Climb Global Solutions 10Q 2023 Q3 Quarterly report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2023

☐

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 000-26408

Climb Global Solutions, Inc.

(Exact name of registrant as specified in its charter)

Delaware		13-3136104
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

4 Industrial Way West, Suite 300, Eatontown, New Jersey 07724

(Address of principal executive offices)

(732) 389-8950

Registrant’s Telephone Number

Securities registered pursuant to Section 12(b) of the Act:


Title of each class:	Trading Symbol	Name of each exchange on which registered:
Common stock, $.01 par value per share	CLMB	The Nasdaq Global Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer ☐		Accelerated Filer ☒
		Smaller Reporting Company ☒
Non-Accelerated Filer ☐		Emerging Growth Company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

There were 4,579,628 outstanding shares of common stock, par value $.01 per share (“Common Stock”) as of November 2, 2023.

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CLIMB GLOBAL SOLUTIONS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2023

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		Page

	PART I FINANCIAL INFORMATION

Item 1	Financial Statements (unaudited)

	Condensed Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022	4

	Condensed Consolidated Statements of Earnings for the three and nine months ended September 30, 2023 and 2022 (unaudited)	5

	Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2023 and 2022 (unaudited)	6

	Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2023 and 2022 (unaudited)	7

	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 (unaudited)	8

	Notes to Condensed Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	32

Item 4.	Controls and Procedures	32

	PART II OTHER INFORMATION

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 6.	Exhibits, Financial Statement Schedules	34

SIGNATURES		35

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Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (“Quarterly Report”) includes statements of our expectations, intentions, plans and beliefs that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are intended to come within the safe harbor protection provided by those sections. The statements, other than statements of historical fact, included in this Quarterly Report are forward-looking statements. Many of the forward-looking statements contained in this Quarterly Report may be identified by the use of forward-looking words such as “believes,” “expects,” “intends,” “anticipates,” “plans,” “estimates,” “projects,” “forecasts,” “should,” “could,” “would,” “will,” “confident,” “may,” “can,” “potential,” “possible,” “proposed,” “in process,” “under construction,” “in development,” “opportunity,” “target,” “outlook,” “maintain,” “continue,” “goal,” “aim,” “commit,” or similar expressions or when we discuss our future operating results, priorities, strategy, goals, vision, mission, opportunities, projections, intentions or expectations. 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. Because these forward-looking statements are subject to risks and uncertainties, actual results could differ materially from those indicated by such forward-looking statements. These risks and uncertainties 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, product mix, market conditions, competitive pricing pressures, the successful integration of acquisitions, contribution of key vendor relationships and support programs, including vendor rebates and discounts, as well as factors that affect the software industry in general and other factors generally. We strongly urge current and prospective investors to carefully consider the cautionary statements and risk factors contained in this report and our annual report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on March 16, 2023.

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. Except as may be required by law, 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.

Unless otherwise specified, the “Company,” “we,” “us” or “our” refers to Climb Global Solutions, Inc., a Delaware corporation, and its consolidated subsidiaries.

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PART I — FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

Climb Global Solutions, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Amounts in thousands, except share and per share amounts)


	(Unaudited)
	September 30,		December 31,
	2023		2022

ASSETS
Current assets:
Cash and cash equivalents	$	49,778	$	20,245
Accounts receivable, net of allowance for doubtful accounts of $740 and $842, respectively		126,331		154,596
Inventory, net		2,518		4,766
Vendor prepayments and advances		—		890
Prepaid expenses and other current assets		5,399		4,141
Total current assets		184,026		184,638

Equipment and leasehold improvements, net		7,307		3,515
Goodwill		19,010		18,963
Other intangibles, net		18,309		19,693
Right-of-use assets, net		933		1,235
Accounts receivable-long-term, net		1,172		3,114
Other assets		1,160		350
Deferred income tax assets		448		348
Total assets	$	232,365	$	231,856
LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable and accrued expenses	$	154,895	$	160,650
Lease liability, current portion		442		521
Term loan, current portion		535		520
Total current liabilities		155,872		161,691

Lease liability, net of current portion		977		1,296
Deferred income tax liabilities		4,135		4,137
Term loan, net of current portion		889		1,292
Non-current liabilities		2,870		2,866
Total liabilities		164,743		171,282

Commitments and contingencies

Stockholders’ equity:
Common stock, $.01 par value; 10,000,000 shares authorized; 5,284,500 shares issued: 4,579,628 and 4,478,432 shares outstanding, respectively		53		53
Additional paid-in capital		33,895		32,715
Treasury stock, at cost, 704,872 and 806,068 shares, respectively		(12,357)		(13,230)
Retained earnings		48,724		43,904
Accumulated other comprehensive loss		(2,693)		(2,868)
Total stockholders’ equity		67,622		60,574
Total liabilities and stockholders' equity	$	232,365	$	231,856

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Climb Global Solutions, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings

(Unaudited)

(Amounts in thousands, except per share data)


	Nine months ended				Three months ended
	September 30,				September 30,
	2023		2022		2023		2022

Net sales	$	245,229	$	215,443	$	78,457	$	76,261

Cost of sales		202,053		177,459		64,183		62,744

Gross profit		43,176		37,984		14,274		13,517

Selling, general, and administrative expenses		31,930		25,026		10,122		8,922

Acquisition related costs		277		445		246		365

Depreciation and amortization expense		1,934		1,357		617		555

Income from operations		9,035		11,156		3,289		3,675

Other income:

Interest, net		760		40		318		58

Foreign currency transaction loss		(100)		(799)		(140)		(500)

Income before provision for income taxes		9,695		10,397		3,467		3,233

Provision for income taxes		2,618		2,662		1,095		999

Net income	$	7,077	$	7,735	$	2,372	$	2,234

Income per common share-Basic	$	1.57	$	1.74	$	0.52	$	0.50

Income per common share-Diluted	$	1.57	$	1.74	$	0.52	$	0.50

Weighted average common shares outstanding — Basic		4,392		4,323		4,414		4,340

Weighted average common shares outstanding — Diluted		4,392		4,323		4,414		4,340

Dividends paid per common share	$	0.51	$	0.51	$	0.17	$	0.17

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Climb Global Solutions, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(Amounts in thousands)


	Nine months ended				Three months ended
	September 30,				September 30,
	2023		2022		2023		2022

Net income	$	7,077	$	7,735	$	2,372	$	2,234

Other comprehensive income (loss):
Foreign currency translation adjustments		175		(5,487)		(1,442)		(3,152)
Other comprehensive income (loss)		175		(5,487)		(1,442)		(3,152)

Comprehensive income (loss)	$	7,252	$	2,248	$	930	$	(918)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Climb Global Solutions, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(Amounts in thousands, except share amounts)


											Accumulated
				Additional							Other
	Common Stock			Paid-In		Treasury			Retained		Comprehensive
	Shares	Amount		Capital		Shares	Amount		Earnings		(Loss) Income		Total
Balance at January 1, 2023	5,284,500	$	53	$	32,715	806,068	$	(13,230)	$	43,904	$	(2,868)	$	60,574
Net income	—		—		—	—		—		3,324		—		3,324
Translation adjustment	—		—		—	—		—		—		613		613
Dividends paid	—		—		—	—		—		(749)		—		(749)
Share-based compensation expense	—		—		546	—		—		—		—		546
Restricted stock grants (net of forfeitures)	—		—		(765)	(43,824)		765		—		—		—
Treasury shares repurchased	—		—		—	5,604		(214)		—		—		(214)
Balance at March 31, 2023	5,284,500	$	53	$	32,496	767,848	$	(12,679)	$	46,479	$	(2,255)	$	64,094
Net income	—		—		—	—		—		1,381		—		1,381
Translation adjustment	—		—		—	—		—		—		1,004		1,004
Dividends paid	—		—		—	—		—		(754)		—		(754)
Share-based compensation expense	—		—		2,238	—		—		—		—		2,238
Restricted stock grants (net of forfeitures)	—		—		(1,258)	(71,965)		1,258		—		—		—
Treasury shares repurchased	—		—		—	19,703		(981)		—		—		(981)
Balance at June 30, 2023	5,284,500		53		33,476	715,586		(12,402)		47,106		(1,251)		66,982
Net income	—		—		—	—		—		2,372		—		2,372
Translation adjustment	—		—		—	—		—		—		(1,442)		(1,442)
Dividends paid	—		—		—	—		—		(754)		—		(754)
Share-based compensation expense	—		—		711	—		—		—		—		711
Restricted stock grants (net of forfeitures)	—		—		(292)	(16,737)		292		—		—		—
Treasury shares repurchased	—		—		—	6,023		(247)		—		—		(247)
Balance at September 30, 2023	5,284,500		53		33,895	704,872		(12,357)		48,724		(2,693)	$	67,622

