What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-16 compared with 2022-03-09 · 66 added, 70 removed, 194 unchanged (41% of the section changed)

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

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

Our Company is 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.

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.

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

We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business.

COVID-19 continues to create macroeconomic uncertainty, volatility and disruption, including supply constraints.

The supply constraints are being caused primarily by component availability, resulting in extended lead times and unpredictability.

In 2021, customer top priorities have been digital transformation, security, hybrid and cloud solutions, client devices, and preparing for workers to return to the office and enhancing remote enablement capabilities as hybrid environments become the future work model.

We have orchestrated solutions by leveraging client devices, accessories, collaboration tools, security, software and hybrid and cloud offerings to help customers build these capabilities and achieve their objectives.

Our employees continue to work in a hybrid environment, which includes splitting time between working from the office and working from home, as a result of the COVID-19 pandemic.

While we did not incur significant disruptions to our operations during the year ended December 31, 2021 as a result of the COVID-19 pandemic, as the duration and ongoing economic impacts of the COVID-19 pandemic remain uncertain, we are unable to predict the future impact this will have on our business, liquidity or results of operations at this time.

Technology trends could also change as customers consider the impact of the COVID-19 pandemic on their operations.

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.

Name Change of Wayside Technology Group, Inc.

to Climb Global Solutions, Inc.

On October 31, 2022, the Company, formerly known as “Wayside Technology Group, Inc.”, amended its organizational documents to change its name to “Climb Global Solutions, Inc.”

Factors Influencing Our Financial Results

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Total dividends paid and the dollar value of shares repurchased were $3.0 million and $0.7 million for the year ended December 31, 2022, respectively, and $3.0 million and $0.5 million for the year ended December 31, 2021, respectively.

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

The payment of future dividends and any share repurchases are 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.

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Furthermore, fluctuations in the Company’s operating results, announcements regarding litigation, the loss of a significant vendor partner 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.

We have historically not been adversely affected by inflation, as abrupt changes in technology, rapid changes in customer preferences, short product life cycles and evolving industry standards within the IT industry have generally caused the prices of the products we sell to decline.

This requires us to sell new products and have growth in unit sales of existing products in order to increase our net sales.

We believe that most price increases could be passed on to our customers, as prices charged by us are not set by long-term contracts;

however, as a result of competitive pressure, there can be no assurance that the full effect of any such price increases could be passed on to our customers or cause a reduction in our customers spending.

Financial Overview

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Selling, general and administrative (“SG&A”) expenses increased 6%, or $2.0 million, to $34.1 million for the year ended December 31, 2022, compared to $32.1 million for the same period in 2021.

There were no legal and financial advisory expenses, net - unsolicited bid and related matters for the year ended December 31, 2021 compared to $1.6 million in expense for the same period in 2020.

There were no acquisition related costs for the year ended December 31, 2021 compared to $1.5 million in expense for the same period in 2020.

Acquisition related costs for the year ended December 31, 2022 were $0.6 million compared to no expense for the same period in 2021.

Amortization and depreciation expense increased $0.6 million to $2.1 million for the year ended December 31, 2022 compared to $1.5 million for the same period in the prior year.

Net income was $9.2 million for the year ended December 31, 2021 compared to $4.5 million for the same period in 2020.

Income per diluted share was $2.09 for the year ended December 31, 2021 compared to $1.01 for the same period in 2020.

Net income increased 36%, or $3.3 million, to $12.5 million for the year ended December 31, 2022 compared to $9.2 million for the same period in 2021.

Income per diluted share increased 34%, or $0.72, to $2.81 for the year ended December 31, 2022 compared to $2.09 for the same period in 2021.

Critical Accounting Policies and Estimates

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Actual results may differ from these estimates.

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

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

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

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.

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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 December 31, 2021 was not material to the consolidated financial statements.

Recently Issued Accounting Pronouncements

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

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No.

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

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In November 2019, FASB issued ASU 2019-10, “ Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).” This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.

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

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

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

Effective January 1, 2023, the company will adopt the update using a modified retrospective approach with a cumulative-effect adjustment to retained earnings.

The new credit loss standard is not expected to have a material effect on our financial position, results of operations or cash flows.

Results of Operations

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Selling, general and administrative expenses

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

Acquisition related costs

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Income from operations

Other (expense) income

Other income (expense)

Income before income taxes

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

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

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.

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Share-based compensation

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

Acquisition related costs

Adjusted EBITDA

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

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

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

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

During the year ended December 31, 2021, gross profit increased 38%, or $12.7 million, to $45.7 million compared to $33.0 million for the same period in 2020 while effective margin decreased 70 basis points to 33.9% compared to 34.6% for the same period in 2020.

During the year ended December 31, 2022, gross profit increased 18%, or $8.4 million, to $54.1 million compared to $45.7 million for the same period in 2021 while effective margin increased 520 basis points to 39.1% compared to 33.9% for the same period in 2021.

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

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.

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 both our Distribution segment or Solutions segment.

