Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of risk and uncertainties, including those set forth under the heading “Forward Looking Statements” and elsewhere in this report and those set forth in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission on March 16, 2021. The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes included in this report and the consolidated financial statements and related notes included in our 2020 Annual Report on Form 10-K.
Overview
Wayside Technology Group, Inc. (the “Company,” “we,” “our,” or “us”) is a value added IT distribution and solutions company, primarily selling software and other third-party IT products and services through two reportable operating segments. Through our “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 “Solutions” segment we act as a cloud solutions provider and value-added reseller, selling computer software and hardware developed by others and provide technical services directly to end user customers worldwide. 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, the Netherlands, the United Kingdom and Ireland, through which sales are made.
COVID-19
We are closely monitoring the impact of the 2019 novel coronavirus, or COVID-19, pandemic on all aspects of our business. COVID-19 has resulted and will continue to result in significant economic disruption, which could also impact our business.
While we did not incur significant disruptions to our operations during the three and six months ended June 30, 2021 as a result of the COVID-19 pandemic, we are unable to predict the impact that the COVID-19 pandemic will have on our business, liquidity or results of operations at this time.
This situation is changing rapidly, and additional impacts may arise that we are not aware of currently. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees, customers and shareholders.
Factors Influencing Our Financial Results
We derive the majority of our net sales though the sale of third-party software licenses, maintenance and service agreements. In our 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 competition, and demand characteristics of the products which we are authorized to distribute. In our Solutions segment sales are generally driven by sales force effectiveness and success in providing superior customer service and cloud solutions support, 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,
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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 equity and effective margin.
Gross profit is calculated as net sales less cost of sales. We record customer rebates and discounts as a component of net sales and record vendor rebates and discounts as a component of cost of sales.
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 shares repurchased were $0.7 million and $0.1 million during the three months ended June 30, 2021. Total dividends paid and shares repurchased were $0.7 million and $3.5 million, which included 261,631 shares of our outstanding common stock repurchased for $3.5 million in accordance with the Settlement Agreement, during the three months ended June 30, 2020. The payment of future dividends and share repurchases is at the discretion of our Board of Directors and dependent on results of operations, projected capital requirements and other factors the Board of Directors may find relevant.
Stock Volatility. The technology, distribution and services sectors of the United States stock markets is subject to substantial volatility. Numerous conditions which impact these sectors 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, par value $0.01 per share (“Common Stock”). Furthermore, the potential adverse effect of the current pandemic of COVID-19, fluctuations in the Company’s operating results, announcements regarding litigation, the loss of a significant vendor or customer, increased competition, reduced vendor incentives and trade credit, higher operating expenses, and other developments, could have a significant impact on the market price of our Common Stock.
Forward Looking Statements
This report includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements in this report regarding future events or conditions, including but not limited to statements regarding industry prospects and the Company’s expected financial position, results of operations, business and financing plans, are forward-looking statements. These statements can be identified by forward-looking words such as “may,” “will,” “plan,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” and “continue,” or similar words.
Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Because these forward-looking statements are subject to risks and uncertainties, actual results could differ materially from those indicated by such forward-looking statements. These risks and uncertainties include, but are not limited to, the continued acceptance of the Company’s distribution channel by vendors and customers, the timely availability and acceptance of new products, product mix, market conditions, competitive pricing pressures, contribution of key vendor relationships and support programs, including vendor rebates and discounts, as well as factors that affect the software industry in general and other factors generally. Currently, one of the most significant factors is the potential adverse effect of the current COVID-19 pandemic on the Company, the global economy and financial markets. The extent to which COVID-19 impacts the Company will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, including the impact on our reseller partners and the end customer markets they serve, among others. We strongly urge current and prospective investors to carefully consider the cautionary statements and
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risk factors contained in this report and our annual report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission on March 16, 2021.
The Company operates in a rapidly changing business, and new risk factors emerge from time to time. Management cannot predict every risk factor, nor can it assess the impact, if any, of all such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements.
Accordingly, forward-looking statements should not be relied upon as a prediction of actual results and readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
The statements concerning future sales, future gross profit margin and future selling and administrative expenses are forward looking statements involving certain risks and uncertainties such as availability of products, product mix, pricing pressures, market conditions and other factors, which could result in a fluctuation of sales below recent experience.