											Accumulated
				Additional							Other
	Common Stock			Paid-In		Treasury			Retained		Comprehensive
	Shares	Amount		Capital		Shares	Amount		Earnings		(Loss) Income		Total
Balance at January 1, 2022	5,284,500		53		32,087	859,828		(13,870)		34,396		(250)	$	52,416
Net income	—		—		—	—		—		2,712		—		2,712
Translation adjustment	—		—		—	—		—		—		(626)		(626)
Dividends paid	—		—		—	—		—		(746)		—		(746)
Share-based compensation expense	—		—		369	—		—		—		—		369
Restricted stock grants (net of forfeitures)	—		—		(502)	(29,499)		502		—		—		—
Treasury shares repurchased	—		—		—	7,118		(216)		—		—		(216)
Balance at March 31, 2022	5,284,500		53		31,954	837,447		(13,584)		36,362		(876)	$	53,909
Net income	—		—		—	—		—		2,791		—		2,791
Translation adjustment	—		—		—	—		—		—		(1,709)		(1,709)
Dividends paid	—		—		—	—		—		(746)		—		(746)
Share-based compensation expense	—		—		345	—		—		—		—		345
Restricted stock grants (net of forfeitures)	—		—		(308)	(17,194)		308		—		—		—
Treasury shares repurchased	—		—		—	5,151		(177)		—		—		(177)
Balance at June 30, 2022	5,284,500		53		31,991	825,404		(13,453)		38,407		(2,585)		54,413
Net income	—		—		—	—		—		2,234		—		2,234
Translation adjustment	—		—		—	—		—		—		(3,152)		(3,152)
Dividends paid	—		—		—	—		—		(748)		—		(748)
Share-based compensation expense	—		—		791	—		—		—		—		791
Restricted stock grants (net of forfeitures)	—		—		(397)	(22,756)		397		—		—		—
Treasury shares repurchased	—		—		—	4,099		(127)		—		—		(127)
Balance at September 30, 2022	5,284,500		53		32,385	806,747		(13,183)		39,893		(5,737)	$	53,411

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Climb Global Solutions, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)


	Nine months ended
	September 30,
	2023		2022
Cash flows from operating activities
Net income	$	7,077	$	7,735
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Depreciation and amortization expense		1,934		1,362
Provision for doubtful accounts		34		17
Deferred income tax benefit		(108)		(292)
Share-based compensation expense		3,422		1,491
Amortization of discount on accounts receivable		(41)		(43)
Amortization of right-of-use assets		304		355
Changes in operating assets and liabilities:
Accounts receivable		30,438		(5,504)
Inventory		2,247		(102)
Prepaid expenses and other current assets		(882)		1,292
Vendor prepayments		890		(752)
Accounts payable and accrued expenses		(8,185)		2,609
Lease liability, net		(399)		(439)
Other assets and liabilities		1,624		76
Net cash and cash equivalents provided by operating activities		38,355		7,805

Cash flows from investing activities
Purchase of equipment and leasehold improvements		(4,180)		(1,479)
Payment for acquisitions, net of cash acquired		—		(8,510)
Net cash and cash equivalents used in investing activities		(4,180)		(9,989)

Cash flows from financing activities
Purchase of treasury stock		(1,441)		(520)
Borrowings under revolving credit facility		10,000		—
Repayments of borrowings under revolving credit facility		(10,000)		—
Borrowings under term loan		—		2,148
Repayments of borrowings under term loan		(388)		(210)
Dividends paid		(2,256)		(2,240)
Payments of deferred financing costs		(638)		—
Net cash and cash equivalents used in financing activities		(4,723)		(822)

Effect of foreign exchange rate on cash and cash equivalents		81		(2,214)

Net increase (decrease) in cash and cash equivalents		29,533		(5,220)
Cash and cash equivalents at beginning of period		20,245		29,272
Cash and cash equivalents at end of period	$	49,778	$	24,052

Supplementary disclosure of cash flow information:
Income taxes paid	$	4,126	$	3,095
Interest paid	$	30	$	39

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Climb Global Solutions, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

September 30, 2023

(Unaudited)

(Amounts in tables in thousands, except share and per share amounts)

1. Basis of Presentation:

The accompanying unaudited condensed consolidated financial statements of Climb Global Solutions, Inc. and its subsidiaries (collectively, the “Company”), have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, as permitted by the rules and regulation of the Securities and Exchange Commission, the financial statements do not include all of the information and footnotes required by U.S. GAAP for complete audited financial statements.

The preparation of these condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, intangible assets, income taxes, stock-based compensation, evaluation of performance obligations and allocation of revenue to distinct items, contingencies and litigation. The Company bases its estimates on its 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. In the opinion of the Company’s management, all adjustments that are of a normal recurring nature, considered necessary for fair presentation of the results for the periods presented, have been included in the accompanying condensed consolidated financial statements. The Company’s actual results may differ from these estimates under different assumptions or conditions. The unaudited condensed consolidated statements of earnings for the interim periods are not necessarily indicative of results for the full year. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K filed with the Securities Exchange Commission for the year ended December 31, 2022.

The consolidated financial statements include the accounts of Climb Global Solutions, Inc. and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated.

2. Recently Issued Accounting Standards:

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326)” ("ASU 2016-13"). ASU 2016-13 revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. Originally, ASU 2016-13 was 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. Effective January 1, 2023, the Company adopted the new credit loss standard and it did not have an impact on the Company’s financial statements.

In July 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-03, “Presentation of Financial Statements (Topic 205), Income Statement — Reporting Comprehensive Income (Topic 220), Distinguishing Liabilities from Equity (Topic 480), Equity (Topic 505), Compensation — Stock Compensation (Topic 718).” This ASU amends various paragraphs in the accounting codification pursuant to the issuance of Commission Staff Accounting Bulletin (“SAB”) number 120. The ASU provides clarifying guidance related to employee and non-employee share-based payment accounting, including guidance related to spring-loaded awards. ASU 2023-03 was effective upon issuance. The adoption of this ASU did not have an impact on the Company’s consolidated financial statements.

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3. Foreign Currency Translation:

Assets and liabilities of the Company’s foreign subsidiaries have been translated using the end of the reporting period exchange rates, and related revenues and expenses have been translated at average rates of exchange in effect during the period. Transactions denominated in currencies other than the applicable functional currency are converted to the functional currency at the exchange rate on the transaction date. Foreign currency transaction gains and losses are recorded as income or expenses as amounts are settled. The net sales from our foreign operations for the three months ended September 30, 2023 and 2022 were $14.0 million and $14.2 million, respectively. The net sales from our foreign operations for the nine months ended September 30, 2023 and 2022 were $55.0 million and $44.0 million, respectively.

4. Comprehensive Income:

Cumulative translation adjustments have been classified within accumulated other comprehensive loss, which is a separate component of stockholders’ equity in accordance with FASB ASC Topic 220, “Comprehensive Income.”

5. Revenue Recognition:

The Company’s revenues primarily result from the sale of various technology products and services, including third-party products, third-party software and third-party maintenance, software support and services. The Company recognizes revenue as control of the third-party products and third-party software is transferred to customers, which generally happens at the point of shipment or fulfilment and at the point that our customers and vendors accept the terms and conditions of the arrangement for third-party maintenance, software support and services.

The Company has contracts with certain customers where the Company’s performance obligation is to arrange for the products or services to be provided by another party. In these arrangements, as the Company assumes an agency relationship in the transaction, revenue is recognized in the amount of the net fee associated with serving as an agent. These arrangements primarily relate to third party maintenance, cloud services and certain security software whose intended functionality is dependent on third party maintenance.

The Company allows its customers to return product for exchange or credit subject to certain limitations. A liability is recorded at the time of sale for estimated product returns based upon historical experience and an asset is recognized for the amount expected to be recorded in inventory upon product return. The Company also provides rebates and other discounts to certain customers which are considered variable consideration. A provision for customer rebates and other discounts is recorded as a reduction of revenue at the time of sale based on an evaluation of the contract terms and historical experience.

The Company considers shipping and handling activities as costs to fulfill the sales of products. Shipping revenue is included in net sales when control of the product is transferred to the customer, and the related shipping and handling costs are included in the cost of products sold. Taxes imposed by governmental authorities on the Company’s revenue producing activities with customers, such as sales taxes and value added taxes, are excluded from net sales.

The Company disaggregates its operating revenue by segment, geography and timing of revenue recognition, which the Company believes provides a meaningful depiction of the nature of its revenue. See Note 16 – Segment Information.

Hardware and software products sold by the Company are generally delivered via shipment from the Company’s facilities, drop shipment directly from the vendor, or by electronic delivery of keys for software products. The majority of the Company’s business involves shipments directly from its vendors to its customers. In these transactions, the Company is generally responsible for negotiating price both with the vendor and customer, payment to the vendor, establishing payment terms with the customer, product returns, and has risk of loss if the customer does not make payment. As the principal with the customer, the Company recognizes revenue upon receiving notification from the vendor that the product was shipped. Control of software products is deemed to have passed to the customer when they acquire the right to use or copy the software under license as substantially all product functionality is available to the customer at the time of sale.

