What changed in this filing

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Item 1. Financial Statements

2021-05-06 compared with 2020-11-12 · 167 added, 278 removed, 284 unchanged (61% of the section changed)

4 unchanged sentences

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

September 30,

Current assets:

2 unchanged sentences

Inventory, net

Vendor prepayments

Vendor prepayments and advances

Prepaid expenses and other current assets

11 unchanged sentences

Lease liability, net of current portion

Non-current liabilities

Deferred income tax liabilities

9 unchanged sentences

Retained earnings

Accumulated other comprehensive loss

Accumulated other comprehensive income (loss)

Total stockholders’ equity

5 unchanged sentences

(Amounts in thousands, except per share data)

Nine months ended

Three months ended

September 30,

Cost of sales

2 unchanged sentences

Acquisition related costs

Amortization and depreciation expense

Income from operations

1 unchanged sentence

Interest, net

Foreign currency transaction gain (loss)

Foreign currency transaction (loss) gain

Income before provision for income taxes

10 unchanged sentences

(Amounts in thousands)

Nine months ended

Three months ended

September 30,

Other comprehensive (loss) income:

Other comprehensive income:

Foreign currency translation adjustments

Other comprehensive (loss) income

Other comprehensive income (loss)

Comprehensive income

5 unchanged sentences

Comprehensive

Income (Loss)

Balance at January 1, 2021

4 unchanged sentences

Treasury shares repurchased

Balance at April 1, 2020

Translation adjustment

Dividends paid

Share-based compensation expense

Restricted stock grants (net of forfeitures)

Treasury shares repurchased

Balance at July 1, 2020

Translation adjustment

Dividends paid

Share-based compensation expense

Restricted stock grants (net of forfeitures)

Treasury shares repurchased

Balance at September 30, 2020

Balance at March 31, 2021

Comprehensive

Income (Loss)

Balance at January 1, 2020

4 unchanged sentences

Treasury shares repurchased

Balance at April 1, 2019

Translation adjustment

Dividends paid

Share-based compensation expense

Restricted stock grants (net of forfeitures)

Treasury shares repurchased

Balance at July 1, 2019

Translation adjustment

Dividends paid

Share-based compensation expense

Restricted stock grants (net of forfeitures)

Treasury shares repurchased

Balance at September 30, 2019

Balance at March 31, 2020

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

3 unchanged sentences

(Amounts in thousands)

Nine months ended

September 30,

Three months ended

Cash flows from operating activities

1 unchanged sentence

Depreciation and amortization expense

Provision for doubtful accounts

Deferred income tax expense

3 unchanged sentences

Change in fair value of contingent earn-out consideration

Changes in operating assets and liabilities:

Changes in operating assets and liabilities, net of acquisitions:

Accounts receivable

7 unchanged sentences

Purchase of equipment and leasehold improvements

Payment for acquisition, net of cash acquired

Net cash and cash equivalents used in investing activities

Vendor advances

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

Cash flows from financing activities

3 unchanged sentences

Dividends paid

Payments of deferred financing costs

Net cash and cash equivalents used in financing activities

Effect of foreign exchange rate on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of period

Cash and cash equivalents at end of period

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Supplementary disclosure of cash flow information:

Income taxes paid

Interest paid

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

2 unchanged sentences

Notes to Condensed Consolidated Financial Statements

September 30, 2020

March 31, 2021

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

24 unchanged sentences

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

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

Simplifying the Accounting for Income Taxes” as part of its initiative to reduce complexity in the accounting standards.

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

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

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

Early adoption is permitted.

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

Foreign Currency Translation:

1 unchanged sentence

Foreign currency transaction gains and losses are recorded as income or expenses as amounts are settled.

The net sales from our foreign operations for the three months ended September 30, 2020 and 2019 were $5.0 million and $4.2 million, respectively.

The net sales from our foreign operations for the nine months ended September 30, 2020 and 2019 were $16.6 million and $13.6 million, respectively.

The net sales from our foreign operations for the three months ended March 31, 2021 and 2020 were $ 16.7 million and $ 4.7 million, respectively.

Comprehensive Income:

1 unchanged sentence

Revenue Recognition:

The core principle of the revenue recognition criteria is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services.

This principle is achieved through applying the following five-step approach:

Identification of the contract, or contracts, with a customer — A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and, (iii) we determine that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.

We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

The Company considers customer purchase orders, which in some cases are governed by master agreements or general terms and conditions of sale, to be contracts with customers.

All revenue is generated from contracts with customers.

Identification of the performance obligations in the contract — Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract.

To the extent a contract includes multiple promised goods or services, we apply judgment to determine whether promised goods or services are capable of being distinct in the context of the contract.

If these criteria are not met the promised goods or services are accounted for as a single performance obligation.

Determination of the transaction price —The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer, net of sales taxes collected from customers, which are subsequently remitted to governmental entities.

Net sales are recorded net of estimated discounts, rebates, and returns.

