Climb Solutions(CLMB) - 2023 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Cautionary Note Regarding Forward-Looking Statements This section provides a standard disclaimer on forward-looking statements, noting actual results may differ due to market, competition, and acquisition risks - Forward-looking statements are subject to risks and uncertainties, and actual results may differ materially[274] - Key risks include continued acceptance of distribution channels, timely availability of new products, market conditions, competitive pricing, successful integration of acquisitions, and vendor relationships[274] - The Company undertakes no obligation to publicly update or revise any forward-looking statements[275] Item 1. FINANCIAL STATEMENTS (unaudited) This section presents unaudited condensed consolidated financial statements, offering a snapshot of the company's financial position and performance Condensed Consolidated Balance Sheets The balance sheets detail the company's financial position, showing changes in assets, liabilities, and equity between periods | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :----- | :--------------------------- | :------------------------------- | | Total Assets | $233,698 | $231,856 | | Total Current Assets | $184,775 | $184,638 | | Total Liabilities | $166,716 | $171,282 | | Total Stockholders' Equity | $66,982 | $60,574 | Condensed Consolidated Statements of Earnings Statements of earnings detail financial performance for the reported periods, showing trends in sales, gross profit, and net income | Metric (in thousands) | Six months June 30, 2023 | Six months June 30, 2022 | Three months June 30, 2023 | Three months June 30, 2022 | | :-------------------- | :----------------------- | :----------------------- | :------------------------- | :------------------------- | | Net sales | $166,771 | $139,182 | $81,732 | $67,863 | | Cost of sales | $137,870 | $114,716 | $68,039 | $55,377 | | Gross profit | $28,901 | $24,466 | $13,693 | $12,486 | | Selling, general, and administrative expenses | $21,837 | $16,183 | $11,576 | $7,934 | | Income from operations | $5,747 | $7,481 | $1,513 | $4,107 | | Net income | $4,705 | $5,503 | $1,381 | $2,791 | | Income per common share-Basic | $1.05 | $1.24 | $0.31 | $0.63 | | Income per common share-Diluted | $1.05 | $1.24 | $0.31 | $0.63 | | Dividends paid per common share | $0.34 | $0.34 | $0.17 | $0.17 | Condensed Consolidated Statements of Comprehensive Income (Loss) This statement presents comprehensive income (loss), including net income and other items like foreign currency translation adjustments | Metric (in thousands) | Six months June 30, 2023 | Six months June 30, 2022 | Three months June 30, 2023 | Three months June 30, 2022 | | :-------------------- | :----------------------- | :----------------------- | :------------------------- | :------------------------- | | Net income | $4,705 | $5,503 | $1,381 | $2,791 | | Foreign currency translation adjustments | $1,617 | $(2,335) | $1,004 | $(1,709) | | Comprehensive income | $6,322 | $3,168 | $2,385 | $1,082 | Condensed Consolidated Statements of Stockholders' Equity Statements of stockholders' equity detail changes in equity components, including net income, dividends, and share-based compensation | Metric (in thousands) | Balance at Jan 1, 2023 | Net Income | Translation Adjustment | Dividends Paid | Share-based Compensation Expense | Restricted Stock Grants (net of forfeitures) | Treasury Shares Repurchased | Balance at June 30, 2023 | | :-------------------- | :--------------------- | :--------- | :--------------------- | :------------- | :------------------------------- | :------------------------------------------- | :-------------------------- | :----------------------- | | Common Stock Amount | $53 | — | — | — | — | — | — | $53 | | Additional Paid-In Capital | $32,715 | — | — | — | $2,238 | $(1,258) | — | $33,476 | | Treasury Amount | $(13,230) | — | — | — | — | $1,258 | $(981) | $(12,402) | | Retained Earnings | $43,904 | $4,705 | — | $(1,503) | — | — | — | $47,106 | | Accumulated Other Comprehensive (Loss) Income | $(2,868) | — | $1,617 | — | — | — | — | $(1,251) | | Total | $60,574 | $4,705 | $1,617 | $(1,503) | $2,238 | — | $(981) | $66,982 | | Metric (in thousands) | Balance at Jan 1, 2022 | Net Income | Translation Adjustment | Dividends Paid | Share-based Compensation Expense | Restricted Stock Grants (net of forfeitures) | Treasury Shares Repurchased | Balance at June 30, 2022 | | :-------------------- | :--------------------- | :--------- | :--------------------- | :------------- | :------------------------------- | :------------------------------------------- | :-------------------------- | :----------------------- | | Common Stock Amount | $53 | — | — | — | — | — | — | $53 | | Additional Paid-In Capital | $32,087 | — | — | — | $714 | $(810) | — | $31,991 | | Treasury Amount | $(13,870) | — | — | — | — | $810 | $(393) | $(13,453) | | Retained Earnings | $34,396 | $5,503 | — | $(1,492) | — | — | — | $38,407 | | Accumulated Other Comprehensive (Loss) Income | $(250) | — | $(2,335) | — | — | — | — | $(2,585) | | Total | $52,416 | $5,503 | $(2,335) | $(1,492) | $714 | — | $(393) | $54,413 | Condensed Consolidated Statements of Cash Flows Statements of cash flows summarize cash from operating, investing, and financing activities, showing net change in cash equivalents | Cash Flow Activity (in thousands) | Six months June 30, 2023 | Six months June 30, 2022 | | :-------------------------------- | :----------------------- | :----------------------- | | Net cash and cash equivalents provided by operating activities | $29,620 | $1,269 | | Net cash and cash equivalents used in investing activities | $(3,025) | $(652) | | Net cash and cash equivalents (used in) provided by financing activities | $(3,538) | $179 | | Effect of foreign exchange rate on cash and cash equivalents | $567 | $(753) | | Net increase in cash and cash equivalents | $23,624 | $43 | | Cash and cash equivalents at end of period | $43,869 | $29,315 | Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations of accounting policies, estimates, and financial statement items for transparency 1. Basis of Presentation Financial statements adhere to U.S. GAAP for interim reporting, using estimates and judgments, with intercompany transactions eliminated - Financial statements are prepared in accordance with U.S. GAAP for interim financial information and SEC rules[53] - Preparation requires estimates and judgments, which are evaluated on an ongoing basis[265] - All intercompany transactions and balances have been eliminated in the consolidated financial statements[311] 2. Recently Issued Accounting Standards The Company adopted ASU 2016-13 (CECL standard) effective January 1, 2023, with no material impact on financial statements - The Company adopted ASU 2016-13 (CECL standard) effective January 1, 2023[283][146] - The adoption of the new credit loss standard did not have an impact on the Company's financial statements[283][146] 3. Foreign Currency Translation Foreign subsidiary assets/liabilities are translated at period-end rates, revenues/expenses at average rates, with transaction gains/losses recorded - Assets and liabilities of foreign subsidiaries are translated using end-of-period exchange rates[312] - Revenues and expenses are translated at average exchange rates for the period[312] | Metric (in millions) | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales from foreign operations | $16.5 | $14.2 | $41.1 | $29.9 | 4. Comprehensive Income Cumulative translation adjustments are classified in accumulated other comprehensive loss within stockholders' equity per FASB ASC 220 - Cumulative translation adjustments are classified within accumulated other comprehensive loss[28] - This classification is in accordance with FASB ASC Topic 220, 'Comprehensive Income'[28] 5. Revenue Recognition Revenue is recognized upon transfer of control for products/services, with principal/agent evaluation and allocation for bundled arrangements - Revenue is recognized as control of third-party products and software is transferred to customers, typically at shipment or fulfillment[285] - For third-party maintenance, cloud services, and certain security software, the Company acts as an agent, recognizing revenue in the amount of the net fee[56][317] - For bundled arrangements, total consideration is allocated based on standalone selling prices (SSP) of each distinct performance obligation[30] - Customer rebates and other discounts are recorded as a reduction of revenue at the time of sale[315] 6. Acquisition The Company acquired Spinnakar Limited on August 18, 2022, for approximately £9.8 million, with final purchase price allocation - The Company acquired Spinnakar Limited on August 18, 2022[318] - The aggregate purchase price was approximately £9.8 million (equivalent to $11.8 million USD), including a potential earn-out[318] - The purchase price allocation is final, and $1.9 million fair value for potential earn-out consideration is included in accounts payable and accrued expenses and non-current liabilities[318][31] 7. Goodwill and Other Intangible Assets This section details goodwill and intangible asset carrying amounts and amortization, noting increased expense due to the Spinnakar acquisition | Intangible Asset (in thousands) | Gross Carrying Amount (June 30, 2023) | Accumulated Amortization (June 30, 2023) | Net Carrying Amount (June 30, 2023) | | :------------------------------ | :------------------------------------ | :--------------------------------------- | :---------------------------------- | | Customer and vendor relationships | $22,228 | $3,205 | $19,023 | | Trade name | $486 | $86 | $400 | | Total | $22,714 | $3,291 | $19,423 | | Estimated Future Amortization Expense (in thousands) | | :----------------------------------- | | 2023 (excluding six months ended June 30, 2023) | $969 | | 2024 | $1,938 | | 2025 | $1,938 | | 2026 | $1,938 | | 2027 | $1,938 | | Thereafter | $10,702 | | Total | $19,423 | - Amortization expense for other intangibles, net, increased to $1.0 million for the six months ended June 30, 2023, from $0.4 million in the prior year, and to $0.5 million for the three months ended June 30, 2023, from $0.2 million in the prior year[62] 8. Right-of-use Asset and Lease Liability The Company recognizes ROU assets and lease liabilities for operating leases of facilities, with expense recognized straight-line - The Company has operating leases for office and warehouse facilities with terms ranging from 2 to 11 years[63] - Operating lease ROU assets and liabilities are recognized at lease commencement based on the present value of lease payments[321] | Lease Liability Maturities (in thousands) | | :---------------------------------------- | | 2023 (excluding six months ended June 30, 2023) | $315 | | 2024 | $543 | | 2025 | $550 | | 2026 | $548 | | 2027 | $116 | | Total | $2,072 | | Less: imputed interest | $(514) | | Total lease liabilities | $1,558 | | Lease liabilities, current portion | $471 | | Lease liabilities, net of current portion | $1,087 | 9. Fair Value Carrying amounts of short-term financial instruments approximate fair value; long-term receivables are discounted to present value - Carrying amounts of cash, short-term accounts receivable, and accounts payable approximate fair value[36] - Long-term accounts receivable are discounted to their present value at prevailing market rates at the time of sale[36] 10. Balance Sheet Detail This section details equipment, leasehold improvements, long-term receivables, and accounts payable, showing carrying amounts | Equipment and Leasehold Improvements (in thousands) | June 30, 2023 | December 31, 2022 | | :---------------------------------- | :------------ | :---------------- | | Equipment | $2,181 | $2,720 | | Capitalized software | $5,064 | $2,997 | | Leasehold improvements | $2,375 | $1,848 | | Total | $9,620 | $7,565 | | Less: accumulated depreciation and amortization | $(3,358) | $(4,050) | | Net | $6,262 | $3,515 | | Accounts Receivable Long-Term, Net (in thousands) | June 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------ | :---------------- | | Total amount due from customer | $2,145 | $5,213 | | Less: unamortized discount | $(32) | $(188) | | Less: current portion included in accounts receivable | $(854) | $(1,911) | | Net | $1,259 | $3,114 | | Accounts Payable and Accrued Expenses (in thousands) | June 30, 2023 | December 31, 2022 | | :----------------------------------- | :------------ | :---------------- | | Trade accounts payable | $146,516 | $151,180 | | Accrued expenses | $10,955 | $9,470 | | Total | $157,471 | $160,650 | 11. Credit Facility The Company secured a new $50.0 million revolving credit facility and has a $2.1 million term loan, with no outstanding amounts on the former - On May 18, 2023, the Company entered into a new revolving credit agreement for up to $50.0 million with JPMorgan Chase Bank, N.A[38][185] - The new credit facility matures on May 18, 2028, and no amounts were outstanding as of June 30, 2023[39][185] - The Company has a $2.1 million term loan with First American Commercial Bancorp, Inc., with $1.6 million outstanding as of June 30, 2023[71][269] 12. Earnings Per Share Basic and diluted EPS are computed using the two-class method, treating non-vested restricted stock as participating securities - Basic and diluted earnings per share are computed using the two-class method[100] - Non-vested restricted stock awards with non-forfeitable dividend rights are considered participating securities[100] | Metric | Six months June 30, 2023 | Six months June 30, 2022 | Three months June 30, 2023 | Three months June 30, 2022 | | :----- | :----------------------- | :----------------------- | :------------------------- | :------------------------- | | Basic net income per share | $1.05 | $1.24 | $0.31 | $0.63 | | Diluted net income per share | $1.05 | $1.24 | $0.31 | $0.63 | 13. Major Customers and Vendors The Company has significant customer and vendor concentrations, impacting net sales and total purchases - Two major customers accounted for 22% and 14% of net sales for the three months ended June 30, 2023 (21% and 20% in 2022)[101][169] - Two major customers accounted for 21% and 14% of net sales for the six months ended June 30, 2023 (23% and 18% in 2022)[101][178] - One major vendor accounted for 12% of total purchases for the three months ended June 30, 2023 (16% in 2022)[43][169] - Two major vendors accounted for 19% and 12% of total purchases for the six months ended June 30, 2023 (one major vendor at 19% in 2022)[43][178] 14. Income Taxes The Company analyzes tax filing positions, recognizing interest/penalties and accruing liabilities based on experience and tax law - The Company recognizes interest related to unrecognized tax benefits as interest expense and penalties as operating