On August 18, 2022, we completed the acquisition of Spinnakar for an aggregate purchase price of approximately £9.8 million (equivalent to $11.8 million USD), subject to certain working capital and other adjustments, paid at closing plus a potential post-closing earn-out.

The operating results of Spinnakar are included in our operating results from the date of acquisition.

The Company recorded net revenue for Spinnakar of approximately $6.0 million and net income of approximately $0.4 million during the year ended December 31, 2022.

Net sales for the year ended December 31, 2022 increased 8%, or $21.7 million, to $304.3 million compared to $282.6 million for the same period in 2021.

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Net sales in our Distribution segment for the year ended December 31, 2022 increased 9%, or $23.1 million, to $282.5 million compared to $259.4 million for the same period in the prior year.

The increase in net sales in our Distribution segment was due to both organic growth from our existing vendor lines and the impact of the CDF and Interwork acquisitions for the full year ended December 31, 2021.

Adjusted gross billings for the Distribution segment for the year ended December 31, 2022 increased 15%, or $126.5 million, to $998.8 million compared to $872.3 million for the same period in 2021.

Net sales in our Solutions segment for the year ended December 31, 2021 increased 30%, or $5.4 million, to $23.2 million compared to $17.8 million for the prior year.

The increase in net sales in our Solutions segment was primarily due to the impact of the CDF acquisition for the full year ended December 31, 2021.

Adjusted gross billings for the Solutions segment for the year ended December 31, 2021 increased 116%, or $33.6 million, to $62.7 million compared to $29.1 million for the same period in 2020.

Net sales and adjusted gross billings increased due to organic growth at our existing vendor lines as well as the impact of the Spinnakar acquisition in the current year.

Adjusted gross billings increased at a greater rate than net sales due to differences in the product mix between the two periods and an unfavorable impact of foreign exchange rates.

Net sales in our Solutions segment for the year ended December 31, 2022 decreased 6%, or $1.4 million, to $21.8 million compared to $23.2 million for the prior year.

Adjusted gross billings for the Solutions segment for the year ended

December 31, 2022 increased 5%, or $3.2 million, to $65.9 million compared to $62.7 million for the same period in 2021.

Adjusted gross billings increased while net sales decreased due to differences in the product mix between the two periods.

During the year ended December 31, 2022, we relied on two key customers for a total of 37% of our total net sales.

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Distribution segment gross profit for the year ended December 31, 2022 increased 23%, or $8.5 million, to $45.0 million compared to $36.5 million for the same period in 2021.

The increase in Distribution segment gross profit resulted primarily from the impact of the acquisition of CDF and Interwork acquisitions for the full year ended December 31, 2021 and lower early pay discounts and other rebates and discounts offered to our customers as a percentage of adjusted gross billings.

Solutions segment gross profit for the year ended December 31, 2021 increased 135%, or $5.3 million, to $9.2 million compared to $3.9 million for the same period in 2020.

The increase in Solutions segment gross profit resulted primarily from increased sales from the acquisition of CDF for the full year ended December 31, 2021.

The increase in Distribution segment gross profit resulted primarily from the organic growth at our existing vendor lines, impact of Spinnakar since the date of acquisition, lower early pay discounts and other rebates and discounts offered to our customers as a percentage of adjusted gross billings and increased rebates and discounts from our vendor partners.

Solutions segment gross profit for the year ended December 31, 2022, decreased 1%, or $0.1 million, to $9.1 million compared to $9.2 million for the same period in 2021.

Customer rebates and discounts for the year ended December 31, 2022 were $8.8 million compared to $8.7 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, as well as increased rebates and discounts to national resellers.

As a percentage of adjusted gross billings, customer rebates and discounts decreased during the year ended December 31, 2022, compared to the same period in the prior year.

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 year ended December 31, 2022, were $6.1 million compared to $4.5 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.

As a percentage of adjusted gross billings, vendor rebates and discounts also increased during the year ended December 31, 2022 compared to 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 or meeting certain early payment programs offered by our vendors.

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

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Selling, General and Administrative Expenses

SG&A expenses for the year ended December 31, 2021 increased 34%, or $8.2 million, to $32.1 million, compared to $23.9 million for the same period in the prior year primarily due to the impact of the acquisition of CDF and Interwork for the full year ended December 31, 2021.

SG&A expenses for the year ended December 31, 2022, increased 6%, or $2.0 million, to $34.1 million, compared to $32.1 million for the same period in the prior year.

The increase was primarily driven by higher payroll and related costs consistent with higher gross profit, including the impact of the Spinnakar acquisition.

SG&A expenses were 3.5% of adjusted gross billings, a non-GAAP financial measure, for the year ended December 31, 2022, compared to 3.4% for the same period in the prior year.

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We plan to continue to expand our investment in information technology to support the growth of our business.

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 during the year ended December 31, 2021 compared to $1.6 million in expense for the same period in the prior year.