Vendor rebates are recorded when earned as a reduction to cost of sales or inventory, as applicable.

Allocation of the transaction price to the performance obligations in the contract — If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation.

Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price, or SSP, basis.

We determine SSP based on the price at which the performance obligation is sold separately.

The Company’s revenues primarily result from the sale of various technology products and services, including third-party products, third-party software and third-party maintenance, software support and services.

The Company recognizes revenue as control of the third-party products and third-party software is transferred to customers, which generally happens at the point of shipment or fulfilment and at the point that our customer and vendor accept the terms and conditions of the arrangement for third-party maintenance, software support and services.

The Company has contracts with certain customers where the Company’s performance obligation is to arrange for the products or services to be provided by another party.

In these arrangements, as the Company assumes an agency relationship in the transaction, revenue is recognized in the amount of the net fee associated with serving as an agent.

These arrangements primarily relate to third party maintenance, cloud services and certain security software whose intended functionality is dependent on third party maintenance.

The Company allows its customers to return product for exchange or credit subject to certain limitations.

A liability is recorded at the time of sale for estimated product returns based upon historical experience and an asset is recognized for the amount expected to be recorded in inventory upon product return.

The Company also provides rebates and other discounts to certain customers which are considered variable consideration.

A provision for customer rebates and other discounts is recorded as a reduction of revenue at the time of sale based on an evaluation of the contract terms and historical experience.

The Company considers shipping and handling activities as costs to fulfill the sales of products.

Shipping revenue is included in net sales when control of the product is transferred to the customer, and the related shipping and handling costs are included in cost of products sold.

Taxes imposed by governmental authorities on the Company’s revenue producing activities with customers, such as sales taxes and value added taxes, are excluded from net sales.

The Company disaggregates its operating revenue by segment, geography and timing of revenue recognition, which the Company believes provides a meaningful depiction of the nature of its revenue.

See segment Note 16.

Hardware and software products sold by the Company are generally delivered via shipment from the Company's facilities, drop shipment directly from the vendor, or by electronic delivery of keys for software products.

The majority of the Company’s business involves shipments directly from its vendors to its customers, in these transactions, the Company is generally responsible for negotiating price both with the vendor and customer, payment to the vendor, establishing payment terms with the customer, product returns, and has risk of loss if the customer does not make payment.

As the principal with the customer, the Company recognizes revenue upon receiving notification from the vendor that the product was shipped.

Control of software products is deemed to have passed to the customer when they acquire the right to use or copy the software under license as substantially all product functionality is available to the customer at the time of sale.

The Company performs an analysis of the number of days of sales in-transit to customers at the end of each reporting period based on an analysis of commercial delivery terms that include drop-shipment arrangements.

This analysis is the basis upon which the Company estimates the amount of net sales in-transit at the end of the period and adjusts revenue and the related costs to reflect only what has been delivered to the customer.

Changes in delivery patterns may result in a different number of business days estimated to make this adjustment.

The Company also performs a weighted average analysis of the estimated number of days between order fulfillment and beginning of the renewal term for term licenses recorded on a gross basis, and a deferral estimate is recorded for term license renewals fulfilled prior to commencement date.

Generally, software products are sold with accompanying third-party delivered software assurance, which is a product that allows customers to upgrade, at no additional cost, to the latest technology if new capabilities are introduced during the period that the software assurance is in effect.

The Company evaluates whether the software assurance is a separate performance obligation by assessing if the third-party delivered software assurance is critical or essential to the core functionality of the software itself.

This involves considering if the software provides its original intended functionality to the customer without the updates, if the customer would ascribe a higher value to the upgrades versus the up-front deliverable, if the customer would expect frequent intelligence updates to the software (such as updates that maintain the original functionality), and if the customer chooses to not delay or always install upgrades.

If the Company determines that the accompanying third-party delivered software assurance is critical or essential to the core functionality of the software license,

the software license and the accompanying third-party delivered software assurance are recognized as a single performance obligation.

The value of the product is primarily the accompanying support delivered by a third party and therefore the Company is acting as an agent in these transactions and recognizes them on a net basis at the point the associated software license is delivered to the customer.

The Company sells cloud computing solutions that utilize third-party vendors to enable customers to access data center functionality in a cloud-based solution, including storage, computing and networking and access to software in the cloud that enhances office productivity, provides security or assists in collaboration.

The Company recognizes revenue for cloud computing solutions for arrangements with one-time invoicing to the customer at the time of invoice on a net basis as the Company is acting as an agent in the transaction.

For monthly subscription-based arrangements, the Company is acting as an agent in the transaction and recognizes revenue as it invoices the customer for its monthly usage on a net basis.

For software licenses where the accompanying third-party delivered software assurance is not critical or essential to the core functionality, the software assurance is recognized as a separate performance obligation, with the associated revenue recognized on a net basis at the point the related software license is delivered to the customer.

