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EX-32.3 - EX-32.3 - Wayside Technology Group, Inc.wstg-20170930ex323ad4290.htm
EX-32.2 - EX-32.2 - Wayside Technology Group, Inc.wstg-20170930ex3224d8707.htm
EX-32.1 - EX-32.1 - Wayside Technology Group, Inc.wstg-20170930ex321895d66.htm
EX-31.3 - EX-31.3 - Wayside Technology Group, Inc.wstg-20170930ex3132ebcb3.htm
EX-31.2 - EX-31.2 - Wayside Technology Group, Inc.wstg-20170930ex31253cb9d.htm
EX-31.1 - EX-31.1 - Wayside Technology Group, Inc.wstg-20170930ex3115b2da8.htm

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2017

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                       to                     

 

Commission File No. 000-26408

 

Wayside Technology Group, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

13-3136104

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

4 Industrial Way West, Suite 300, Eatontown, New Jersey 07724

(Address of principal executive offices)

 

(732) 389-8950

Registrant’s Telephone Number

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒  No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☒  No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Check One:

Large Accelerated Filer ☐

 

Accelerated Filer ☒

 

 

Smaller Reporting Company ☐

Non-Accelerated Filer ☐

 

Emerging Growth Company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒  

There were 4,481,864 outstanding shares of common stock, par value $.01 per share, (“Common Stock”) as of November 5, 2017, not including 803,036 shares classified as treasury stock.    

 

 

 

 


 

PART I — FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

Wayside Technology Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

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

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

    

2017

    

2016

    

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,065

 

$

13,524

 

Accounts receivable, net of allowances of $2,641 and $2,293, respectively

 

 

63,683

 

 

83,317

 

Inventory, net

 

 

2,403

 

 

2,324

 

Vendor prepayments

 

 

7,471

 

 

 —

 

Prepaid expenses and other current assets

 

 

788

 

 

948

 

Total current assets

 

 

78,410

 

 

100,113

 

 

 

 

 

 

 

 

 

Equipment and leasehold improvements, net

 

 

1,924

 

 

1,937

 

Accounts receivable-long-term, net

 

 

10,243

 

 

11,119

 

Other assets

 

 

204

 

 

113

 

Deferred income taxes

 

 

235

 

 

416

 

 

 

$

91,016

 

$

113,698

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 Accounts payable and accrued expenses

 

$

50,922

 

$

76,087

 

Revolving credit facility

 

 

2,000

 

 

 —

 

Total current liabilities

 

 

52,922

 

 

76,087

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common Stock, $.01 par value; 10,000,000 shares authorized; 5,284,500 shares issued; 4,481,964 and 4,555,434 shares outstanding, respectively

 

 

53

 

 

53

 

Additional paid-in capital

 

 

30,694

 

 

30,683

 

Treasury stock, at cost, 802,536 and 729,066 shares, respectively

 

 

(13,855)

 

 

(12,029)

 

Retained earnings

 

 

22,152

 

 

20,515

 

Accumulated other comprehensive loss

 

 

(950)

 

 

(1,611)

 

Total stockholders’ equity

 

 

38,094

 

 

37,611

 

 

 

$

91,016

 

$

113,698

 

 

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

2


 

Wayside Technology Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings

(Unaudited)

(Amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

Three months ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

322,423

 

$

298,167

 

$

106,646

 

$

99,586

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

302,848

 

 

278,842

 

 

100,403

 

 

93,214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

19,575

 

 

19,325

 

 

6,243

 

 

6,372

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative expenses

 

 

14,261

 

 

13,570

 

 

4,451

 

 

4,351

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

5,314

 

 

5,755

 

 

1,792

 

 

2,021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

466

 

 

183

 

 

145

 

 

58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency transaction gain (loss)

 

 

22

 

 

(1)

 

 

73

 

 

 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before provision for income taxes

 

 

5,802

 

 

5,937

 

 

2,010

 

 

2,082

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

1,867

 

 

2,008

 

