PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act. StatementsAct of 1934, as amended (the “Exchange Act”), and Section 27A of the Securities Act of 1933, as amended (the “Securities Act”). All statements, other than statements of historical or current fact, in this report regarding future events or conditions,are forward-looking statements, including but not limited to statements regarding future events or conditions, industry prospects and the Company’s expected financial position, business and financing plans, areplans.  These forward-looking statements.statements may be accompanied by such words as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “potential,” “project,” “target,” “should,” “likely,” “will” and other words and terms of similar meaning.

Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. These forward-looking statements are subject to certain known and unknown risks and uncertainties, as well as assumptions that could cause actual results to differ materially from those reflected in these forward-looking statements. We strongly urge current and prospective investors to carefully consider the cautionary statements and risks contained in this report, particularly the risks described under “Item 1A. Risk Factors” herein. Such risks include, but are not limited to, the continued acceptance of the Company’s distribution channel by vendors and customers, the timely availability and acceptance of new products, contribution of key vendor relationships and support programs, as well as factors that affect the software industry generally.

The Company operates in a rapidly changing business, and new risk factors emerge from time to time. Management cannot predict every risk factor, nor can it assess the impact, if any, of all such risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those projected in any forward-looking statements.

Accordingly, forward-looking statements should not be relied upon as a prediction of actual results and readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The statements concerning future sales, future gross profit margin and future selling and administrative expenses are forward looking statements involving certain risks and uncertainties such as availability of products, product mix, pricing pressures, market conditions and other factors, which could result in a fluctuation of sales below recent experience.

PART I

Item 11. Business

General

Wayside Technology Group, Inc. and Subsidiaries (the “Company,” “us,” “we,” or “our”) is an information technology (“IT”) channel company. The Company primarily operates through two reportable operating segments.  Theits “Lifeboat Distribution” segment, which distributes technical software and hardwareemerging technologies to corporate resellers, value added resellers (VARs), consultants and systems integrators worldwide. The Company also operates a smaller segment called “TechXtend” segment, which is a value-added reseller of software, hardware and services for corporations, government organizations and academic institutions in the USA and Canada. WeAcross both segments, we offer an extensive line of products from leading publishers of software vendors and tools for virtualization/cloud computing, security, networking, storage and infrastructure management, application lifecycle management and other technically sophisticated domains as well as computer hardware.

The Company was incorporated in Delaware in 1982. Our common stock, par value $0.01 per share (“Common StockStock”) is listed on The NASDAQ Global Market under the symbol “WSTG”. Our main web site address is www.waysidetechnology.com, and the other web sites maintained by our business include www.lifeboatdistribution.com and www.techxtend.com.  Reference to these “uniform resource locators”The information contained on, or “URLs” is made as an inactive textual reference for informational purposes only. Information onotherwise accessible through, our web sites should not be considered filed with the Securities and Exchange Commission, andwebsites is not and should not be deemed to be, a part of, or incorporated by reference into, this report.

In our Lifeboat Distribution segment, we distribute technology products from software developers, publisherssoftware vendors or original equipment manufacturers (OEMs) to resellers, and system integrators worldwide. We purchase software, maintenance/service agreements, networking/storage/security equipment and complementary products from our vendors and sell them to our reseller customers. The large majority of products we sell are “drop shipped” directly to the customers, which reduces physical handling by the Company and required investment in inventory.  Generally, a vendor authorizes a limited of number of companies to act as distributors of their product and sell to resellers of their product. Our reseller customers include value-added resellers, or VARs, corporate resellers, government resellers, system integrators, direct marketers, and national IT superstores. We combine our core strengths in customer service, marketing, distribution, credit and billing to allow our customers to achieve greater efficiencies in time to market in the IT channel in a cost effectivecost-effective manner.

OurWhile our Lifeboat Distribution business is characterized by low gross profit as a percentage of revenue,adjusted gross billings, or gross margin, and price competition.   competition, we have been able to operate profitably by leveraging an efficient business model. The large majority of the products we sell are either digital products such as license authorizations, third party maintenance contracts, or hardware which is dropped shipped to the end customer directly by the vendor. We utilize electronic digital interchange (“EDI”) and other automation to fulfill these orders on a cost-efficient basis. We also maintain relatively low inventory balances relative to our gross billings and enjoy what we believe is favorable credit from our suppliers, allowing us to deploy a capital efficient model as reflected by our return on invested capital and pre-tax income as a percentage of gross profit generated.

In our Lifeboat segment, we are highly dependent on the end-market demand for the products we sell, and on our partners’ strategic initiatives and business models. This end-market demand is influenced by many factors including the introduction of new products, replacement and renewal cycles for existing products, competitive products, overall economic growth and general business activity. A difficult and challenging economic environment may also lead to consolidation or decline in the industry and increased price-based competition. We continually review the marketplace to identify new and emerging vendors and products to potentially add to our vendor partners.   

We also provide comprehensive IT solutions directly to end users through our TechXtend segment. Products in this segment are acquired directly from original equipment manufacturers (OEMs), software developers or distributors and sold to end users. We provide customer service, billing, sales and marketing support in this segment and also provide extended payment terms to facilitate sales.

The Company operates a distribution facility in Eatontown, New Jersey.

Products

An essential part of our ongoing operations and growth plans is the continued recruitment of software publishersvendors for which we become authorized distributors of their products. The Company offersThrough our Lifeboat Distribution business, we sell a wide variety of technology products from a broad range of publisherssoftware vendors and manufacturers, such as Bluebeam Software, Dell/Dell Software, erwin, Flexera Software, Hewlett Packard, Infragistics, Intel Software, Lenovo, Micro Focus, Microsoft, Mindjet, Samsung, SmartBear Software, SolarWinds, Sophos, StorageCraft Technology, TechSmith, Unitrends, Veeam SoftwareCloudGenix, Tintri and VMware.Extrahop.  On a continuous basis, we screen new vendors and products for inclusion in our direct sales portfolio, and web sitesline card based on their features, quality, price, profit margins and warranties, as well ascurrent market trends. We believe that effective purchasing from a diverse vendor base is a key element of our business strategy. For the year ended December 31, 2019, Sophos and SolarWinds accounted for 22% and 17%, respectively of our consolidated purchases. For the year ended December 31, 2018, Sophos and SolarWinds accounted for 24% and 15%, respectively of our consolidated purchases.  The loss of a key vendor or group of vendors could disrupt our product availability and otherwise have an adverse effect on current sales trends. Thethe Company.

suppliers. SubstantiallyWhile substantially all of the Company’s contracts with its vendors are terminable upon 30 days’ notice or less.less, the tenure of the relationships with our vendor partners tends to extend over several years. Moreover, the manner in whichway software products are distributed and sold is changing, and new methods of distribution and sale may emerge or expand. Software publishersvendors have sold, and may intensify their efforts to sell, their products directly to end-users. The Company’s business and results of operations may be adversely affected if the terms and conditions of the Company’s authorizations with its vendors were to be significantly modified or if certain products become unavailable to the Company.

