Wayside Technology Group, Inc. (now Climb Global Solutions, Inc.) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 14, 2020. The filing is issued under the name Wayside Technology Group, Inc. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
The company distributes third-party technology products through its Climb Channel Solutions segment and resells software, hardware, and services through TechXtend. It completed the acquisition of Interwork Technologies on April 30, 2020; acquired results are included from May 1.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $56.6 | $50.7 | $119.2 | $95.5 |
| Gross profit | $7.1 | $7.8 | $15.3 | $15.1 |
| Gross margin | 12.6% | 15.4% | 12.8% | 15.8% |
| Operating income | $0.8 | $2.2 | $1.7 | $4.0 |
| Net income | $0.6 | $1.9 | $1.4 | $3.3 |
| Diluted EPS | $0.13 | $0.41 | $0.31 | $0.74 |
| Adjusted EBITDA (non-GAAP) | $2.1 | $2.7 | $5.2 | $5.0 |
- Q2 sales rose 12%, while gross profit fell 9%; six-month sales rose 25%, while gross profit increased only 1%. The company attributed the sales growth mainly to new vendor relationships and Interwork, partly offset by declines in established vendor lines.
- Q2 gross margin compression reflected lower non-routine marketing, rebate and early-payment income, discounts offered to a large customer for changed payment terms, and weaker sales from certain established vendors. TechXtend sales declined 29% in Q2 and 5% for the six-month period.
- Q2 operating results included $0.5 million of legal and advisory costs related to the unsolicited bid and shareholder matters and $0.2 million of acquisition costs. For the half year, those items were $1.8 million and $0.6 million, respectively. Adjusted EBITDA excludes these costs and is a non-GAAP measure.
Cash, liquidity, and obligations
- Cash and cash equivalents were $45.0 million at June 30, 2020, versus $15.0 million at year-end 2019. Current assets were $124.8 million and current liabilities $91.1 million.
- Operating cash flow was $36.4 million for the half year, versus cash used of $3.9 million in the prior-year period. The increase was primarily driven by a $36.5 million cash benefit from accounts receivable changes, associated with customer payment timing and revised payment terms; it should not be read as recurring earnings-based cash generation.
- Investing cash use was $1.2 million, including the net cash acquisition payment. Financing cash use was $5.0 million, including $3.5 million for share repurchases and $1.5 million in dividends. Dividends were $0.17 per share in Q2 and $0.34 per share for the half year.
- No borrowings were outstanding under the $20 million revolving credit facility at June 30. The facility was scheduled to mature August 31, 2020; the filing provides no clear detail on a subsequent renewal or replacement. The company said cash and unused facility capacity were expected to cover working-capital and cash needs for at least 12 months.
- Lease liabilities totaled $2.5 million. The filing reports no other borrowings outstanding.
Material developments, outlook, and risks
- Interwork acquisition: Purchase consideration was provisionally valued at $2.9 million in the purchase-price allocation, including a potential $0.8 million earn-out; the company reported an approximately $3.6 million USD headline purchase price, subject to working-capital adjustments. Interwork contributed about $3.7 million of revenue in the quarter. Purchase accounting remained provisional, including certain intangible asset, goodwill, and tax valuations.
- Shareholder settlement: The company settled litigation and shareholder matters, dismissed its lawsuit with prejudice, and repurchased 261,631 shares (about 5.8% of shares then outstanding) for $3.5 million, or $13.19 per share. It recorded $1.8 million of related legal and advisory expense in the first half; potential insurance reimbursements were not recognized because they had not been realized.
- Customer and vendor concentration: Two customers accounted for 47% of Q2 and first-half sales (29% and 18%). Two vendors accounted for 26% of Q2 purchases and 29% of first-half purchases. Concentration creates exposure to changes in key relationships, payment behavior, and vendor terms.
- COVID-19: Management reported no significant operational disruption through June 30 and said employees worked remotely after office closures. It could not predict the pandemic’s effect on demand, collections, supply chains, liquidity, or results; estimates were subject to greater uncertainty.
- Management commentary: Management planned to integrate Interwork’s administrative functions in Q3 and Q4 2020 and continue investing in business development, sales, and marketing. It cited ongoing price competition and possible quarter-to-quarter volatility. No specific revenue or earnings guidance was provided.
- The company was in compliance with credit-facility covenants at June 30. Disclosure controls were assessed as effective, but Interwork’s controls were excluded from that evaluation while integration work continued.
Most important facts for investors to verify
- Whether the revolving facility was renewed, replaced, or otherwise available after its August 31, 2020 maturity.
- How much of the first-half operating cash inflow reflects durable collections versus the one-time working-capital benefit from revised customer payment terms.
- Whether lower gross margins and reduced profit persist, and how customer discounts, vendor rebates, and established product-line sales evolve.
- Interwork’s subsequent contribution to revenue and profit, final purchase-price allocation, and any earn-out payment.
- Developments in concentrated customer and vendor relationships, COVID-19-related credit or supply risks, and any recovery of legal expenses through insurance.