 

669

 

 

704

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,935

 

$

3,929

 

$

1,341

 

$

1,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income per common share-Basic (Restated) Notes 1 and  9

 

$

0.87

 

$

0.83

 

$

0.30

 

$

0.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income per common share-Diluted (Restated) Notes 1 and 9

 

$

0.87

 

$

0.83

 

$

0.30

 

$

0.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — Basic (Restated) Notes 1 and 9

 

 

4,303

 

 

4,537

 

 

4,283

 

 

4,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — Diluted

(Restated) Notes 1and 9

 

 

4,303

 

 

4,537

 

 

4,283

 

 

4,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid per common share

 

$

0.51

 

$

0.51

 

$

0.17

 

$

0.17

 

 

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

3


 

Wayside Technology Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited)

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

Three months ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,935

 

$

3,929

 

$

1,341

 

$

1,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

661

 

 

(60)

 

 

274

 

 

(130)

 

Other comprehensive income (loss)

 

 

661

 

 

(60)

 

 

274

 

 

(130)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

4,596

 

$

3,869

 

$

1,615

 

$

1,248

 

 

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

4


 

Wayside Technology Group, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited)

(Amounts in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Treasury

 

Retained

 

Comprehensive

 

 

 

 

 

   

Shares

   

Amount

   

Capital

   

Shares

   

Amount

   

Earnings

   

(loss) income

   

Total

 

Balance at January 1, 2017

 

5,284,500

 

$

53

 

$

30,683

 

729,066

 

$

(12,029)

 

$

20,515

 

$

(1,611)

 

$

37,611

 

Net income

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

3,935

 

 

 —

 

 

3,935

 

Translation adjustment

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

661

 

 

661

 

Dividends paid

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(2,298)

 

 

 —

 

 

(2,298)

 

Share-based compensation expense

 

 —

 

 

 —

 

 

1,026

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,026

 

Restricted stock grants (net of forfeitures)

 

 —

 

 

 —

 

 

(1,015)

 

(83,440)

 

 

1,015

 

 

 —

 

 

 —

 

 

 —

 

Treasury shares repurchased

 

 —

 

 

 —

 

 

 —

 

156,910

 

 

(2,841)

 

 

 —

 

 

 —

 

 

(2,841)

 

Balance at September 30, 2017

 

5,284,500

 

$

53

 

$

30,694

 

802,536

 

$

(13,855)

 

$

22,152

 

$

(950)

 

$

38,094

 

 

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

 

 

5


 

Wayside Technology Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 30,

 

 

    

2017

    

2016

    

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

3,935

 

$

3,929

 

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

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

359

 

 

192

 

Deferred income tax expense

 

 

181

 

 

32

 

Share-based compensation expense

 

 

1,026

 

 

1,168

 

Benefit for doubtful accounts receivable

 

 

(95)

 

 

(57)

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

21,101

 

 

(2,271)

 

Inventory

 

 

(69)

 

 

62

 

Prepaid expenses and other current assets

 

 

169

 

 

(204)

 

Vendor prepayments

 

 

(7,471)

 

 

 —

 

Accounts payable and accrued expenses

 

 

(25,405)

 

 

1,312

 

Other assets

 

 

(96)

 

 

(45)

 

Net cash  (used in) provided by operating activities

 

 

(6,365)

 

 

4,118

 

 

 

 

 

 

 

 

 

Cash flows used in investing activities

 

 

 

 

 

 

 

Purchase of equipment and leasehold improvements

 

 

(339)

 

 

(779)

 

Net cash used in investing activities

 

 

(339)

 

 

(779)

 

 

 

 

 

 

 

 

 

Cash flows used in financing activities

 

 

 

 

 

 

 

Purchase of treasury stock

 

 

(2,841)

 

 

(3,612)

 

Tax benefit from share-based compensation

 

 

 —

 

 

115

 

Dividends paid

 

 

(2,298)

 

 

(2,420)

 

Net borrowings under  revolving credit facility

 