We believe that effective purchasing from a diverse vendor base is a key element of our business strategy. For the year ended December 31, 2017, Sophos and Solarwinds accounted for 26.4% and 14.7%, respectively of our consolidated purchases. For the year ended December 31, 2016, Sophos and Solarwinds accounted for 23.1% and 10.8%, respectively, of our consolidated purchases. For the year ended December 31, 2015, Sophos was the only individual vendor from whom our purchases exceeded 10% of our total purchases and accounted for 24.2% of our total

renewals of maintenance agreements. These types of programs may continue to be developed and used by

In December 2017, we adopted a Code of EthicalEthics and Business Conduct.  We review the Code of Ethics and Business Conduct annually and consider updates as necessary. The full text of the Code of EthicalEthics and Business Conduct, which applies to all employees, officers and directors of the Company, including our Chief Executive Officer and Chief Financial Officer, is available at our web site, http://www.waysidetechnology.com, under “Governance.” The Company intendswww.waysidetechnology.com. We intend to disclose any amendment to, or waiver from, a provision of the Code of Ethical Conduct that applies to its Chief Executive Officer or Chief Financial Officer on its web site under “Investor Information.”

Reference to the “uniform resource locators” or “URLs” contained in this section is made as an inactive textual reference for informational purposes only. Information on our web sites should not be considered filed with the Securities and Exchange Commission, and is not, and should not be deemed to be part of this report.site.

Item 1A. Risk Factors

Investors should carefully consider the risk factors set forth below as well as the other information contained in this report. Any of the following risks could materially and adversely affect our business, financial condition or results of operations. Additional risks and uncertainties not currently known to us or those currently viewed by us to be immaterial may also materially and adversely affect our business, financial condition or results of operations.

Changes in the information technology industry and/or economic environment may reduce demand for the products and services we sell. Our results of operations are influenced by a variety of factors, including the condition of the IT industry, general economic conditions, shifts in demand for, or availability of, computer products and software and IT services and industry introductions of new products, upgrades or methods of distribution. The information technology products industry is characterized by abrupt changes in technology, rapid changes in customer preferences, short product life cycles and evolving industry standards. Net sales can be dependent on demand for specific product categories, and any change in demand for or supply of such products could have a material adverse effect on our net sales, and/or cause us to record write-downs of obsolete inventory, if we fail to react in a timely manner to such changes.

We rely on our suppliers for product availability, marketing funds, purchasing incentives and competitive products to sell. We acquire products for resale both directly from manufacturers and indirectly from distributors. The loss of a supplier could cause a disruption in the availability of products. Additionally, there is no assurance that as manufacturers continue to or increasingly sell directly to end users and through the distribution channel, that they will not limit or curtail the availability of their products to distributors/resellers like us. For example, resellers and publisherssoftware vendors may attempt to increase the volume of software products distributed electronically through ESD (Electronic Software

outlook, which, in turn, could adversely affect our stock price. In addition, international, regional or domestic political unrest and the related potential impact on global stability, terrorist attacks and the potential for other hostilities in various parts of the world, potential public health crises (such as the coronavirus outbreak) and natural disasters continue to contribute to a climate of economic and political uncertainty that could adversely affect our results of operations and financial condition. Furthermore, if any ofcondition, including our customers to whom we provide larger extended payment terms go elsewhere for financing, such loss of revenue could have a material adverse effect on our business, operating resultsgrowth and financial condition.profitability.

The IT products and services industry is intensely competitive and actions of competitors, including manufacturers of products we sell, can negatively affect our business. Competition has been based primarily on price, product availability, speed of delivery, credit availability and quality and breadth of product lines and, increasingly, also is based on the ability to tailor specific solutions to client needs. We compete with manufacturers, including manufacturers of products we sell, as well as a large number and wide variety of marketers and resellers of IT products and services. In addition, manufacturers are increasing the volume of software products they distribute electronically directly to end-users and in the future, will likely pay lower referral fees for sales of certain software licensing agreements sold by us.  Generally, pricing is very aggressive in the industry, and we expect pricing pressures to continue. There can be no assurance that we will be able to negotiate prices as favorable as those negotiated by our competitors or that we will be able to offset the effects of price reductions with an increase in the number of clients, higher net sales, cost reductions, or greater sales of services, which service sales typically are delivered at higher gross margins, or otherwise. Price reductions by our competitors that we either cannot or choose not to match could result in an erosion of our market share and/or reduced sales or, to the extent we match such reductions, could result in reduced operating margins, any of which could have a material adverse effect on our business, results of operations and financial condition.

We operate on narrow margins.The way software products are distributed and sold is changing, and new methods of distribution and sale may emerge or expand. We operate in a very competitive business environment. Like other companies inSoftware vendors have sold, and may intensify their efforts to sell, their products directly to end-users. There can be no assurances that software developers and vendors will continue using distributors and resellers to the technology distribution industry,same extent they currently do. Future efforts by software developers and vendors to bypass third-party sales channels could materially and adversely affect the Company’s business, is continually under pricing pressureresults of operations and characterized by narrow grossfinancial condition. In addition, resellers and operating margins. These narrow margins magnifysoftware vendors may attempt to increase the impactvolume of software products distributed electronically through ESD (Electronic Software Distribution) technology, through subscription services, and through on-line shopping services. Any of these competitive programs, if successful, could have a material adverse effect on the Company’s operatingbusiness, results attributed to variations in salesof operations and operating costsfinancial condition. The Company’s business and place a premium on our ability to leverage our infrastructure. Future gross and operating marginsresults of operations may be adversely affected if the terms and conditions of the Company’s authorizations with its vendors were to be significantly modified or if certain products become unavailable to the Company.

We offer credit to our customers and, therefore, are subject to significant credit risk. We sell our products to a large and diverse customer base. We finance a significant portion of such sales through trade credit, typically by changes in product mix, vendor pricing actions and competitive and economic pressures.providing 30-75-day payment terms. In addition, failurewe offer extended payment terms to attract new sourcescertain customers for terms of 1-3 years. As a result, our business from expansioncould be adversely affected in the event of productsa deterioration of the financial condition of our customers, resulting in the customers’ inability to repay us. This risk may increase if there is a general economic downturn affecting a large number of our customers and in the event our customers do not adequately manage their business or services or entry into new markets may adversely affect future gross and operating margins.

If we loseproperly disclose their financial condition. Also, several of our larger customers require greater than 30-day payment terms which could increase our earningscredit risk and decrease our operating cash flow. 