These expenses relate to the costs incurred in conjunction with the unsolicited bid and shareholder demand resolved in the prior year (see Note 14 in the Notes to the Consolidated Financial Statements).

Acquisition Related Costs

There were no acquisition related costs for the year ended December 31, 2021 compared to $1.5 million in expense for the same period in the prior year.

These expenses relate to costs incurred in conjunction with the acquisition of CDF and Interwork.

Foreign Currency Transaction (Loss) Gain

Foreign currency transaction loss for the year ended December 31, 2021 was $0.1 million compared to a foreign currency transaction gain of $0.8 million for the same period in the prior year.

Acquisition related costs for the year ended December 31, 2022 were $0.6 million compared to no expense for the same period in the prior year.

These expenses relate to costs incurred in conjunction with the acquisition of Spinnakar.

Foreign Currency Transaction Loss

Foreign currency transaction loss for the year ended December 31, 2022 was $0.9 million compared to a foreign currency transaction loss of $0.1 million for the same period in the prior year.

These expenses primarily relate to the change in the value of accounts payable and other monetary assets and liabilities denominated in currencies other than their functional currency between the date of origination and settlement.

For the year ended December 31, 2022, the Company recorded a provision for income taxes of $4.0 million, or 24.4% of income before taxes, compared to $3.2 million, or 25.6% of income before taxes for the same period in the prior year.

The provision for income taxes in the current year was impacted by a deferred tax adjustment due to an increase in the corporate tax rate in a foreign jurisdiction the Company operates in that will impact the rate at which deferred taxes are reversed in future periods, partially offset by changes in the mix of jurisdictions in which taxable income was earned.

The provision for income taxes in the prior year was impacted by limitations on the deductibility of certain facilitative acquisition related costs in the prior year.

The provision for income taxes in the prior year was impacted by a deferred tax adjustment due to an increase in the corporate tax rate in a foreign jurisdiction the Company operates in that will impact the rate at which deferred taxes are reversed in future periods.

Liquidity and Capital Resources

Our cash and cash equivalents remained consistent at $29.3 million at December 31, 2021 and December 31, 2020, respectively.

Cash and cash equivalents remaining consistent was primarily the result of $4.7 million of cash and cash equivalents provided by operating activities, offset by $0.3 million of cash used in investing activities and $4.4 million of cash used in financing activities.

Our cash and cash equivalents decreased by $9.1 million to $20.2 million at December 31, 2022 compared to $29.3 million at December 31, 2021.

Cash and cash equivalents decreasing was primarily the result of $4.5 million of cash and cash equivalents provided by operating activities, offset by $8.5 million payment for the Spinnakar acquisition, $2.5 million of cash used in other investing activities, $1.8 million of cash used in financing activities and $0.7 million negative impact of foreign exchange rates on cash and cash equivalents.

Net cash provided by operating activities for the year ended December 31, 2022 was $4.6 million, comprised of net income adjusted for non-cash items of $16.3 million offset by changes in operating assets and liabilities of $11.8 million.

Net cash and cash equivalents used in investing activities during the year ended December 31, 2021 consisted of $0.3 million of purchases of fixed assets.

Net cash and cash equivalents used in financing activities during the year ended December 31, 2021 was $4.4 million, primarily comprised of dividend payments on our Common Stock of $3.0 million, contingent consideration paid of $0.9 million and purchases of treasury stock of $0.5 million.

Net cash and cash equivalents used in investing activities during the year ended December 31, 2022 was $11.0 million, comprised of $2.5 million of purchases of fixed assets and $8.5 million payment for the Spinnakar acquisition, net of cash acquired.

The Company financed the acquisition from existing cash on the balance sheet.

Net cash and cash equivalents used in financing activities during the year ended December 31, 2022 was $1.8 million, comprised of borrowings under term loan, net of $1.8 million, offset by dividend payments on our Common Stock of $3.0 million and purchases of treasury stock of $0.6 million.

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

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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”).

(“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.

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 December 31, 2021.

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.

As of December 31, 2022 and 2021, the Company had no borrowings outstanding under the Credit Facility.

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, 2023, 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 December 31, 2021, no borrowings were outstanding under the Uncommitted Credit Facility.

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

The Company incurred $0.1 million of interest expense, related to the Credit Facility for each of the years ended December 31, 2021 and 2020.

As of December 31, 2022 and 2021, no borrowings were outstanding under the Uncommitted Credit Facility.

On April 8, 2022, the Company entered into a $2.1 million term loan (the “Term Loan”) with First American Commercial Bancorp, Inc.

pursuant to a Master Loan and Security Agreement.

The proceeds from the Term Loan will be used to fund certain capital expenditures.

The borrowing under the Term Loan bears interest at a rate of 3.73% per annum and is being repaid over forty-eight monthly installments of principal and interest through April 2026.

As of December 31, 2022, the Company had $1.8 million outstanding under the Term Loan.

There were no amounts outstanding under the Term Loan as of December 31, 2021.

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

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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-K

Item 7. Management’s Discussion and Analysis