The Company also sells some of its products and services as part of bundled contract arrangements containing multiple deliverables, which may include a combination of products and services.

For each deliverable that represents a distinct performance obligation, total arrangement consideration is allocated based upon the standalone selling prices (“SSP”) of each performance obligation.

SSP is determined based on the price at which the performance obligation is sold separately.

If the standalone selling price is not observable through established standard prices, we use judgement and estimate the standalone selling price considering available information such as market pricing and pricing related to similar products.

Contracts with a significant financing component are discounted to their present value at contract inception and accreted up to the expected payment amounts.

These contracts generally offer customers extended payment terms of up to three years.

Recognition of revenue when, or as, we satisfy a performance obligation — The Company recognizes revenue when its performance obligations are complete, and control of the specified goods or services pass to the customer.

The Company considers the following indicators in determining when control passes to the customer:

(i) the Company has a right to payment for the product or service (ii) the customer has legal title to the product, (iii) the Company has transferred physical possession of the product (iv) the Customer has the significant risk and rewards of ownership of the product and (v) the customer has

accepted the product.

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

Disaggregation of Revenue

We generate revenue from the re-sale of third-party software licenses, subscriptions, hardware, and related service contracts.

Finance fees related to sales are classified as interest income.

The following table depicts the disaggregation of revenue according to revenue type and is consistent with how we evaluate our financial performance:

Nine months ended

Three months ended

September 30,

Hardware, software and other products

Software - security & highly interdependent with support

Maintenance, support & other services

Hardware, software and other products - Hardware product consists of sales of hardware manufactured by third parties.

Hardware product is delivered from our warehouse or drop shipped directly from the vendor.

Revenue from our hardware products is recognized on a gross basis, with the selling price to the customer as net sales, and the cost of the related product as cost of sales, upon transfer of control to the customer, as the Company is acting as a principal in the transaction.

Control is generally deemed to have passed to the customer upon transfer of title and risk of ownership.

Software products consist of sales of perpetual and term software licenses for products developed by third party vendors, which are distinct from related maintenance and support.

Software licenses are delivered via electronic license keys provided by the vendor to the end user.

Revenue from the sale of software products is recognized on a gross basis, with the selling price to the customer as net sales, and the cost of the related product as cost of sales, upon transfer of control to our customers as the Company is a principal in the transaction.

Control is deemed to have passed to the customer when they acquire the right to use or copy the software under license as substantially all product functionality is available to the customer at the time of sale.

Other products include marketing revenues that are recorded on a gross basis as the Company is a principal in the arrangement.

Software maintenance and support, commonly known as software assurance or post contract support, consists of software updates and technical support provided by the software vendor to the licensor over a period.

In cases where the software maintenance is distinct from the related software license, software maintenance is accounted for as a separate performance obligation.

In cases where the software maintenance is not distinct from the related software license, it is accounted for as a single performance obligation with the related license.

We utilize judgement in determining whether the maintenance is distinct from the software itself.

This involves considering if the software provides its original intended functionality without updates, or is dependent on frequent, or continuous updates to maintain its functionality.

See Allocation of the transaction price to the performance obligations in the contract above for a discussion of the allocation of maintenance and support costs when they are distinct from the related software licenses and Software - security and highly interdependent with support below for a discussion of maintenance and support costs when they are not distinct from the related software license.

Software - security and highly interdependent with support - Software - security and highly interdependent with support consists of sales of security subscriptions and other licensed software products whose functionality is highly interdependent with, and therefore not distinct from, related software maintenance.

Delivery of the software license and related support over time is considered a single performance obligation of the third-party vendor for these products.

The Company is an agent in these transactions, with revenue being recorded on a net basis when its performance obligation of processing a valid order between the supplier and customer contracting for the services is complete.

Maintenance, support and other services revenue - Maintenance, support and other services revenue consists of third-party post-contract support that is not critical or essential to the core functionality of the related licensed software, and, to a lesser extent, from third-party professional services, software as a service, and cloud subscriptions.

Revenue from maintenance, support and other service revenues is recognized on a net basis, upon fulfillment of an order to the customer,

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

Costs to obtain and fulfill a contract - We pay commissions and related payroll taxes to sales personnel when customers are invoiced.

The Company records freight billed to its customers as net sales and the related freight costs as cost of sales when the underlying product revenue is recognized.

For freight not billed to its customers, the Company records the freight costs as cost of sales.

The Company's typical shipping terms result in shipping being performed before the customer obtains control of the product.

The Company considers shipping to be a fulfillment activity and not a separate performance obligation.

The Company pays commissions and related payroll taxes to sales personnel when customers are invoiced.

These costs are recorded as selling general and administrative expenses in the period earned as all our performance obligations are complete within a short window of processing the order.

Contract balances - Accounts receivable is recorded at the invoiced amount, net of an allowance for doubtful accounts.

A receivable is recognized in the period we deliver goods or provide services or when our right to consideration is unconditional.