The Company performs an analysis of the number of days of sales in-transit to customers at the end of each reporting period based on an analysis of commercial delivery terms that include drop-shipment arrangements. This analysis is the basis upon which the Company estimates the amount of net sales in-transit at the end of the period and adjusts revenue and the related costs to reflect only what has been delivered to the customer. Changes in delivery patterns may result in a different number of business days estimated to make this adjustment. The Company also performs a weighted average analysis of the

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estimated number of days between order fulfillment and beginning of the renewal term for term licenses recorded on a gross basis, and a deferral estimate is recorded for term license renewals fulfilled prior to commencement date.

Generally, software products are sold with accompanying third-party delivered software assurance, which is a product that allows customers to upgrade, at no additional cost, to the latest technology if new capabilities are introduced during the period that the software assurance is in effect. The Company evaluates whether the software assurance is a separate performance obligation by assessing if the third-party delivered software assurance is critical or essential to the core functionality of the software itself. This involves considering if the software provides its original intended functionality to the customer without the updates, if the customer would ascribe a higher value to the upgrades versus the up-front deliverable, if the customer would expect frequent intelligence updates to the software (such as updates that maintain the original functionality), and if the customer chooses to not delay or always install upgrades. If the Company determines that the accompanying third-party delivered software assurance is critical or essential to the core functionality of the software license, the software license and the accompanying third-party delivered software assurance are recognized as a single performance obligation. The value of the product is primarily the accompanying support delivered by a third party and therefore the Company is acting as an agent in these transactions and recognizes them on a net basis at the point the associated software license is delivered to the customer. The Company sells cloud computing solutions that utilize third-party vendors to enable customers to access data center functionality in a cloud-based solution, including storage, computing and networking and access to software in the cloud that enhances office productivity, provides security or assists in collaboration. The Company recognizes revenue for cloud computing solutions for arrangements with one-time invoicing to the customer at the time of invoice on a net basis as the Company is acting as an agent in the transaction. For monthly subscription-based arrangements, the Company is acting as an agent in the transaction and recognizes revenue as it invoices the customer for its monthly usage on a net basis. For software licenses where the accompanying third-party delivered software assurance is not critical or essential to the core functionality, the software assurance is recognized as a separate performance obligation, with the associated revenue recognized on a net basis at the point the related software license is delivered to the customer.

The Company also sells some of its products and services as part of bundled contract arrangements containing multiple deliverables, which may include a combination of products and services. For each deliverable that represents a distinct performance obligation, total arrangement consideration is allocated based upon the standalone selling prices (“SSP”) of each performance obligation. SSP is determined based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through established standard prices, we use judgement and estimate the standalone selling price considering available information such as market pricing and pricing related to similar products.

The Company records freight billed to its customers as net sales and the related freight costs as cost of sales when the underlying product revenue is recognized. For freight not billed to its customers, the Company records the freight costs as cost of sales. The Company’s typical shipping terms result in shipping being performed before the customer obtains control of the product. The Company considers shipping to be a fulfillment activity and not a separate performance obligation.

The Company pays commissions and related payroll taxes to sales personnel when customers are invoiced. These costs are recorded as selling, general and administrative expenses in the period earned as all our performance obligations are complete within a short window of processing the order.

6. Acquisition:

On August 18, 2022, the Company entered into a Share Purchase Agreement pursuant to which the Company purchased the entire share capital of Spinnakar Limited (“Spinnakar”) for an aggregate purchase price of approximately £9.8 million (equivalent to $11.8 million USD), subject to certain working capital and other adjustments, paid at closing plus a potential post-closing earn-out. The allocation of the purchase price was based upon the estimated fair value of Spinnakar’s net tangible and identifiable intangible assets as of the date of the acquisition. The transaction was accounted for under the purchase method of accounting. The purchase price allocation is final, with no measurement period adjustment made to the account balances recorded at the acquisition date.

The purchase consideration included approximately $1.8 million fair value for potential earn-out consideration if certain targets are achieved, payable in cash, which is included in non-current liabilities as of September 30, 2023.

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7. Goodwill and Other Intangible Assets:

The following table summarizes the changes in the carrying amount of goodwill for the nine months ended September 30, 2023:


Balance January 1, 2023	$	18,963
Translation adjustments		47
Balance September 30, 2023	$	19,010

Information related to the Company’s other intangibles, net is as follows:


	As of September 30, 2023
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Customer and vendor relationships	$	21,509	$	3,578	$	17,931
Trade name		469		91		378
Total	$	21,978	$	3,669	$	18,309

	As of December 31, 2022
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Customer and vendor relationships	$	21,457	$	2,165	$	19,292
Trade name		468		67		401
Total	$	21,925	$	2,232	$	19,693

Customer relationships are amortized over thirteen years. Vendor relationships are amortized between eight and fifteen years. Trade name is amortized over fifteen years.

During the three months ended September 30, 2023 and 2022, the Company recognized total amortization expense for other intangibles, net of $0.5 million and $0.3 million, respectively. During the nine months ended September 30, 2023 and 2022, the Company recognized total amortization expense for other intangibles, net of $1.5 million and $0.7 million, respectively.

Estimated future amortization expense of the Company’s other intangibles, net as of September 30, 2023 is as follows:


2023 (excluding the nine months ended September 30, 2023)	$	468
2024		1,871
2025		1,871
2026		1,871
2027		1,871
Thereafter		10,357
Total	$	18,309

8. Right-of-use Asset and Lease Liability:

The Company has entered into operating leases for office and warehouse facilities, which have terms at lease commencement that range from 2 years to 11 years. The Company determines if an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded on the Consolidated Balance Sheets and lease expense for these leases is recognized on a straight-line basis over the lease term.

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Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date of the lease based on the present value of the lease payments over the lease term. As our leases do not provide a readily determinable implicit rate, we use an incremental borrowing rate based on the information available at commencement date, including lease term, in determining the present value of future payments. The operating lease asset also includes any lease payments made and excludes lease incentives. Operating lease expense is recognized on a straight-line basis over the lease term and included in selling, general and administrative expenses.

Information related to the Company’s ROU assets and related lease liabilities were as follows:


	Nine months ended
	September 30,
		2023		2022
Cash paid for operating lease liabilities	$	467	$	314
Right-of-use assets obtained in exchange for new operating lease obligations	$	—	$	63
Weighted-average remaining lease term		3.4 years		4.6 years
Weighted-average discount rate		3.5%		3.4%

Maturities of lease liabilities as of September 30, 2023 were as follows:


2023 (excluding the nine months ended September 30, 2023)	$	158
2024		540
2025		548
2026		546
2027		116
		1,908
Less: imputed interest		(489)
Total lease liabilities	$	1,419

Lease liabilities, current portion		442
Lease liabilities, net of current portion		977
Total lease liabilities	$	1,419

9. Fair Value:

The carrying amounts of financial instruments, including cash and cash equivalents, short-term accounts receivable and accounts payable approximated fair value at September 30, 2023 and December 31, 2022 because of the relative short maturity of these instruments. The Company’s accounts receivable long-term are discounted to their present value at prevailing market rates at the time of sale.

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10. Balance Sheet Detail:

Equipment and leasehold improvements consist of the following:



	September 30,		December 31,
	2023		2022
Equipment	$	2,285	$	2,720
Capitalized software		6,111		2,997
Leasehold improvements		2,346		1,848
		10,742		7,565
Less accumulated depreciation and amortization		(3,435)		(4,050)
	$	7,307	$	3,515

During the three months ended September 30, 2023, and 2022, the Company recorded depreciation and amortization expense of $0.1 million and $0.2 million, respectively. During the nine months ended September 30, 2023 and 2022, the Company recorded depreciation and amortization expense of $0.5 million and $0.6 million, respectively.

In limited circumstances, the Company offers extended payment terms to customers for periods of 12 to 24 months. The related customer receivables are classified as accounts receivable long-term and discounted to their present value at prevailing market rates at the time of sale. In subsequent periods, the accounts receivable is increased to the amounts due and payable by the customers through the accretion of interest income on the unpaid accounts receivable due in future years. The amounts under these long-term accounts receivable due within one year are reclassified to the current portion of accounts receivable. Accounts receivable long term, net consists of the following:



	September 30,		December 31,
	2023		2022
Total amount due from customer	$	1,851	$	5,213
Less: unamortized discount		(20)		(188)
Less: current portion included in accounts receivable		(659)		(1,911)
	$	1,172	$	3,114

The undiscounted cash flows to be received by the Company relating to these accounts receivable long-term is expected to be $0.6 million, $0.4 million, $0.4 million and $0.4 million during each of the 12-month periods ending September 30, 2024, 2025, 2026 and 2027, respectively.

Accounts payable and accrued expenses consist of the following:



	September 30,		December 31,
	2023		2022
Trade accounts payable	$	146,939	$	151,180
Accrued expenses		7,956		9,470
	$	154,895	$	160,650

11. Credit Facility:

On May 18, 2023, the Company entered into a revolving credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A. (“JPM”), providing for a revolving credit facility of up to $50.0 million, including the issuance of letters of credit and swingline loans not to exceed $2.5 million and $5.0 million, respectively, at any time outstanding. In addition, subject to certain conditions enumerated in the Credit Agreement, the Company has the right to increase the revolving credit facility by a total amount not to exceed $20.0 million. The proceeds of the revolving loans, letters of credit and swingline loans under the Credit Agreement may be used for working capital needs, general corporate purposes and for acquisitions permitted by the terms of the Credit Agreement.