Financial Overview
Net sales increased 33%, or $18.8 million, to $75.4 million for the three months ended June 30, 2021 compared to $56.6 million for the same period in the prior year. Gross profit increased 54%, or $3.9 million, to $11.0 million for the three months ended June 30, 2021 compared to $7.1 million for the same period in the prior year. Selling, general and administrative (“SG&A”) expenses increased 49%, or $2.7 million, to $8.1 million for the three months ended June 30, 2021 compared to $5.5 million for the same period in the prior year. Amortization and depreciation expense increased 178%, or $0.3 million, to $0.4 million for the three months ended June 30, 2021 compared to $0.1 million for the same period in the prior year. Net income for the three months ended June 30, 2021 was $2.1 million compared to $0.6 million for the same period in the prior year. Diluted income per share for the three months ended June 30, 2021 was $0.49 compared to $0.13 for the same period in the prior year.
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 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, 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.
Revenue
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.
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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 – Long Term
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.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting, which allocates the fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions. The Company may utilize third-party valuation specialists to assist the Company in the allocation. Initial purchase price allocations are subject to revision within the measurement period, not to exceed one year from the date of acquisition. Acquisition-related expenses and transaction costs associated with business combinations are expensed as incurred.
Goodwill
We test goodwill for impairment on an annual basis, and between annual tests if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
In a qualitative assessment, we assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If, after assessing the totality of events or circumstances, we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is unnecessary.
If, after assessing the totality of events or circumstances, we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform the quantitative goodwill impairment test. We may also elect the unconditional option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test.
In the quantitative impairment test, we compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. Conversely, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.
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Intangible Assets
Intangible assets with determinable lives are amortized on a straight-line basis over their respective estimated useful lives, which is determined based on their expected period of benefit. Intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset's carrying amount over its fair value. In addition, each quarter, the Company evaluates whether events and circumstances warrant a revision to the remaining estimated useful life of each of these intangible assets. If the Company were to determine that a change to the remaining estimated useful life of an intangible asset was necessary, then the remaining carrying amount of the intangible asset would be amortized prospectively over that revised remaining useful life.
Income Taxes
The Company considers future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance related to deferred tax assets. 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 record the impact of 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.
Foreign Exchange
The Company’s foreign currency exposure relates primarily to international transactions where the currency collected from customers can be different from the currency used to purchase the product. In cases where the Company is not able to create a natural hedge by maintaining offsetting asset and liability amounts in the same currency, it may enter into foreign exchange contracts, typically in the form of forward purchase agreements, to facilitate the hedging of foreign currency exposures to mitigate the impact of changes in foreign currency exchange rates. These contracts generally have terms of no more than two months. The Company does not apply hedge accounting to these contracts and therefore the changes in fair value are recorded in earnings. The Company does not enter into foreign exchange contracts for trading purposes and the risk of loss on a foreign exchange contract is the risk of nonperformance by the counterparties, which the Company minimizes by limiting its counterparties to major financial institutions. The fair value of forward purchase contracts at June 30, 2021 was not material to the consolidated financial statements.
Interest, Net
Interest, net consists primarily of income from the amortization of the discount on accounts receivable long term, net of interest expense on the Company’s credit facility.
Recently Issued Accounting Pronouncements
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
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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.
Results of Operations
The following table sets forth for the periods indicated certain financial information derived from the Company’s unaudited condensed consolidated statements of earnings expressed as a percentage of net sales. This comparison of financial results is not necessarily indicative of future results:
Six months ended
Three months ended
June 30,
June 30,
2021
2020
2021
2020
Net sales
100.0
%
100.0
%
100.0
%
100.0
%
Cost of sales
84.2
87.2
85.4
87.4
Gross profit
15.8
12.8
14.6
12.6
Selling, general and administrative expenses
12.0
9.1
10.8
9.7
Legal and financial advisory expenses, net - unsolicited bid and related matters
—
1.5
—
0.9
Acquisition related costs
—
0.5
—
0.4
Amortization and depreciation expense
0.6
0.2
0.5
0.3
Income from operations
3.2
1.4
3.2
1.3
Other (expense) income
0.2
0.3
0.4
0.3
Income before income taxes
3.4
1.7
3.7
1.7
Income tax provision
0.8
0.5
0.8
0.6
Net income
2.7
%
1.2
%
2.8
%
1.0
%
Key Operating Metrics
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, 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.