 

2,000

 

 

 —

 

Net cash used in financing activities

 

 

(3,139)

 

 

(5,917)

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rate on cash

 

 

384

 

 

(287)

 

 

 

 

 

 

 

 

 

Net decrease  in cash and cash equivalents

 

 

(9,459)

 

 

(2,865)

 

Cash and cash equivalents at beginning of period

 

 

13,524

 

 

23,823

 

Cash and cash equivalents at end of period

 

$

4,065

 

$

20,958

 

 

 

 

 

 

 

 

 

Supplementary disclosure of cash flow information:

 

 

 

 

 

 

 

Income taxes paid

 

$

1,944

 

$

1,915

 

 

 

 

 

 

 

 

 

Leasehold improvements funded by tenant allowance

 

$

-

 

$

840

 

 

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

6


 

 

Wayside Technology Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2017

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

 

1.

   Basis of Presentation:

 

The accompanying unaudited condensed consolidated financial statements of Wayside Technology Group, Inc. and its subsidiaries (collectively, the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by U.S. GAAP for complete audited financial statements.

 

The preparation of these condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, intangible assets, income taxes, stock-based compensation, and contingencies and litigation. The Company bases its estimates on its historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. In the opinion of the Company’s management, all adjustments that are of a normal recurring nature, considered necessary for fair presentation, have been included in the accompanying condensed consolidated financial statements. The Company’s actual results may differ from these estimates under different assumptions or conditions. The unaudited condensed consolidated statements of earnings for the interim periods are not necessarily indicative of results for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K filed with the Securities Exchange Commission for the year ended December 31, 2016.

 

Earnings per share two class method

 

Earnings per share for the three and nine months ended September 30,2016 were recalculated and restated using the two class method and presented on a comparable basis with the same periods in 2017. In 2017 the Company determined it should be reporting earnings per share using the two-class method in accordance with ASC 260-10-45-60, which treats unvested restricted shares granted under our 2012 Stock-Based Compensation Plan that are entitled to receive non-forfeitable dividends as participating securities. While the Company has determined the impact of applying the two-class method does not have a material impact on previously issued financial statements, it is appropriate to recalculate and restate amounts presented on a comparative and consistent basis with current period results.  The table below summarizes previously reported and restated amounts on a comparative basis. Footnote 9, Earnings Per Share provides more detail on the two-class method calculation.

 

7


 

 

 

 

 

 

 

 

 

 

Nine months ended

 

Three months ended

 

 

September 30,

    

September 30,

 

 

2016

 

2016

As Previously Reported:

 

 

 

 

 

 

Income per common share - Basic

 

$

0.87

 

$

0.31

Income per common share - Diluted

 

$

0.86

 

$

0.31

 

 

 

 

 

 

 

Weighted average common shares outstanding - Basic

 

 

4,537

 

 

4,507

Weighted average common shares outstanding - Diluted

 

 

4,548

 

 

4,518

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As Restated:

 

 

 

 

 

 

 Income per common share - Basic

 

$

0.83

 

$

0.29

 Income per common share - Diluted

 

$

0.83

 

$

0.29

 

 

 

 

 

 

 

 Weighted average common shares outstanding – Basic

 

 

4,537

 

 

4,507

 Weighted average common shares outstanding – Diluted

 

 

4,537

 

 

4,507

 

 

 

