What changed in this filing

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Item 9A. Controls and Procedures

2022-03-14 compared with 2021-03-16 · 163 added, 192 removed, 786 unchanged (31% of the section changed)

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The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in

the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

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Changes in Internal Control over Financial Reporting

In 2017, we began the process of implementing a new company-wide ERP system as part of a multi-year plan to integrate and upgrade our systems and processes.

The system became operational in May 2020.

As the implementation of the new ERP system has now been largely completed, we have experienced certain changes to our processes and procedures which, in turn, have resulted in changes to the design and operation of certain internal controls over financial reporting.

We believe the necessary steps have been taken to monitor and maintain appropriate internal control over financial reporting during this period of change and we will continue to evaluate the design and operating effectiveness of related key controls during subsequent periods.

While we ultimately expect the new ERP system to strengthen our internal financial controls by automating certain manual processes and standardizing business processes and reporting across our organization, management will continue to evaluate and monitor our internal controls as each of the affected areas evolves.

Furthermore, in response to the COVID-19 pandemic, we have undertaken measures to protect our employees, partners, and clients, including encouraging employees to work remotely.

These changes have compelled us to modify some of our control procedures, however, those changes have so far not been material.

Except for the changes as described in detail above, there were no additional changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal year ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.We are continually monitoring and assessing the potential impact of the COVID-19 pandemic on our internal controls to minimize the impact on their design and operating effectiveness.

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal year ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Other information

On March 15, 2021, the Company entered into Incentive and Retention Agreements (each the “Retention Agreement” and together, the “Retention Agreements”) with our President, Timothy McGrath, and our Chief Financial Officer, Thomas Baker (each individually, the “Executive”).

The Retention Agreements provide that if we terminate the Executive’s employment without Cause (as defined in the applicable Retention Agreement) then, subject to the Executive signing and not revoking a release of claims, the Executive will receive the following:

● continued base salary for a period of up to 24 months (subject to offset for salary or consulting fees earned during that period);

● a pro-rated portion of the Executive’s target bonus as in effect for the fiscal year in which the termination occurs;

● continued payment by the Company of the share of COBRA premiums that the Company would pay for similarly situated employees, with such payment to extend for up to 24 months

In the event of a Change in Control (as defined in the applicable Retention Agreement), the Retention Agreements provide that 75% of the shares of our common stock underlying the unvested portion of each outstanding stock option and other equity award held by the Executive shall become fully vested, exercisable and otherwise free from forfeiture immediately prior to the closing of such Change in Control, with the remaining unvested portion of such equity awards continuing to vest and becoming fully exercisable and free from forfeiture on the first anniversary of the closing of the Change in Control (the “first anniversary vest date”).

In the case of each restricted stock unit that vests on the first anniversary vest date, the Executive will be entitled to the greater of (i) the per share consideration paid with respect to the Company common stock in connection with the Change in Control and (ii) if the Company common stock converts into stock of the acquiring or succeeding entity in connection with the Change in Control, then such stock or the cash value thereof as of the first anniversary vest date, if higher than the per share consideration.

The Retention Agreements also provide that if we terminate the Executive’s employment without Cause, or if an Executive terminates his employment for Good Reason (as defined in the applicable Retention Agreement), and such termination

occurs within the 12 month period following a Change of Control, then subject to the Executive signing and not revoking a release of claims, the Executive will receive the following

● continued base salary for a period of up to 24 months (subject to offset for salary or consulting fees earned during that period);

● the Executive’s full target bonus as in effect for the fiscal year in which the termination occurs;

● continued payment by the Company of the share of COBRA premiums that the Company would pay for similarly situated employees, with such payment to extend for up to 24 months;

● all outstanding and unvested equity awards in each case that vest solely based on continued service that are then held by Executive shall become fully vested, exercisable and otherwise free from forfeiture and, in the case of any restricted stock units, will be entitled to the greater of (i) the per share consideration paid with respect to the Change in Control and (ii) if the Company common stock converts into stock of the acquiring or succeeding entity in connection with the Change in Control, then such stock or the cash value thereof as of the Executive’s termination date, if higher than the per share consideration.

McGrath’s Retention Agreement also terminated the limitation on the number of shares of our common stock that may be sold by Mr.

McGrath in each calendar year contained in the restricted stock unit awards granted to Mr.

McGrath on each of November 12, 2012 and February 13, 2018, and changed the vesting with respect to restricted stock units granted to Mr.

McGrath on February 13, 2018 such that the tranches of such award that would have vested on or after January 1, 2028 will vest as two tranches, 50% on April 1, 2021 and 50% on July 1, 2021.

Third Amendment to Third Amended and Restated Credit and Security Agreement.

We entered into a Third Amended and Restated Credit and Security Agreement on February 24, 2012, by and among us, the guarantors party thereto, the lenders from time to time party thereto, and Citizens Bank, N.A., or Citizens, as agent for the lenders, pursuant to which we may borrow up to $50.0 million, which amount may be increased to $80.0 million at our option in certain circumstances, or the Credit Facility.

The Credit Facility includes various customary financial ratios and affirmative and negative operating covenants, including minimum net worth and maximum funded debt ratio requirements, and default acceleration provisions.

On December 2, 2021, we, as borrower, and GovConnection, Inc., PC Connection Sales Corporation, MoreDirect, Inc.

and GlobalServe, Inc., as guarantors, entered into the Third Amendment to Third Amended and Restated Credit and Security Agreement with Citizens, as a lender and as agent for the lenders, or the Third Amendment.