Six months ended
Three months ended
June 30,
June 30,
June 30,
June 30,
2021
2020
2021
2020
Net sales
$
138,163
$
119,206
$
75,350
$
56,586
Adjusted gross billings (Non-GAAP)
$
445,981
$
331,838
$
235,120
$
158,738
Gross profit
$
21,822
$
15,279
$
10,979
$
7,114
Gross profit - Distribution
$
16,688
$
13,806
$
8,814
$
6,643
Gross profit - Solutions
$
5,134
$
1,473
$
2,165
$
471
Adjusted EBITDA (Non-GAAP)
$
6,158
$
5,209
$
3,512
$
2,087
Gross margin % - Adjusted gross billings (Non-GAAP)
4.9%
4.6%
4.7%
4.5%
Effective margin % - Adjusted EBITDA (Non-GAAP)
28.2%
34.1%
32.0%
29.3%
We consider gross profit growth and effective margin to be key metrics in evaluating our business. During the three months ended June 30, 2021, gross profit increased 54%, or $3.9 million, to $11.0 million compared to $7.1 million for the same period in the prior year while effective margin increased to 32.0% compared to 29.3% for the same period in the prior year. During the six months ended June 30, 2021, gross profit increased 43%, or $6.5 million, to $21.8 million
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compared to $15.3 million for the same period in the prior year while effective margin decreased to 28.2% compared to 34.1% for the same period in the prior year.
Reconciliations of Non-GAAP Financial Measures
Six months ended
Three months ended
June 30,
June 30,
June 30,
June 30,
Reconciliation of net sales to adjusted gross billings (Non-GAAP):
2021
2020
2021
2020
Net sales
$
138,163
$
119,206
$
75,350
$
56,586
Costs of sales related to sales where the Company is an agent
307,818
212,632
159,770
102,152
Adjusted gross billings
$
445,981
$
331,838
$
235,120
$
158,738
We define adjusted gross billings as net sales in accordance with US GAAP, adjusted for the cost of sales related to sales where the Company is an agent. 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.
Six months ended
Three months ended
June 30,
June 30,
June 30,
June 30,
Net income reconciled to adjusted EBITDA:
2021
2020
2021
2020
Net income
$
3,664
$
1,417
$
2,144
$
581
Provision for income taxes
1,046
641
615
362
Amortization and depreciation
796
239
398
143
Interest expense
36
41
18
24
EBITDA
5,542
2,338
3,175
1,110
Share-based compensation
616
400
337
233
Legal and financial advisory expenses, net - unsolicited bid and related matters
-
1,833
-
509
Acquisition related costs
-
638
-
235
Adjusted EBITDA
$
6,158
$
5,209
$
3,512
$
2,087
We define adjusted EBITDA, as net income, plus provision for income taxes, depreciation, amortization, share-based compensation, interest, legal and financial advisory expenses, net – unsolicited bid and related matters and acquisition related costs. We define effective margin as adjusted EBITDA as a percentage of gross profit. 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.
Acquisitions
On April 30, 2020 we completed the acquisition of Interwork Technologies Inc. (“Interwork”) for a purchase price of $3.6 million, subject to certain working capital adjustments, and a potential earnout of $0.8 million payable approximately one year after the acquisition date. The operating results of Interwork are included in our operating results effective May 1, 2020.
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On November 6, 2020 we completed the acquisition of CDF Group Limited (“CDF”) for a purchase price of $17.4 million, subject to certain working capital adjustments. The operating results of CDF are included in our operating results effective November 7, 2020.
Operating results of Interwork are included in our Distribution segment. Operating results of CDF are included in either our Distribution segment or Solutions segment.
Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020
Net Sales and Adjusted Gross Billings
Net sales for the three months ended June 30, 2021 increased 33%, or $18.8 million, to $75.4 million compared to $56.6 million for the same period in the prior year. Adjusted gross billings for the three months ended June 30, 2021 increased 48%, or $76.4 million, to $235.1 million compared to $158.7 million for the same period in the prior year. Adjusted gross billings increased at a faster rate than net sales due to shift in product mix from hardware sales, which are recorded on a gross basis, to security, maintenance and cloud products which are recorded net of related cost of sales.