2.                       Recently issued accounting standards:

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance for revenue recognition for contracts, superseding the previous revenue recognition requirements, along with most existing industry-specific guidance. In March, April, May and December 2016, the FASB issued additional updates to the new accounting standard which provide supplemental adoption guidance and clarifications. The guidance requires an entity to review contracts in five steps: 1) identify the contract, 2) identify performance obligations, 3) determine the transaction price, 4) allocate the transaction price, and 5) recognize revenue in order to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue arising from contracts with customers. Entities are permitted to transition to the new standard by either recasting prior periods or recognizing the cumulative effect as of the beginning of the period of adoption. The standard and related amendments will be effective for the Company for its annual reporting period beginning January 1, 2018, including interim periods within that reporting period. The Company has engaged with outside advisors to assist in its assessment and is in the process of finalizing its conclusions on several aspects of the standard including principal versus agent considerations, identification of performance obligations, the determination of when control of goods and services transfers to the Company’s customer, which transition approach will be applied and the estimated impact it will have on our consolidated financial statements. While its assessment is still underway, the Company has determined that it may have material adjustments related to accounting for certain third-party maintenance, subscription and support agreements based on the assessment of whether the Company is acting as a principal or an agent in the transaction. Those adjustments, if any, are expected to impact whether the related sales are recognized on a gross or on a net basis, however such adjustments are not expected to have a material impact on net earnings. Our disclosures related to revenue recognition may be significantly different under the new accounting guidance. The Company has not yet determined which method of adoption it will adopt, pending the outcome of its final assessment.

 

 

In July 2015, the FASB issued Accounting Standards Update No. 2015-11, "Simplifying the Measurement of Inventory (Topic 330)", ("ASU 2015-11"). Topic 330, Inventory, currently requires an entity to measure inventory at the lower of cost or market, with market value represented by replacement cost, net realizable value or net realizable value less a normal profit margin. The amendments in ASU 2015-11 require an entity to measure inventory at the lower of cost or net realizable value. ASU 2015-11 is effective for reporting periods beginning after December 15, 2016. We adopted ASU 2015-11 during the quarter ended March 31, 2017 and it did not have a material impact on our consolidated financial statements.

 

In March 2016, the FASB issued Accounting Standards Update ("ASU") 2016-09, Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies several aspects of the accounting for

8


 

share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Effective January 1, 2017,  the Company adopted the provisions of ASU 2016-09 related to the recognition of excess tax benefits in the income statement and classification in the statement of cash flows were adopted on a prospective basis and the prior periods were not retrospectively adjusted. The Company has elected to account for forfeitures of share-based awards when they occur in determining compensation cost to be recognized each period. The adoption of ASU 2016-09 did not have a material impact on our consolidated financial statements

 

In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 supersedes the lease guidance under FASB Accounting Standards Codification ("ASC") Topic 840, Leases, resulting in the creation of FASB ASC Topic 842, Leases. ASU 2016-02 requires a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. Leases will be classified as either finance or operating leases with classification affecting the pattern of expense recognition in the statement of earnings. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently assessing the potential impact of adopting ASU 2016-02 on its consolidated financial statements.

 

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326) ("ASU No. 2016-13"). ASU No. 2016-13 revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU No. 2016-13 is effective for the Company in the first quarter of 2020, with early adoption permitted, and is to be applied using a modified retrospective approach. 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 for accounts receivable.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (“ASU 2016-15”) ASU 2016-15 which reduces diversity in practice in how certain transactions are classified in the statement of cash flows. The new standard will become effective for the Company beginning with the first quarter of 2018, with early adoption permitted. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements.

 

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory.” This amendment is intended to improve accounting for the income tax consequences of intra-entity transfers of assets other than inventory. In accordance with this guidance, an entity should recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The ASU is effective for the Company beginning in fiscal 2019. Early adoption is permitted in fiscal 2018 with modified retrospective application. The Company is continuing to evaluate the impact of the adoption of this guidance on its consolidated financial statements.

 

In May 2017, the FASB issued ASU No. 2017-09, “Scope of Modification Accounting”, to reduce diversity in practice and provide clarity regarding existing guidance in ASC 718, “Stock Compensation”. The amendments in this updated guidance clarify that an entity should apply modification accounting in response to a change in the terms and conditions of an entity’s share-based payment awards unless three newly specified criteria are met. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted. The Company has evaluated the potential impacts of this updated guidance, and it does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815) – Targeted Improvements to Accounting for Hedging Activities, which improves the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements. The amendments in this update also make certain targeted improvements to simplify the application of the hedge accounting guidance in current GAAP. ASU No. 2017-12 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years; the ASU allows for early adoption in any interim period after issuance of the update. The company is currently assessing the impact this ASU will have on its consolidated financial statements.

