Climb Solutions(CLMB) - 2023 Q4 - Annual Report

PART I Item 1. Business Climb Global Solutions operates in IT distribution (92% of net sales) and solutions, expanding vendor base, cloud offerings, and acquisitions - The company operates through two main segments: Distribution (92% of 2023 net sales) and Solutions (8% of 2023 net sales)[127][160] - The Distribution segment operates on a low gross margin but profitable model by leveraging efficient, scalable systems like drop-shipping and EDI, requiring low capital investment[159] - Strategic growth is driven by recruiting new software vendors, expanding cloud offerings, and making strategic acquisitions. The company completed the acquisition of Data Solutions in 2023 to expand its footprint in the UK and Ireland[138][139][162] - The company competes with large distributors like Arrow Electronics, TD Synnex, and Ingram Micro by offering more flexibility and specialized support for emerging technology vendors[150] - As of December 31, 2023, the company had 365 employees, with 181 in the Americas and 184 in EMEA[198][180] Item 1A. Risk Factors The company faces significant business, financial, operational, and legal risks, including customer/vendor dependency, intense competition, and cybersecurity threats - The company is highly dependent on a limited number of customers and vendors. In 2023, the two largest customers accounted for 35% of net sales, and the top five accounted for 51%. The top five vendors represented approximately 40% of purchases[233][232] - The IT industry is intensely competitive, with pressure on pricing from larger competitors and the risk of vendors selling directly to end-users, which could erode market share and margins[208][231] - Acquisitions are a key part of the growth strategy but involve risks such as integration challenges, unanticipated costs, and potential loss of key employees from acquired companies[235][212][237] - International operations, which accounted for 26% of net sales in 2023, expose the company to risks including foreign currency fluctuations, compliance with international laws, and political instability[214][11] - Cybersecurity threats pose a significant risk. A failure to maintain the security of confidential information could lead to business disruption, financial penalties, and reputational damage[191][218] - Financial risks include credit risk associated with offering payment terms to customers, interest rate risk on variable-rate debt, and the potential for goodwill impairment charges if future valuations decline[188][217][250] Item 1C. Cybersecurity The company implements a comprehensive cyber risk management program, overseen by the Board, focusing on prevention, detection, and mitigation - The company employs a layered cybersecurity strategy based on prevention, detection, and mitigation, with policies aligned to NIST, PCI-DSS, and CIS standards[255] - Oversight is provided by the Board's Risk and Security Committee, with the Chief Information Officer responsible for program implementation and reporting[278] - All employees are required to complete annual cybersecurity training, and the company conducts periodic penetration tests and simulations to ensure program robustness[278] - To date, cybersecurity risks have not materially affected the company's business, financial position, or results of operations[279] Item 2. Properties The company's properties include a leased 20,000 sq ft HQ in Eatontown, NJ, other leased offices, and an owned 5,800 sq ft facility in Dublin, Ireland - The corporate headquarters is a leased 20,000 sq. ft. space in Eatontown, NJ, under a lease expiring in April 2027[256] - The company owns a 5,800 sq. ft. office and warehouse in Dublin, Ireland, which was acquired with Data Solutions[258] - Additional leased properties include warehouse space in Eatontown, NJ, and offices in the UK, Colorado, and Maryland[281] Item 3. Legal Proceedings The company is not currently a party to any material legal proceedings, only routine matters incidental to business - The company is not currently a party to any material legal proceedings[509] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq (CLMB), declared $0.68 dividends in 2023/2022, and has an active share repurchase program - The company's common stock is traded on The Nasdaq Global Market under the symbol 'CLMB'[283] - Dividends of $0.68 per share were declared in both 2023 and 2022[260] - As of December 31, 2023, the company is authorized to repurchase an additional 545,786 shares under its existing plan. No shares were repurchased during the fourth quarter of 2023[371][286] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales grew 16% to $352.0M in 2023 due to organic growth and acquisitions, while net income slightly decreased despite strong operating cash flow Financial Performance Summary (2023 vs. 2022) | Metric | 2023 | 2022 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $352.0M | $304.3M | +16% | | Gross Profit | $64.2M | $54.1M | +19% | | SG&A Expenses | $44.3M | $34.1M | +30% | | Net Income | $12.3M | $12.5M | -2% | | Diluted EPS | $2.72 | $2.81 | -3% | Non-GAAP Financial Measures (2023 vs. 2022) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Adjusted