The Third Amendment, among other things, (i) extended the maturity date of the Credit Agreement from February 10, 2022 to March 31, 2025, (ii) replaced the Eurodollar Rate with the LIBOR Rate, (iii) replaced the Base Rate with the Alternate Base Rate, which is defined as a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 0.50% per annum and (c) the Adjusted LIBOR Rate in effect on such day for deposits in dollars for a one month or three month interest period plus 1.00% per annum, provided that the Alternate Base Rate shall at no time be less than 0% per annum and (iv) modified the LIBOR Rate provisions to provide for a successor benchmark using the secured overnight financing rate, or SOFR.

In connection with the Third Amendment, we paid a one-time facility fee to Citizens.

Capitalized terms used in this Item 9B.

and not otherwise defined herein shall have the respective meanings ascribed to them in the Third Amendment.

The foregoing description of the Third Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the Third Amendment, which is filed as Exhibit 10.49 hereto and incorporated herein by reference.

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not Applicable.

Directors, Executive Officers, and Corporate Governance

The information included under the headings, “Information about our Executive Officers” in Part I hereof and “Election of Directors,” “Information Concerning Directors, Nominees, and Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Code of Business Conduct and Ethics Policy,” and “Board Committees – Audit Committee” in our definitive Proxy Statement for our 2021 Annual Meeting of Stockholders to be filed with the SEC within 120 days of December 31, 2020 (the “Proxy Statement”) is incorporated herein by reference.

In addition to the information included below, the information included under the headings “Election of Directors,” “Information Concerning Directors, Nominees, and Executive Officers,” “Delinquent Section 16(a) Reports,” “Code of Business Conduct and Ethics Policy,” “Director Candidates,” and “Board Committees – Audit Committee” in our definitive Proxy Statement for our 2022 Annual Meeting of Stockholders to be filed with the SEC (the “Proxy Statement”) is incorporated herein by reference.

With the exception of the foregoing information and other information specifically incorporated by reference into this Form 10-K, the Proxy Statement is not being filed as a part hereof.

Information about our Executive Officers

Our executive officers and their ages as of March 14, 2022 are as follows:

Patricia Gallup

Chair and Chief Administrative Officer

Timothy McGrath

President and Chief Executive Officer

Senior Vice President, Chief Financial Officer and Treasurer

Patricia Gallup is our co-founder and has served as Chair of our Board of Directors since September 1994, and as Chief Administrative Officer since August 2011.

Gallup has served as a member of our executive management team since 1982.

Timothy McGrath has served as our Chief Executive Officer since August 2011, and as President since May 2010.

McGrath has served as a member of our executive management team since he joined the Company in 2005.

Thomas Baker has served as our Chief Financial Officer and as a member of our executive management team since he joined the Company since March 2019.

Prior to joining the Company, Mr.

Baker had served as Corporate Vice President and Chief Financial Officer for the New Markets and Service Group at Applied Materials, Inc., a semiconductor capital equipment company, since 2013.

Code of Business Conduct and Ethics

We have adopted a Code of Business Conduct and Ethics that applies to our officers, including our principal executive, financial and accounting officers, and our directors and employees.

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Certain Relationships and Related Transactions, and Director Independence

The information included under the headings “Certain Relationships and Related Transactions” and “Director Independence” in the Proxy Statement is incorporated herein by reference.

The information included under the headings “Certain Relationships and Related Transactions,” “Policies and Procedures for Related Person Transactions” and “Director Independence” in the Proxy Statement is incorporated herein by reference.

Principal Accounting Fees and Services

The information included under the heading “Principal Accounting Fees and Services” in the Proxy Statement is incorporated herein by reference.

The information included under the heading “Principal Accounting Fees and Services” and “Pre-Approval Policies and Procedures” in the Proxy Statement is incorporated herein by reference.

Exhibits and Financial Statement Schedules

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Form of Registration Rights Agreement among the Registrant, Patricia Gallup, David Hall, and the 1998 PC Connection Voting Trust.

Form of Incentive Stock Option Agreement for 2020 Stock Incentive Plan.

2020 Stock Incentive Plan.

Amended and Restated 2007 Stock Incentive Plan, as amended.

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Incentive and Retention agreement, dated as of March 15, 2021, between the Registrant and Timothy McGrath .

Incentvie and Retention agreement, dated March 15, 2021, between the Registrant and Thomas Baker

Form of Restricted Stock Units Agreement for 2020 Stock Incentive Plan

Incentive and Retention agreement, dated March 15, 2021, between the Registrant and Thomas Baker

Form of Restricted Stock Units for 2020 Stock Incentive Plan

Third Amendment, dated December 2, 2021, to the Third Amended and Restated Credit and Security Agreement, among Citizens Bank of Massachusetts, as lender and as agent, other financial institutions party thereto from time to time, as lenders, PC Connection, Inc., as borrower, GovConnection, Inc., PC Connection Sales Corporation, MoreDirect, Inc., and Professional Computer Center, Inc., each as guarantors.

Subsidiaries of Registrant.

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(28) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-K, filed on February 6, 2020.

(29) Incorporated by reference from exhibits filed with the Company's annual report on Form 10-K, filed on March 16, 2021.

(30) Incorporated by reference from exhibits filed with the Company's quarterly report on Form 10-Q, filed on May 7, 2021.

* Management contract or compensatory plan or arrangement.

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(i) Consolidated Balance Sheets at December 31, 2021 and December 31, 2020, (ii) Consolidated Statements of Income for the years ended December 31, 2021, 2020, and 2019, (iii) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2021, 2020, and 2019, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020, and 2019, and (v) Notes to Consolidated Financial Statements.

Attached as Exhibit 104 to this report is the Cover Page Interactive Data File (embded within the Inline XBRL document).