Payment terms on invoiced amounts are typically 30-75 days.

The balance of accounts receivable, net of allowance for doubtful accounts as of September 30, 2020 and December 31, 2019 is presented in the accompanying Consolidated Balance Sheets.

Accounts receivable-long-term result from product sales with extended payment terms that are discounted to their present values at the Company’s estimates of prevailing market rates at the time of the sale.

The Company has determined that these amounts do not represent variable consideration as the amount earned is fixed.

In subsequent periods, the accounts receivable is increased to the amounts due and payable by the customers through the accretion of interest income on the unpaid accounts receivable due in future years.

The amounts due under these long-term accounts receivable due within one year are reclassified to the current portion of accounts receivable and are shown net of reserves.

As our revenues are generally recognized at a point in time in the same period as they are billed, we have no deferred revenue balances.

Provisions for doubtful accounts including long-term accounts receivable and returns are estimated based on historical write offs, sales returns and credit memo analysis which are adjusted to actual on a periodic basis.

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

Principal versus agent considerations – The Company determines whether it is acting as a principal or agent in a transaction by assessing whether it controls a good or service prior to it being transferred to a customer, with control being defined as having the ability to direct the use of and obtain the benefits from the asset.

The Company considers the following indicators, among others, in making the determination:

1) the Company is primarily responsible for fulfilling the promise to provide the promised good or service, 2) the Company has inventory risk, before or after the specified good or service has been transferred to the customer, and 3) the Company has discretion in establishing price for the specified good or service.

Generally, we conclude that we are a principal in transactions where software or hardware products containing their core functionality are delivered to the customer at the time of sale and are agents in transactions where we are arranging for the provision of future performance obligations by a third party.

As we enter into distribution agreements with third-party service providers, we evaluate whether we are acting as a principal or agent for each product sold under the agreement based on the nature of the product or service, and our performance obligations.

Products for which there are significant ongoing third-party performance obligations include software maintenance, which includes periodic software updates and support, security software that is highly interdependent with maintenance, software as a service, cloud and third-party professional services.

Sales of hardware, software and other products where we are a principal are recorded on a gross basis with the selling price to the customer recorded as sales and the cost of the product or software recorded as cost of sales.

Sales where we are acting as an agent are recognized on a net basis at the date our performance obligations are complete.

Under net revenue recognition, the cost paid to the vendor or third-party service provider is recorded as a reduction to sales, resulting in revenue being equal to the gross profit on the transaction.

Sales In-Transit – The Company performs an analysis of the number of days of sales in-transit to customers at the end of each reporting period based on an analysis of commercial delivery terms that include drop-shipment arrangements.

The Company performs a weighted average analysis of the estimated number of days between order fulfillment and beginning of the renewal term for term licenses recorded on a gross basis to determine the amount of potential deferred net sales.

Prior to the quarter ended September 30, 2020 it had been determined that this amount was not material.

Due to increased sales of term licenses we have recorded an estimate of the impact of term license renewals fulfilled prior to commencement date during the three months ended September 30, 2020.

In conjunction with this amount recorded in the current period, the Company also corrected within the current period a similar sales in-transit estimate amount that existed in the prior year.

As part of the Company’s analysis, it determined that there was an inconsequential impact to previously reported interim and annual financial statements and as such, no adjustments were required to be made to any prior period financial statements.

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

(“Buyer”), a newly-formed indirectly wholly-owned subsidiary of the Company completed the purchase of Interwork Technologies Inc., a Delaware corporation (“Interwork US”) and Interwork Technologies Inc., a corporation incorporated under the laws of the Province of Ontario, Canada (“Interwork Canada”).

Buyer acquired Interwork US and Interwork Canada for an aggregate purchase price of $5 million Canadian dollar (equivalent to $3.6 million USD), subject to certain working capital adjustments, paid at closing plus a potential post-closing $1.1 million Canadian dollar (equivalent to $0.8 million USD) earn-out.

The allocation of the purchase price was based upon the estimated fair value of Interwork US and Interwork Canada’s net tangible and identifiable intangible assets as of the date of the acquisition.

Acquisition of Interwork Technologies

On April 30, 2020, the Company completed the purchase of Interwork Technologies Inc., a Delaware corporation and Interwork Technologies Inc., a corporation incorporated under the laws of the Province of Ontario, Canada (collectively, “Interwork”) 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 purchase price allocation is final.

The purchase consideration included approximately $ 0.8 million of potential earn-out consideration if certain targets are achieved, payable in cash.

As of March 31, 2021, the Company reassessed the earn-out liability and increased the fair value of the earn-out liability to approximately $ 0.9 million, with less than $ 0.1 million adjustment recognized within selling, general and administrative expenses during the three months ended March 31, 2021.

The earn-out liability is included in accounts payable and accrued expenses as of March 31, 2021 as payment would be due in the third quarter of 2021.