expenses[73] - Accruals for tax liabilities are based on an assessment of factors including historical experience and interpretations of tax law[73] 15. Stockholders' Equity and Stock Based Compensation This section details equity incentive plans, restricted stock awards, and share-based compensation expense, with unrecognized costs amortized over 1.9 years - The 2021 Omnibus Incentive Plan authorizes various equity-based awards, with 257,805 shares available for future grants as of June 30, 2023[102][304] - The 2012 Stock-Based Compensation Plan has been replaced by the 2021 Plan, with zero shares available as of June 30, 2023[103] | Restricted Stock Awards (Shares) | Nonvested at Jan 1, 2023 | Granted in 2023 | Vested in 2023 | Forfeited in 2023 | Nonvested at June 30, 2023 | | :------------------------------- | :----------------------- | :-------------- | :------------- | :---------------- | :------------------------- | | Shares | 121,059 | 115,789 | (71,478) | — | 165,370 | | Weighted Average Grant Date Fair Value | $24.83 | $45.81 | $37.98 | — | $33.83 | - Total unrecognized compensation costs related to nonvested share-based compensation arrangements are approximately $5.1 million, expected to be recognized over a weighted-average period of 1.9 years[104] 16. Segment Information The Company operates 'Distribution' and 'Solutions' segments, assessing performance by revenue, cost, and direct costs, with assets identified - The Company has two reportable operating segments: 'Distribution' and 'Solutions'[77] - The 'Distribution' segment sells products and services to corporate resellers, VARs, consultants, and systems integrators[2][77] - The 'Solutions' segment acts as a cloud solutions provider and value-added reseller, selling software/hardware and providing technical services directly to end-user customers[2][77] | Metric (in thousands) | Six months June 30, 2023 | Six months June 30, 2022 | Three months June 30, 2023 | Three months June 30, 2022 | | :-------------------- | :----------------------- | :----------------------- | :------------------------- | :------------------------- | | Net Sales: | | | | | | Distribution | $154,678 | $128,775 | $76,128 | $62,992 | | Solutions | $12,093 | $10,407 | $5,604 | $4,871 | | Gross Profit: | | | | | | Distribution | $23,801 | $19,852 | $11,074 | $10,259 | | Solutions | $5,100 | $4,614 | $2,619 | $2,227 | | Segment Income Before Taxes: | | | | | | Distribution | $13,825 | $12,601 | $6,064 | $6,672 | | Solutions | $2,482 | $2,466 | $1,302 | $1,217 | | Selected Assets by Segment (in thousands) | As of June 30, 2023 | As of December 31, 2022 | | :------------------------ | :------------------ | :---------------------- | | Distribution | $152,199 | $180,602 | | Solutions | $21,374 | $21,420 | | Segment Select Assets | $173,573 | $202,022 | | Corporate Assets | $60,125 | $29,834 | | Total Assets | $233,698 | $231,856 | | Identifiable Assets by Geographic Areas (in thousands) | June 30, 2023 | December 31, 2022 | | :------------------------------------- | :------------ | :---------------- | | USA | $137,315 | $137,877 | | Canada | $25,789 | $27,597 | | Europe and United Kingdom | $70,594 | $66,382 | | Total | $233,698 | $231,856 | 17. Related Party Transactions The Company made sales to a related party customer, with net sales of approximately $0.5 million and $1.0 million for the periods - Net sales to a related party customer were approximately $0.5 million for the three months ended June 30, 2023 (vs. $0.7 million in 2022)[9] - Net sales to this customer totaled approximately $1.0 million for the six months ended June 30, 2023 (vs. $1.0 million in 2022)[9] - Amounts due from this customer were approximately $0.5 million as of June 30, 2023 (vs. $0.1 million as of December 31, 2022)[9] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and results, covering business segments, influencing factors, critical accounting policies, and performance analysis Overview The Company is an IT distribution and solutions provider, serving resellers and end-users through its 'Distribution' and 'Solutions' segments - The Company is a value-added IT distribution and solutions company[2] - Operates through 'Distribution' (selling to resellers) and 'Solutions' (cloud solutions provider and VAR to end-users) segments[2] - Offers extensive products from leading software vendors and tools for virtualization/cloud computing, security, networking, storage, and infrastructure management[2] Factors Influencing Our Financial Results Financial results are influenced by competitive pressures, declining margins, product mix, and IT spending, with inflation impact limited by declining IT prices - Majority of net sales are derived from third-party software licenses, maintenance, and service agreements[88] - Gross product margins have historically declined due to competition and shifts in product mix[117] - Inflation has not historically been adverse, as IT product prices generally decline, but competitive