Climb Global Solutions, Inc. quarterly report, Q2 FY2018

Business context and reporting period

The supplied filing is Wayside Technology Group, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2018, filed August 9, 2018. This differs from the request metadata naming Climb Global Solutions; investors should verify the issuer and any corporate name history. Wayside distributed third-party software and hardware through its Lifeboat Distribution segment and resold technology products and services through TechXtend.

Comparative 2017 figures reflect retrospective adoption of ASC 606. For certain security software, maintenance, support and services, the company acts as agent and reports revenue net of vendor costs. This reduced reported revenue and cost of sales without changing gross profit for the affected comparative periods. The company also presents adjusted gross billings, a non-GAAP measure.

Key financial metrics

Amounts below are in millions except per-share data. Q2 refers to the three months ended June 30; H1 refers to the six months ended June 30.

Cash, liquidity and debt: Cash was $10.409 million at June 30, 2018, up from $5.530 million at December 31, 2017. H1 operating cash flow was $7.784 million, versus $0.172 million in H1 2017; investing cash outflow was $0.189 million and financing cash outflow was $2.528 million. Current assets were $89.939 million and current liabilities $57.765 million. No borrowings were outstanding under the $20 million revolving facility, which matures August 31, 2020. The company said cash and available facility capacity should fund working-capital and cash needs for at least 12 months. Operating lease commitments totaled $4.018 million.

Capital returns and other metrics: H1 dividends were $1.535 million, or $0.34 per share; treasury-stock purchases used $0.993 million. Net accounts receivable was $71.780 million current and $5.269 million long-term at June 30. Foreign operations generated $9.9 million of H1 sales, or 11.7% of total sales.

Material changes versus prior comparable periods

• Q2 sales rose about 13% year over year and H1 sales rose about 10%; adjusted gross billings increased about 13% in Q2 and 12% in H1.
• Gross profit was nearly flat in both periods, while margins contracted. Management cited product mix, competitive pricing and growth in high-volume, lower-margin products; Q2 Lifeboat gross profit also faced lower vendor rebates after a distribution agreement ended.
• Q2 reported a $1.117 million net loss, compared with $1.275 million net income a year earlier. H1 net income fell to $0.480 million from $2.592 million.
• SG&A increased 9% in Q2 to $5.298 million and 6% in H1 to $10.346 million, though SG&A as a percentage of sales declined modestly in both periods.
• Cash from operations improved substantially year over year, with working-capital movements, including lower receivables and use of prior-year vendor prepayments, contributing to the H1 increase.

Outlook, management commentary, risks and unusual items

• CEO departure and separation charge: Former Chairman and CEO Simon Nynens resigned May 11, 2018. The company recorded $2.446 million of separation expense, including $1.7 million for accelerated vesting of restricted shares and approximately $0.8 million in cash payments and related amounts. Management reported Q2 net income excluding separation expense, net of tax, of $0.891 million, a non-GAAP measure.
• No specific earnings or revenue guidance: Management gave no numerical forecast. It expects to invest in IT and marketing and said SG&A may vary with sales and growth investment. Results may fluctuate with IT demand, product mix, pricing, customer spending timing and vendor or customer turnover.
• Concentration and competitive risks: Two customers represented 34.5% of Q2 net sales and 39.1% of H1 net sales; two vendors represented 41.1% of H1 purchases. A vendor terminated an agreement accounting for less than 10% of net sales. Management cited vendor relationship changes, rebates, pricing pressure and declining margins as risks.
• Taxes: The company had a $0.6 million accrual for potential state income tax liabilities related to economic-nexus statutes. Tax accounting under the 2017 Tax Act remained provisional, with completion expected in the second half of 2018; further adjustments could materially affect tax expense and the effective tax rate.
• Controls: Management concluded disclosure controls and procedures were not effective at period-end because previously reported deficiencies in financial-reporting controls collectively remained a material weakness. Management said identified errors were immaterial individually and in aggregate and described remediation work, including additional personnel, outside advisers and improved control documentation.
• Other exposures: International activity exposes the company to Canadian dollar and euro exchange-rate movements. Management also warned that sales, margins and operating results can be volatile. No off-balance-sheet arrangements were reported.

Important facts for investors to verify

1. Confirm the issuer identity and the relationship, if any, between the filing’s Wayside Technology Group name and the Climb Global Solutions name in the request.
2. Review the material weakness, remediation progress and any subsequent updates on disclosure and financial-reporting controls.
3. Assess whether revenue growth translates into durable gross profit given margin compression, net-versus-gross revenue presentation and vendor rebate changes.
4. Evaluate customer and vendor concentration, including the effect of the terminated distribution agreement and customer receivable exposure.
5. Check subsequent filings for finalization of Tax Act accounting, state tax exposures, CEO transition costs and liquidity or credit-facility changes.