We face substantial competition from other companies. We compete in all areas of our business against local, regional, national, and international firms. Some of our current competitors have substantially greater capital resources and sales and distribution capabilities than we do. In response to competitive pressures from any of our current or future competitors, we may be affected. Meetingrequired to lower selling prices in order to maintain or increase market share, and such measures could adversely affect our customers’ needs quicklyoperating results. In addition, we face competition from vendors, which may choose to market their products directly to end-users, rather than through channel partners such as the Company, and fairly is criticalthis could adversely affect our future sales. Many competitors compete based principally on price and may have lower costs or accept lower selling prices than we do and, therefore, our gross margins may not be maintainable. Our gross margins have declined historically and may continue to our business success.decline in the future. Our contracts for the provision ofcompetitors may offer better or different products are generally non-and services

exclusive agreements that are terminable by either party upon 30 days’ notice.than we offer. In addition, our agreements with these larger customerswe do not provide for minimum purchase commitments. Thehave guaranteed purchasing volume commitments from our customers and, therefore, our sales volume may be volatile.

Our business is substantially dependent on a limited number of customers and vendors, and the loss of several of our large customers,or any change in the failurebusiness habits of such key customers to pay their accounts receivable on a timely basis, or a material reduction in the amount of purchases made by such customers couldvendors may have a material adverse effect on our business, financial position and results of operations. Because our standing arrangements and agreements with our customers and vendors typically contain no purchase or sale obligations and are terminable by either party upon several months or otherwise relatively short notice, we are subject to significant risks associated with the loss or change at any time in the business habits and financial condition of key customers or vendors. We have experienced the loss and changes in the business habits of key customer and vendor relationships in the past and expect to do so again in the future.

Sales of products purchased from our largest two vendors accounted for 39% of our 2019 purchases and sales from our largest five vendors generated approximately 54% of 2019 purchases. As is the case with many of our vendor and customer relationships, our contractual arrangements with these large vendors are terminable by either party upon several months’ notice. If these contracts or our relationships with these vendors terminate for any reason, or if any of our other significant vendor relationships terminate for any reason, and we are not able to sell or procure a sufficient supply of those products from alternative sources, or at all, our financial position and results of operations would be adversely affected. Our vendors are subject to many if not all of the same (or similar) risks and cash flows. Additionally, anything that negatively impactsuncertainties to which we are subject, as well as other risks and uncertainties, and we compete with others for their business. Accordingly, we are at a continual risk of loss of their business on account of a number of factors and forces, many of which are largely beyond our control.

In 2019, our two largest customers accounted for 42% of our net sales and our largest five customers accounted for  56% of our net sales. If any of our significant customer relations also can negatively impactrelationships terminate for any reason, and we are not able to replace those customers and associated revenues, our operating results.financial position and results of operations would be adversely affected.

Disruptions in our information technology and voice and data networks could affect our ability to service our clients and cause us to incur additional expenses. We believe that our success to date has been, and future results of operations likely will be, dependent in large part upon our ability to provide prompt and efficient service to clients. Our ability to provide such services is dependent largely on the accuracy, quality and utilization of the information generated by our IT systems, which affect our ability to manage our sales, client service, distribution, inventories and accounting systems and the reliability of our voice and data networks.

Failure to adequately maintain the security of our electronic and other confidential information could materially adversely affect our financial condition and results of operations. We are dependent upon automated information technology processes. Privacy, security, and compliance concerns have continued to increase as technology has evolved to facilitate commerce and as cross-border commerce increases. As part of our normal business activities, we collect and store certain confidential information, including personal information of employees and information about partners and clients which may be entitled to protection under a number ofseveral regulatory regimes. In the course of normal and customary business practice, we may share some of this information with vendors who assist us with certain aspects of our business. Moreover, the success of our operations depends upon the secure transmission of confidential and personal data over public networks, including the use of cashless payments. AnyAlthough we did not have any material cybersecurity breaches in 2019 and 2018, any failure on the part of us or our vendors to maintain the security of data we are required to protect, including via the penetration of our network security and the misappropriation of confidential and personal information, could result in business disruption, damage to our reputation, financial obligations to third parties, fines, penalties, regulatory proceedings and private litigation with potentially large costs, and also result in deterioration in our employees’, partners’ and clients’ confidence in us and other competitive disadvantages, and thus could have a material adverse impact on our business, financial condition and results of operations. During 2017 and 2016 we did not have any cybersecurity breaches.

We depend on certain key personnel. Our future success will be largely dependent on the efforts of key management personnel for strategic and operational guidance as well as relationships with our key vendors and customers. We also believe that our future success will be largely dependent on our continued ability to attract and retain highly qualified management, sales, service, finance and technical personnel. We cannot assure you that we will be able to attract and retain such personnel. Further, we make a significant investment in the training of our sales account executives. Our

inability to retain such personnel or to train them either rapidly enough to meet our expanding needs or in an effective manner for quickly changing market conditions could cause a decrease in the overall quality and efficiency of our sales staff, which, in turn, could have a material adverse effect on our business, results of operations and financial condition.

Risks related to our common stock. The exercise of options or any other issuance of shares by us may dilute your ownership of our Common Stock. Our Common Stock is thinly traded, which may be exacerbated by our repurchases of our Common Stock. As a result of the thin trading market for our stock, its market price may fluctuate significantly more than the stock market as a whole or of the stock prices of similar companies.  Without a larger float, our common stock will be less liquid than the stock of companies with broader public ownership, and, as a result, the trading prices for our Common Stock may be more volatile. Among other things, trading of a relatively small volume of our Common Stock may have a greater impact on the trading price of our stock than would be the case if our public float were larger.

Our common stock is listed on The NASDAQ Global Market, and we therefore are subject to continued listing requirements, including requirements with respect to the market value and number of publicly-held shares, number of stockholders, minimum bid price, number of market makers and either (i) stockholders’ equity or (ii) total market value of stock, total assets and total revenues. If we fail to satisfy one or more of the requirements, we may be delisted from The NASDAQ Global Market. If we do not qualify for listing on The NASDAQ Capital Market, and if we are not able

We may be subject to litigation. We may be subject to legal claims or regulatory matters involving stockholder, consumer, antitrust, intellectual property and other issues. Litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could include monetary damages or other adverse effects. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on our business, financial position and results of operations for the period in which the ruling occurred or future periods.