pressure may limit passing on price increases[3] - Sales and operating results fluctuate due to software industry conditions, demand shifts, pricing, and product offerings[118][237] Financial Overview For Q2 2023, net sales increased 20% to $81.7 million, but net income decreased 52% to $1.4 million due to higher SG&A | Metric (in millions) | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Change (%) | | :------------------- | :------------------------------- | :------------------------------- | :--------- | | Net sales | $81.7 | $67.9 | +20% | | Gross profit | $13.7 | $12.5 | +10% | | Selling, general and administrative ("SG&A") expenses | $11.6 | $7.9 | +46% | | Amortization and depreciation expense | $0.6 | $0.4 | +50% | | Net income | $1.4 | $2.8 | -52% | | Diluted income per share | $0.31 | $0.63 | -52% | Critical Accounting Policies and Estimates This section outlines critical accounting policies and estimates requiring significant judgment, including revenue, allowances, goodwill, and income taxes - The preparation of financial statements requires estimates and judgments affecting reported amounts of assets, liabilities, revenues, and expenses[93] - Estimates are based on historical experience and reasonable assumptions, with ongoing evaluation for product returns, bad debts, inventories, intangible assets, income taxes, stock-based compensation, and contingencies[122][137] Revenue Judgment is used to determine performance obligations and allocate sales prices for bundled products and third-party maintenance - Significant judgment is used to determine if ongoing maintenance obligations by third-party vendors are distinct from software licenses[138][95] - Sales proceeds are allocated among performance obligations using observable data like standalone selling prices or market pricing for similar products and services[95] Allowances for Accounts Receivable Allowances for doubtful accounts and sales returns are estimated based on historical experience, aging, and creditworthiness - Allowances for doubtful accounts are estimated considering historical experience, aging of receivables, and customer creditworthiness[124] - An estimate for sales returns is recorded as a liability at the time of sale based on historical experience[124] Inventory Allowances Inventory is written down for obsolescence based on future demand and market conditions; further write-offs may be needed - Inventory is written down for estimated obsolescence or unmarketable inventory[125] - Estimates are based on assumptions about future demand and market conditions[125] Accounts Receivable – Long Term Long-term accounts receivable are discounted to present value at market rates, with interest income accreted subsequently - Long-term accounts receivable are discounted to their present value at prevailing market rates at the time of sale[140] - Interest income is accreted on unpaid accounts receivable in future periods[37] Goodwill Goodwill is tested for impairment annually or as needed, using qualitative and, if necessary, quantitative assessments of fair value - Goodwill is tested for impairment annually, and between annual tests if circumstances change[126] - A qualitative assessment determines if it's more likely than not that fair value is less than carrying amount[98] - A quantitative test compares the fair value of a reporting unit with its carrying amount; an impairment loss is recognized if carrying amount exceeds fair value[99] Intangible Assets Intangible assets are amortized straight-line over their useful lives and reviewed for impairment if carrying amount is unrecoverable - Intangible assets with determinable lives are amortized on a straight-line basis over their estimated useful lives[239] - Assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount may not be recoverable[239] Income Taxes Valuation allowances for deferred tax assets are assessed based on future taxable income and planning; unrealizable assets are charged to income - Future taxable income and tax planning strategies are considered when assessing the need for a valuation allowance on deferred tax assets[129] - If deferred tax assets are deemed unrealizable, an adjustment would be charged to income[129] Share-Based Payments Stock-based compensation is measured at grant date fair value and expensed straight-line over the service period; forfeitures are recorded as they occur - Stock-based compensation cost is measured at grant date fair value[5] - Expense is recognized on a straight-line basis over the requisite service period[5] - The impact of forfeitures is recorded when they occur[5] Foreign Exchange Foreign currency exposure from international transactions may be hedged with forward contracts, with fair value changes recorded in earnings - Foreign currency exposure relates primarily to international transactions where collected currency differs from purchase currency[144] - The Company may use foreign exchange contracts (forward purchase