There were no acquisition related costs incurred during the three months ended March 31, 2021.

The Company incurred acquisition related costs of approximately $ 0.4 million during the three months ended March 31, 2020 in conjunction with the acquisition of Interwork, which are reflected in the accompanying consolidated statements of earnings.

Acquisition of CDF Group Limited

On November 6, 2020, the Company entered into a Share Purchase Agreement and purchased the entire share capital of CDF Group Limited (“CDF”) 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 allocation of the purchase price was based upon the estimated fair value of CDF’s net tangible and identifiable intangible assets as of the date of the acquisition.

The transaction was accounted for under the purchase method of accounting.

The Company incurred acquisition related costs of approximately $0.3 million and $1.0 million during the three and nine months ended September 30, 2020, respectively.

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

The financial position and operating results of Interwork US and Interwork Canada are included in the Company’s condensed consolidated financial statements from the date of acquisition.

The Company recorded net revenue for Interwork US and Interwork Canada of approximately $2.6 million and $6.3 million during the three and nine months ended September 30, 2020.

The impact of the acquisition’s preliminary purchase price allocations on the Company’s consolidated balance sheet and the acquisition date fair value of the total consideration transferred were as follows.

The Company is in the process of obtaining third-party valuations of certain intangible assets;

thus the provisional measurements of intangible assets, goodwill and deferred income taxes are subject to change:

The financial position and operating results of CDF is included in the Company’s consolidated financial statements for the three months ended March 31, 2021.

The Company recorded net revenue for CDF of approximately $ 8.4 million and net income of approximately $ 0.4 million during the three months ended March 31, 2021.

Due to the timing of the closing of the transaction in the fourth quarter of 2020, the Company has not yet completed its evaluation and determination of certain assets acquired and liabilities assumed, primarily (i) the final valuation of goodwill and intangible assets, (ii) capitalized software, and (iii) the final evaluation and assessment of income tax accounts;

therefore the final fair value of the assets acquired and liabilities assumed may vary from the Company’s preliminary estimates:

(in thousands)

1 unchanged sentence

Other current assets

Equipment and leasehold improvements, net

Intangible assets

Vendor relationships (14-year weighted average useful life)

Customer relationships ( 13-year useful life)

Trademarks ( 15-year useful life)

Non-compete ( 1-year useful life)

1 unchanged sentence

Deferred income tax liabilities

Taxes payable

Other liabilities

(in thousands)

1 unchanged sentence

Cash paid to sellers

Contingent earn-out

Total purchase consideration

Cash paid to sellers

Cash acquired in acquisition

Net cash paid for acquisition

Intangible assets are comprised of approximately $3.8 million of vendor relationships with a weighted average amortization period of 13.7 years, representing the expected period of benefits, of which $2.3 million is deductible for Canadian income tax purposes.

Goodwill, which was allocated to the Climb Channel Solutions segment, is the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined company and assembled workforce.

Estimated intangible assets are comprised of approximately $ 6.4 million of customer relationships with an amortization period of 13 years and $ 0.5 million of tradenames with an amortization period of 15 years , representing the expected periods of benefits.

Goodwill is the excess of the consideration transferred over the net assets recognized and represents the expected revenue and cost synergies of the combined company and assembled workforce.

Goodwill recognized as a result of the acquisition is not deductible for income tax purposes.

The purchase consideration includes approximately $0.8 million of potential earn-out consideration if certain targets are achieved, payable in cash.

As of September 30, 2020, the Company reassessed the earn-out liability and increased the fair value of the earn-out liability by less than $0.1 million, with the adjustment recognized within selling, general and administrative expenses during the three and nine months ended September 30, 2020.

The earn-out liability is included in accounts payable and accrued expenses as of September 30, 2020 as payment would be due in the third quarter of 2021.

The preliminary allocation of the purchase price for the acquisition was allocated based on information that is currently available.

The preliminary allocation of the purchase price for the acquisition of CDF was allocated based on information that is currently available.

The Company's estimates and assumptions underlying the initial allocations is subject to the collection of information necessary to complete its allocations within the measurement period, which is up to one year from the acquisition date.

Goodwill and Other Intangible Assets:

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

The following table summarizes the changes in the carrying amount of goodwill for the three months ended March 31, 2021:

Balance at January 1, 2021

Acquisition of Interwork US and Interwork Canada

Translation adjustments

Balance September 30, 2020

Goodwill represents the premium paid over the fair value of the net tangible and intangible assets that are individually identified and separately recognized in business combinations.

The change in our goodwill balance during the nine months ended September 30, 2020 relates to our acquisition of Interwork US and Interwork Canada, which has been allocated to the Climb Channel Solutions segment.

Balance March 31, 2021

Goodwill acquired through our acquisition of CDF is provisional for a period of up to one year from the acquisition date.

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

September 30, 2020

As of March 31, 2021

Gross Carrying Amount

1 unchanged sentence

Net Carrying Amount

Vendor relationships

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

Vendor relationships are amortized between eleven to fifteen years.