Our business could be negatively affected as a result of the actions of activist shareholders. Publicly traded companies have increasingly become subject to campaigns by activist investors advocating corporate actions such as financial restructurings, increased borrowings, special dividends, stock repurchases or even sales of assets or entire companies to third parties or the activists themselves. Responding to proxy contests and other actions by activist shareholders can be costly and time-consuming, disrupt our operations and divert the attention of our Board of Directors and senior management from the pursuit of business strategies, which could adversely affect our results of operations and financial condition. Additionally, perceived uncertainties as to our future direction as a result of shareholder activism or changes to the composition of the Board of Directors may lead to the perception of a change in the direction of the business, instability or lack of continuity.  These uncertainties may be more acute or heightened when an activist seeks to change a majority of the Board of Directors or ultimately desires to acquire the Company. Additionally, actions by activist shareholders may be exploited by our competitors, cause concern to our current or potential customers, make it more difficult to attract and retain qualified personnel and may create adverse uncertainty for our employees.

On December 20, 2019, Simon F. Nynens nominated four individuals for election to our Board of Directors at the 2020 annual meeting of stockholders. Mr. Nynens previously served as the Chairman of the Board of Directors, President and Chief Executive Officer of the Company. According to publicly available filings made to the Securities and Exchange Commission, Mr. Nynens granted to Shepherd Kaplan Krochuk, LLC (“SKK”) an irrevocable proxy to vote his shares of our common stock in favor of any acquisition proposal by SKK, against any third-party acquisition and as directed by SKK with respect to the election of directors nominated by persons other than the Company. Prior to the entrance of Mr. Nynens into such agreement with SKK, the Company had received unsolicited acquisition proposals from SKK and North & Webster SSG, LLC (“N&W” and together with SKK, the “N&W Group”) jointly to acquire all of the outstanding shares of common stock of the Company. The most recent unsolicited acquisition proposal from the N&W Group was received on December 10, 2019 and expired on its own terms on December 16, 2019.

While the N&W Group’s most recent proposal has expired, there can be no assurance that the N&W Group or another third party will not make another unsolicited acquisition proposal in the future and no assurance that if the four persons proposed by Mr. Nynens for election at our 2020 annual meeting are elected, they will not attempt to influence the Company’s decision related to any future acquisition proposal made by the N&W Group or another third party.

By letter dated January 22, 2020, a shareholder of the Company demanded that the Board of Directors investigate and bring an action against Mr. Nynens for his breaches of certain restrictive covenants contained in the separation agreement he entered into with the Company on or about May 11, 2018. Following receipt of the shareholder demand, we filed a lawsuit on February 14, 2020, in the Superior Court of New Jersey Monmouth County, against Mr. Nynens and the N&W Group on the grounds that Mr. Nynens breached certain restrictive covenants in his separation agreement with the Company by seeking future employment with the Company and by sharing confidential information with the N&W Group, and that the N&W Group had tortiously induced Mr. Nynens to commit those breaches. In connection with the claims, we are seeking monetary damages, injunctive relief, and a declaratory judgment against Mr. Nynens and the N&W Group. We may choose to initiate, or may become subject to, other litigation as a result of continued or further stockholder activist campaigns, which could serve as a distraction to our Board of Directors and management and could require us to incur additional costs.

Our quarterly financial results may fluctuate, which could lead to volatility in our stock price.Our revenue and operating results have fluctuated from quarter to quarter in the past and may continue to do so in the future. As a result, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of our future performance. Fluctuations in our revenue and operating results could negatively affect the trading price of our stock. In addition, our revenue and results of operations may, in the future, be below the expectations of analysts and investors, which could

cause our stock price to decline. Factors that are likely to cause our revenue and operating results to fluctuate include the risk factors discussed throughout this section.

The elimination of LIBOR could adversely affect our business, operating results, and financial condition. The U. K.’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. The U.S. Federal Reserve has begun publishing a Secured Overnight Funding Rate (“SOFR”), which is intended to replace U.S. dollar LIBOR. Plans for alternative reference rates for other currencies have also been announced. At this time, we cannot predict how markets will respond to these proposed alternative rates or the effect of any changes to LIBOR or the discontinuation of LIBOR. If LIBOR is no longer available or if our lenders have increased costs due to changes in LIBOR, we may experience potential increases in interest rates on our variable rate debt, which could adversely impact our interest expense, results of operations and cash flows.

Changes in accounting rules, or the misapplication of current accounting rules, may adversely affect our future financial results. We prepare our financial statements in conformity with accounting principles generally accepted in the U.S. These accounting principles are subject to interpretation by the Financial Accounting Standards Board, the Public Company Accounting Oversight Board, the SEC, the American Institute of Certified Public Accountants (“AICPA”) and various other bodies formed to interpret and create appropriate accounting policies. Future periodic assessments required by current or new accounting standards may result in noncash charges and/or changes in presentation or disclosure. In addition, any change in accounting standards may influence our customers’ decision to purchase from us or finance transactions with us, which could have a significant adverse effect on our financial position or results of operations.

We are required to determine if we are the principal or agent in all transactions with our customers. The voluminous number of products and services we sell, and the manner in which they are bundled, are technologically complex. Mischaracterization of these products and services could result in misapplication of revenue recognition polices. We use estimates where necessary, such as allowance for doubtful accounts and product returns, which require judgment and are based on best available information. If we are unable to accurately estimate the cost of these services or the timeline for completion of contracts, the profitability of our contracts may be materially and adversely affected.

The inability to obtain financing on favorable terms will adversely impact our business, financial position and results of operations. Our business requires working capital to operate and to finance accounts receivable and product inventory that are not financed by trade creditors. We have historically relied upon cash generated from operations, revolving credit facilities and trade credit from our vendors to satisfy our capital needs and finance growth. As the financial markets change, the cost of acquiring financing and the methods of financing may change. Changes in our credit rating or other market factors may increase our interest expense or other costs of capital, or capital may not be available to us on competitive terms to fund our working capital needs. 

We may not be able to continue to pay dividends on our Common Stock in the future, which could impair the value of our Common Stock.We have paid a quarterly dividend on our Common Stock since the first quarter of 2003. Any future declaration of dividends remains subject to further determination from time to time by our Board of Directors. Our ability to pay dividends in the future will depend on our financial results, liquidity and financial condition. There is no assurance that we will be able to pay dividends in the future, or if we are able to, that our Board of Directors will continue to declare dividends in the future, at current rates or at all. If we discontinue or reduce the amount or frequency of dividends, the value of our Common Stock may be impaired.

Risks related to our Common Stock. The exercise of options or any other issuance of shares by us may dilute your ownership of our Common Stock. Our Common Stock is thinly traded, which may be exacerbated by our repurchases of our Common Stock. As a result of the thin trading market for our stock, its market price may fluctuate significantly more than the stock market as a whole or of the stock prices of similar companies. Without a larger float, our Common Stock will be less liquid than the stock of companies with broader public ownership, and, as a result, the trading prices for our Common Stock may be more volatile. Among other things, trading of a relatively small volume of our Common Stock may have a greater impact on the trading price of our stock than would be the case if our public float were larger.

