinct performance obligations.

These estimates require significant judgment to determine whether the software’s functionality is dependent on ongoing maintenance or if substantially all functionality is available in the original software download.

We also use judgment in the allocation of sales proceeds among performance obligations, utilizing observable data such as stand-alone selling prices, or market pricing for similar products and services.

Allowance for Accounts Receivable

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments.

Management determines the estimate of the allowance for uncollectible accounts receivable by considering a number of factors, including 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.

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

If actual sales returns are greater than estimated by management, additional expense may be incurred.

Accounts Receivable –

The Company’s accounts receivable long-term are discounted to their present value at prevailing market rates at the time of sale.

In doing so, the Company considers competitive market rates and other relevant factors.

Inventory Allowances

The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.

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

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

In the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.

Share-Based Payments

Under the fair value recognition provision, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period.

We make certain assumptions in order to value and expense our various share-based payment awards.

In connection with our restricted stock programs we record the forfeitures when they occur.

We review our valuation assumptions periodically and, as a result, we may change our valuation assumptions used to value stock-based awards granted in future periods.

Such changes may lead to a significant change in the expense we recognize in connection with share-based payments.

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, “Leases”

("ASU 2016-02").

ASU 2016-02 supersedes the lease guidance under FASB ASC Topic 840, Leases, resulting in the creation of FASB ASC Topic 842, Leases.

ASU 2016-02 requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term from operating leases.

For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities.

In transition, lessees and lessors were originally required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach.

In July 2018, FASB issued ASU 2018-11, Targeted Improvements.

This update still requires modified retrospective transition;

however, it adds the option to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment in the current period instead of at the beginning of the earliest period presented.

Under this option, comparative periods presented in the financial statements in which the new lease standard is adopted will continue to be presented in accordance with prior guidance.

The Company adopted the new accounting standard on January 1, 2019 using the modified retrospective transition option.

The new standard provides optional practical expedients in transition, which the Company has elected as a package permitting the Company to not reassess under the new standard prior conclusions regarding lease identification, lease classification and initial direct costs.

Also, in accordance with the new standard, the Company has elected in transition and for an ongoing basis not to apply the recognition requirements for all short-term leases.

The adoption of the new standard had a material effect on the Company’s financial statements, with the most significant effects of adoption relating to (1) the recognition of new right-of-use assets and lease liabilities on its balance sheet for real estate operating leases;

and (2) providing significant new disclosures about its leasing activities.

Upon adoption, the Company recognized operating lease liabilities of approximately $3.0 million based on the present value of the remaining minimum rental payments for existing operating leases.

The Company also recognized corresponding right-

of-use assets, net of lease incentives of approximately $2.2 million.

There was no impact to stockholders’

equity from the adoption.

In June 2016, the FASB issued Accounting Standards Update No.

2016-13, “Financial Instruments - Credit Losses (Topic 326)”

("ASU 2016-13").

ASU 2016-13 revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded.

Originally, ASU 2016-13 was effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted.

In November 2019, FASB issued ASU 2019-10, “

Financial Instruments –

Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).”

This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

The Company is planning to adopt this standard in the first quarter of fiscal 2023.

The Company is currently evaluating the potential effects of adopting the provisions of ASU No.

2016-13 on its Consolidated Financial Statements, particularly its recognition of allowances for accounts receivable.

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”

(“ASU 2018-02”), which permits the reclassification of stranded tax effects resulting from the Tax Cuts and Jobs Act (the “TCJA”

or “U.S.

tax reform”) from accumulated other comprehensive income (loss) to retained earnings.

The new standard became effective for the Company beginning with the first quarter of 2019.

The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.

In June 2018, the FASB issued ASU 2018-07, “Compensation —

Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting”

(“ASU 2018-07”), which aligns the measurement and classification guidance for share-based payments to nonemployees with that for employees, with certain exceptions.

It expands the scope of ASC 718 to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in the entity’s own operations and supersedes the guidance in ASC 505-50.

The ASU retains the existing cost attribution guidance, which requires entities to recognize compensation cost for nonemployee awards in the same period and in the same manner (i.e., capitalize or expense) they would if they paid cash for the goods or services, but it moves the guidance to ASC 718.

The new standard became effective for the Company beginning with the first quarter of 2019.

The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.

In July 2018, the FASB issued ASU 2018-09 –

Codification Improvements, which facilitates amendments to a variety of topics to clarify, correct errors in, or make minor improvements to the accounting standards codification.

The effective date of the standard is dependent on the facts and circumstances of each amendment.

Some amendments do not require transition guidance and will be effective upon the issuance of this standard.