Distribution segment net sales for the three months ended June 30, 2021 increased 29%, or $15.7 million, to $69.9 million compared to $54.2 million for the same period in the prior year. Adjusted gross billings for the Distribution segment for the three months ended June 30, 2021 increased 42%, or $64.6 million, to $219.4 million compared to $154.8 million for the same period in the prior year. The increase in net sales and adjusted gross billings in our Distribution segment was primarily due to the impact of the Interwork and CDF acquisitions for the three months ended June 30, 2021.
Solutions segment net sales for the three months ended June 30, 2021 increased 131%, or $3.1 million, to $5.5 million compared to $2.4 million for the same period in the prior year. Adjusted gross billings for the Solutions segment for the three months ended June 30, 2021 increased 298%, or $11.8 million, to $15.7 million compared to $3.9 million for the same period in the prior year. The increase in net sales and adjusted gross billings in our Solutions segment was primarily due to the impact of the CDF acquisition for the three months ended June 30, 2021.
During the three months ended June 30, 2021, we relied on two key customers for a total of 34% of our net sales, with each customer accounting for 17% of our total net sales. The Company had two major customers that accounted for 29% and 18%, respectively, of its total net sales during the three months ended June 30, 2020. The Company had two major vendors that accounted for 18% and 12%, respectively, of total purchases during the three months ended June 30, 2021 and 16% and 10%, respectively, of total purchases during the three months ended June 30, 2020.
Gross Profit
Gross profit for the three months ended June 30, 2021 increased 54%, or $3.9 million, to $11.0 million compared to $7.1 million for the same period in the prior year.
Distribution segment gross profit for the three months ended June 30, 2021 increased 33%, or $2.2 million, to $8.8 million compared to $6.6 million for the same period in the prior year. The increase in Distribution segment gross profit resulted primarily from the impact of the acquisitions of Interwork and CDF, partially offset by higher early pay discounts and other rebates and discounts offered to our customers.
Solutions segment gross profit for the three months ended June 30, 2021 increased 360%, or $1.7 million, to $2.2 million compared to $0.5 million for the same period in the prior year. The increase in Solutions segment gross profit resulted primarily from increased sales from the acquisition of CDF.
Customer rebates and discounts for the three months ended June 30, 2021 were $2.5 million compared to $1.3 million for the same period in the prior year. This increase is attributable to a change in payment terms with one of our larger customers during the second quarter of 2020, which resulted in a cash inflow of approximately $30 million from the date the program was implemented, as well as increased rebates and discounts to national resellers. Customer rebates and discounts vary based on terms of rebate and early pay discount programs offered to customers and timing of payments ultimately received from our customers.
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Vendor rebates and discounts for the three months ended June 30, 2021 were $1.1 million compared to $0.9 million for the same period in the prior year. Vendor rebates are dependent on programs offered by our vendors and in some cases reaching certain volume targets set by our vendors. The Company monitors vendor rebate levels, competitive pricing, and gross profit margins carefully. 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 three months ended June 30, 2021 increased 49%, or $2.7 million, to $8.1 million compared to $5.5 million for the same period in the prior year, primarily due to the impact of the acquisition of CDF and Interwork, as well as $0.2 million of employee separation expenses. SG&A expenses were 10.8% of net sales for the three months ended June 30, 2021, compared to 9.7% for the same period in the prior year.
The Company expects that its SG&A expenses, as a percentage of net sales, may vary depending on changes in sales volume, as well as the levels of continuing investments in key growth initiatives. We plan to continue to expand our investment in business development, sales and marketing to maximize our market penetration.
Amortization and Depreciation Expense
Amortization and depreciation expense for the three months ended June 30, 2021 increased 178%, or $0.3 million, to $0.4 million compared to $0.1 million for the same period in the prior year, primarily due to the amortization of intangible assets acquired in the Interwork and CDF acquisitions.
Legal and Financial Advisory Expenses, Net – Unsolicited Bid and Related Matters
There were no legal and financial advisory expenses, net – unsolicited bid and related matters incurred during the three months ended June 30, 2021 compared to $0.5 million for the same period in the prior year.
Acquisition Related Costs
There were no acquisition related costs incurred during the three months ended June 30, 2021 compared to $0.2 million for the same period in the prior year. Acquisition related costs incurred in the prior year were in conjunction with the acquisition of Interwork.