Our Common Stock is listed on The NASDAQ Global Market, and we therefore are subject to continued listing requirements, including requirements with respect to the market value and number of publicly-held shares, number of stockholders, minimum bid price, number of market makers and either (i) stockholders’ equity or (ii) total market value of stock, total assets and total revenues. If we fail to satisfy one or more of the requirements, we may be delisted from The NASDAQ Global Market. If we do not qualify for listing on The NASDAQ Capital Market, and if we are not able to list our Common Stock on another exchange, our Common Stock could be quoted on the OTC Bulletin Board or on the “pink sheets”. As a result, we could face significant adverse consequences including, among others, a limited availability of market quotations for our securities and a decreased ability to issue additional securities or obtain additional financing in the future.

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

The Company leases approximately 20,000 square feet of space in Eatontown, New Jersey for its corporate headquarters under a lease expiring in March 2027. Total annual rent expense for these premises is approximately $420,000. The Company also leases 7,800 square feet of warehouse space in Eatontown, New Jersey under a lease expiring in October 2020. Total annual rent expense for such warehouse space is approximately $44,000.   The Company also leases 2,800 square feet of office space in Mesa, Arizona under a lease expiring in August 2018. Total annual rent expense is approximately $55,000.  Additionally, the Company leases approximately 3,700 square feet of office and warehouse space in Mississauga, Canada, under a lease which expires in November 30, 2019. Total annual rent expense for these premises is approximately $30,000.  The Company also leases office space in Amsterdam, Netherlands under a lease which expires June 30, 2018, at an annual rent of approximately $34,000.$49,000. We believe that each of the properties is in good operating condition and that such properties are adequate for the operation of the Company’s business as currently conducted. We also rent smaller satellite offices on a short-term basis.

Item 3. Legal Proceedings

By letter dated January 22, 2020, a shareholder of the Company demanded that the Board of Directors investigate and bring an action against the Company’s former Chairman, President and Chief Executive Officer, Simon Nynens, for his breaches of certain restrictive covenants contained in the separation agreement he entered into with the Company on or about May 11, 2018. Following receipt of the shareholder demand, the Company filed a lawsuit against Mr. Nynens, Shepherd Kaplan Krochuk, LLC (“SKK”), and North & Webster SSG, LLC (“N&W,” and together with SKK, the “N&W Group”) on February 14, 2020, in the Superior Court of New Jersey Monmouth County. The Company’s complaint asserts claims against Mr. Nynens for his breaches of his separation agreement with the Company and claims for tortious interference against the N&W Group for inducing Mr. Nynens to commit those breaches.  In connection with its claims, the Company seeks monetary damages, injunctive relief, and a declaratory judgment against Mr. Nynens and the N&W Group.  The litigation is in its early stages.

Previously, the Company had received unsolicited acquisition proposals from the N&W Group to acquire all of the outstanding shares of common stock of the Company. The Company received the most recent unsolicited acquisition proposal from the N&W Group on December 10, 2019, and that proposal expired on its own terms on December 16, 2019. Prior to that, Mr. Nynens entered into an agreement with the N&W Group on November 27, 2019, granting SKK an irrevocable proxy to vote his shares of our common stock in favor of any acquisition proposal by SKK, against any third-party acquisition, and as directed by SKK with respect to the election of directors nominated by persons other than the Company. On December 20, 2019, Mr. Nynens nominated four individuals for election to our Board of Directors at the 2020 annual meeting of stockholders.

The Company and its Board of Directors have hired financial advisors and legal counsel to advise on resolution of the matters. The ultimate outcome of these matters and related costs cannot be determined at this time, and accordingly no provision has been recorded for estimated expenses to resolve the matter.

We are involved from time to time in routine legal matters and other claims incidental to our business. We review outstanding claims and proceedings internally and with external counsel as necessary to assess probability and amount of potential loss. There are no other material legal proceedings to which the Company or any of its subsidiaries is a party or of which any of their property is the subject.

Item 4. Mine Safety Disclosures

Not applicable.

Purchases of Equity Securities

During the fourth quarter of 2017,2019, we repurchased shares of our Common Stock as follows:

Item 6. Selected Financial Data

The following tables set forth, for the periods indicated, selected consolidated financial and other data for Wayside Technology Group, Inc. and its Subsidiaries. You should read the selected consolidated financial and other data below in conjunction with our consolidated financial statementsConsolidated Financial Statements and the related notes in Part II, Item 8, and with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this Form 10-K. The following table includes Non-US GAAP measures, for which we provided a reconciliation of net income excluding separation expenses, net of taxes to net income, as well as the related amounts per share, which are the most directly comparable measure of accounting principles generally accepted in the United States of America (“US GAAP”), in the footnotes below. We use net income excluding separation expense as a supplemental measure of our performance to gain insight into comparison of our businesses profitability when compared to the prior year. Our use of net income excluding separation expenses, net of taxes has limitations, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under US GAAP. In addition, other companies, including companies in our industry, might calculate separation expenses net of taxes, or similarly titled measures differently, which may reduce their usefulness as comparative measures.

The selected financial data for the years ended December 31, 2019, 2018, 2017 and 2016 reflects our adoption of ASC 606 – Revenue from Contracts with Customers (“ASC 606”). Effective January 1, 2018, we adopted ASC 606 using the full retrospective method, which requires us to recast our historical financial information to reflect the adoption as of the earliest reporting period presented, which was for the year ended December 31, 2016. There was no impact to gross profit from the adoption. We have not adjusted the selected financial data for the year ended December 31, 2015.

Year Ended December 31,

(Amounts in thousands, except per share amounts)

.

December 31,

(Amounts in thousands, except per share amounts)

networking, storage and infrastructure management, application lifecycle management and other technically sophisticated domains as well as computer hardware. We market these products through creative marketing communications, including our web sites, local and on-line seminars, webinars, social media, direct e-mail, and printed materials.

The Company hasWe have subsidiaries in the United States, Canada and the Netherlands, through which its sales are made.

Factors Influencing Our Financial Results

We derive the majoritymost of our net sales though the sale of third-party software licenses, maintenance and service agreements. In our Lifeboat distributionDistribution segment, sales are impacted by the number of product lines we distribute, and sales penetration of those products into the reseller channel, product lifecycle competitive, and demand characteristics of the products which we are authorized to distribute. In our TechXtend segment sales are generally driven by sales force effectiveness and success in providing superior customer service, competitive pricing, and flexible payment solutions to our customers. Our sales are also impacted by external factors such as levels of IT spending and customer demand for products we distribute.