A majority of the amendments in this standard became effective for the Company beginning with the first quarter of 2019.

The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.

In December 2019, the FASB issued ASU 2019-12, “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes”

as part of its initiative to reduce complexity in the accounting standards.

The standard eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences.

The standard also clarifies and simplifies other aspects of the accounting for income taxes.

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

Early adoption is permitted.

The Company is currently evaluating the impact that this guidance will have upon its financial position and results of operations, if any.

Results of Operations

The following table sets forth for the years indicated the percentage of net sales represented by selected items reflected in the Company’s Consolidated Statements of Earnings.

The year-to-year comparison of financial results is not necessarily indicative of future results:

Year ended December 31,

Cost of sales

Selling, general and administrative expenses

Separation expenses

Income from operations

Income before income taxes

Income tax provision

Non-GAAP Financial Measures

Our management monitors several financial and non-financial measures and ratios on a regular basis in order to track the progress of our business.

We believe that the most important of these measures and ratios include net sales, adjusted gross billings, gross profit, net income, net income excluding separation expenses, net of taxes, adjusted EBITDA, gross profit as a percentage of adjusted gross billings and adjusted EBITDA as a percentage of gross profit.

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.

Year ended December 31,

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

Costs of sales related to Software –

security and highly interdependent with support and maintenance, support or other services

Adjusted gross billings

We define adjusted gross billings as net sales in accordance with US GAAP, adjusted for the cost of sales related to Software –

security and highly interdependent with support and maintenance, support and other services.

We provided a reconciliation of adjusted gross billings to net sales, which is the most directly comparable US GAAP measure.

We use adjusted gross billings of product and services as a supplemental measure of our performance to gain insight into the volume of business generated by our business, and to analyze the changes to our accounts receivable and accounts payable.

Our use of adjusted gross billings of product and services as analytical tools has limitations, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under US GAAP.

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.

Reconciliation of net income to net income excluding

Year ended December 31,

separation expenses, net of tax (Non-GAAP):

Separation expenses

Income tax benefits related to separation expenses

Net income excluding separation expenses, net of taxes

Diluted earnings per share reconciled to diluted earnings per share

Year ended December 31,

excluding separation expenses, net of taxes (Non-GAAP):

Diluted earnings per share

Separation expenses

Income tax benefit related to separation expenses

Diluted earnings per share excluding separation expenses, net of taxes

We define net income excluding separation expenses, net of taxes, as net income, plus separation expenses, less the income tax benefit attributable to the separation expenses.

We provided a reconciliation of net income excluding separation expenses, net of taxes, to net income, as well as the related amounts per share, which are the most directly comparable US GAAP measures.

We use net income excluding separation expense, net of taxes as a supplemental measure of our performance to gain insight into comparison of our businesses profitability when compared to the prior year.

In addition, other companies, including companies in our industry, might calculate separation expenses, separation expenses net of taxes, or similarly titled measures differently, which may reduce their usefulness as comparative measures.

Net income reconciled to adjusted EBITDA:

Provision for income taxes

Depreciation and amortization

Interest expense

Share-based compensation

Separation expenses

Adjusted EBITDA

We define adjusted EBITDA, as net income, plus provision for income taxes, depreciation, amortization, share-based compensation, interest and separation expenses.

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

We provided a reconciliation of adjusted EBITDA to net income, which is the most directly comparable US GAAP measure.

We use adjusted EBITDA as a supplemental measure of our performance to gain insight into our businesses profitability when compared to the prior year and our competitors.

Adjusted EBITDA is also a component to our financial covenants in our credit facility.

Our use of adjusted EBITDA has limitations, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under US GAAP.

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.

Key Financial Metrics

Year ended December 31,

Adjusted gross billings (Non-GAAP)

Gross profit - Lifeboat Distribution

Gross profit - TechXtend

Net income excluding Separation expense (Non-GAAP)

Adjusted EBITDA (Non-GAAP)

Gross margin % - Adjusted gross billings (Non-GAAP)

Effective margin % - Adjusted EBITDA (Non-GAAP)

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

During the year ended December 31, 2019, gross profit increased 11%, or $3.1 million, to $30.0 million compared to $26.9 million for the same period in 2018 while effective margin increased 70 basis points to 34.8% compared to 34.1% for the same period in 2018, reflecting the scalability in our business model.

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

Net sales for the year ended December 31, 2019 increased 15%, or $27.3 million, to $208.8 million compared to $181.4 million for the same period in 2018.