Income Taxes
For the three months ended June 30, 2021 and 2020, the Company recorded a provision for income taxes of $0.6 million and $0.4 million, respectively. The effective tax rate for the three months ended June 30, 2021 and 2020 was 22.3% and 38.4%, respectively. The change in the effective tax rate for the three months ended June 30, 2021 compared to the same period in the prior year is a result of changes in the mix of jurisdictions in which taxable income was earned and limitations on the deductibility of certain facilitative acquisition related costs in the prior year.
Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020
Net Sales and Adjusted Gross Billings
Net sales for the six months ended June 30, 2021 increased 16%, or $19.0 million, to $138.2 million compared to $119.2 million for the same period in the prior year. Adjusted gross billings for the six months ended June 30, 2021 increased 34%, or $114.2 million, to $446.0 million compared to $331.8 million for the same period in the prior year. Adjusted gross billings increased at a faster rate than net sales due to shift in product mix from hardware sales, which are recorded on a gross basis, to security, maintenance and cloud products which are recorded net of related cost of sales.
Distribution segment net sales for the six months ended June 30, 2021 increased 12%, or $13.2 million, to $124.7 million compared to $111.5 million for the same period in the prior year. Adjusted gross billings for the Distribution segment for the six months ended June 30, 2021 increased 29%, or $92.1 million, to $412.8 million compared to $320.7 million for the same period in the prior year primarily due to the impact of the acquisitions of Interwork and CDF.
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Solutions segment net sales for the six months ended June 30, 2021 increased 74%, or $5.8 million, to $13.5 million compared to $7.7 million for the same period in the prior year. The increase in net sales in our Solutions segment was primarily due to sales from the CDF acquisition for the six months ended June 30, 2021. Adjusted gross billings for the Solutions segment for the six months ended June 30, 2021 increased 197%, or $22.1 million, to $33.2 million compared to $11.2 million for the same period in the prior year.
During the six months ended June 30, 2021, we relied on two key customers for a total of 34% of our net sales, with each customer accounting for 17% of our total net sales. The Company had two major customers that accounted for 29% and 18%, respectively, of its total net sales during the six months ended June 30, 2020. The Company had two major vendors that accounted for 21% and 9%, respectively, of total purchases during the six months ended June 30, 2021 and 19% and 10%, respectively, of total purchases during the six months ended June 30, 2020.
Gross Profit
Gross profit for the six months ended June 30, 2021 increased 43%, or $6.5 million, to $21.8 million compared to $15.3 million for the same period in the prior year.
Distribution segment gross profit for the six months ended June 30, 2021 increased 21%, or $2.9 million, to $16.7 million compared to $13.8 million for the same period in the prior year. The increase in Distribution segment gross profit resulted primarily from the impact of the acquisitions of Interwork and CDF, partially offset by higher early pay discounts and other rebates and discounts offered to our customers. The increase in early pay discounts was impacted by a change in payment terms with one of our larger customers during the second quarter of 2020.
Solutions segment gross profit for the six months ended June 30, 2021 increased 248%, or $3.6 million, to $5.1 million compared to $1.5 million for the same period in the prior year. The increase in Solutions segment gross profit resulted primarily from increased sales from the acquisition of CDF.
Customer rebates and discounts for the six months ended June 30, 2021 were $4.5 million compared to $2.4 million for the same period in the prior year. This increase is attributable to a change in payment terms with one of our larger customers during the second quarter of 2020, which resulted in a cash inflow of approximately $30 million from the date the program was implemented, as well as increased rebates and discounts to national resellers. Customer rebates and discounts vary based on terms of rebate and early pay discount programs offered to customers and timing of payments ultimately received from our customers.
Vendor rebates and discounts for the six months ended June 30, 2021 and 2020 were $1.9 million, respectively. Vendor rebates are dependent on programs offered by our vendors and in some cases reaching certain volume targets set by our vendors. The Company monitors vendor rebate levels, competitive pricing, and gross profit margins carefully. We anticipate that price competition in our market will continue in both of our business segments.
Selling, General and Administrative Expenses
SG&A expenses for the six months ended June 30, 2021 increased 52%, or $5.7 million, to $16.6 million compared to $10.9 million for the same period in the prior year, primarily due to the impact of the acquisition of CDF and Interwork, as well as $0.5 million of employee separation expenses. SG&A expenses were 12.0% of net sales for the six months ended June 30, 2021, compared to 9.1% for the same period in the prior year.