 

 

 

 

9


 

 

3.                        Foreign Currency Translation:

 

Assets and liabilities of the Company’s foreign subsidiaries have been translated at current exchange rates, and related sales and expenses have been translated at average rates of exchange in effect during the period.  The sales from our foreign operations for the first nine months of 2017 were $34.9 million as compared to $31.6 million in the first nine months of 2016. The sales from our foreign operations for the third quarter of 2017 were $11.3 million as compared to $10.7 million in the third quarter of 2016.  

 

4.   Comprehensive Income:

 

Cumulative translation adjustments have been classified within accumulated other comprehensive loss, which is a separate component of stockholders’ equity in accordance with FASB ASC Topic 220, “Comprehensive Income.”

 

5.Revenue Recognition:

 

Revenue on product (software and hardware) and maintenance and subscription agreement sales are recognized once four criteria are met: (1) persuasive evidence of an arrangement exists, (2) the price is fixed and determinable, (3) delivery (software and hardware) or fulfillment (maintenance and subscription) has occurred, and (4) there is reasonable assurance of collection of the sales proceeds. Revenues from the sales of hardware products, software products and licenses, maintenance and subscription agreements are generally recognized on a gross basis upon delivery or fulfillment with the selling price to the customer recorded as sales and the acquisition cost of the product recorded as cost of sales.

 

Product delivery to customers occur in a variety of ways, including (i) as physical product shipped from the Company’s warehouse, (ii) via drop-shipment by the vendor, or (iii) via electronic delivery for software licenses. The Company leverages drop-ship arrangements with many of its vendors and suppliers to deliver products to customers without having to physically hold the inventory at its warehouse, thereby increasing efficiency and reducing costs. The Company generally recognizes revenue for drop-ship arrangements on a gross basis. Furthermore, in such drop-ship arrangements, the Company negotiates price with the customer, pays the supplier directly for the product shipped and bears credit risk of collecting payment from its customers. Maintenance and subscription agreements allow customers to access software and obtain technical support directly from the software publisher and to upgrade, at no additional cost, to the latest technology if new applications are introduced by the software publisher during the period that the maintenance and subscription agreement is in effect. The Company generally serves as the principal with the customer and, therefore, recognizes the sale and cost of sale of the product upon receiving notification from the supplier that the product has shipped or the contract with respect to maintenance and subscription agreements has been fulfilled as the Company has no future performance obligation.

 

Sales are recorded net of discounts, rebates, and returns.  Vendor rebates and price protection are recorded when earned as a reduction to cost of sales or merchandise inventory, as applicable.

 

Cooperative reimbursements from vendors, which are earned and available, are recorded in the period the related advertising expenditure is incurred. Cooperative reimbursements are recorded as a reduction of cost of sales in accordance with FASB ASC Topic 605-50 “Accounting by a Customer (including reseller) for Certain Consideration Received from a Vendor.” 

 

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

 

Accounts receivable-long-term result from product sales with extended payment terms that are discounted to their present values at the prevailing market rates at the time of the sale. In subsequent periods, the accounts receivable are increased to the amounts due and payable by the customers through the accretion of interest income on the unpaid accounts receivable due in future years. The amounts due under these long-term accounts receivable due within one year are reclassified to the current portion of accounts receivable and are shown net of reserves.

 

 

 

 

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6.Fair Value:

 

The carrying amounts of financial instruments, including cash and cash equivalents, accounts receivable and accounts payable approximated fair value at September 30, 2017 and December 31, 2016 because of the relative short maturity of these instruments. The Company’s accounts receivable long-term is discounted to their present value at prevailing market rates at the date of sale so the balances approximate fair value.