agreements) to hedge exposures, with changes in fair value recorded in earnings[144] - No foreign exchange contracts were outstanding as of June 30, 2023[144] Interest, Net Net interest comprises income from long-term receivable discount amortization, offset by credit facility interest expense - Interest, net, primarily consists of income from the amortization of the discount on accounts receivable long-term[131] - This income is net of interest expense on the Company's credit facility[131] Recently Issued Accounting Pronouncements The Company adopted ASU 2016-13 (CECL standard) effective January 1, 2023, with no impact on its financial statements - The Company adopted ASU 2016-13 (CECL standard) effective January 1, 2023[146] - The adoption did not have an impact on the Company's financial statements[146] Results of Operations This section analyzes financial performance, including key operating metrics, non-GAAP reconciliations, and comparative review of sales, profit, and expenses | Metric (as % of Net Sales) | Six months June 30, 2023 | Six months June 30, 2022 | | :------------------------- | :----------------------- | :----------------------- | | Net sales | 100.0% | 100.0% | | Cost of sales | 83.2% | 81.6% | | Gross profit | 16.8% | 18.4% | | Selling, general and administrative expenses | 14.2% | 11.7% | | Amortization and depreciation expense | 0.7% | 0.7% | | Income from operations | 1.9% | 6.1% | | Other income (expense) | 0.4% | (0.7%) | | Income before income taxes | 2.3% | 5.4% | | Income tax provision | 0.6% | 1.3% | | Net income | 1.7% | 4.1% | Key Operating Metrics / Non-GAAP Financial Measures Management monitors key financial and non-financial metrics like net sales, adjusted gross billings, gross profit, and adjusted EBITDA for strategic decisions - Key operating metrics include net sales, adjusted gross billings, gross profit, adjusted EBITDA, gross profit as a percentage of adjusted gross billings, and adjusted EBITDA as a percentage of gross profit[147] - Gross profit increased 10% to $13.7 million for the three months ended June 30, 2023, while effective margin decreased to 34.1%[148] - Gross profit increased 18% to $28.9 million for the six months ended June 30, 2023, while effective margin increased to 35.7%[148] Reconciliations of Non-GAAP Financial Measures This section reconciles non-GAAP financial measures, including adjusted gross billings to net sales and adjusted EBITDA to net income - Adjusted gross billings are defined as net sales adjusted for the cost of sales related to sales where the Company is an agent[14] - Adjusted EBITDA is defined as net income plus provision for income taxes, depreciation, amortization, share-based compensation, and interest[151] | Reconciliation of net sales to adjusted gross billings (Non-GAAP) (in thousands) | Six months June 30, 2023 | Six months June 30, 2022 | Three months June 30, 2023 | Three months June 30, 2022 | | :--------------------------------------------------------------- | :----------------------- | :----------------------- | :------------------------- | :------------------------- | | Net sales | $166,771 | $139,182 | $81,732 | $67,863 | | Costs of sales related to sales where the Company is an agent | $414,653 | $341,328 | $192,980 | $173,950 | | Adjusted gross billings | $581,424 | $480,510 | $274,712 | $241,813 | | Net income reconciled to adjusted EBITDA (in thousands) | Six months June 30, 2023 | Six months June 30, 2022 | Three months June 30, 2023 | Three months June 30, 2022 | | :-------------------------------------- | :----------------------- | :----------------------- | :------------------------- | :------------------------- | | Net income | $4,705 | $5,503 | $1,381 | $2,791 | | Provision for income taxes | $1,523 | $1,663 | $458 | $867 | | Amortization and depreciation | $1,317 | $802 | $604 | $445 | | Interest expense | $49 | $40 | $21 | $24 | | EBITDA | $7,594 | $8,008 | $2,464 | $4,127 | | Share-based compensation | $2,735 | $714 | $2,206 | $344 | | Adjusted EBITDA | $10,329 | $8,722 | $4,670 | $4,471 | Acquisitions The Company acquired Spinnakar Limited on August 18, 2022, for approximately £9.8 million, with its operating results included from acquisition - The Company acquired Spinnakar Limited on August 18, 2022[242] - The aggregate purchase price was approximately £9.8 million (equivalent to $11.8 million USD)[242] - Operating results of Spinnakar are included in the Company's results from the acquisition date[242] Three Months Ended June 30, 2023 Compared to Three Months Ended June 30, 2022 This section compares financial performance for Q2 2023 versus prior year, detailing changes in net sales, gross profit, expenses, and taxes Net Sales and Adjusted Gross Billings Net sales increased 20% to $81.7 million, and adjusted gross billings increased 14%, with growth rate differences due to product mix shifts - Net sales increased 20% to $81.7 million for the three months ended June 30, 2023[154] - Adjusted gross