Form 10-K Summary

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March 14, 2022

/s/ Gary Kinyon

March 14, 2022

PC CONNECTION, INC.

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm (PCAOB ID No 34 )

Consolidated Balance Sheets as of December 31, 2021 and 2020

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We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.

Revenue — Refer to Notes 1 and 2 to the financial statements

Critical Audit Matter Description

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Inventories, net

Income taxes receivable

Prepaid expenses and other current assets

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Income from operations

Interest expense

Interest income

Gain from life insurance

Other income, net

Income before taxes

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Balance - December 31, 2018

Cumulative effect of adoption of ASC 606

Issuance of common stock under Employee Stock Purchase Plan

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Balance - December 31, 2020

Issuance of common stock under Employee Stock Purchase Plan

Stock-based compensation expense

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Shares withheld for taxes paid on stock awards

Repurchase of common stock for treasury

Dividend declaration

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Cash Flows provided by Operating Activities:

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

Provision for credit losses

Adjustments to credit losses reserve

Stock-based compensation expense

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Gain from life insurance

Loss on disposal of fixed assets

(Gain) loss on disposal of fixed assets

Changes in assets and liabilities:

Accounts receivable

Prepaid expenses, income tax receivables and other current assets

Prepaid expenses and other current assets

Other non-current assets

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Purchases of equipment and capitalized software

Proceeds from sale of equipment

Proceeds from life insurance

Net cash used in investing activities

Cash Flows (used in) provided by Financing Activities:

Proceeds from short-term borrowings

Repayment of short-term borrowings

Cash Flows used in Financing Activities:

Purchase of treasury shares

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Accrued capital expenditures

Life insurance recorded as receivable

Dividend declarations

Life insurance recorded as receivable

Supplemental Cash Flow Information:

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PC Connection, Inc.

is a leading solutions provider of a wide range of information technology, or IT, solutions.

The Company help its customers design, enable, manage, and service their IT environments.

The Company provides IT products, including computer systems, software and peripheral equipment, networking communications, and other products and accessories that it purchases from manufacturers, distributors, and other suppliers.

The Company also offers services involving design, configuration, and implementation of IT solutions.

These services are performed by the Company’s personnel and by first-party service providers.

is a Fortune 1000 Global Solutions Provider that simplifies the information technology, or IT, purchasing experience, guiding the connection between people and technology.

The Company’s dedicated Account Managers partner with customers to design, deploy, and support cutting-edge IT environments using the latest hardware, software, and services.

The Company provides a wide range of IT solutions, from the desktop to the cloud—including computer systems, data center solutions, software and peripheral equipment, networking communications, and other products and accessories that the Company purchases from manufacturers, distributors, and other suppliers.

The Company also offers comprehensive portfolio of managed services and professional services.

These services are performed by the Company’s personnel and by third-party providers.

The Company’s GlobalServe offering ensures worldwide coverage for the Company’s multinational customers, delivering global procurement solutions through the Company’s network of incountry suppliers in over 150 countries.

The Company operates through three sales segments:

(a) the Business Solutions segment, which serves small- to medium-sized businesses, through its PC Connection Sales subsidiary, (b) the Enterprise Solutions segment, which serves large enterprise customers, through its MoreDirect subsidiary, and (c) the Public Sector Solutions segment, which serves federal, state, and local governmental and educational institutions, through its GovConnection subsidiary.

• Connection Enterprise Solutions (formerly MoreDirect)—serving large enterprise customers (Large Accounts)

• Connection Business Solutions (formerly PC Connection Sales Corp)—serving SMBs

• Connection Public Sector Solutions (formerly GovConnection)—serving federal, state, and local government and educational institutions

The following is a summary of the Company’s significant accounting policies:

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These estimates and assumptions affect the reported amounts and disclosures of assets and liabilities and the reported amounts and disclosures of revenue and expenses during the period.

Management bases its estimates and judgments on the information available at the time and various other assumptions believed to be reasonable under the circumstances, including estimates of the impact of the coronavirus pandemic (“COVID-19 pandemic”).

Management bases its estimates and judgments on the information available at the time and various other assumptions believed to be reasonable under the circumstances.

By nature, estimates are subject to an inherent degree of uncertainty.

Actual results could differ from those estimates and assumptions, including the impact of the COVID-19 pandemic.

Actual results could differ from those estimates and assumptions.

Revenue Recognition

On January 1, 2018, the Company adopted ASC 606— Revenue from Contracts with Customers (“ASC 606”), which replaced existing revenue recognition rules with a comprehensive revenue measurement and recognition standard and expanded disclosure requirements.

Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services.

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Revenue is recognized at the amount expected to be collected, net of any taxes collected from customers, which are subsequently remitted to governmental authorities.

The Company generally invoices for its products at the time of shipping, and accordingly there is not a significant financing component included in our arrangements.

generally invoices for its products at the time of shipping, and accordingly there is not a significant financing component included in our arrangements.

Cost of Sales and Certain Other Costs

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The carrying value of our cash equivalents approximates fair value.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

The accounting guidance includes a fair value hierarchy that priorities the inputs to valuation techniques used to measure fair value.

The three levels of the fair value hierarchy are as as follows:

Quoted prices for identical assets or liabilities in active markets.;

Observable inputs other than those described as Level 1;

Unobservable inputs that are supportable by little or no market activities and are based on significant assumptions and estimates.;

The company’s money market funds are valued at the closing price reported by the fund sponsor from an actively traded exchange.

It is included as cash equivalents within the Company’s consolidated balance sheet and is categorized as a level 1 measurement.

The majority of payments due from credit card processors and banks for third-party credit card and debit card transactions process within one to five business days.