Gross Billings | $1,260.4M | $1,064.7M | | Adjusted EBITDA | $24.6M | $21.1M | | Effective Margin % | 38.3% | 39.1% | - Net sales growth was driven by organic growth in the Distribution segment and the impact of the Data Solutions acquisition. Adjusted gross billings in the Distribution segment increased by 18% to $1.18 billion[340] - The increase in SG&A expenses was primarily due to higher payroll costs associated with higher gross profit and the impact of the Data Solutions acquisition[385] - Cash and cash equivalents increased by $16.1 million to $36.3 million at year-end, primarily due to $42.1 million in net cash provided by operating activities[389][370] - In May 2023, the company entered into a new $50.0 million revolving credit facility with JPMorgan Chase Bank, N.A., replacing its previous facility. No amounts were outstanding as of December 31, 2023[393] Item 9A. Controls and Procedures Management and independent auditors concluded the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[376] - Internal control over financial reporting was deemed effective as of December 31, 2023, based on the COSO 2013 framework[421] - The assessment of internal controls excluded the operations of Data Solutions, acquired on October 6, 2023, which constituted 17% of total assets and 4% of consolidated net sales[378][457] - The independent registered public accounting firm, BDO USA, P.C., audited and provided an unqualified opinion on the effectiveness of the company's internal control over financial reporting[403][437] PART IV Item 15. Exhibits, Financial Statement Schedules This section lists the Consolidated Financial Statements, Schedule II, and various exhibits, including acquisition agreements, credit agreements, and executive compensation plans - This item includes the Consolidated Financial Statements and Schedule II—Valuation and Qualifying Accounts[408] - Filed exhibits include the Share Purchase Agreement for the Data Solutions acquisition (dated Oct 6, 2023) and the Spinnakar acquisition (dated Aug 18, 2022)[427] - The Credit Agreement with JPMorgan Chase Bank, N.A., dated May 18, 2023, is included as an exhibit[427] - Management and compensatory plans, such as the 2021 Omnibus Incentive Plan and the Executive Severance and Change in Control Plan, are also filed as exhibits[430] Financial Statements and Supplementary Data Note 2. Summary of Significant Accounting Policies The company's significant accounting policies cover EPS calculation, cash equivalents, revenue recognition, goodwill impairment, income taxes, and stock-based compensation - Revenue is recognized when control of products and services transfers to customers. For transactions where the company acts as an agent (e.g., certain third-party maintenance and cloud services), revenue is recognized on a net basis[102][103] - Goodwill is tested for impairment annually as of October 1, or more frequently if impairment indicators arise, using either a qualitative or quantitative assessment at the reporting unit level[14][24] - Earnings per share (EPS) is calculated using the two-class method, which allocates earnings to common stock and participating securities (like non-vested restricted stock with dividend rights)[1] Earnings Per Share Calculation (2023 vs. 2022) | (in thousands, except per share data) | 2023 | 2022 | | :--- | :--- | :--- | | Net Income | $12,323 | $12,497 | | Less: Income allocated to participating securities | $323 | $317 | | Net Income Attributable to Common Shareholders | $12,000 | $12,180 | | Weighted Average Common Shares (Basic & Diluted) | 4,401 | 4,331 | | Basic & Diluted Net Income Per Share | $2.72 | $2.81 | - The company may use foreign exchange forward contracts to hedge currency exposures but does not apply hedge accounting; changes in fair value are recorded in earnings[22] Note 3. Acquisition On October 6, 2023, the company acquired Data Solutions for €15.0 million ($15.9 million USD), recognizing $7.1 million goodwill and $8.3 million vendor relationships - On October 6, 2023, the company acquired Data Solutions for a total purchase consideration of $18.1 million, including a $2.2 million contingent earn-out liability[565][546] Preliminary Purchase Price Allocation for Data Solutions Acquisition | (in thousands) | Amount | | :--- | :--- | | Cash | $3,190 | | Accounts receivable | $32,503 | | Vendor relationships (intangible) | $8,269 | | Goodwill | $7,143 | | Accounts payable & other liabilities | ($34,793) | | Deferred tax liability | ($1,576) | | Net assets acquired | $18,095 | - The goodwill from the acquisition was allocated to the Distribution segment and is not deductible for tax purposes[568] - For the year ended December 31, 2023, the Data Solutions acquisition contributed approximately $14.3 million in revenue and $0.8 million in net income[519][545] Note 4. Goodwill and Other Intangible Assets Goodwill increased to $27.2 million in 2023 due to the Data Solutions acquisition, with other intangibles totaling $26.9 million and projected $3.0 million annual amortization Goodwill by Segment (2022-2023) | (in thousands) | Distribution | Solutions | Consolidated | | :--- | :--- | :--- | :--- | | Balance Jan 1, 2022 | $8,141 | $9,047 | $17,188 | | Goodwill acquired | $3,244 | $0 | $3,244 | | Translation adjustments | ($703) | ($766) | ($1,469) | | Balance Dec 31, 2022 | $10,682 | $8,281 | $18,963 | | Goodwill acquired | $7,143 | $0 | $7,143 | | Translation adjustments | $833 | $243 | $1,076 | | Balance Dec 31, 2023 | $18,658 | $8,524 | $27,182 | Other Intangible Assets, Net (as of Dec 31, 2023) | (in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | | :--- | :--- | :--- | :--- | | Customer and vendor relationships | $30,968 | $4,424 | $26,544 | | Trade name | $489 | $103 | $386 | | Total | $31,457 | $4,527 | $26,930 | - Total amortization expense for other intangibles was $2.2 million in 2023, up from $1.2 million in 2022[52] Estimated Future Amortization Expense | Year | Amount (in thousands) | | :--- | :--- | | 2024 | $3,037 | | 2025 | $3,037 | | 2026 | $3,037 | | 2027 | $3,037 | | 2028 | $3,037 | | Thereafter | $11,745 | | Total | $26,930 | Note 7. Income Taxes The 2023 income tax provision was $4.5 million with an effective tax rate of 26.6%, up from 24.4% in 2022, mainly due to executive compensation deductibility limits Income Tax Provision (2023 vs. 2022) | (in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | Current | | | | Federal | $2,793 | $2,694 | | State | $676 | $622 | | Foreign | $1,372 | $1,254 | | Deferred | | | | Federal, State, Foreign | ($383) | ($535) | | Total Provision | $4,458 | $4,035 | | Effective Tax Rate | 26.6% | 24.4% | - The difference between the U.S. statutory rate and the effective tax rate is influenced by state income taxes, non-deductible acquisition costs, and stock compensation[58][82] - The company's federal tax returns for 2020-2022 remain open for examination. There was no activity related to unrecognized tax benefits in 2023 or 2022[59][60] Note 8. Credit Facilities In May 2023, the company established a new $50.0 million revolving credit facility with JPMorgan Chase, with no outstanding balance, and has a $1.3 million term loan - On May 18, 2023, the company entered into a new $50.0 million revolving credit agreement with JPMorgan Chase Bank, N.A., maturing in 2028. No amount was outstanding as of December 31, 2023[599][582] - The company has a term loan with First American Commercial Bancorp, Inc., with an outstanding balance of $1.3 million as of December 31, 2023[61][558] - Through the Data Solutions acquisition, the company acquired an invoice discounting facility with a balance of $4.3 million as of December 31, 2023[584] Note 9. Stockholders' Equity and Stock-Based Compensation The company granted 132,526 restricted shares in 2023, recognizing $4.1 million in stock-based compensation expense, with $4.5 million unrecognized cost remaining - The company's active equity plan is the 2021 Omnibus Incentive Plan, with 241,068 shares available for future grants as of December 31, 2023[601] - In 2023, the company granted 132,526 shares of restricted stock. Total share-based compensation expense was $4.1 million for the year[585][606] - As of year-end 2023, there was $4.5 million of total unrecognized compensation cost related to non-vested awards, to be recognized over a weighted-average period of 1.5 years[89] - There was no stock option activity in 2023 or 2022, and no options were outstanding at the end of either year[88] Note 13. Industry, Segment and Geographic Financial Information The company operates in Distribution ($325.3 million net sales) and Solutions ($26.8 million net sales) segments, with the USA as the primary geographic market and customer concentration Segment Financial Data for Year Ended Dec 31, 2023 | (in thousands) | Distribution | Solutions | Total | | :--- | :--- | :--- | :--- | | Net Sales | $325,262 | $26,751 | $352,013 | | Gross Profit | $53,363 | $10,884 | $64,247 | | Segment Income Before Taxes | $30,896 | $5,646 | $36,542 | Net Sales by Geography for Year Ended Dec 31, 2023 | (in thousands) | Amount | | :--- | :--- | | USA | $259,686 | | Europe and United Kingdom | $67,420 | | Canada | $24,907 | | Total | $352,013 | Identifiable Assets by Geography (as of Dec 31, 2023) | (in thousands) | Amount | | :--- | :--- | | USA | $171,080 | | Europe and United Kingdom | $140,024 | | Canada | $23,994 | | Total | $335,098 | - In 2023, two customers accounted for 20% and 15% of consolidated net sales, respectively. One vendor accounted for 14% of consolidated purchases[616] Note 14. Fair Value Measurements The company measures assets like $5.1 million treasury bills (Level 1) and liabilities like a $4.2 million contingent earn-out (Level 3) at fair value - Fair value is measured using a three-level hierarchy: Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs)[78][594][95] Assets and Liabilities Measured at Fair Value (as of Dec 31, 2023) | (in thousands) | Level 1 | Level 2 | Level 3 | Total | | :--- | :--- | :--- | :--- | :--- | | Assets: | | | | | | Treasury bills | $5,096 | $0 | $0 | $5,096 | | Liabilities: | | | | | | Contingent earn-out | $0 | $0 | $4,189 | $4,189 | - The contingent earn-out liability increased from $1.8 million at the end of 2022 to $4.2 million at the end of 2023, primarily due to the $2.2 million earn-out from the Data Solutions acquisition[97]