We sell in a competitive environment where gross product margins have historically declined due to competition and changes in product mix towards products where no delivery of a physical product is required. In addition, we grant discounts, allowances, and rebates to certain customers, which may vary from period to period, based on volume, payment terms and other criteria.  To date, we have been able to implement cost efficiencies such as the use of drop shipments, electronic ordering (“EDI”) and other capabilities to be able to operate our business profitably as gross margins have declined. We evaluate the profitability of our business based on return on invested capital and effective margin (see management’s discussion and analysis below).  

Selling, general and administrative expenses are comprised mainly of employee salaries, commissions and other employee related expenses, facility costs, costs to maintain our IT infrastructure, public company compliance costs and professional fees. We monitor our level of accounts payable, inventory turnover and accounts receivable turnover which are measures of how efficiently we utilize capital in our business.

The Company’s sales, gross profit and results of operations have fluctuated and are expected to continue to fluctuate on a quarterly basis as a result of a number of factors, including but not limited to: the condition of the software industry in general, shifts in demand for software products, pricing, level of extended payment terms sales transactions, industry shipments of new software products or upgrades, fluctuations in merchandise returns, adverse weather conditions that affect response, distribution or shipping, shifts in the timing of holidays and changes in the Company’s product offerings. The Company’s operating expenditures are based on sales forecasts. If sales do not meet expectations in any given quarter, operating results may be materially adversely affected.

Financial Overview

Net sales increased 7%15%, or $31.2$27.4 million, to $449.4$208.8 million for the year ended December 31, 2017,2019, compared to $418.1$181.4 million for the same period in 2016.2018. Gross profit decreased 1%increased 11%, or $0.3$3.1 million, to $27.1$30.0 million for the year ended December 31, 2017,2019, compared to $27.3$26.9 million for the same period in the prior year.2018. Selling, general and administrative (“SG&A”) expenses increased 3%5%, or $0.5$1.1 million, to $19.3$21.4 million for the year ended December 31, 2017,2019, compared to $18.7$20.3 million for the same period in the prior year. Net income decreased 14%, or $0.8 million, to $5.12018. Separation expenses were $0.1 million for the year ended December 31, 2017,2019 compared to $5.9$2.4 million for the same period in the prior year. Weighted Average diluted shares outstanding decreased by 4.5% from the prior year, primarily due2018. Net income increased 92%, or $3.2 million, to the Company’s share buyback program. Income per share diluted decreased 10.3% to $1.13$6.8 million for the year ended December 31, 2017,2019 compared to $1.25$3.5 million for the same period in 2016.2018. Weighted Average diluted shares outstanding increased by 1% from the prior year. Income per diluted share increased 94% to $1.51 for the year ended December 31, 2019 compared to $0.78 for the same period in 2018.

Critical Accounting Policies and Estimates

Management’s discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s consolidated financial statementsConsolidated Financial Statements that have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP.GAAP”). The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Revenues from the sales of hardware products, software products, licenses, maintenance and subscription agreements are recognized on a gross basis upon delivery or fulfillment, with the selling price to the customer recorded as sales and the acquisition cost of the product recorded as cost of sales.

On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, investments, intangible assets, income taxes, stock-based compensation, contingencies and litigation.

The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The Company believes the following critical accounting policies used in the preparation of its consolidated financial statementsConsolidated Financial Statements affect its more significant judgments and estimates.

Revenue

The Company utilizes judgment regarding performance obligations inherent in the products for services it sells including, whether ongoing maintenance obligations performed by third party vendors are distinct from the related software licenses, and allocation of sales prices among distinct performance obligations. These estimates require significant judgment to determine whether the software’s functionality is dependent on ongoing maintenance or if substantially all functionality is available in the original software download. We also use judgment in the allocation of sales proceeds among performance obligations, utilizing observable data such as stand-alone selling prices, or market pricing for similar products and services.

Allowance for Accounts Receivable

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Management determines the estimate of the allowance for uncollectible accounts receivable by considering a number of factors, including:including historical experience, aging of the accounts receivable, and specific information obtained by the Company on the financial condition and the current creditworthiness of its

Accounts Receivable – Long Term

The Company’s accounts receivable long-term are discounted to their present value at prevailing market rates at the time of sale. In doing so, the Company considers competitive market rates and other relevant factors.

Inventory Allowances

The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-offs may be required.

Income Taxes

The Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance related to deferred tax assets. In the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.

Share-Based Payments

Under the fair value recognition provision, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period. We make certain assumptions in order to value and expense our various share-based payment awards. In connection with our restricted stock programs we record the forfeitures when they occur. We review our valuation assumptions periodically and, as a result, we may change our valuation assumptions used to value stock basedstock-based awards granted in future periods. Such changes may lead to a significant change in the expense we recognize in connection with share-based payments.

Recently Issued Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance for revenue recognition for contracts, superseding the previous revenue recognition requirements, along with most existing industry-specific guidance. In March, April, May and December 2016, the FASB issued additional updates to the new accounting standard which provide supplemental adoption guidance and clarifications. The guidance requires an entity to review contracts in five steps: 1) identify the contract, 2) identify performance obligations, 3) determine the transaction price, 4) allocate the transaction price, and 5) recognize revenue in order to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard will also result in enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue arising from contracts with customers.

The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). The new standard will be effective for the Company beginning January 1, 2018, and early adoption as of January 1, 2017 is permitted.

The Company elected to adopt the standard effective January 1, 2018 using the full retrospective method, which will require the Company to recast our historical financial information for the years 2017 and 2016 to be consistent with the standard. The most significant impact of adopting the standard relates to the determination of whether the Company is acting as a principal or an agent in the sale of third party security software and software that is highly interdependent

of-use assets, net of lease incentives of approximately $2.2 million. There was no impact to stockholders’ equity from the adoption.

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326)” ("ASU No. 2016-13"). ASU No. 2016-13 replacesrevises the incurred loss impairment methodology for measuring credit losses on financial instruments requiring consideration for a broader range of information in determiningand the timing of when such losses are recorded. Originally, ASU No. 2016-13 iswas effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. In November 2019, FASB issued ASU 2019-10, “Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842).”  This ASU defers the effective date of ASU 2016-13 for public companies that are considered smaller reporting companies as defined by the SEC to fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is planning to adopt this standard in the first quarter of 2020, with early adoption permitted, and is to be applied using a modified retrospective approach. fiscal 2023.The companyCompany is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-13 on it consolidated financial statements.its Consolidated Financial Statements, particularly its recognition of allowances for accounts receivable.

Results of Operations

The following table sets forth for the years indicated the percentage of net sales represented by selected items reflected in the Company’s Consolidated Statements of Earnings. The year-to-year comparison of financial results is not necessarily indicative of future results:

companies, including companies in our industry, might calculate adjusted gross billings of product and services or similarly titled measures differently, which may reduce their usefulness as comparative measures.