Adjusted gross billings, a non-GAAP financial measure, for the year ended December 31, 2019 increased 18%, or $91.0 million, to $601.0 million compared to $510.0 million for the same period in 2018.

Net sales in our Lifeboat Distribution segment for the year ended December 31, 2019 increased 18%, or $30.0 million, to $193.6 million compared to $163.6 million for the same period in 2018.

The increase in our Lifeboat Distribution segment was primarily due to growth in sales penetration for several of our more significant product lines, as well as incremental sales from several new product lines.

Adjusted gross billings, a non-GAAP financial measure, for the Lifeboat Distribution segment for the year ended December 31, 2019 increased 23%, or $105.7 million, to $575.4 million compared to $469.7 million for the same period in 2018.

Net sales in our TechXtend segment for the year ended December 31, 2019 decreased 15%, or $2.7 million, to $15.2 million compared to $17.9 million for the prior year.

Sales in our TechXtend segment may vary significantly from year to year based on the timing of IT spending decisions by our larger customers and internal capital allocation decisions regarding the amount of capital we allocate to the extended payment program.

Adjusted gross billings, a non-GAAP financial measure, for the TechXtend segment for the year ended December 31, 2019 decreased 36%, or $14.7 million, to $25.6 million compared to $40.3 million for the same period in 2018.

During the year ended December 31, 2019, we relied on two key customers for a total of 42% of our total net sales.

One major customer accounted for 26% and the other for 16%, of our total net sales during the year ended December 31, 2019.

These same customers accounted for 43% and 12%, of total net accounts receivable as of December 31, 2019.

Gross profit for the year ended December 31, 2019 increased 11%, or $3.1 million, to $30.0 million compared to $26.9 million for the same period in 2018.

Lifeboat Distribution segment gross profit for the year ended December 31, 2019 increased 14%, or $3.4 million, to $26.8 million compared to $23.4 million for the same period in 2018 due to higher net sales discussed above, which were partially offset by the impact of lower gross margin as a percentage of net sales.

TechXtend segment gross profit for the year ended December 31, 2019 decreased 8%, or $0.3 million, to $3.2 million compared to $3.5 million for the same period in 2018 due to the decreased level of net sales discussed above.

Vendor rebates and discounts for the year ended December 31, 2019 were $3.3 million compared to $2.4 million for the same period in 2018.

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 year ended December 31, 2019 increased 5%, or $1.1 million, to $21.4 million, compared to $20.3 million for the same period in 2018.

The increase in SG&A expenses is primarily due to increased employee related costs including salary, commission and bonus expense to support the increased sales on existing and new vendor lines, partially offset by decreased stock compensation expense.

SG&A expenses as a percentage of net sales were 10.3% for the year ended December 31, 2019 compared to 12.0% for the same period in 2018.

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 information technology and marketing, while monitoring SG&A expenses closely.

Separation Expense

Separation expense for the year ended December 31, 2019 was $0.1 million related to the resignation of our former President, Chief Executive Officer and member of the Board.

Separation expense for the year ended December 31, 2018 was $2.4 million related to the resignation of our former Chairman, President and Chief Executive Officer, consisting of a $1.7 million charge for accelerated vesting of restricted stock and $0.8 million in cash payments to be made over twelve months.

For the year ended December 31, 2019, the Company recorded a provision for income taxes of $2.3 million, or 25.0% of income before taxes, compared to $1.6 million, or 30.9% of income before taxes for the same period in 2018.

Liquidity and Capital Resources

Our cash and cash equivalents increased by $0.1 million to $15.0 million at December 31, 2019 from $14.9 million at December 31, 2018.

The increase in cash was primarily the result of cash provided by operating activities of $3.2 million offset, in part, by use of cash for dividends of $3.1 million.

Net cash provided by operating activities for the year ended December 31, 2019 was $3.2 million, comprised of net income adjusted for non-cash items of $7.9 million, less cash used in changes in operating assets and liabilities of $4.7 million.

The net cash used in changes in operating assets and liabilities in 2019 were the result of increases in accounts receivables due to increased sales to a large customer with longer than average payment terms, partially offset by increases in accounts payable required to support the business and utilization of a prior year vendor prepayment as part of a distribution agreement.

Net cash provided by operating activities for the year ended December 31, 2018 was $13.9 million, comprised of net income adjusted for non-cash items of $5.9 million, plus cash provided by changes in operating assets and liabilities of $8.0 million.

The net cash provided by changes in operating assets and liabilities in 2018 was primarily due to a decrease in net working capital (accounts receivable, inventory, and vendor prepayments less accounts payable) required to support our business.