 

 

7.Balance Sheet Detail:

 

Equipment and leasehold improvements consist of the following:

 

 

 

 

 

 

 

 

 

    

September 30,

 

December 31,

 

 

 

2017

    

2016

    

Equipment

 

$

1,972

 

$

1,638

 

Leasehold improvements

 

 

1,330

 

 

1,317

 

 

 

 

3,302

 

 

2,955

 

Less accumulated depreciation and amortization

 

 

(1,378)

 

 

(1,018)

 

 

 

$

1,924

 

$

1,937

 

 

For the nine months ended September 30, 2017 and 2016, the Company recorded depreciation and amortization expense of $0.4 million and $0.2 million respectively, which is included in the Company’s general and administrative expense.

 

Accounts payable and accrued expenses consist of the following

 

 

 

 

 

 

 

 

 

 

    

September 30,

 

December 31,

 

 

 

2017

    

2016

    

Trade accounts payable

 

$

47,876

 

$

72,093

 

Accrued expenses

 

 

3,046

 

 

3,994

 

 

 

$

50,922

 

$

76,087

 

 

 

 

 

 

8.Credit Facility:

 

On January 4, 2013, the Company entered into a $10,000,000 revolving credit facility (the “Credit Facility”) with Citibank, N.A. (“Citibank”) pursuant to a Business Loan Agreement (the “Loan Agreement”), Promissory Note (the “Note”), Commercial Security Agreements (the “Security Agreements”) and Commercial Pledge Agreement (the “Pledge Agreement”).  The Credit Facility matures on January 31, 2019, at which time the Company must pay this loan in one payment of any outstanding principal plus all accrued unpaid interest. The interest rate for any borrowings under the Credit Facility is subject to change from time to time based on the changes in an independent index which is the LIBOR Rate (the “Index”).  If the Index becomes unavailable during the term of this loan, Citibank may designate a substitute index after notifying the Company.  Interest on the unpaid principal balance of the Note will be calculated using a rate of 1.500 percentage points over the Index.  The Credit Facility is secured by the assets of the Company.

 

Among other affirmative covenants set forth in the Loan Agreement, the Company must maintain (i) a ratio of Total Liabilities to Tangible Net Worth (each as defined in the Loan Agreement) of not greater than 2.50 to 1.00, to be tested quarterly and (ii) a minimum Debt Service Coverage Ratio (as defined in the Loan Agreement) of 2.00 to 1.00.  Additionally, the Loan Agreement contains negative covenants related to, among other items, prohibitions against the creation of certain liens, engaging in any business activities substantially different than those currently engaged in by the Company, and paying dividends on the Company’s stock other than (i) dividends payable in its stock and (ii) cash dividends in amounts and frequency consistent with past practice, without first securing the written consent of Citibank. The Company is in compliance with all covenants at September 30, 2017.

 

At September 30, 2017, the Company had $2.0 million of borrowings outstanding under the Credit Facility. The Company incurred interest expense of $0.1 million during the third quarter of 2017. The average interest rate for the quarter was approximately 2.74%.

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9.Earnings Per Share:

 

Our basic and diluted earnings per share are computed using the two-class method. The two-class method is an earnings allocation that determines net income per share for each class of common stock and participating securities according to their participation rights in dividends and undistributed earnings or losses. Non-vested restricted stock awards that include non-forfeitable rights to dividends are considered participating securities. Per share amounts are computed by dividing net income available to common shareholders by the weighted average shares outstanding during each period. Diluted and basic earnings per share are the same because the restricted shares are the only potentially dilutive security.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

Three months ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

    

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

3,935

 

$

3,929

 

$

1,341

 

$

1,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less distributed and undistributed income allocated to participating securities

 

 

179

 

 

171

 

 

57

 

 

58

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Attributable to Common Shareholders

 

 

3,756

 

 

3,758

 

 

1,284

 

 

1,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares (Basic)

 

 

4,303

 

 

4,537

 

 

4,283

 

 

4,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares including assumed conversions (Diluted)

 

 

4,303

 

 

4,537

 

 

4,283

 