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All outstanding loans issued pursuant to the Credit Agreement become due and payable, on May 18, 2028. There were no amounts outstanding under the Credit Agreement as of September 30, 2023.

Outstanding Loans comprising (i) ABR Borrowings bear interest at the ABR plus the Applicable Rate, (ii) Term Benchmark Borrowings bear interest at the Adjusted Term SOFR Rate or the Adjusted EURIBOR Rate, as applicable, plus the Applicable Rate and (iii) RFR Loans bear interest at a rate per annum equal to the applicable Adjusted Daily Simple RFR plus the Applicable Rate. The Applicable Rate for borrowings varies (i) in the case of ABR Borrowings, from 0.50% to 0.75% and (ii) in the case of Term Benchmark Borrowings and RFR Loans, from 1.50% to 1.75%.

The Credit Agreement contains customary affirmative covenants, such as financial statement and collateral reporting requirements. The Credit Agreement also contains customary negative covenants that limit the ability of the Company to, among other things, incur indebtedness, create liens or permit encumbrances, or undergo certain fundamental changes. Additionally, under certain circumstances, the Company is required to maintain a minimum fixed charge coverage ratio.

In connection with entering into the Credit Agreement, on May 18, 2023, the Company voluntarily terminated its existing revolving credit agreement, dated November 15, 2017 with Citibank N.A. (“Previous Credit Facility”). As of December 31, 2022 and as of the date of termination, the Company had no borrowings outstanding under the Previous Credit Facility.

On April 8, 2022, the Company entered into a $2.1 million term loan (the “Term Loan”) with First American Commercial Bancorp, Inc. (“First American”) pursuant to a Master Loan and Security Agreement. The proceeds from the Term Loan will be used to fund certain capital expenditures. The borrowing under the Term Loan bears interest at a rate of 3.73% per annum and is being repaid over forty-eight monthly installments of principal and interest through April 2026.

At September 30, 2023 and December 31, 2022, the Company had $1.4 million and $1.8 million outstanding under the Term Loan, respectively. At September 30, 2023, future principal payments under the Term Loan are as follows:


2023 (excluding the nine months ended September 30, 2023)		176
2024		542
2025		562
2026		144
Total	$	1,424

12. Earnings Per Share:

Our basic and diluted earnings per share are computed using the two-class method in accordance with ASC 260. The two-class method is an earnings allocation that determines net income per share for each class of common stock and participating securities according to their participation rights in dividends and undistributed earnings or losses. Non-vested restricted stock awards that include non-forfeitable rights to dividends are considered participating securities. Per share amounts are computed by dividing net income available to common shareholders by the weighted average shares outstanding during each period. Diluted and basic earnings per share are the same because the restricted shares are the only potentially dilutive security.

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A reconciliation of the numerators and denominators of the basic and diluted per share computations follows:


		(Unaudited)			(Unaudited)
	Nine months ended				Three months ended
	September 30,				September 30,
	2023		2022		2023		2022
Numerator:
Net income	$	7,077	$	7,735	$	2,372	$	2,234

Less distributed and undistributed income allocated to participating securities		171		196		61		54

Net income attributable to common shareholders		6,906		7,539		2,311		2,180

Denominator:
Weighted average common shares (Basic)		4,392		4,323		4,414		4,340

Weighted average common shares including assumed conversions (Diluted)		4,392		4,323		4,414		4,340

Basic net income per share	$	1.57	$	1.74	$	0.52	$	0.50
Diluted net income per share	$	1.57	$	1.74	$	0.52	$	0.50

13. Major Customers and Vendors:

The Company had one major vendor that accounted for 15% of total purchases during the three months ended September 30, 2023, and 16% of total purchases during the three months ended September 30, 2022. The Company had one major vendor that accounted for 16% of total purchases during the nine months ended September 30, 2023 and 18% of total purchases during the nine months ended September 30, 2022.

The Company had two major customers that accounted for 21% and 17%, respectively, of its net sales during the three months ended September 30, 2023, and 20% and 15%, respectively, of its net sales during the three months ended September 30, 2022. The Company had two major customers that accounted for 21% and 15%, respectively, of its net sales during the nine months ended September 30, 2023, and 22% and 16%, respectively, of its net sales during the nine months ended September 30, 2022. These same customers accounted for 19% and 11%, respectively, of total net accounts receivable as of September 30, 2023, and 16% and 18%, respectively, of total net accounts receivable as of December 31, 2022.

14. Income Taxes:

The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The Company’s policy is to recognize interest related to unrecognized tax benefits as interest expense and penalties as operating expenses. The Company believes that it has appropriate support for the income tax positions it takes and expects to take on its tax returns, and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to the facts of each matter.

15. Stockholders’ Equity and Stock Based Compensation:

The 2021 Omnibus Incentive Plan (the “2021 Plan”) authorizes the grant of Stock Options, Stock Units, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Bonuses and other equity-based awards. The 2021 Plan was approved by the Company’s stockholders at the 2021 Annual Meeting in June 2021. The total number of shares of the Company’s common stock, par value $0.01 per share (“Common Stock”) initially available for award under the 2021 Plan was 500,000 shares. As of September 30, 2023, the number of shares of Common Stock available for future award grants to employees, officers and directors under the 2021 Plan is 241,068.

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The 2012 Stock-Based Compensation Plan (the “2012 Plan”) authorized the grant of Stock Options, Stock Units, Stock Appreciation Rights, Restricted Stock, Deferred Stock, Stock Bonuses and other equity-based awards. The total number of shares of the Company’s Common Stock initially available for award under the 2012 Plan was 600,000, which was increased to 1,000,000 shares by stockholder approval at the Company’s 2018 Annual Meeting in June 2018. Immediately prior to the replacement of the 2012 Plan by the 2021 Plan, there were 352,158 shares of Common Stock available under the 2012 Plan. The 2012 Plan has been replaced by the 2021 Plan and none of the remaining shares of Common Stock authorized under the 2012 Plan will be transferred to or used under the 2021 Plan nor will any awards under the 2012 Plan that are forfeited increase the shares available for awards under the 2021 Plan. As of September 30, 2023, the number of shares of Common Stock available under the 2012 Plan was zero.

During the nine months ended September 30, 2023, the Company granted a total of 132,526 shares of Restricted Stock to officers and employees. These shares of Restricted Stock vest immediately, over time in three equal installments or over time in sixteen equal quarterly installments.

During the nine months ended September 30, 2022, the Company granted a total of 73,505 shares of Restricted Stock to officers. These shares of Restricted Stock vest over time in sixteen equal quarterly installments. During the nine months ended September 30, 2022, a total of 4,056 shares of Restricted Stock were forfeited.

A summary of nonvested shares of Restricted Stock awards outstanding under the 2012 and 2021 Plans as of September 30, 2023, and changes during the nine months then ended is as follows:


		Weighted
		Average Grant
		Date
	Shares	Fair Value
Nonvested shares at January 1, 2023	121,059	$	24.83
Granted in 2023	132,526		45.81
Vested in 2023	(91,624)		37.98
Forfeited in 2023	—		—
Nonvested shares at September 30, 2023	161,961	$	35.26

As of September 30, 2023, there is approximately $5.1 million of total unrecognized compensation costs related to nonvested share-based compensation arrangements. The unrecognized compensation cost is expected to be recognized over a weighted-average period of 1.6 years.

During the three months ended September 30, 2023, and 2022, the Company recognized share-based compensation expense of $0.7 million and $0.8 million, respectively. During the nine months ended September 30, 2023, and 2022, the Company recognized share-based compensation expense of $3.4 million and $1.5 million, respectively.

16. Segment Information:

The Company distributes software developed by others through resellers indirectly to customers worldwide. We also resell computer software and hardware developed by others and provide technical services directly to customers worldwide.

FASB ASC Topic 280, “Segment Reporting,” requires that public companies report profits and losses and certain other information on their “reportable operating segments” in their annual and interim financial statements. The internal organization used by the public company’s Chief Operating Decision Maker (CODM) to assess performance and allocate resources determines the basis for reportable operating segments. The Company’s CODM is the Chief Executive Officer.

The Company is organized into two reportable operating segments. The “Distribution” segment distributes technical software to corporate resellers, value added resellers (VARs), consultants and systems integrators worldwide. The “Solutions” segment is a cloud solutions provider and value-added reseller of software, hardware and services to customers worldwide.

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As permitted by FASB ASC Topic 280, the Company has utilized the aggregation criteria in combining its operations in Canada, Europe and the United Kingdom with the domestic segments as the international operations provide the same products and services to similar clients and are considered together when the Company’s CODM decides how to allocate resources.

