Climb Global Solutions, Inc. quarterly report, Q3 FY2018

Filing and business context

The filing is Wayside Technology Group, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The registrant named in the filing is Wayside Technology Group, not Climb Global Solutions. The company distributes third-party technology products through Lifeboat Distribution and resells software, hardware, and services through TechXtend.

Unless stated otherwise, financial amounts below are in millions of dollars. 2017 comparative figures were retrospectively adjusted for adoption of ASC 606, which changed certain software, maintenance, and service transactions from gross to net revenue reporting.

Financial results and position

• Revenue and segments: Q3 net sales rose 23%; nine-month sales rose 14%. Lifeboat revenue grew 27% in Q3 and 15% year to date. TechXtend revenue fell 12% in Q3 but increased 7% for the nine-month period.
• Non-GAAP volume measure: Adjusted gross billings were $134.0 million in Q3, up 26%, and $375.6 million for nine months, up 16%. This measure adds certain vendor costs back to GAAP net sales and is not a substitute for GAAP revenue.
• Profitability: Gross profit was nearly flat despite higher sales, as margins declined. SG&A increased 10% in Q3 to $4.9 million and 7% year to date to $15.2 million; as a share of net sales, it declined to 10.2% in Q3 and 11.5% year to date.
• Unusual expense and adjusted result: Nine-month operating results included $2.446 million of separation expense following the former CEO’s resignation, including approximately $1.7 million for accelerated stock vesting and approximately $0.8 million of cash payments. Management’s non-GAAP net income excluding this expense, net of tax, was $3.807 million for the nine months, versus GAAP net income of $1.799 million.
• Cash flow: Nine-month operating cash flow was $4.6 million, versus cash used of $6.4 million in 2017. Investing cash use was $0.2 million. Financing cash use was $3.3 million, including $2.3 million of dividends and $1.0 million of share repurchases.
• Liquidity and debt: Cash was $6.5 million at September 30, compared with $5.5 million at year-end 2017. Current assets were $96.5 million and current liabilities $62.7 million. No revolver borrowings were outstanding. The company had a $20 million secured revolving facility maturing August 31, 2020.
• Dividends and equity: Dividends were $0.17 per share in Q3 and $0.51 per share for nine months. The company repurchased $1.0 million of treasury shares during the nine-month period.

Changes, outlook, and risks

• Management attributed Lifeboat growth to greater sales penetration and new product lines, partly offset by vendor and customer turnover, including termination of a vendor agreement representing less than 10% of net sales. TechXtend results may fluctuate with large customers’ IT spending and the company’s capacity to support extended payment terms.
• Management cited lower gross margins on hardware and software products, high-volume lower-margin sales, and product mix as drivers of margin compression. It expects competitive pressure on margins to continue. Management also plans continued investment in IT and marketing while monitoring SG&A.
• The company expects working-capital needs to increase with business growth, but stated that cash and available credit should fund requirements for at least the next 12 months. No specific sales or earnings guidance was provided.
• Customer concentration is significant: two customers represented 52.9% of Q3 sales and 44.0% of nine-month sales. The same customers represented 49.4% of net receivables at quarter-end. Two vendors accounted for 39.9% of nine-month purchases.
• Other disclosed risks include vendor agreement turnover, competitive pricing and margin pressure, customer credit and collection exposure, foreign-exchange movements, and possible changes to provisional tax estimates under the 2017 Tax Act. The company accrued $0.6 million for potential state income-tax liabilities related to economic nexus statutes; its nine-month effective tax rate was 35.4%, while the ordinary-income rate was 24.2%.
• Controls concern: Management concluded disclosure controls were ineffective at quarter-end because previously reported deficiencies constituted a material weakness in internal control over financial reporting. Management said additional procedures found related errors immaterial to current and prior financial statements and described remediation efforts that were still being assessed and tested.
• At September 30, operating lease obligations totaled $3.9 million. The company reported no off-balance-sheet arrangements and no outstanding credit-facility borrowings.

Important facts for investors to verify

1. Confirm the filing is for Wayside Technology Group, Inc.; the supplied company metadata identifies Climb Global Solutions.
2. Review the ASC 606 retrospective presentation and the distinction between GAAP net sales and non-GAAP adjusted gross billings when comparing growth and margins.
3. Track whether margin compression persists and whether revenue growth translates into improved operating income and cash generation.
4. Assess customer and vendor concentration, receivable collectability, and the impact of the terminated vendor relationship.
5. Monitor remediation and any subsequent reporting on the material weakness in financial-reporting controls.
6. Review final tax accounting under the Tax Act and the adequacy of the state tax contingency accrual.