We define net income excluding separation expenses, net of taxes, as net income, plus separation expenses, less the income tax benefit attributable to the separation expenses. We provided a reconciliation of net income excluding separation expenses, net of taxes, to net income, as well as the related amounts per share, which are the most directly comparable US GAAP measures. We use net income excluding separation expense, net of taxes as a  supplemental measure of our performance to gain insight into comparison of our businesses profitability when compared to the prior year. Our use of net income excluding separation expenses, net of taxes has limitations, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under US GAAP. In addition, other companies, including companies in our industry, might calculate separation expenses, separation expenses net of taxes, or similarly titled measures differently, which may reduce their usefulness as comparative measures.

We define adjusted EBITDA, as net income, plus provision for income taxes, depreciation, amortization, share-based compensation, interest and separation expenses. We define effective margin as adjusted EBITDA as a percentage of gross profit. We provided a reconciliation of adjusted EBITDA to net income, which is the most directly comparable US GAAP measure. We use adjusted EBITDA as a supplemental measure of our performance to gain insight into our businesses profitability when compared to the prior year and our competitors. Adjusted EBITDA is also a component to our financial covenants in our credit facility. Our use of adjusted EBITDA has limitations, and you should not consider it in isolation or as a substitute for analysis of our financial results as reported under US GAAP. In addition, other companies,

including companies in our industry, might calculate adjusted EBITDA, or similarly titled measures differently, which may reduce their usefulness as comparative measures.

Key Financial Metrics

We consider gross profit growth and effective margin to be key metrics in evaluating our business. During the year ended December 31, 2019, gross profit increased 11%, or $3.1 million, to $30.0 million compared to $26.9 million for the same period in 2018 while effective margin increased 70 basis points to 34.8% compared to 34.1% for the same period in 2018, reflecting the scalability in our business model.

Year Ended December 31, 20172019 Compared to Year Ended December 31, 20162018

Net Sales

Net sales for the year ended December 31, 20172019 increased 7%15%, or $31.2$27.3 million, to $449.4$208.8 million compared to  $418.1$181.4 million for the same period in 2016. 2018.  

Adjusted gross billings, a non-GAAP financial measure, for the year ended December 31, 2019 increased 18%, or $91.0 million, to $601.0 million compared to $510.0 million for the same period in 2018.

Net sales in our Lifeboat distributionDistribution segment for the year ended December 31, 2019 increased $47.918%, or $30.0 million, or 13% to $417.4$193.6 million when compared to $163.6 million for the prior year, however the increase was offset by decreased extended payment term salessame period in our TechXtend segment (discussed below).  

2018. The increase in our Lifeboat Distribution segment was primarily due to growth in sales penetration for several of our more significant product lines, as well as the addition ofincremental sales from several new product lines.  The increases were partially offset by turnover

Adjusted gross billings, a non-GAAP financial measure, for the Lifeboat Distribution segment for the year ended December 31, 2019 increased 23%, or $105.7 million, to $575.4 million compared to $469.7 million for the same period in some vendor and customer accounts due2018. 

  Net sales in our TechXtend segment for the year ended December 31, 2019 decreased 15%, or $2.7 million, to competitive bid situations. We operate$15.2 million compared to $17.9 million for the prior year. Sales in a competitive market in which some sales agreements are subject to periodic competitive bidding processes, resulting in fluctuationsour TechXtend segment may vary significantly from year to year based on the outcome.timing of IT spending decisions by our larger customers and internal capital allocation decisions regarding the amount of capital we allocate to the extended payment program. 

Adjusted gross billings, a non-GAAP financial measure, for the TechXtend segment net sales decreased $16.7 million or 34% to $32.0 million for the year ended December 31, 2017,2019 decreased 36%, or $14.7 million, to $25.6 million compared to $48.6$40.3 million for the prior year.  The decreasesame period in TechXtend was due primarily to lower large enterprise sales, including those sold under extended payment terms. Large enterprise sales tend to fluctuate from period to period based on the timing of customer purchasing decisions for IT projects. The Company’s focus on extended payment sales is impacted by such timing, and internal capital allocation decisions.  During 2017, as significant amount of our working capital was invested in vendor prepayments and extended payment sales from the fourth quarter of 2016, reducing our  emphasis on this business during 2017.2018. 

During the year ended December 31, 2017,2019, we relied on two key customers for a total of 42.4%42% of our revenue.total net sales. One major customer accounted for 23.0%26% and the other for 19.4%16%, of our total net sales during the year ended December 31, 2017.2019. These same customers accounted for 15.1%43% and 28.6%12%, of total net accounts receivable as of December 31, 2017.2019.

Gross Profit

Gross profit for the year ended December 31, 2017 decreased 1%2019 increased 11%, or $0.3$3.1 million, to $27.1$30.0 million compared to $27.3$26.9 million for the prior year.same period in 2018. Lifeboat Distribution segment gross profit increased 4% to $23.2 million for the year ended December 31, 20172019 increased 14%, or $3.4 million, to $26.8 million compared to $22.3$23.4 million for the prior year.same period in 2018 due to higher net sales discussed above, which were partially offset by the impact of lower gross margin as a percentage of net sales. TechXtend segment gross profit decreased 22% to $3.9 million for the year ended December 31, 20172019 decreased 8%, or $0.3 million, to $3.2 million compared to $5.0$3.5 million for the prior year. Gross profit decreased primarilysame period in 2018 due to lower extended payment terms sales in our TechXtend segment described above and vendor competitive pressures on gross profit margins as discussed below, which were mitigated in part by the impact of increased sales in our Lifeboat segment.

Gross profit margin (gross profit as a percentage of net sales) for the year ended December 31, 2017 was 6.0% compared to 6.5% in 2016. Lifeboat Distribution segment gross profit margin was 5.6% for the year ended December 31, 2017, compared to 6.0%  in 2016. The decrease in gross profit margin for the Lifeboat Distribution segment was caused primarily by competitive pricing pressure and a change in product mix to a higher percentage of our sales being derived from the sale of third party software subscription and maintenance contracts. Gross profit as a percentage of sales generally is lower on subscription and maintenance contracts than on product sales. We operate in a competitive environment where the trend has been for gross profit margins as a percentagedecreased level of net sales to decline for the past several years and may continue to decline in the future.  We have instituted operational efficiencies such as electronic ordering and distribution through the use of EDI and other automation that have increased our productivity and enabled us to maintain profitability while selling these services. TechXtend segment gross profit margin for the year ended December 31, 2017 was 12.2%, compared to 10.2%  in 2016. The increase in gross profit margin was due to a decrease in larger enterprise and public sector sales. Sales of large enterprise licenses and related equipment typically carry a lower gross profit margin as a percent of gross billings, and lower incremental selling and administrative costs as a percentage of revenue, than smaller account sales.discussed above.