Customer and vendor relationships

As of December 31, 2020

Gross Carrying Amount

Accumulated Amortization

Net Carrying Amount

Customer and vendor relationships

Customer relationships are amortized over thirteen years .

Vendor relationships are amortized between eleven and fifteen years .

Trade name is amortized over fifteen years .

Non-compete is amortized over one year .

During the three and nine months ended September 30, 2020, the Company recognized total amortization expense for other intangibles, net of $0.1 million.

There was no amortization expense for other intangibles, net during the three and nine months ended September 30, 2019.

Amortization expense is included in selling, general and administrative expense.

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

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

Intangible assets acquired through our acquisition of CDF are provisional for a period of up to one year from the acquisition date.

During the three months ended March 31, 2021, the Company recognized total amortization expense for other intangibles, net of $ 0.2 million.

There was no amortization expense for other intangibles, net during the three months ended March 31, 2020.

Estimated future amortization expense of the Company’s other intangibles, net as of March 31, 2021 is as follows:

2021 (excluding the three months ended March 31, 2021)

Right-of-use Asset and Lease Liability:

8 unchanged sentences

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

Nine months ended

September 30,

Three months ended

Cash paid for operating lease liabilities

2 unchanged sentences

Weighted-average discount rate

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

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

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

Maturities of lease liabilities as of March 31, 2021 were as follows:

2021 (excluding the three months ended March 31, 2021)

imputed interest

3 unchanged sentences

Total lease liabilities

The carrying amounts of financial instruments, including cash and cash equivalents, short-term accounts receivable and accounts payable approximated fair value at September 30, 2020 and December 31, 2019 because of the relative short maturity of these instruments.

The carrying amounts of financial instruments, including cash and cash equivalents, short-term accounts receivable and accounts payable approximated fair value at March 31, 2021 and December 31, 2020 because of the relative short maturity of these instruments.

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

1 unchanged sentence

Equipment and leasehold improvements consist of the following:

September 30,

Capitalized software

Leasehold improvements

Less accumulated depreciation and amortization

During the three months ended September 30, 2020 and 2019, the Company recorded depreciation and amortization expense of $0.1 million.

During the nine months ended September 30, 2020 and 2019, the Company recorded depreciation and amortization expense of $0.3 million and $0.4 million, respectively.

Depreciation and amortization expense is included in selling, general and administrative expense.

During the three months ended March 31, 2021 and 2020, the Company recorded depreciation and amortization expense of $ 0.3 million and $ 0.2 million, respectively.

In limited circumstances, the Company offers extended payment terms to customers for periods of 12 to 36 months .

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Accounts receivable long term, net consists of the following:

September 30,

Total amount due from customer

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current portion included in accounts receivable

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

The undiscounted cash flows to be received by the Company relating to these accounts receivable long-term expects to be $ 1.5 million, $ 0.1 million and $ 0.1 million during the 12-month periods ending March 31, 2022, 2023 and 2024, respectively.

Accounts payable and accrued expenses consist of the following:

September 30,

Trade accounts payable

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The interest rate for any borrowings under the Amended Credit Facility is subject to change from time to time based on the changes in the LIBOR Rate, as defined in the Amended Loan Agreement (the “Index”).

The Index was 2.50% at September 30, 2020.

The Index was 2.50 % at March 31, 2021.

Interest on the unpaid principal balance of the Amended Note will be calculated using a rate of 1.75 percentage points over the Index.

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Additionally, the Loan Agreement contains negative covenants, which were not amended as part of the Amended Credit Facility, prohibiting, among other things, the creation of certain liens, the alteration of the nature or character of the Company’s business, and transactions with the Company’s shareholders, directors, officers, subsidiaries and/or affiliates other than with respect to (i) the repurchase of the issued and outstanding capital stock of the Company from the stockholders of the Company or (ii) the declaration and payment of dividends to the stockholders of the Company.

The Company was in compliance with all such covenants at September 30, 2020 and December 31, 2019.

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

The Company was in compliance with all such covenants at March 31, 2021 and December 31, 2020.

At March 31, 2021 and December 31, 2020, the Company had no borrowings outstanding under the Credit Facility.

Subsequent to the quarter end, on April 13, 2021, Wayside Technology UK Holdings Limited (“Wayside UK”), a wholly-owned subsidiary of the Company, entered into an uncommitted short term credit facility of £ 8,000,000 (“Uncommitted Credit Facility”) with Citibank N.A., London Branch (“Citibank London”) pursuant to certain terms and conditions.

Obligations under the Uncommitted Credit Facility are guaranteed by the Company and will be used for working capital and general corporate purposes and have a maturity date of April 13, 2022, at which time Wayside UK must pay all outstanding principal of all outstanding loans plus all accrued and unpaid interest, and any interest, fees, costs and expenses, if any.