Segment income is based on segment revenue less the respective segment’s cost of revenues as well as segment direct costs (including such items as payroll costs and payroll related costs, such as profit sharing, incentive awards and insurance) and excluding general and administrative expenses not attributed to an individual segment business unit. The Company only identifies accounts receivable, vendor prepayments and inventory by segment as shown below as “Selected Assets” by segment; it does not allocate its other assets, including capital expenditures by segment. The following segment reporting information of the Company is provided:


	Nine months ended				Three months ended
	September 30,				September 30,
	2023		2022		2023		2022
Net Sales:
Distribution	$	226,905	$	195,304	$	72,227	$	66,529
Solutions		18,324		20,139		6,230		9,732
		245,229		215,443		78,457		76,261
Gross Profit:
Distribution	$	35,472	$	30,953	$	11,671	$	11,101
Solutions		7,704		7,031		2,603		2,416
		43,176		37,984		14,274		13,517
Direct Costs:
Distribution	$	15,225	$	11,374	$	5,249	$	4,123
Solutions		3,844		3,262		1,226		1,113
		19,069		14,636		6,475		5,236
Segment Income Before Taxes: (1)
Distribution	$	20,247	$	19,579	$	6,422	$	6,978
Solutions		3,860		3,769		1,377		1,303
Segment Income Before Taxes		24,107		23,348		7,799		8,281

General and administrative	$	12,861	$	10,390	$	3,647	$	3,686
Acquisition related costs		277		445		246		365
Depreciation and amortization expense		1,934		1,357		617		555
Interest, net		760		40		318		58
Foreign currency transaction loss		(100)		(799)		(140)		(500)
Income before taxes	$	9,695	$	10,397	$	3,467	$	3,233

(1)	Excludes general corporate expenses including interest and foreign currency transaction loss



	As of		As of
	September 30,		December 31,
Selected Assets by Segment:	2023		2022

Distribution	$	141,224	$	180,602
Solutions		26,116		21,420
Segment Select Assets		167,340		202,022
Corporate Assets		65,025		29,834
Total Assets	$	232,365	$	231,856

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Geographic areas and net sales mix related to operations for the three and nine months ended September 30, 2023 and 2022 were as follows. Revenue is allocated to a geographic area based on the location of the sale, which is generally the customer’s country of domicile.


	Nine months ended						Three months ended
	September 30, 2023						September 30, 2023
	Distribution		Solutions		Total		Distribution		Solutions		Total
Geography
USA	$	180,278	$	9,908	$	190,186	$	60,891	$	3,605	$	64,496
Europe and United Kingdom		28,903		7,508		36,411		6,353		2,418		8,771
Canada		17,724		908		18,632		4,983		207		5,190
Total net sales	$	226,905	$	18,324	$	245,229	$	72,227	$	6,230	$	78,457

Timing of Revenue Recognition
Transferred at a point in time where the Company is principal (1)	$	200,027	$	13,290	$	213,317	$	63,587	$	4,422	$	68,009
Transferred at a point in time where the Company is agent (2)		26,878		5,034		31,912		8,640		1,808		10,448
Total net sales	$	226,905	$	18,324	$	245,229	$	72,227	$	6,230	$	78,457

	Nine months ended						Three months ended
	September 30, 2022						September 30, 2022
	Distribution		Solutions		Total		Distribution		Solutions		Total
Geography
USA	$	159,335	$	12,027	$	171,362	$	54,812	$	7,224	$	62,036
Europe and United Kingdom		19,252		6,816		26,068		5,933		2,077		8,010
Canada		16,717		1,296		18,013		5,784		431		6,215
Total net sales	$	195,304	$	20,139	$	215,443	$	66,529	$	9,732	$	76,261

Timing of Revenue Recognition
Transferred at a point in time where the Company is principal (1)	$	173,606	$	15,076	$	188,682	$	58,669	$	7,982	$	66,651
Transferred at a point in time where the Company is agent (2)		21,698		5,063		26,761		7,860		1,750		9,610
Total net sales	$	195,304	$	20,139	$	215,443	$	66,529	$	9,732	$	76,261

(1)	Includes net sales from third-party hardware and software products.

(2)	Includes net sales from third-party maintenance, software support and services.

Geographic identifiable assets related to operations as of September 30, 2023 and December 31, 2022 were as follows.


	September 30,		December 31,
Identifiable Assets by Geographic Areas	2023		2022
USA	$	147,805	$	137,877
Canada		24,169		27,597
Europe and United Kingdom		60,391		66,382
Total	$	232,365	$	231,856

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17. Related Party Transactions:

The Company made sales to a customer where a family member of one of our executives has a minority ownership position. During the three months ended September 30, 2023 and 2022, net sales to this customer totaled approximately $0.3 million and $0.7 million, respectively. During the nine months ended September 30, 2023 and 2022, net sales to this customer totaled approximately $1.3 million and $1.7 million, respectively. Amounts due from this customer as of September 30, 2023 and December 31, 2022 were approximately $0.2 million and $0.1 million, respectively, which were or are expected to be settled in cash subsequent to each period end.

18. Subsequent Events:

Acquisition of Data Solutions Holdings Limited

On October 6, 2023, Climb Global Solutions Holdings UK Limited (“Buyer”), a private limited company under the laws of England and Wales and a wholly-owned subsidiary of the Company, entered into the Share Purchase Agreement by and among Michael O’Hara, Francis O’Haire, Roberta McCrossan, David Keating, Alan Smyth and Brian Davis, as sellers (collectively, “Sellers”), Buyer and the Company (as guarantor) (the “SPA”).

Pursuant to the SPA, on October 6, 2023, Buyer, among other things, purchased the entire share capital of Data Solutions Holdings Limited, a private limited company under the laws of Ireland, from Sellers for an aggregate purchase price of €15.4 million (equivalent to $16.3 million USD), subject to certain working capital and other adjustments, plus a potential post-closing earn-out. The Company has guaranteed certain obligations of the Buyer under the SPA, including the potential post-closing earn-out.

The SPA contains customary Irish warranties and covenants and customary indemnification obligations of Sellers, subject to certain limitations and insurance caps.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This following information should be read in conjunction with the consolidated financial statements and the notes included in Item 1 of Part I of this 10-Q and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the 10-K filed with the SEC on for the fiscal year ended December 31, 2022. In addition to historical information, the following discussion contains certain forward-looking information. See “Cautionary Note Regarding Forward Looking Statements” above for certain information concerning -forward-looking statements.

Overview

Our Company is a value added IT distribution and solutions company, primarily selling software and other third-party IT products and services through two reportable operating segments. Through our “Distribution” segment we sell products and services to corporate resellers, value added resellers (VARs), consultants and systems integrators worldwide, who in turn sell these products to end users. Through our “Solutions” segment we act as a cloud solutions provider and value-added reseller, selling computer software and hardware developed by others and provide technical services directly to end user customers worldwide. We offer an extensive line of products from leading 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. We market these products through creative marketing communications, including our web sites, local and on-line seminars, webinars, social media, and direct e-mail.

We have subsidiaries in the United States, Canada, the Netherlands, the United Kingdom and Ireland, through which sales are made.

Factors Influencing Our Financial Results

We derive the majority of our net sales through the sale of third-party software licenses, maintenance and service agreements. In our Distribution segment, sales are impacted by the number of product lines we distribute, and sales penetration of those products into the reseller channel, product lifecycle competition, and demand characteristics of the products which we are authorized to distribute. In our Solutions segment sales are generally driven by sales force effectiveness and success in providing superior customer service and cloud solutions support, 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 equity and effective margin.

Gross profit is calculated as net sales less cost of sales. We record customer rebates and discounts as a component of net sales and record vendor rebates and discounts as a component of cost of sales.

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, 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.

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Dividend Policy and Share Repurchase Program. Historically we have sought to return value to investors through the payment of quarterly dividends and share repurchases. Total dividends paid and shares repurchased were $0.8 million and $0.2 million, during the three months ended September 30, 2023. Total dividends paid and shares repurchased were $0.7 million and $0.1 million, respectively, during the three months ended September 30, 2022. The payment of future dividends and share repurchases is at the discretion of our Board of Directors and dependent on results of operations, projected capital requirements, applicable legal, tax and regulatory restrictions, and other factors the Board of Directors may find relevant.

Stock Volatility. The technology, distribution and services sectors of the United States stock markets is subject to substantial volatility. Numerous conditions which impact these sectors or the stock market in general or the Company in particular, whether or not such events relate to or reflect upon the Company’s operating performance, could adversely affect the market price of the Company’s Common Stock. Furthermore, fluctuations in the Company’s operating results, announcements regarding litigation, the loss of a significant vendor or customer, increased competition, reduced vendor incentives and trade credit, higher operating expenses, and other developments, could have a significant impact on the market price of our Common Stock.

Inflation. We have historically not been adversely affected by inflation, as abrupt changes in technology, rapid changes in customer preferences, short product life cycles and evolving industry standards within the IT industry have generally caused the prices of the products we sell to decline. This requires us to sell new products and have growth in unit sales of existing products in order to increase our net sales. We believe that most price increases could be passed on to our customers, as prices charged by us are not set by long-term contracts; however, as a result of competitive pressure, there can be no assurance that the full effect of any such price increases could be passed on to our customers or cause a reduction in our customers spending.