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Based on the results of the credit assessments, the Company will extend credit under its standard payment terms or may request alternative early payment actions.

The Company determines the required allowance for expected credit losses using information such as its customer credit history and financial condition, industry and market segment information, credit reports, and economic trends and conditions such as the impacts of COVID-19 pandemic in the year ended December 31, 2020.

Allowances can be affected by changes in the industry, customer credit issues or customer bankruptcies or expectations of any such events in a future period when reasonable and supportable.

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Amounts are charged against the allowance when it is determined that expected credit losses may occur.

We assessed collectability by reviewing account receivable on an aggregated basis where similar characteristics exist and on an individual basis when we identify specific customers with collectability issues, and if necessary, records a reserve against those receivables it determines may not be collectable.

We assess collectability by reviewing account receivable on an aggregated basis where similar characteristics exist and on an individual basis when we identify specific customers with collectability issues, and if necessary, records a reserve against those receivables it determines may not be collectable.

Trade receivables are written off in the period in which they are deemed uncollectible.

Recoveries of trade receivables previously charged are recorded when received.

As of December 31, 2020, allowances include collectability concerns stemming from business and market disruption caused by the COVID-19 pandemic and may fluctuate materially in future periods as the duration and severity of the impact of the COVID-19 pandemic remains uncertain.

Inventories (all finished goods) consisting of software packages, computer systems, and peripheral equipment, are stated at cost (determined under a weighted-average cost method which approximates the first-in, first-out method) or net realizable value, whichever is lower.

net realizable value, whichever is lower.

Inventory quantities on hand are reviewed regularly, and allowances are maintained for obsolete, slow moving, and nonsalable inventory.

Vendor Consideration

The Company receives funding from merchandise vendors for price protections, discounts, product rebates, and other programs.

These allowances are treated as a reduction of the vendor’s prices and are recorded as adjustments to cost of sales.

Allowances for product rebates that require certain volumes of product sales or purchases are recorded as the related milestones are probable of being met.

Advertising Costs and Vendor Consideration

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This vendor consideration, to the extent that it represents specific reimbursements of incremental and identifiable costs, is offset against selling, general and administrative expenses (“SG&A”) expenses.

Advertising consideration that cannot

be associated with a specific program or that exceeds the fair value of advertising expense associated with that program is classified as an offset to cost of sales.

Advertising consideration that cannot be associated with a specific program or that exceeds the fair value of advertising expense associated with that program is classified as an offset to cost of sales.

The Company’s vendor partners generally consolidate their funding of advertising and other marketing programs, and accordingly, the Company classifies substantially all vendor consideration as a reduction of cost of sales rather than a reduction of advertising expense.

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Property and equipment are stated at cost, net of accumulated depreciation and amortization.

Depreciation and amortization is provided for financial reporting purposes over the estimated useful lives of the assets ranging from three to seven years .

The estimated useful lives of the assets range from three to seven years .

Computer software, including licenses and internally developed software, is capitalized and amortized over lives generally ranging from three to ten years .

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Note 3 describes the annual impairment methodology that the Company uses each year in calculating the recoverability of goodwill and non-amortizing intangibles.

This same impairment test is performed at other times during the course of a year should an event occur or circumstance change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

This same impairment test is performed at other times during

the course of a year should an event occur or circumstance change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Recoverability of amortizing intangible assets is assessed only when events have occurred that may give rise to impairment.

When a potential impairment has been identified, forecasted undiscounted net cash flows of the operations to which the asset relates are compared to the current carrying value of the long-lived assets present in that operation.

If such cash flows are less than such carrying amounts, long-lived assets including such intangibles, are written down to

their respective fair values.

If such cash flows are less than such carrying amounts, long-lived assets including such intangibles, are written down to their respective fair values.

No intangible assets impairment was recognized for each of the years ended December 31, 2021, 2020 and 2019.

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No single customer accounted for more than 4 % of total net sales in 2021, 2020, and 2019.

While no single agency of the federal government comprised more than 3 % of total sales, aggregate sales to the federal government as a percentage of total net sales were 4.6 %, 6.9 %, and 5.4 % in 2020, 2019, and 2018, respectively.

Product purchases from Ingram Micro, Inc., our largest supplier, Synnex and HP Inc.

accounted for approximately 21 %, 15 % and 12 % respectively, of our total product purchases in 2020.

Product purchases from Ingram Micro, Inc., our largest supplier, Synnex and HP Inc.

accounted for approximately 21 %, 14 % and 8 % respectively, of our total product purchases in 2019.

Product purchases from Ingram Micro, Inc., our largest supplier, Synnex and HP Inc.

Product purchases from Ingram Micro, Inc., TD Synnex Corporation, and Dell Inc.

accounted for approximately 23 %, 23 % and 12 % respectively, of our total product purchases in 2021.

No other singular vendor supplied more than 10% of our total product purchases in 2020, 2019 and 2018.

In addition to these vendors, product purchases, whether purchased directly or from a wholesale distributor, from Dell and Tech Data comprised a total of 66 % of our product purchases in 2020.

We believe that, while we may experience some short-term disruption if products from Ingram, Synnex, HP Inc., or any of these vendors become unavailable to us, alternative sources for these products are available.

Products manufactured by Hewlett Packard Enterprise and HP Inc.

Product purchases from Ingram Micro, Inc., TD Synnex Corporation and HP Inc.

accounted for approximately 21 %, 15 % and 12 % respectively, of the Company’s total product purchases in 2020.

Product purchases from Ingram Micro, Inc., TD Synnex Corporation and HP Inc.

accounted for approximately 21 %, 14 % and 8 % respectively, of the Company’s total product purchases in 2019.