 

4,507

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

$

0.87

 

$

0.83

 

$

0.30

 

$

0.29

 

Diluted net income per share

 

$

0.87

 

$

0.83

 

$

0.30

 

$

0.29

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10.Major Customers and Vendors:

 

The Company had two major vendors that accounted for 27.0% and 14.1%, respectively, of total purchases during the nine months ended September 30, 2017, and 27.9% and 14.1% of total purchases for the three months ended September 30, 2017. The Company had two major vendors that accounted for 23.8% and 10.2%, respectively, of its total purchases during the nine months ended September 30, 2016, and 23.6%, and 10.5% of total net purchases for the three months ended September 30, 2016. The Company had two major customers that accounted for 22.5% and 19.3%, respectively, of its total net sales during the nine months ended September 30, 2017, and 24.4%, and 18.5% of total net sales for the three months ended September 30, 2017. These same customers accounted for 14.8% and 25.5%, respectively, of total net accounts receivable as of September 30, 2017. The Company had two major customers that accounted for 19.8% and 17.8%, respectively, of its total net sales during the nine months ended September 30, 2016, and 21.4%, and 17.5% of total net sales for the three months ended September 30, 2016.

 

The Company entered into a distribution agreement in July 2017, and made a nonrefundable prepayment of $8.0 million to be applied against any amounts due under this agreement. The amount will be recorded as a prepaid and will be reduced as purchases are made under the agreement.

 

11.Income Tax:

 

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and in various state and foreign jurisdictions. The Company has identified its federal consolidated tax return and its state tax return in New Jersey and its Canadian tax return as major tax jurisdictions. The Company’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. The Company believes that it has

12


 

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

 

The effective tax rate for the nine and three months ended September  30, 2017 was  32.2% and 33.3%, respectively, compared to 33.8% for the same periods last year.

 

12.Stockholders’ Equity and Stock Based Compensation:

 

The 2012 Stock-Based Compensation Plan (the “2012 Plan”) authorizes the grant of Stock Options, Stock Units, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Bonuses and other equity-based awards. The total number of shares of Common Stock initially available for award under the 2012 Plan was 600,000. As of September 30, 2017, the number of shares of Common stock available for future award grants to employees and directors under the 2012 Plan is 226,788.

 

During 2012, the Company granted a total of 92,000 shares of Restricted Stock to officers, directors, and employees. These shares of Restricted Stock vest over 20 equal quarterly installments. A total of 3,525 shares of Restricted Stock were forfeited as a result of employees terminating employment with the Company.

 

During 2013, the Company granted a total of 56,500 shares of Restricted Stock to officers and employees. Included in these grants were 40,000 Restricted Shares granted to the Company’s CEO in accordance with the satisfaction of certain performance criteria included in his compensation plan. These 40,000 Restricted Shares vest over 16 equal quarterly installments. The remaining grants of Restricted Stock vest over 20 equal quarterly installments. A total of 775 shares of Restricted Stock were forfeited as a result of employees terminating employment with the Company.

 

During 2014, the Company granted a total of 98,689 shares of Restricted Stock to officers, directors and employees. These shares of Restricted Stock vest between one and twenty equal quarterly installments. A total of 34,487 shares of Restricted Stock were forfeited as a result of officers and employees terminating employment with the Company.

 

During 2015, the Company granted a total of 44,000 shares of Restricted Stock to officers. These shares of Restricted Stock vest over sixteen equal quarterly installments. In 2015, a total of 4,465 shares of Restricted Stock were forfeited as a result of officers and employees terminating employment with the Company.

 

 

During 2016, the Company granted a total of 171,252 shares of Restricted Stock to officers, directors, and employees. These shares of Restricted Stock vest between one and twenty equal quarterly installments.  A total of 7,167 shares of Restricted Stock were forfeited as a result of officers and employees terminating employment with the Company.