Financial Overview

Net sales increased 3%, or $2.2 million, to $78.5 million for the three months ended September 30, 2023 compared to $76.3 million for the same period in the prior year. Gross profit increased 6%, or $0.8 million, to $14.3 million for the three months ended September 30, 2023 compared to $13.5 million for the same period in the prior year. Selling, general and administrative (“SG&A”) expenses increased 13%, or $1.2 million, to $10.1 million for the three months ended September 30, 2023 compared to $8.9 million for the same period in the prior year. Depreciation and amortization expense remained consistent at $0.6 million for the three months ended September 30, 2023 and 2022, respectively. Net income increased 6%, or $0.2 million, to $2.4 million for the three months ended September 30, 2023 compared to $2.2 million for the same period in the prior year. Diluted income per share increased 4%, or $0.02, to $0.52 for the three months ended September 30, 2023 compared to $0.50 for the same period in the prior year.

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 statements that have been prepared in accordance with US 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.

On an on-going basis, the Company evaluates its estimates, including those related to product returns, bad debts, inventories, 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 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

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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.

Allowances 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 doubtful accounts receivable by considering a number of factors, 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 customers. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. At the time of sale, we record an estimate for sales returns based on historical experience, which is included in accounts payable and accrued expenses. If actual sales returns are greater than estimated by management, additional expense may be required as an offset to net sales.

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.

Business Combinations

The Company accounts for business combinations using the acquisition method of accounting, which allocates the fair value of the purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions. The Company may utilize third-party valuation specialists to assist the Company in the allocation. Initial purchase price allocations are subject to revision within the measurement period, not to exceed one year from the date of acquisition. Acquisition-related expenses and transaction costs associated with business combinations are expensed as incurred.

Goodwill

We test goodwill for impairment on an annual basis, and between annual tests if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

In a qualitative assessment, we assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If, after assessing the totality of events or circumstances, we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is unnecessary.

If, after assessing the totality of events or circumstances, we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform the quantitative goodwill impairment test. We may also elect the unconditional option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test.

In the quantitative impairment test, we compare the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. Conversely, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

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Intangible Assets

Intangible assets with determinable lives are amortized on a straight-line basis over their respective estimated useful lives, which is determined based on their expected period of benefit. Intangible assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recorded for the excess of the asset's carrying amount over its fair value. In addition, each quarter, the Company evaluates whether events and circumstances warrant a revision to the remaining estimated useful life of each of these intangible assets. If the Company were to determine that a change to the remaining estimated useful life of an intangible asset was necessary, then the remaining carrying amount of the intangible asset would be amortized prospectively over that revised remaining useful life.

Income Taxes

The Company considers future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a 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 record the impact of forfeitures when they occur. We review our valuation assumptions periodically and, as a result, we may change our valuation assumptions used to value stock-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.

Foreign Exchange

The Company’s foreign currency exposure relates primarily to international transactions where the currency collected from customers can be different from the currency used to purchase the product. In cases where the Company is not able to create a natural hedge by maintaining offsetting asset and liability amounts in the same currency, it may enter into foreign exchange contracts, typically in the form of forward purchase agreements, to facilitate the hedging of foreign currency exposures to mitigate the impact of changes in foreign currency exchange rates. These contracts generally have terms of no more than two months. The Company does not apply hedge accounting to these contracts and therefore the changes in fair value are recorded in earnings. The Company does not enter into foreign exchange contracts for trading purposes and the risk of loss on a foreign exchange contract is the risk of nonperformance by the counterparties, which the Company minimizes by limiting its counterparties to major financial institutions. There were no contracts outstanding as of September 30, 2023.

Interest, Net

Interest, net consists primarily of interest income earned on our cash and cash equivalents and income from the amortization of the discount on accounts receivable long term, net of interest expense on the Company’s credit facility.

Recently Issued Accounting Pronouncements

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Results of Operations

The following table sets forth for the periods indicated certain financial information derived from the Company’s unaudited condensed consolidated statements of earnings expressed as a percentage of net sales. This comparison of financial results is not necessarily indicative of future results:


	Nine months ended				Three Months Ended
	September 30,				September 30,
	2023		2022		2023		2022
Net sales	100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales	82.4		82.4		81.8		82.3
Gross profit	17.6		17.6		18.2		17.7
Selling, general and administrative expenses	13.0		11.6		12.9		11.7
Acquisition related costs	0.1		0.2		0.3		0.5
Depreciation and amortization expense	0.8		0.6		0.8		0.7
Income from operations	3.7		5.2		4.2		4.8
Other income (expense)	0.3		(0.4)		0.2		(0.6)
Income before income taxes	4.0		4.8		4.4		4.2
Income tax provision	1.1		1.2		1.4		1.3
Net income	2.9	%	3.6	%	3.0	%	2.9	%

Key Operating Metrics / Non-GAAP Financial Measures

Our management monitors several financial and non-financial measures and ratios on a regular basis in order to track the progress of our business. We believe that the most important of these measures and ratios include net sales, adjusted gross billings, gross profit, adjusted EBITDA, gross profit as a percentage of adjusted gross billings and adjusted EBITDA as a percentage of gross profit. We use a variety of operating and other information to evaluate the operating performance of our business, develop financial forecasts, make strategic decisions, and prepare and approve annual budgets. These key indicators include financial information that is prepared in accordance with US GAAP and presented in our Consolidated Financial Statements as well as non-US GAAP performance measurement tools.


	Nine months ended				Three months ended
	September 30,		September 30,		September 30,		September 30,
	2023		2022		2023		2022

Net sales	$	245,229	$	215,443	$	78,457	$	76,261
Adjusted gross billings (Non-GAAP)	$	863,339	$	744,814	$	281,915	$	264,304

Gross profit	$	43,176	$	37,984	$	14,274	$	13,517
Gross profit - Distribution	$	35,472	$	30,953	$	11,671	$	11,101
Gross profit - Solutions	$	7,704	$	7,031	$	2,603	$	2,416

Adjusted EBITDA (Non-GAAP)	$	15,422	$	13,745	$	5,062	$	4,945

Gross margin % - Adjusted gross billings (Non-GAAP)		5.0%		5.1%		5.1%		5.1%
Effective margin % - Adjusted EBITDA (Non-GAAP)		35.7%		36.2%		35.5%		36.6%

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We consider gross profit growth and effective margin to be key metrics in evaluating our business. During the three months ended September 30, 2023, gross profit increased 6%, or $0.8 million, to $14.3 million compared to $13.5 million for the same period in the prior year while effective margin decreased to 35.5% compared to 36.6% for the same period in the prior year. During the nine months ended September 30, 2023, gross profit increased 14%, or $5.2 million, to $43.2 million compared to $38.0 million for the same period in the prior year while effective margin decreased to 35.7% compared to 36.2% for the same period in the prior year.

Reconciliations of Non-GAAP Financial Measures


	Nine months ended				Three Months Ended
	September 30,		September 30,		September 30,		September 30,
Reconciliation of net sales to adjusted gross billings (Non-GAAP):	2023		2022		2023		2022

Net sales	$	245,229	$	215,443	$	78,457	$	76,261
Costs of sales related to sales where the Company is an agent		618,110		529,371		203,458		188,043
Adjusted gross billings	$	863,339	$	744,814	$	281,915	$	264,304

We define adjusted gross billings as net sales in accordance with US GAAP, adjusted for the cost of sales related to sales where the Company is an agent. We provided a reconciliation of adjusted gross billings to net sales, which is the most directly comparable US GAAP measure. We use adjusted gross billings of product and services as a supplemental measure of our performance to gain insight into the volume of business generated by our business, and to analyze the changes to our accounts receivable and accounts payable. Our use of adjusted gross billings of product and services as analytical tools has limitations, and you should not consider them in isolation or as substitutes for analysis of our financial results as reported under US GAAP. In addition, other 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.


	Nine months ended				Three months ended
	September 30,		September 30,		September 30,		September 30,
Net income reconciled to adjusted EBITDA (Non-GAAP):	2023		2022		2023		2022

Net income	$	7,077	$	7,735	$	2,372	$	2,234
Provision for income taxes		2,618		2,662		1,095		999
Depreciation and amortization		1,934		1,357		617		555
Interest expense		94		55		45		15
EBITDA		11,723		11,809		4,129		3,803
Share-based compensation		3,422		1,491		687		777
Acquisition related costs		277		445		246		365
Adjusted EBITDA	$	15,422	$	13,745	$	5,062	$	4,945

We define adjusted EBITDA, as net income, plus provision for income taxes, depreciation, amortization, share-based compensation and interest. 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.

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Acquisitions

On August 18, 2022, we completed the acquisition of Spinnakar Limited (“Spinnakar”) for an aggregate purchase price of approximately £9.8 million (equivalent to $11.8 million USD), subject to certain working capital and other adjustments, paid at closing plus a potential post-closing earn-out. The operating results of Spinnakar are included in our operating results from the date of acquisition.