No other singular vendor supplied more than 10% of the Company’s total product purchases in 2021, 2020 and 2019.

We believe that, while the Company may experience some short-term disruption if products from Ingram Micro, Inc., TD Synnex Corporation, Dell Inc., and HP Inc., or any of these vendors become unavailable to us, alternative sources for these products are available.

Products manufactured by HP Inc.

collectively represented approximately 15 % of the Company’s net sales in 2021, 18 % in 2020 and 19 % in 2019.

We believe that in the event we experience either a short-term or permanent disruption of supply of HP products, such disruption would likely have a material adverse effect on the Company’s results of operations and cash flows.

In the event the Company experiences either a short-term or permanent disruption of supply of HP products, such disruption would likely have a material adverse effect on the Company’s results of operations and cash flows.

Restructuring and other charges

Restructuring and other charges are presented separately from SG&A expenses.

Costs incurred were as follows:

Year Ended December 31,

Employee separations

Lease termination costs

Total restructuring and other charges

The restructuring and other charges recorded in 2020 were related to a reduction in workforce across our business segments and included cash severance and other related termination benefits.

The restructuring and other charges recorded in 2019 were related to a reduction in workforce in our Headquarters/Other group and included cash severance payments and other related benefits.

Also included in restructuring charges were exit costs incurred associated with the closing of one of our office facilities.

The restructuring and other charges recorded in 2018 were related to a reduction in workforce at our Business Solutions, Public Sector Solutions, and Headquarter segments and included cash severance payments and other related benefits.

Overall, restructuring and other charges consist primarily of employee termination benefits, which are accrued in the period incurred and paid within a year of termination.

Included in accrued expenses at December 31, 2020, 2019, and 2018 were $ 181 , $ 110 , and $ 784 , respectively, related to unpaid employee termination benefits.

The amount accrued as of December 31, 2020 is expected to be paid in 2021.

All planned restructuring and other charges were incurred as of December 31, 2020 and the Company has no ongoing restructuring plans.

In the years ended December 31 2020 and 2019, we undertook actions across the business to lower our cost structure and align our business in an effort to improve our ability to execute our strategy.

In connection with these restructuring initiatives, we incurred restructuring and related costs of $ 1.0 million and $ 0.7 million for the years ended December 31, 2020 and 2019, respectively.

There were no restructuring related costs incurred for the year ended December 31, 2021.

Earnings Per Share

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For the years ended December 31, 2021, 2020, and 2019, the Company did no t exclude any outstanding nonvested stock units or stock options from the computation of diluted earnings per share because including them would have had an anti-dilutive effect.

Other Income, Net

Other income, net for the year ended December 31, 2020 consisted of $ 1,061 related to a gain from life insurance, which was realized upon the passing of one of our co-founders and a member of the Company’s Board of Directors, David H.

Also included in other income, net for the year ended December 31, 2020 was interest income of $ 168 , partially offset by interest expense of $ 107 .

Other income, net for the year ended December 31, 2019 consisted of interest income of $ 810 , which was partially offset by interest expense of $ 103 .

Other income, net for the year ended December 31, 2018 consisted of $ 2,255 related to a gain, net of costs incurred of $ 745 , that was realized upon execution of a favorable $ 3,000 cash resolution of a contract dispute that arose in 2017.

Also included in other income, net for the year ended December 31, 2018 was interest income of $ 868 , offset partially by interest expense of $ 145 .

Adoption of Recently Issued Financial Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) ASU 2016-13, Financial Instruments—Credit Losses, which adds an impairment model for financial instruments, including trade receivables, that is based on expected losses rather than incurred losses.

Under the new guidance, an entity recognizes as an allowance its estimate of lifetime expected losses, which is expected to result in more timely recognition of such losses.

The Company adopted this new standard beginning January 1, 2020 for both interim and annual reporting periods.

At adoption, this ASU did not have a material impact on the Company’s consolidated financial statements.

The impact of the adoption of this standard was limited to the Company’s trade receivables as it does not currently have any other financial instruments that would be affected by this standard.

Recently Issued Financial Accounting Standards

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The Company’s secured credit facility agreement references LIBOR, which is expected to be discontinued as a result of reference rate reform.

The Company expects to adopt the guidance upon transition from LIBOR, but does not believe the adoption will have a material effect on its consolidated financial statements.

The optional amendments are effective as of March 12, 2020 through December 31, 2022.

The Company is currently evaluating the effect of the adoption of this standard on the Company, but does not believe the adoption will have a material effect on its consolidated financial statements.

Nature of Products and Services

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The Company is the principal in these transactions and recognizes revenue for the on-premise license at the point in time when the software is made available to the customer and the commencement of the term of the software license or when the renewal term begins, as applicable.

For certain on-premise licenses for security software, the customer derives substantially all of the benefit from these arrangements through the third-party delivered software maintenance, which provides software updates and other support services.

support services.

The Company does not have control over the delivery of these performance obligations, and accordingly the Company is the agent in these transactions.

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The Company evaluates such engagements to determine whether it is the principal or the agent in each transaction.

For those transactions in which we do not control the service, the Company acts as an agent and recognizes the transaction revenue on a net basis at a point in time when the vendor and customer accept the terms and conditions in the sales arrangement.

For those transactions in which the Company does not control the service, the Company acts as an agent and recognizes the transaction revenue on a net basis at a point in time when the vendor and customer accept the terms and conditions in the sales arrangement.

All amounts billed to a customer in a sales transaction related to shipping and handling, if any, represent revenues earned for the goods provided, and these amounts have been included in net sales.