billings increased 14% to $274.7 million for the three months ended June 30, 2023[154] - Distribution segment net sales increased 21% to $76.1 million, and Solutions segment net sales increased 15% to $5.6 million[155][156] - The difference in growth rates between net sales and adjusted gross billings was due to product mix, with more gross-basis products in 2023 and more net-basis products in 2022[154][155][156] Gross Profit Gross profit increased 10% to $13.7 million, driven by organic growth in Distribution and increased billings in Solutions - Gross profit increased 10% to $13.7 million for the three months ended June 30, 2023[249] - Distribution segment gross profit increased 8% to $11.1 million, driven by organic growth but offset by higher early pay discounts[243] - Solutions segment gross profit increased 18% to $2.6 million, driven by increased adjusted gross billings[266] - Customer rebates and discounts increased to $2.5 million (from $1.8 million), and vendor rebates and discounts increased to $2.1 million (from $1.6 million)[170][157] Selling, General and Administrative Expenses SG&A expenses increased 47% to $11.6 million, primarily due to a $1.8 million one-time CEO stock compensation and higher personnel costs - SG&A expenses increased 47% to $11.6 million for the three months ended June 30, 2023[250] - Included in SG&A was a $1.8 million one-time stock compensation expense for the Chief Executive Officer[159] - The remaining increase was due to higher salaries, commissions, personnel costs, and professional fees, supporting infrastructure investment for future growth[174] Amortization and Depreciation Expense Amortization and depreciation expense increased 50% to $0.6 million, mainly due to intangible assets from the Spinnakar acquisition - Amortization and depreciation expense increased 50% to $0.6 million for the three months ended June 30, 2023[200] - The increase was primarily due to the amortization of intangible assets acquired in the Spinnakar acquisition[200] Income Taxes Income tax provision was $0.5 million with a 24.9% effective tax rate, impacted by executive compensation deductibility limitations - Provision for income taxes was $0.5 million for the three months ended June 30, 2023 (vs. $0.9 million in 2022)[175] - The effective tax rate was 24.9% for the three months ended June 30, 2023 (vs. 23.7% in 2022)[175] - The change in effective tax rate was a result of limitations on the deductibility of certain executive compensation amounts[175] Six Months Ended June 30, 2023 Compared to Six Months Ended June 30, 2022 This section compares financial performance for H1 2023 versus prior year, detailing changes in net sales, gross profit, expenses, and taxes Net Sales and Adjusted Gross Billings Net sales increased 20% to $166.8 million, and adjusted gross billings increased 21%, with growth differences due to product mix and FX - Net sales increased 20% to $166.8 million for the six months ended June 30, 2023[176] - Adjusted gross billings increased 21% to $581.4 million for the six months ended June 30, 2023[176] - Distribution segment net sales increased 20% to $154.7 million, and Solutions segment net sales increased 16% to $12.1 million[267][162] - Adjusted gross billings increased at a greater rate than net sales due to product mix shifts towards net-basis products and an unfavorable foreign exchange impact[176][267] Gross Profit Gross profit increased 18% to $28.9 million, driven by organic growth in Distribution and increased billings in Solutions - Gross profit increased 18% to $28.9 million for the six months ended June 30, 2023[164] - Distribution segment gross profit increased 20% to $23.8 million, driven by organic growth but offset by higher early pay discounts[204] - Solutions segment gross profit increased 11% to $5.1 million, driven by increased adjusted gross billings[179] - Customer rebates and discounts increased to $6.4 million (from $3.7 million), and vendor rebates and discounts increased to $3.8 million (from $3.7 million)[165][205] Selling, General and Administrative Expenses SG&A expenses increased 35% to $21.8 million, primarily due to a $1.8 million one-time CEO stock compensation and higher personnel costs - SG&A expenses increased 35% to $21.8 million for the six months ended June 30, 2023[166] - Included in SG&A was a $1.8 million one-time stock compensation expense for the Chief Executive Officer[206] - The remaining increase was due to higher salaries, commissions, personnel costs, and professional fees, supporting infrastructure investment for future growth[181] - SG&A expenses remained consistent at 3.7% of adjusted gross billings for both periods[166] Amortization and Depreciation Expense Amortization and depreciation expense increased 63% to $1.3 million, mainly due to intangible assets from the Spinnakar acquisition - Amortization and depreciation expense increased 63% to $1.3 million for the six months ended June 30, 2023[207] - The increase was