Interest on the unpaid principal balance of the Uncommitted Credit Facility will be calculated using a rate of 1.85 percentage points over the Daily Rate, as defined in the Uncommitted Credit Facility.

Amounts borrowed under the Uncommitted Credit Facility will be guaranteed by the Company.

The Uncommitted Credit Facility may be cancelled at any time by Citibank London.

Citibank London has the sole discretion to accept or reject any requested utilization of the Uncommitted Credit Facilitation.

Earnings Per Share:

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

Nine months ended

Three months ended

September 30,

Less distributed and undistributed income allocated to participating securities

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Major Customers and Vendors:

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

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

The Company had two major customers that accounted for 22% and 12%, respectively, of its net sales during the three months ended September 30, 2020 and 19% and 17%, respectively, of its net sales during the three months ended September 30, 2019.

The Company had two major customers that accounted for 26% and 14%, respectively, of its net sales during the nine months ended September 30, 2020 and 24% and 20%, respectively, of its net sales during the nine months ended September 30, 2019.

These same customers accounted for 19% and 11%, respectively, of total net accounts receivable as of September 30, 2020 and 43% and 12%, respectively, of total net accounts receivable as of December 31, 2019.

The Company had two major vendors that accounted for 24 % and 9 %, respectively, of total purchases during the three months ended March 31, 2021 and 22 % and 14 %, respectively, of total purchases during the three months ended March 31, 2020.

The Company had two major customers that accounted for 20 % and 13 %, respectively, of its net sales during the three months ended March 31, 2021 and 27 % and 14 %, respectively, of its net sales during the three months ended March 31, 2020.

These same customers accounted for 18 % and 10 %, respectively, of total net accounts receivable as of March 31, 2021 and 19 % and 9 %, respectively, of total net accounts receivable as of December 31, 2020.

Income Taxes:

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The Company believes that it has appropriate support for the income tax positions it takes and expects to take on its tax returns, and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.

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

The effective tax rate for the nine months ended September 30, 2020 and 2019 was 31.1% and 25.4%, respectively.

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

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”).

The primary impact to the Company’s financial statements as a result of the CARES Act was the deferral of US corporate income tax payments from the second quarter of 2020 to the third quarter of 2020.

Stockholders’ Equity and Stock Based Compensation:

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The total number of shares of the Company’s common stock, par value $ 0.01 per share (“Common Stock") initially available for award under the 2012 Plan was 600,000 , which was increased to 1,000,000 shares by shareholder approval at the Company’s 2018 Annual Meeting in June 2018.

As of September 30, 2020, the number of shares of Common Stock available for future award grants to employees, officers and directors under the 2012 Plan is 384,164.

During the nine months ended September 30, 2020, the Company granted a total of 134,165 shares of Restricted Stock to directors, officers and employees.

These shares of Restricted Stock vest immediately or over time in sixteen equal quarterly installments.

During the nine months ended September 30, 2020, a total of 4,682 shares of Restricted Stock were forfeited.

During the nine months ended September 30, 2019, the Company granted a total of 32,905 shares of Restricted Stock to directors, officers and employees.

These shares of Restricted Stock vest immediately or over time in sixteen equal quarterly installments.

During the nine months ended September 30, 2019, a total of 16,530 shares of Restricted Stock were forfeited.

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

As of March 31, 2021, the number of shares of Common Stock available for future award grants to employees, officers and directors under the 2012 Plan is 331,974 .

During the three months ended March 31, 2021, the Company granted a total of 52,190 shares of Restricted Stock to officers.

These shares of Restricted Stock vest over time in sixteen equal quarterly installments.

During the three months ended March 31, 2020, the Company granted a total of 66,560 shares of Restricted Stock to officers.

These shares of Restricted Stock vest over time in sixteen equal quarterly installments.

During the three months ended March 31, 2020, a total of 2,750 shares of Restricted Stock were forfeited.

A summary of nonvested shares of Restricted Stock awards outstanding under the 2012 Plan as of March 31, 2021, and changes during the three months then ended is as follows:

Average Grant

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Forfeited in 2021

Nonvested shares at September 30, 2020

As of September 30, 2020, there is approximately $1.7 million of total unrecognized compensation costs related to nonvested share-based compensation arrangements.

Nonvested shares at March 31, 2021

As of March 31, 2021, there is approximately $ 2.2 million of total unrecognized compensation costs related to nonvested share-based compensation arrangements.

The unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.9 years.

During the three months ended September 30, 2020 and 2019, the Company recognized share-based compensation expense of $0.6 million and $0.3 million, respectively.

During the nine months ended September 30, 2020 and 2019, the Company recognized share-based compensation expense of $1.0 million and $0.6 million, respectively.

During the three months ended March 31, 2021 and 2020, the Company recognized share-based compensation expense of $ 0.3 million and $ 0.2 million, respectively.

Segment Information:

The Company distributes software developed by others through resellers indirectly to customers worldwide.