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Total net sales

For the Year Ended December 31, 2019

Public Sector

Notebooks/Mobility

Servers/Storage

Net/Com Products

Displays and Sound

Other Hardware/Services

Total net sales

Contract Balances

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Goodwill and intangible assets with indefinite lives are subject to an annual impairment test as of November 30 and tested more frequently if events or circumstances occur that would indicate a potential decline in fair value.

In 2020, the Company used a discounted cash flow methodology to determine the fair value of each reporting unit.

Internal forecasts were used to estimate the future year cash flow and long-term growth rates was estimated based on the most recent views of each reporting unit.

Discount rate used in the model reflects the risk and uncertainty associated with the respective businesses.

For 2019, the Company performed a qualitative “Step 0” analysis.

In 2021 and 2020, the Company performed a qualitative “step 0”analysis.

ASC 350— Intangible – Goodwill and Other states that an entity may assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill.

This analysis allows the Company to consider qualitative factors that might impact the carrying amount of its goodwill to determine whether a more detailed quantitative analysis would be necessary.

Factors considered when performing the “Step 0” impairment assessment included the Company’s performance relative to historical and projected future operating results, macroeconomic conditions, industry and market trends, cost factors that may have a negative impact on earnings and cash flows, changes in the Company’s stock price and market capitalization, and other relevant entity-specific events.

Based on the analysis, there were no indications that an impairment was more than likely to exist.

Goodwill is held by the Company’s Large Account and SMB segments.

The Company concluded that the fair values of the domain name and the two reporting units each exceeded the respective carrying values, and accordingly, an impairment was not identified in the annual test.

The Company also did not identify any events or circumstances that would indicate that it is more likely than not that the carrying values of the reporting units or the domain name were in excess of the respective fair values during the years ended December 31, 2020 and 2019, respectively.

The Company concluded that the fair values of the domain name and the two reporting units each substantially exceeded the respective carrying values, and accordingly, an impairment was not identified in the annual test.

The Company also did not identify any events or circumstances that would indicate that it is more likely than not that the

carrying values of the reporting units or the domain name were in excess of the respective fair values during the year ended December 31, 2020.

Factors considered when performing the impairment assessment included the Company’s performance relative to historical and projected future operating results, macroeconomic conditions, industry and market trends, cost factors that may have a negative impact on earnings and cash flows, changes in the Company’s stock price and market capitalization, and other relevant entity-specific events.

Based on the above qualitative analysis, the Company determined goodwill was not impaired for the years ended December 31, 2021 and 2020.

The carrying amount of goodwill for the periods presented is detailed below:

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At December 31, 2021, the Company’s intangible assets included a domain name for $ 450 , which has an indefinite life and is not subject to amortization.

In addition, in 2016 the Company acquired customer relationships from its Softmart and GlobalServe acquisitions, which will be amortized on a straight-line basis over their estimated useful lives of 10 years .

In addition, in 2016 the Company acquired customer relationships from its Softmart and GlobalServe acquisitions, which are amortized on a straight-line basis over their estimated useful lives of 10 years .

The Company’s remaining intangible assets are amortized in proportion to the estimates of the future cash flows underlying the valuation of the assets.

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For the Years Ended December 31,

2026 and thereafter

ACCOUNTS RECEIVABLE

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The Company leases certain facilities from a related party, which is affiliated with the Company through common ownership.

Included in the right-of-use asset as of December 31, 2020 was $ 3,460 and a corresponding lease liability of

$ 3,460 associated with related party leases.

Included in the right-of-use asset as of December 31, 2021 was $ 2,318 and a corresponding lease liability of $ 2,318 associated with related party leases.

As of December 31, 2021, the Company had no leases that were classified as financing leases and there were no additional operating or financing leases that have not yet commenced.

For the Year Ended December 31, 2020

Refer to the following table for quantitative information related to the Company’s leases for the year ended December 31, 2021 and 2020:

Year Ended December 31, 2021

Related Parties

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Capitalized operating leases

Year Ended December 31, 2020

Related Parties

Capitalized operating lease cost

Short-term lease cost

Total lease cost

Other Information

Cash paid for amounts included in the measurement of lease liabilities and capitalized operating leases:

Operating cash flows

Weighted-average remaining lease term (in years):

Capitalized operating leases

Weighted-average discount rate:

Capitalized operating leases

As of December 31, 2021, future lease payments over the remaining term of capitalized operating leases were as follows:

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Related Parties

2025 and thereafter

Imputed interest

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The long-term lease liability was $ 6,789 and the short-term lease liability , which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $ 3,422 .

As of December 31, 2019, the ROU asset had a balance of $ 13,842 .

The long-term lease liability was $ 10,330 and the short-term lease liability, which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $ 4,316 .

As of December 31, 2020, the ROU asset had a balance of $ 12,821 The long-term lease liability was $ 9,631 and the short-term lease liability , which is included in accrued expenses and other liabilities in the consolidated balance sheets, was $ 3,928 .

ACCRUED EXPENSES AND OTHER LIABILITIES

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Customer and vendor deposits

Dividends payable

Dividend Payable

Short term lease liability

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GAIN ON LIFE INSURANCE

The Company owns and is the beneficiary of one life insurance policy on Patricia Gallup, the Company’s Chair and Chief Administrative Officer.

This policy had a total cash value recorded as “Other assets” on the Company’s balance sheet of approximately $ 200 as of December 31, 2021 and December 31, 2020 respectively.

On November 14, 2020, David Hall, one of the Company co-founders and a member of the Company’s Board of Directors passed away.

The Company owned and was the beneficiary of two life insurance policies on Mr.