The Company expects that its SG&A expenses, as a percentage of net sales, may vary depending on changes in sales volume, as well as the levels of continuing investments in key growth initiatives. We plan to continue to expand our investment in business development, sales and marketing to maximize our market penetration.
Amortization and Depreciation Expense
Amortization and depreciation expense for the six months ended June 30, 2021 increased 233%, or $0.6 million, to $0.8 million compared to $0.2 million for the same period in the prior year, primarily due to the amortization of intangible assets acquired in the Interwork and CDF acquisitions.
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Legal and Financial Advisory Expenses, Net – Unsolicited Bid and Related Matters
There were no legal and financial advisory expenses, net – unsolicited bid and related matters incurred during the six months ended June 30, 2021 compared to $1.8 million for the same period in the prior year.
Acquisition Related Costs
There were no acquisition related costs incurred during the six months ended June 30, 2021 compared to $0.6 million for the same period in the prior year. Acquisition related costs incurred in the prior year were in conjunction with the acquisition of Interwork.
Income Taxes
For the six months ended June 30, 2021 and 2020, the Company recorded a provision for income taxes of $1.0 million and $0.6 million, respectively. The effective tax rate for the six months ended June 30, 2021 and 2020 was 22.2% and 31.1%, respectively. The change in the effective tax rate for the six months ended June 30, 2021 compared to the same period in the prior year is a result of changes in the mix of jurisdictions in which taxable income was earned and limitations on the deductibility of certain facilitative acquisition related costs in the prior year.
Liquidity and Capital Resources
Our cash and cash equivalents decreased to $23.8 million as of June 30, 2021 compared to $29.3 million as of December 31, 2020. The decrease in cash and cash equivalents was primarily the result of $0.9 million of cash and cash equivalents used in operating activities, $3.2 million of cash used in investing activities and $1.7 million of cash used for dividends.
Net cash and cash equivalents used in operating activities for the six months ended June 30, 2021 was $0.9 million, comprised primarily of net income adjusted for non-cash items of $5.3 million, partially offset by changes in operating assets and liabilities of $6.2 million.
Net cash and cash equivalents used in investing activities during the six months ended June 30, 2021 consisted of $3.0 million of vendor advances and $0.2 million of purchases of fixed assets.
Net cash and cash equivalents used in financing activities during the six months ended June 30, 2021 was $1.7 million, comprised of dividend payments on our Common Stock of $1.5 million and purchases of treasury stock of $0.2 million.
On November 15, 2017, the Company entered into a $20,000,000 revolving credit facility (the “Credit Facility”) with Citibank, N.A. (“Citibank”) pursuant to a Second Amended and Restated Revolving Credit Loan Agreement (the “Loan Agreement”), Second Amended and Restated Revolving Credit Loan Note (the “Note”), Second Amended and Restated Security Agreement and Second Amended and Restated Pledge and Security Agreement. On August 31, 2020, the Company entered into an amendment to the Credit Facility (the “Amended Credit Facility”) pursuant to a First Amendment to Second Amended and Restated Revolving Credit Loan Agreement and Other Loan Documents (the “Amended Loan Agreement”) and First Allonge to Second Amended and Restated Revolving Credit Loan Note (the “Amended Note”). The Amended Credit Facility, which will continue to be used for working capital and general corporate purposes, matures on June 30, 2023, at which time the Company must pay all outstanding principal of all outstanding loans plus all accrued and unpaid interest, and any, fees, costs and expenses. As of June 30, 2021, no borrowings were outstanding under the Credit Facility.
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. As of June 30, 2021, no borrowings were outstanding under the Uncommitted Credit Facility.
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We anticipate that our working capital needs will increase as we invest in the growth of our business. We believe that the funds held in cash and cash equivalents and our unused borrowings under our Uncommitted Credit Facility will be sufficient to fund our working capital and cash requirements for the next 12 months.
Foreign Exchange
The Company’s foreign subsidiaries are 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 Dollar, Euro Dollar and British Pound-to-U.S. Dollar exchange rate.
Off-Balance Sheet Arrangements
As of June 30, 2021, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Smaller reporting companies are not required to provide the information required by this item.
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