We also resell computer software and hardware developed by others and provide technical services directly to customers worldwide.

FASB ASC Topic 280, “Segment Reporting,” requires that public companies report profits and losses and certain other information on their “reportable operating segments” in their annual and interim financial statements.

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The Company is organized into two reportable operating segments.

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

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

As permitted by FASB ASC Topic 280, the Company has utilized the aggregation criteria in combining its operations in Canada with the domestic segments as the Canadian operations provide the same products and services to similar clients and are considered together when the Company’s CODM decides how to allocate resources.

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

The “Solutions” segment is a cloud solutions provider and value-added reseller of software, hardware and services to customers worldwide.

As permitted by FASB ASC Topic 280, the Company has utilized the aggregation criteria in combining its operations in Canada, Europe and the United Kingdom with the domestic segments as the international operations provide the same products and services to similar clients and are considered together when the Company’s CODM decides how to allocate resources.

Segment income is based on segment revenue less the respective segment’s cost of revenues as well as segment direct costs (including such items as payroll costs and payroll related costs, such as profit sharing, incentive awards and insurance) and excluding general and administrative expenses not attributed to an individual segment business unit.

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The following segment reporting information of the Company is provided:

Nine months ended September 30,

Three months ended September 30,

Climb Channel Solutions

Three months ended

Gross Profit:

Climb Channel Solutions

Direct Costs:

Climb Channel Solutions

Segment Income Before Taxes:

Climb Channel Solutions

Segment Income Before Taxes

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Acquisition related costs

Amortization and depreciation expense

Interest, net

Foreign currency transaction gain

Foreign currency transaction (loss) gain

Income before taxes

(1) Excludes general corporate expenses including interest and foreign currency translation expenses.

September 30,

(1) Excludes general corporate expenses including interest and foreign currency transaction (loss) gain.

Selected Assets by Segment:

Climb Channel Solutions

Segment Select Assets

Goodwill and Intangible Assets

Corporate Assets

Nine months ended

Geographic areas and net sales mix related to operations for the three months ended March 31, 2021 and 2020 were as follows.

Revenue is allocated to a geographic area based on the location of the sale, which is generally the customer’s country of domicile.

Three months ended

Disaggregation of Revenue:

September 30,

Climb Channel Solutions

Hardware, software and other products

Software - security & highly interdependent with support

Maintenance, support & other services

Hardware, software and other products

Software - security & highly interdependent with support

Maintenance, support & other services

March 31, 2021

Europe and United Kingdom

Total net sales

Timing of Revenue Recognition

Transferred at a point in time where the Company is principal (1)

Transferred at a point in time where the Company is agent (2)

Total net sales

Three months ended

March 31, 2020

Europe and United Kingdom

Total net sales

Timing of Revenue Recognition

Transferred at a point in time where the Company is principal (1)

Transferred at a point in time where the Company is agent (2)

Total net sales

(1) Includes net sales from third-party hardware and software products.

(2) Includes net sales from third-party maintenance, software support and services.

Geographic identifiable assets related to operations as of March 31, 2021 and December 31, 2020 were as follows.

Identifiable Assets by Geographic Areas

Europe and United Kingdom

Related Party Transactions:

The Company made sales to a customer where a member of our Board of Directors is an executive.

During the three months ended September 30, 2020 and 2019, net sales to this customer totaled approximately $0.1 million, respectively.

During the nine months ended September 30, 2020 and 2019, net sales to this customer totaled approximately $0.1 million, respectively.

Amounts due from this customer as of September 30, 2020 and December 31, 2019 was less than $0.1 million, respectively, which were settled in cash subsequent to each period end.

During the three months ended March 31, 2021 and 2020, net sales to this customer totaled approximately $ 0.2 million and $ 0.1 million, respectively.

Amounts due from this customer as of March 31, 2021 and December 31, 2020 were approximately $ 0.1 million, respectively, which were settled in cash subsequent to each period end.

Unsolicited Bid and Shareholder Demand:

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.

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.

On December 20, 2019, Mr.

Nynens delivered a nomination notice to the Company regarding his intent to nominate Kim J.

McCauley, Delynn Copley, Dennis M.

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 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 to purchase all of Mr.

On April 16, 2020 (the “Effective Date”), the Company entered into a Settlement Agreement (the “Settlement Agreement”) with Simon Nynens, Shepherd Kaplan Krochuk, LLC, North & Webster SSG, LLC, and each of Dennis Crowley, David Shepherd, David Kaplan, Timothy Krochuk and Samuel Kidston relating to an unsolicited bid and shareholder demand.

Pursuant to the Settlement Agreement, the Company agreed 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.

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.

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.

Subsequent Events:

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.

The Company incurred zero and $ 1.3 million in legal and advisory expenses, net during the three months ended March 31, 2021 and 2020, respectively, related to the above matter.

Risks and Uncertainties Related to the COVID-19 Pandemic:

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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 1. Financial Statements