primarily due to the amortization of intangible assets acquired in the Spinnakar acquisition[207] Income Taxes Income tax provision was $1.5 million with a 24.5% effective tax rate, impacted by executive compensation deductibility limitations - Provision for income taxes was $1.5 million for the six months ended June 30, 2023 (vs. $1.7 million in 2022)[182] - The effective tax rate was 24.5% for the six months ended June 30, 2023 (vs. 23.2% in 2022)[182] - The change in effective tax rate was a result of limitations on the deductibility of certain executive compensation amounts[182] Liquidity and Capital Resources Cash and cash equivalents significantly increased to $43.9 million, with operating activities providing $29.6 million and sufficient liquidity expected - Cash and cash equivalents increased 117% to $43.9 million as of June 30, 2023, from $20.2 million at December 31, 2022[183] - Net cash provided by operating activities was $29.6 million for the six months ended June 30, 2023[208] - Net cash used in investing activities was $3.0 million, primarily for fixed asset purchases[184] - Net cash used in financing activities was $3.5 million, including dividends, treasury stock purchases, and loan repayments[209] - The Company anticipates sufficient funds from cash and its $50.0 million revolving credit facility to meet working capital and cash requirements for the next 12 months[210][185] Foreign Exchange Foreign subsidiaries face currency exchange rate fluctuations, primarily CAD, EUR, and GBP to USD, impacting demand or pricing - Foreign subsidiaries are subject to changes in demand or pricing from fluctuations in currency exchange rates[211] - Primary exposure is to the Canadian Dollar, Euro Dollar, and British Pound-to-U.S. Dollar exchange rates[211] Off-Balance Sheet Arrangements As of June 30, 2023, the Company had no off-balance sheet arrangements as defined by SEC regulations - As of June 30, 2023, the Company had no off-balance sheet arrangements[212] Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, the Company is exempt from providing quantitative and qualitative disclosures about market risk - Smaller reporting companies are not required to provide information on quantitative and qualitative disclosures about market risk[213] Item 4. Controls and Procedures This section details the Company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures Management, including CEO and CFO, concluded that disclosure controls and procedures were effective as of June 30, 2023 - Management evaluated the effectiveness of disclosure controls and procedures as of June 30, 2023[189][214] - The evaluation was conducted under the supervision and participation of the CEO, CFO, and Chief Accounting Officer[189] - Management concluded that the Company's disclosure controls and procedures were effective[189] Changes in Internal Control Over Financial Reporting No material changes occurred in internal control over financial reporting during the three months ended June 30, 2023 - No material changes in internal control over financial reporting occurred during the three months ended June 30, 2023[215] PART II — OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on Common Stock repurchases, primarily shares surrendered by employees for tax withholding upon Restricted Stock vesting | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :----- | :------------------------------- | :--------------------------- | | April 1, 2023 - April 30, 2023 | 13,377 | $51.32 | | May 1, 2023 - May 31, 2023 | 6,326 | $46.29 | | June 1, 2023 - June 30, 2023 | — | — | | Total | 19,703 | $49.71 | - 19,703 shares were surrendered by employees to satisfy individual tax withholding obligations upon vesting of Restricted Stock[217] - These surrendered shares are not part of the publicly announced Common Stock repurchase program[217] - The Board of Directors approved increases to the repurchase program in 2014 and 2017, with 545,786 shares remaining available for repurchase as of June 30, 2023[218][192] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate documents, incentive plans, credit agreements, and certifications - Exhibits include corporate governance documents (Certificate of Incorporation, Bylaws), executive compensation plans, and credit agreements[220] - Certifications pursuant to Rule 13a-14(a) or Rule 15d-14(a) and 18 U.S.C. Section 1350 are included for the CEO, CFO, and Chief Accounting Officer[220] - The cover page interactive data file (XBRL) is embedded within the Inline XBRL document[195] SIGNATURES This section contains required signatures from the CEO, CFO, and Chief Accounting Officer, certifying the report filing - The report is signed by Dale Foster (Chief Executive Officer), Andrew Clark (Vice President and Chief Financial Officer), and Matthew Sullivan (Vice President and Chief Accounting Officer)[234] - The signatures certify the report pursuant to the requirements of the Securities Exchange Act of 1934[233]