Net cash usedprovided by operating activities for the year ended December 31, 20172019 was $2.0$3.2 million, comprised of net income adjusted for non-cash items of $7.2$7.9 million, offset byless cash used in changes in operating assets and liabilities of $9.3$4.7 million.

The increase innet cash used in changes in operating assets and liabilities in 20172019 were the result of increases in accounts receivables due to increased sales to a large customer with longer than average payment terms, partially offset by increases in accounts payable required to support the business and utilization of a prior year vendor prepayment as part of a distribution agreement.

Net cash provided by operating activities for the year ended December 31, 2018 was $13.9 million, comprised of net income adjusted for non-cash items of $5.9 million, plus cash provided by changes in operating assets and liabilities of $8.0 million.

The net cash provided by changes in operating assets and liabilities in 2018 was primarily due to an increasea decrease in net working capital (accounts receivable, inventory, and vendor prepayments less accounts payable) required to support our business. The increaseddecreased working capital requirement is primarily driven by increased sales levels and extended payment terms sales during the fourth quarter$3.7 million utilization in 2018 of 2016, and a prior year vendor prepayment of approximately $8.0 million as part of a distribution agreement. Our accounts receivable – long term increaseddecreased by approximately $4.3 million during the fourth quarter of 20162018 due to a higher levelcollection of receivables with extended payment term sales. The products related to these sales were paid for in the first quarter of 2017, while related sales proceeds will be collected over future periods.

Net cash used in operatinginvesting activities for the year ended December 31, 20162019 was $0.5$0.1 million comprised of net income adjusted for non-cash items of $7.9compared to $0.3 million offset by cash used by changes in operating assets and liabilities of $8.4 million. Net cash provided by operating activities for the year ended December 31, 2015 was $8.2 million comprised of net income adjusted for non-cash items of $7.3 million and cash provided by changessame period in operating assets and liabilities of $0.9 million.

The increase in cash used in changes in operating assets and liabilities in 2016 was primarily due to increased accounts receivable, inventories and accounts receivable – long term, partially offset by increased accounts payable. The increase in accounts receivable and accounts payable was primarily due to higher fourth quarter 2016 sales activity when compared to the prior year, increased accounts receivable payment terms for a large reseller customer, and increased sales with extended payment terms. Accounts receivable at December 31, 2016 included approximately $9.5 million of accounts receivable related to two extended payment term sales from 2016 that were collected during the first two months of 2017.

In 2017, net2018. Net cash used in investing activities was $0.4 million, compared to $1.0 million in the prior year. The decrease was primarily due torepresented capital expenditures for equipment and leasehold improvements related to our new office in 2016. In October 2016, the Company moved into a new office, occupying approximately 20,000 square foot facility under a ten year lease with renewal options.improvements.

Net cash used in financing activities for the year ended December 31, 2017 of $6.02019 was $3.2 million, which was comprised of $3.1 million of dividend payments on our Common Stock and $3.0$0.1 million for the purchases of treasury shares of our Common Stock.

Net cash used in financing activities for the year ended December 31, 20162018 of $8.5$4.1 million was comprised of $3.2$3.1 million of dividend payments on our Common Stock, and $5.4$1.0 million for the purchases of treasury shares of our Common Stock, offset by the tax benefit from share based compensation of $0.1 million.Stock.

On December 3, 2014, the Board of Directors of the Company approved an increase of 500,000 shares of Common Stock to the number of shares of Common Stock available for repurchase under its repurchase plans. On February 2, 2017, the Board of Directors approved an additional increase of 500,000 shares of Common Stock to the number of shares of Common Stock available for repurchase under its repurchase plans. A  total of 2,963,525 shares of the Company’s Common Stock has been bought back as of December 31, 2017, leavingThe Company is authorized to purchase 547,488 shares of Common Stock available that the Company is

Our current and anticipated use of cash and cash equivalents is to fund working capital, operational expenditures, the stock repurchase program and dividends, if any, declared by the Board of Directors.

Subsequent Events

By letter dated January 22, 2020, a shareholder of the Company demanded that the Board of Directors investigate and bring an action against the Company’s former Chairman, President and Chief Executive Officer, Simon Nynens, for his breaches of certain restrictive covenants contained in the separation agreement he entered into with the Company on or about May 11, 2018. Following receipt of the shareholder demand, the Company filed a lawsuit against Mr. Nynens, Shepherd Kaplan Krochuk, LLC (“SKK”), and North & Webster SSG, LLC (“N&W,” and together with SKK, the “N&W Group”) on February 14, 2020, in the Superior Court of New Jersey Monmouth County. The Company’s complaint asserts claims against Mr. Nynens for his breaches of his separation agreement with the Company and claims for tortious interference against the N&W Group for inducing Mr. Nynens to commit those breaches.  In connection with its claims, the Company seeks monetary damages, injunctive relief, and a declaratory judgment against Mr. Nynens and the N&W Group.  The litigation is in its early stages.

Previously, the Company had received unsolicited acquisition proposals from the N&W Group to acquire all of the outstanding shares of common stock of the Company. The Company received the most recent unsolicited acquisition proposal from the N&W Group on December 10, 2019, and that proposal expired on its own terms on December 16, 2019. Prior to that, Mr. Nynens entered into an agreement with the N&W Group on November 27, 2019, granting SKK an irrevocable proxy to vote his shares of our common stock in favor of any acquisition proposal by SKK, against any third-party acquisition, and as directed by SKK with respect to the election of directors nominated by persons other than the Company. On December 20, 2019, Mr. Nynens nominated four individuals for election to our Board of Directors at the 2020 annual meeting of stockholders.

The Company and its Board of Directors have hired financial advisors and legal counsel to advise on resolution of the matters. The ultimate outcome of these matters and related costs cannot be determined at this time, and accordingly no provision has been recorded for estimated expenses to resolve the matter.

Contractual Obligations as of December 31, 2017

(Amounts in thousands)2019

As of December 31, 2017,Smaller reporting companies are not required to provide the Company is not committedinformation required by lines of credit or standby letters of credit, and has no standby repurchase obligations or other commercial commitments (see Note 5 - Credit Facility in the Notes to our Consolidated Financial Statements).this item.

Foreign Exchange

The Company’s foreign business is subject to changes in demand or pricing resulting from fluctuations in currency exchange rates or other factors. We are subject to fluctuations primarily in the Canadian and Euro Dollar-to-U.S. Dollar exchange rate.

Off-Balance Sheet Arrangements

As of December 31, 2017,2019, we did not have any off-balance sheet arrangements, as defined in Item 303 (a)(4)(ii) of SEC Regulation S-K.