These policies had a total cash value of approximately $ 0.4 million recorded as “Other assets” on the Company’s balance sheet as of December 31, 2019.

These policies had a total cash value of approximately $ 400 recorded as “Other assets” on the Company’s balance sheet as of December 31, 2019.

After the death of Mr.

Hall, $ 1.5 million was recorded as receivable on the Company’s balance sheet.

The difference between the total insurance proceeds and the cash surrender value of the policies was approximately $ 1.1 million, which was recorded as non-operating income.

The life insurance proceeds are not subject to federal or state income taxes.

The Company also owns and is the beneficiary of one life insurance policy on Patricia Gallup, the Company’s Chair and Chief Administrative Officer.

This policy had a total cash value recorded as “Other assets” on the Company’s balance sheet of approximately $ 0.2 million as of December 31, 2020 and $ 0.1 million as of December 31, 2019.

Hall, $ 1,500 was recorded as receivable on the Company’s balance sheet in 2020.

The difference between the total insurance proceeds and the cash surrender value of the policies was $ 1,061 , which was recorded as non-operating income for the year ended December 31, 2020.

The life insurance proceeds were received in 2021, which are not subject to federal or state income taxes.

BANK BORROWINGS

The Company has a $ 50,000 credit facility collateralized by its account receivables that expires February 10, 2022 .

The Company has a $ 50,000 credit facility collateralized by its account receivables that expires March 31, 2025 .

This facility can be increased, at the Company’s option, to $ 80,000 for permitted acquisitions or other uses authorized by the lender on substantially the same terms.

Amounts outstanding under this facility bear interest at the one-month London Interbank Offered Rate (“ LIBOR ”) ( 0.14 % at December 31, 2020) , plus a spread based on our funded debt ratio, or in the absence of LIBOR, the prime rate ( 3.25 % at December 31, 2020).

Amounts outstanding under this facility bear interest at greatest of (i) the prime rate ( 3.25 % at December 31, 2021), (ii) the federal funds effective rate plus 0.50 % per annum and (iii) the one-month London Interbank Offered Rate (“LIBOR”), plus 1.00 % per annum, provided that the rate shall at no time be less than 0 % per annum.

The credit facility includes various customary financial ratios and operating covenants, including minimum net worth and maximum funded debt ratio requirements, and default acceleration provisions.

The credit facility does not include restrictions on future dividend payments.

Funded debt ratio is the ratio of average outstanding advances under the credit facility to Adjusted EBITDA (Earnings Before Interest Expense, Taxes, Depreciation, Amortization, and Special Charges).

Funded debt ratio is the ratio of average outstanding advances under the credit facility to Adjusted Earnings Before Interest Expense, Taxes, Depreciation, Amortization, and Special Charges (Adjusted EBITDA).

The maximum allowable funded debt ratio under the agreement is 2.0 to 1.0.

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The Company had no outstanding bank borrowings at December 31, 2021 or 2020, and accordingly, the entire $ 50,000 facility was available for borrowings under the credit facility.

As of December 31, 2020, the Company was in compliance with the financial covenants.

As of December 31, 2021, the Company was in compliance with all financial covenants contained in the agreement governing the credit facility.

In December of 2021, we entered into an amendment to our credit facility to, among other things, extend the maturity date to March 31, 2025, at which time any amounts outstanding shall become due.

See “Part II – Item 9b.

Other Information – Third Amendment to Third Amended and Restated Credit and Security Agreement” for additional information.

STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION

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There is no fixed termination date for this repurchase program.

Purchases may be made in open-market transactions, block transactions on

or off an exchange, or in privately negotiated transactions.

Purchases may be made in open-market transactions, block transactions on or off an exchange, or in privately negotiated transactions.

The timing and amount of any share repurchases will be based on market conditions and other factors.

The Company repurchased 247 , 135 , and 535 shares for $ 10.2 million, $ 4.5 million, $ 15.4 million during the years ended December 31, 2020, 2019, 2018, respectively, under Board-authorized repurchase programs.

There was no shares repurchases during the year ended December 31, 2021.

The Company repurchased 247 and 135 shares for $ 10.2 million and $ 4.5 million during the years ended December 31, 2020 and 2019, respectively, under Board-authorized repurchase programs.

As of December 31, 2021, the Company has repurchased an aggregate of 2,599 shares for $ 42.3 million under Board-authorized repurchase programs, and the maximum approximate dollar value of shares that may yet be purchased under the Company’s existing Board-authorized program is $ 12.7 million.

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In 2020, the Board adopted and the Company’s stockholders approved the 2020 Stock Incentive Plan (the “2020 plan”), which replaces the Amended and Restated 2007 Stock Incentive Plan.

The 2020 plan extended the term of the Restated 2007 plan and authorized the issuance of 350 shares of common stock plus any shares remain available for grant under the Restated 2007 plan.

The 2020 plan extended the term of the Restated 2007 plan and authorized the issuance of 350 shares of common stock plus any shares that remain available for grant under the Restated 2007 plan.

As of December 31, 2021, there were 188 shares eligible for future grants under the 2020 Plan.

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An aggregate of 1,203 shares of common stock has been reserved for issuance under the Purchase Plan, of which 1,200 shares have been purchased.

In 2020, after the first offering was executed in June, 2020, the purchase plan was suspended by the Board.

The Purchase Plan was suspended by the Board since June, 2020.

No decision has been made whether to resume the Purchase Plan as of December 31, 2021.

Accounting for Share-Based Compensation

The Company measures the grant date fair value of equity awards given to employees and recognize that cost, adjusted for forfeitures, over the period that services are performed.