Three Months Ended September 30, 2023 Compared to Three Months Ended September 30, 2022

Net Sales and Adjusted Gross Billings

Net sales for the three months ended September 30, 2023 increased 3%, or $2.2 million, to $78.5 million compared to $76.3 million for the same period in the prior year. Adjusted gross billings for the three months ended September 30, 2023 increased 7%, or $17.6 million, to $281.9 million compared to $264.3 million for the same period in the prior year. Adjusted gross billings increased at a greater rate than net sales due to differences in the product mix between the two periods and an unfavorable impact of foreign exchange rates. During the three months ended September 30, 2023, adjusted gross billings included a greater percentage of security, maintenance and cloud products, which are recorded net of related cost of sales, while during the three months ended September 30, 2022, adjusted gross billings included a greater percentage of hardware and software products, which are recorded on a gross basis.

Distribution segment net sales for the three months ended September 30, 2023 increased 9%, or $5.7 million, to $72.2 million compared to $66.5 million for the same period in the prior year. Adjusted gross billings for the Distribution segment for the three months ended September 30, 2023 increased 7%, or $17.4 million, to $261.6 million compared to $244.2 million for the same period in the prior year. Net sales increased at a rate greater than adjusted gross billings due to the impact of hardware and software sales recognized during the current period in our Distribution segment, which are recorded on a gross basis.

Solutions segment net sales for the three months ended September 30, 2023, decreased 36%, or $3.5 million, to $6.2 million compared to $9.7 million for the same period in the prior year. Adjusted gross billings for the Solutions segment for the three months ended September 30, 2023 increased 1%, or $0.2 million, to $20.3 million compared to $20.1 million for the same period in the prior year. Net sales decreased while adjusted gross billings increased due to the aforementioned differences in the product mix between the two periods.

During the three months ended September 30, 2023, the Company had two major customers that accounted for 21% and 17%, respectively, of our total net sales. During the three months ended September 30, 2022, the Company had two major customers that accounted for 20% and 15%, respectively, of our total net sales. The Company had one major vendor that accounted for 15% of total purchases during the three months ended September 30, 2023 and 16% of total purchases during the three months ended September 30, 2022.

Gross Profit

Gross profit for the three months ended September 30, 2023 increased 6%, or $0.8 million, to $14.3 million compared to $13.5 million for the same period in the prior year.

Distribution segment gross profit for the three months ended September 30, 2023 increased 5%, or $0.6 million, to $11.7 million compared to $11.1 million for the same period in the prior year. The increase in Distribution segment gross profit was due to organic growth from our existing vendor partnerships, partially offset by higher early pay discounts and other rebates and discounts offered to our customers as a percentage of adjusted gross billings.

Solutions segment gross profit for the three months ended September 30, 2023 increased 8%, or $0.2 million, to $2.6 million compared to $2.4 million for the same period in the prior year. This increase was driven by the aforementioned increase in adjusted gross billings compared to the same period in the prior year.

Customer rebates and discounts for the three months ended September 30, 2023 were $2.8 million compared to $1.9 million for the same period in the prior year. Customer rebates and discounts vary based on terms of rebate and early pay discount programs offered to customers and timing of payments ultimately received from our customers.

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Vendor rebates and discounts for the three months ended September 30, 2023 were $2.3 million compared to $1.5 million for the same period in the prior year. Vendor rebates are dependent on programs offered by our vendors and in some cases reaching certain volume targets set by our vendors or meeting certain early payment programs offered by our vendors. The Company monitors vendor rebate levels, competitive pricing, and gross profit margins carefully.

Selling, General and Administrative Expenses

SG&A expenses for the three months ended September 30, 2023 increased 13%, or $1.2 million, to $10.1 million compared to $8.9 million for the same period in the prior year. SG&A expenses were 3.6% of adjusted gross billings for the three months ended September 30, 2023, compared to 3.4% for the same period in the prior year.

The remaining increase in SG&A expenses were primarily due to increased salaries, commission and personnel costs in support of our continued investment in our infrastructure to drive future growth, including new personnel, employee training and development. The Company expects that its SG&A expenses, as a percentage of adjusted gross billings, may vary depending on changes in sales volume, as well as the levels of continuing investments to drive future growth.

Depreciation and Amortization Expense

Depreciation and amortization expense for the three months ended September 30, 2023, remained consistent at $0.6 million for the same period in the prior year.

Acquisition Related Costs

Acquisition related costs for the three months ended September 30, 2023 were $0.2 million compared to $0.4 million for the same period in the prior year. These expenses for the three months ended September 30, 2023 were incurred in conjunction with the acquisition of Data Solutions discussed below, while these expenses in the same period in the prior year related to the acquisition of Spinnakar.

Income Taxes

For the three months ended September 30, 2023 and 2022, the Company recorded a provision for income taxes of $1.1 million and $1.0 million, respectively. The effective tax rate for the three months ended September 30, 2023 and 2022 was 31.6% and 30.9%, respectively. The Company’s effective tax rate for the three months ended September 30, 2023 and 2022 were impacted by limitations on the deductibility of certain facilitative acquisition related costs.

Nine months Ended September 30, 2023 Compared to Nine months Ended September 30, 2022

Net Sales and Adjusted Gross Billings

Net sales for the nine months ended September 30, 2023 increased 14%, or $29.8 million, to $245.2 million compared to $215.4 million for the same period in the prior year. Adjusted gross billings for the nine months ended September 30, 2023 increased 16%, or $118.5 million, to $863.3 million compared to $744.8 million for the same period in the prior year. Adjusted gross billings increased at a greater rate than net sales due to differences in the product mix between the two periods and an unfavorable impact of foreign exchange rates. During the nine months ended September 30, 2023, adjusted gross billings included a greater percentage of security, maintenance and cloud products, which are recorded net of related cost of sales, while during the nine months ended September 30, 2022, adjusted gross billings included a greater percentage of hardware and software products, which are recorded on a gross basis.

Distribution segment net sales for the nine months ended September 30, 2023 increased 16%, or $31.6 million, to $226.9 million compared to $195.3 million for the same period in the prior year. Adjusted gross billings for the Distribution segment for the nine months ended September 30, 2023 increased 16%, or $113.1 million, to $805.2 million compared to $692.1 million for the same period in the prior year. Net sales and adjusted gross billings increased at consistent rates due to similar product mixes period over period.

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Solutions segment net sales for the nine months ended September 30, 2023, decreased 9%, or $1.8 million, to $18.3 million compared to $20.1 million for the same period in the prior year. Adjusted gross billings for the Solutions segment for the nine months ended September 30, 2023 increased 10%, or $5.4 million, to $58.1 million compared to $52.8 million for the same period in the prior year. Net sales decreased while adjusted gross billings increased due to the aforementioned differences in the product mix between the two periods.

During the nine months ended September 30, 2023, the Company had two major customers that accounted for 21% and 15%, respectively, of our total net sales. During the nine months ended September 30, 2022, the Company had two major customers that accounted for 22% and 16%, respectively, of our total net sales. The Company had one major vendor that accounted for 16% of total purchases during the nine months ended September 30, 2023, and 18% of total purchases during the nine months ended September 30, 2022.

Gross Profit

Gross profit for the nine months ended September 30, 2023 increased 14%, or $5.2 million, to $43.2 million compared to $38.0 million for the same period in the prior year.

Distribution segment gross profit for the nine months ended September 30, 2023 increased 15%, or $4.5 million, to $35.5 million compared to $31.0 million for the same period in the prior year. The increase in Distribution segment gross profit was due to organic growth from our existing vendor partnerships, partially offset by higher early pay discounts and other rebates and discounts offered to our customers as a percentage of adjusted gross billings.

Solutions segment gross profit for the nine months ended September 30, 2023 increased 10%, or $0.7 million, to $7.7 million compared to $7.0 million for the same period in the prior year. This increase was driven by the aforementioned increase in adjusted gross billings compared to the same period in the prior year.

Customer rebates and discounts for the nine months ended September 30, 2023 were $9.2 million compared to $5.6 million for the same period in the prior year. Customer rebates and discounts vary based on terms of rebate and early pay discount programs offered to customers and timing of payments ultimately received from our customers.

Vendor rebates and discounts for the nine months ended September 30, 2023 were $6.1 million compared to $4.1 million for the same period in the prior year. Vendor rebates are dependent on programs offered by our vendors and in some cases reaching certain volume targets set by our vendors or meeting certain early payment programs offered by our vendors. The Company monitors vendor rebate levels, competitive pricing, and gross profit margins carefully.

Selling, General and Administrative Expenses

SG&A expenses for the nine months ended September 30, 2023 increased 28%, or $6.9 million, to $31.9 million compared to $25.0 million for the same period in the prior year. SG&A expenses were 3.7% of adjusted gross billings for the nine months ended September 30, 2023, compared to 3.4% for the same period in the prior year.