The decreased working capital is primarily driven by $3.7 million utilization in 2018 of a prior year vendor prepayment as part of a distribution agreement.

Our accounts receivable –

long term decreased by approximately $4.3 million during 2018 due to collection of receivables with extended payment term sales.

Net cash used in investing activities for the year ended December 31, 2019 was $0.1 million compared to $0.3 million for the same period in 2018.

Net cash used in investing activities primarily represented capital expenditures for equipment and leasehold improvements.

Net cash used in financing activities for the year ended December 31, 2019 was $3.2 million, which was comprised of $3.1 million of dividend payments on our Common Stock and $0.1 million for the purchases of treasury shares of our Common Stock.

Net cash used in financing activities for the year ended December 31, 2018 of $4.1 million was comprised of $3.1 million of dividend payments on our Common Stock, and $1.0 million for the purchases of treasury shares of our Common Stock.

On December 3, 2014, the Board of Directors of the Company approved an increase of 500,000 shares of Common Stock to the number of shares of Common Stock available for repurchase under its repurchase plans.

On February 2, 2017, the Board of Directors approved an increase of 500,000 shares of Common Stock to the number of shares of Common Stock available for repurchase under its repurchase plans.

The Company is authorized to purchase 547,488 shares of Common Stock as of December 31, 2019.

The Common Stock repurchase program does not have an expiration date.

As of December 31, 2019, we held 778,807 shares of our Common Stock in treasury at an average cost of $16.99 per share.

As of December 31, 2018, we held 788,006 shares of our Common Stock in treasury at an average cost of $17.06 per share.

We intend to hold the repurchased shares in treasury for general corporate purposes, including issuances under various stock plans.

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, Second Amended and Restated Revolving Credit Loan Note, Second Amended and Restated Security Agreement and Second Amended and Restated Pledge and Security Agreement.

The Credit Facility, which is 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.

At December 31, 2019 and 2018, the Company had no borrowings outstanding under the Credit Facility.

The Company incurred $0.1 million of interest expense, related to the Credit Facility for the years ended December 31, 2019 and 2018, respectively.

Our current and anticipated use of cash and cash equivalents is to fund working capital, operational expenditures, the stock repurchase program and dividends, if any, declared by the Board of Directors.

Subsequent Events

By letter dated January 22, 2020, a shareholder of the Company demanded that the Board of Directors investigate and bring an action against the Company’s former Chairman, President and Chief Executive Officer, Simon Nynens, for his breaches of certain restrictive covenants contained in the separation agreement he entered into with the Company on or about May 11, 2018.

Following receipt of the shareholder demand, the Company filed a lawsuit against Mr.

Nynens, Shepherd Kaplan Krochuk, LLC (“SKK”), and North & Webster SSG, LLC (“N&W,”

and together with SKK, the “N&W Group”) on February 14, 2020, in the Superior Court of New Jersey Monmouth County.

The Company’s complaint asserts claims against Mr.

Nynens for his breaches of his separation agreement with the Company and claims for tortious interference against the N&W Group for inducing Mr.

Nynens to commit those breaches.

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

Nynens and the N&W Group.

The litigation is in its early stages.

Previously, the Company had received unsolicited acquisition proposals from the N&W Group to acquire all of the outstanding shares of common stock of the Company.

The Company received the most recent unsolicited acquisition proposal from the N&W Group on December 10, 2019, and that proposal expired on its own terms on December 16, 2019.

Prior to that, Mr.

Nynens entered into an agreement with the N&W Group on November 27, 2019, granting SKK an irrevocable proxy to vote his shares of our common stock in favor of any acquisition proposal by SKK, against any third-party acquisition, and as directed by SKK with respect to the election of directors nominated by persons other than the Company.

On December 20, 2019, Mr.

Nynens nominated four individuals for election to our Board of Directors at the 2020 annual meeting of stockholders.

The Company and its Board of Directors have hired financial advisors and legal counsel to advise on resolution of the matters.

The ultimate outcome of these matters and related costs cannot be determined at this time, and accordingly no provision has been recorded for estimated expenses to resolve the matter.

Contractual Obligations as of December 31, 2019

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

Foreign Exchange

The Company’s foreign business is subject to changes in demand or pricing resulting from fluctuations in currency exchange rates or other factors.

We are subject to fluctuations primarily in the Canadian and Euro Dollar-to-U.S.

Dollar exchange rate.

Off-Balance Sheet Arrangements

As of December 31, 2019, 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

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

Financial Statements and Supplementary Data

See Index to Consolidated Financial Statements at Item 15(a).

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Total stockholders’ equity

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-K

Item 5. Market for Registrant’s Common Equity