The Company values grants with multiple vesting periods as a single award, estimate expected forfeitures based upon historical patterns of employee turnover, and record share-based compensation as a component of SG&A expenses.

The Company values grants with multiple vesting periods as a single award, estimates expected forfeitures based upon historical patterns of employee turnover, and records share-based compensation as a component of SG&A expenses.

The following table summarizes the share-based compensation expenses included in the consolidated statements of net income (dollars in thousands):

1 unchanged sentence

Net effect on net income

In 2020, 2019, and 2018, the Company issued nonvested stock units that settle in stock and vest over periods up to ten years .

In 2021, 2020, and 2019, the Company issued nonvested stock units that settle in stock and vest over periods up to six years .

Recipients of nonvested stock units do not possess stockholder rights.

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Total deferred

Net provision

Provision for income taxes

The components of the deferred taxes at December 31, 2021 and 2020 are as follows:

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The Company has deferred tax assets from state net operating loss carryforwards aggregating $ 1,786 at December 31, 2021 representing state tax benefits, net of federal taxes, of approximately $ 1,411 .

These loss carryforwards are subject to between five , fifteen , and twenty-year carryforward periods, with $ 3 expiring after 2021, $ 3 expiring after 2022, $ 4 expiring after 2023, $ 3 expiring after 2024, $ 4 expiring after 2025, $ 1,277 expiring beyond 2025, and $ 70 with no expiration.

The Company has provided valuation allowances of $ 942 and $ 992 at December 31, 2020 and 2019, respectively, against the state tax loss carryforwards, representing the portion of carryforward losses that the Company

believes are not likely to be realized.

The net change in the total valuation allowance reflects a $ 50 decrease in 2020, and a $ 153 and $ 94 increase in 2019 and 2018.

These loss carryforwards are subject to five , fifteen , or twenty-year carryforward periods, with $ 3 expiring in 2022, $ 3 expiring in 2023, $ 4 expiring in 2024, $ 4 expiring in 2025, $ 3 expiring in 2026, $ 1,516 expiring beyond 2026, and $ 253 with no expiration.

The Company has provided valuation allowances of $ 1,174 and $ 942 at December 31, 2021 and 2020, respectively, against the state tax loss carryforwards, representing the portion of carryforward losses that the Company believes are not likely to be realized.

The net change in the total valuation allowance reflects a $ 232 increase in 2021, and a $ 50 decrease in 2020, respectively.

A reconciliation of the Company’s 2021, 2020, and 2019 income tax provision to total income taxes at the statutory federal tax rate is as follows:

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state tax jurisdictions.

The tax years 2016-2019 remain open to examination by the major state taxing jurisdictions in which the Company files.

The tax years 2017 -

2020 remain open to examination by the major state taxing jurisdictions in which the Company files.

The tax years 2018-2020 remain open to examination by the Internal Revenue Service.

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The Company has a contributory profit-sharing and employee savings plan covering all qualified employees.

No contributions to the profit-sharing element of the plan were made by the Company in 2020, 2019, or 2018.

The Company made matching contributions to the employee savings element of such plan of $ 5,656 , $ 2,778 , $ 2,538 in 2020, 2019, and 2018, respectively.

No contributions to the profit-sharing element of the plan were made by the Company in 2021, 2020, and 2019.

The Company made matching contributions to the employee savings element of such plan of $ 5,951 , $ 5,656 , and $ 2,778 in 2021, 2020, and 2019, respectively.

COMMITMENTS AND CONTINGENCIES

3 unchanged sentences

The Company records a liability when it believes that a loss is both probable and reasonably estimable.

On a quarterly basis, the Company reviews each of these legal proceedings to determine whether it is probable, reasonably possible, or remote that a liability has been incurred and, if it is at least reasonably possible, whether a range of loss can

be reasonably estimated.

Significant judgment is required to determine both the likelihood of there being a loss and the estimated amount of such loss.

25 unchanged sentences

Total operating income

Other income, net

Other (expenses) income, net

Income before taxes

21 unchanged sentences

The Company’s primary target customers are SMBs, medium-to-large corporate accounts, and federal, state, and local government agencies, educational institutions, and medium-to-large corporate accounts.

No single customer accounted for more than 5 % of total net sales in 2020, 2019, or 2018.

While no single agency of the federal government comprised more than 3 % of total sales, aggregate sales to the federal government were 4.6 %, 6.9 %, and 5.4 % in 2020, 2019, and 2018, respectively.

QUARTERLY FINANCIAL RESULTS (UNAUDITED)

The following table sets forth certain unaudited quarterly data of the Company for each of the calendar quarters in 2020 and 2019.

This information has been prepared on the same basis as the annual financial statements, and all necessary adjustments, consisting only of normal recurring adjustments, have been included in the amounts stated below to present fairly the selected quarterly information when read in conjunction with the annual financial statements and the notes thereto included elsewhere in this document.

The quarterly operating results are not necessarily indicative of future results of operations.

Quarters Ended

September 30,

Cost of sales

Selling, general and administrative expenses

Restructuring and other charges

Income from operations

Other income, net

Income before taxes

Income tax provision

Earnings per common share:

Weighted average common shares outstanding:

Quarters Ended

September 30,

Cost of sales

Selling, general and administrative expenses

Restructuring and other charges

Income from operations

Interest income, net

Income before taxes

Income tax provision

Earnings per common share:

Weighted average common shares outstanding:

PC CONNECTION, INC.

AND SUBSIDIARIES

SCHEDULE I I—VALUATION AND QUALIFYING ACCOUNTS

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

(amounts in thousands)

8 unchanged sentences

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 9A. Controls and Procedures