Included in SG&A expense during the nine months ended September 30, 2023 was stock compensation expense recognized of $1.8 million relating to the one-time stock grant of 35,000 shares of immediately vested Common Stock to our Chief Executive Officer. This grant was made in recognition of prior performance and as changes to his compensation arrangement from his participation in the Company’s Executive Severance and Change in Control Plan and the termination of his existing employment agreement.

Depreciation and Amortization Expense

Depreciation and amortization expense for the nine months ended September 30, 2023, increased 43%, or $0.6 million, to $1.9 million compared to $1.4 million for the same period in the prior year, primarily due to the full year

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amortization in the current year of intangible assets acquired in the Spinnakar acquisition compared to a lesser period in the comparable prior year period as the acquisition closed on August 18, 2022.

Acquisition Related Costs

Acquisition related costs for the nine months ended September 30, 2023 were $0.3 million compared to $0.4 million for the same period in the prior year. These expenses for the nine months ended September 30, 2023 were incurred in conjunction with the acquisition of Data Solutions discussed below, while these expenses in the same period in the prior year related to the acquisition of Spinnakar.

Income Taxes

For the nine months ended September 30, 2023 and 2022, the Company recorded a provision for income taxes of $2.6 million and $2.7 million, respectively. The effective tax rate for the nine months ended September 30, 2023 and 2022 was 27.0% and 25.6%, respectively. The change in the effective tax rate for the nine months ended September 30, 2023 compared to the same period in the prior year is a result of limitations on the deductibility of certain executive compensation amounts during the current period, as well as the Company’s effective tax rate for both periods were impacted by limitations on the deductibility of certain facilitative acquisition related costs.

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Acquisition of Data Solutions

On October 6, 2023, Climb Global Solutions Holdings UK Limited (“Buyer”), a private limited company under the laws of England and Wales and a wholly-owned subsidiary of the Company, entered into a Share Purchase Agreement by and among Michael O’Hara, Francis O’Haire, Roberta McCrossan, David Keating, Alan Smyth and Brian Davis, as sellers (collectively, “Sellers”), Buyer and the Company (as guarantor) (the “SPA”).

The SPA contains customary Irish warranties and covenants and customary indemnification obligations of Sellers, subject to certain limitations and insurance caps.

Liquidity and Capital Resources

Our cash and cash equivalents as of September 30, 2023 increased 146%, or $29.6 million, to $49.8 million compared to $20.2 million as of December 31, 2022.

Net cash and cash equivalents provided by operating activities for the nine months ended September 30, 2023 was $38.4 million, comprised primarily of changes in operating assets and liabilities of $25.8 million and net income adjusted for non-cash items of $12.6 million.

Net cash and cash equivalents used in investing activities during the nine months ended September 30, 2023 consisted of $4.2 million purchases of fixed assets supporting our ongoing ERP project.

Net cash and cash equivalents used in financing activities during the nine months ended September 30, 2023 was $4.7 million, comprised of dividend payments on our Common Stock of $2.3 million, purchases of treasury stock of $1.4 million, repayments of borrowings under term loan of $0.4 million and payments of deferred financing costs of $0.6 million.

On April 8, 2022, the Company entered into a $2.1 term loan (the “Term Loan”) with First American Commercial Bancorp, Inc. (“First American”) pursuant to a Master Loan and Security Agreement. The proceeds from the Term Loan will be used to fund certain capital expenditures. The borrowing under the Term Loan bears interest at a rate of 3.73% per annum and is being repaid over forty-eight monthly installments of principal and interest through April 2026. As of September 30, 2023, the Company had $1.4 million outstanding under the Term Loan.

We anticipate that our working capital needs will increase as we invest in the growth of our business. We believe that the funds held in cash and cash equivalents and our unused borrowings under our Credit Agreement will be sufficient to fund our working capital and cash requirements for the next 12 months.

Foreign Exchange

The Company’s foreign subsidiaries are 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 Dollar, Euro Dollar and British Pound-to-U.S. Dollar exchange rate.

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Off-Balance Sheet Arrangements

As of September 30, 2023, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K promulgated under the Securities Act of 1934, as amended.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Smaller reporting companies are not required to provide the information required by this item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that material information relating to us is made known to the officers who certify as to our financial reports and to other members of senior management and the Board of Directors. These disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that are filed or submitted under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

As required by Rule 13a-15(b) under the Exchange Act, our management carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. This evaluation was carried out under the supervision and with the participation of various members of our management, including our Company’s Chief Executive Officer (principal executive officer), Vice President and Chief Financial Officer (principal financial officer) and Vice President and Chief Accounting Officer (principal accounting officer). Based upon that evaluation, the Company’s Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that the Company’s disclosure controls and procedures were effective, as of the end of the period covered by this report, to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting. There has been no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) under the Exchange Act, that occurred during the three months ended September 30, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 2. - Unregistered Sales of Equity Securities and Use of Proceeds

The table below sets forth the repurchase of Common Stock by the Company and its affiliated purchasers during the third quarter of 2023.

ISSUER PURCHASE OF EQUITY SECURITIES


							Maximum
							Number of
				Total Number			Shares That
				of Shares			May Yet Be
	Total			Purchased as			Purchased
	Number	Average		Part of Publicly			Under the
	of Shares	Price Paid		Announced	Average		Plans or
	Purchased	Per Share		Plans or	Price Paid		Programs
Period	(1)	(2)		Programs	Per Share		(3)

July 1, 2023 - July 31, 2023	—	$	—	—	$	—	545,786
August 1, 2023 - August 31, 2023	—	$	—	—	$	—	545,786
September 1, 2023 - September 30, 2023	—	$	—	—	$	—	545,786
Total	—	$	—	—	$	—	545,786

(1)	Does not include 6,023 shares surrendered, or deemed surrendered, to the Company by employees to satisfy individual tax withholding obligations upon vesting of previously issued shares of Restricted Stock.

(2)	For the quarter ended September 30, 2023, we did not repurchase any shares of our Common Stock under our share repurchase plans referred to in footnote (3) below.

(3)

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 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. The Company expects to purchase shares of its Common Stock from time to time in the market or otherwise subject to market conditions. The timing, number and value of shares of Common Stock repurchased are subject to the Company’s discretion. The Common Stock repurchase program does not have an expiration date.

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Item 6. Exhibits


(a)	Exhibits

3.1	Form of Amended and Restated Certificate of Incorporation of the Company. (1)

3.1(a)	Certificate of Amendment of Restated Certificate of Incorporation of the Company. (2)

3.2	Amended and Restated Bylaws of the Company. (3)

10.1*	Stock Purchase Agreement, dated October 6, 2023, by and among certain individuals listed therein, Climb Global Solutions Holdings UK Limited, and Climb Global Solutions, Inc. (4)

31.1	Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, of Dale Foster, the Chief Executive Officer (principal executive officer) of the Company (filed herewith).

31.2	Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, of Andrew Clark, the Vice President and Chief Financial Officer (principal financial officer) of the Company (filed herewith).

31.3	Certification pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, of Matthew Sullivan, the Vice President and Chief Accounting Officer (principal accounting officer) of the Company (filed herewith).

32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Dale Foster, the Chief Executive Officer (principal executive officer) of the Company (filed herewith).

32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Andrew Clark, the Vice President and Chief Financial Officer (principal financial officer) of the Company (filed herewith).

32.3	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of Matthew Sullivan, the Vice President and Chief Accounting Officer (principal accounting officer) of the Company (filed herewith).

101	The following financial information from Climb Global Solutions, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, filed with the SEC on November 2, 2023, formatted in Inline XBRL (Extensible Business Reporting Language) includes: (1) Condensed Consolidated Balance Sheets, (2) Condensed Consolidated Statements of Income, (3) Condensed Consolidated Statements of Stockholders’ Equity, (4) Condensed Consolidated Statements of Comprehensive Income, (5) Condensed Consolidated Statements of Cash Flows, and (6) the Notes to the Unaudited Condensed Consolidated Financial Statements.

104	Cover Page Interactive Data File – The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

(1) Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 or amendments thereto (File No. 333-92810) filed on May 30, 1995, July 7, 1995 and July 18, 1995

(2) Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed on October 27, 2022.

(3) Incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K, filed on October 27, 2022.

(4) Incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed on October 10, 2023.

* Certain schedules to this agreement have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish a copy of all omitted schedules to the SEC upon its request. Portions of this exhibit have been omitted pursuant to Item 601(b)(2)(ii) of Regulation S-K. The Company agrees to furnish supplementally an unredacted copy of the Exhibits to the SEC upon its request.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		CLIMB GLOBAL SOLUTIONS, INC

November 2, 2023	By:	/s/ Dale Foster
Date		Dale Foster, Chief Executive Officer (Principal Executive Officer)


November 2, 2023	By:	/s/ Andrew Clark
Date		Andrew Clark, Vice President and Chief Financial Officer (Principal Financial Officer)


November 2, 2023	By:	/s/ Matthew Sullivan
Date		Matthew Sullivan, Vice President and Chief Accounting Officer (Principal Accounting Officer)

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Climb Global Solutions (CLMB) 10-Q2023 Q3 Quarterly report

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