 

During 2017, the Company granted a total of 87,076 shares of Restricted Stock to officers and employees. These shares of Restricted Stock vest between eight and twenty equal quarterly installments.  A total of 3,636 shares of Restricted Stock were forfeited as a result of employees terminating employment with the Company.

 

A summary of nonvested shares of Restricted Stock awards outstanding under the Company’s the 2012 Plan as of September  30, 2017, and changes during the three months then ended is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

Weighted Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

 

Nonvested shares at January 1, 2017

 

186,081

 

$

15.58

 

Granted in 2017

 

87,076

 

 

18.25

 

Vested in 2017

 

(67,634)

 

 

15.18

 

Forfeited in 2017

 

(3,636)

 

 

16.49

 

Nonvested shares at September 30, 2017

 

201,887

 

$

15.85

 

 

13


 

As of September 30, 2017, there is approximately $3.2 million of total unrecognized compensation costs related to nonvested share-based compensation arrangements. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 3.0 years.

 

For the nine months ended September 30, 2017 and 2016, the Company recognized share-based compensation cost of $1.0 million and $1.2  million respectively, which is included in the Company’s general and administrative expense.

 

13.Segment Information:

 

FASB ASC Topic 280, “Segment Reporting,” requires that public companies report profits and losses and certain other information on their “reportable operating segments” in their annual and interim financial statements. The internal organization used by the public company’s Chief Operating Decision Maker (CODM) to assess performance and allocate resources determines the basis for reportable operating segments. The Company’s CODM is the Chief Executive Officer.

 

The Company is organized into two reportable operating segments.  The “Lifeboat Distribution” segment distributes technical software to corporate resellers, value added resellers (VARs), consultants and systems integrators worldwide.  The “TechXtend” segment is a value-added reseller of software, hardware and services for corporations, government organizations and academic institutions in the United States and Canada.

 

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

 

Segment income is based on segment revenue less the respective segment’s cost of revenues as well as segment direct costs (including such items as payroll costs and payroll related costs, such as profit sharing, incentive awards and insurance) and excluding general and administrative expenses not attributed to an individual segment business unit. The Company only identifies accounts receivable and inventory by segment as shown below as “Selected Assets” by segment; it does not allocate its other assets, including capital expenditures by segment.

 

The following segment reporting information of the Company is provided:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

Three months ended

 

 

 

September 30,

 

September 30,

 

 

    

2017

    

2016

    

2017

    

2016

    

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Lifeboat Distribution

 

$

300,344

 

$

267,113

 

$

100,188

 

$

91,114

 

TechXtend

 

 

22,079

 

 

31,054

 

 

6,458

 

 

8,472

 

 

 

 

322,423

 

 

298,167

 

 

106,646

 

 

99,586

 

Gross Profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

Lifeboat Distribution

 

$

16,873

 

$

16,139

 

$

5,417

 

$

5,440

 

TechXtend

 

 

2,702

 

 

3,186

 

 

826

 

 

932

 

 

 

 

19,575

 

 

19,325

 

 

6,243

 

 

6,372

 

Direct Costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

Lifeboat Distribution

 

$

6,142

 

$

5,442

 

$

1,866

 

$

1,846

 

TechXtend

 

 

1,362

 

 

1,553

 

 

473

 

 

490

 

 

 

 

7,504

 

 

6,995

 

 

2,339

 

 

2,336

 

Segment Income Before Taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

Lifeboat Distribution

 

$

10,731

 

$

10,697

 

$

3,551

 

$

3,594

 

TechXtend

 

 

1,340

 

 

1,633

 

 

353

 

 

442

 

Segment Income Before Taxes

 

 

12,071

 

 

12,330

 

 

3,904

 

 

4,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

$

6,757

 

$

6,575

 

$

2,112

 

$

2,015

 

Interest, net

 

 

466

 

 

183

 

 

145

 

 

58

 

Foreign currency translation

 

 

22

 

 

(1)

 

 

73

 

 

 3

 

Income before taxes

 

$

5,802

 

$

5,937

 

$

2,010

 

$

2,082

 

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