SEC Form 10-Q filed by Climb Global Solutions Inc.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
| | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
| | 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.
Climb Global Solutions, Inc.
(Exact name of registrant as specified in its charter)
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| (State or other jurisdiction of | (I.R.S. Employer Identification No.) |
| incorporation or organization) | |
(Address of principal executive offices)
(
(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: | ||
| | | | | The |
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 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.
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).
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 ☐ | |
| | 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
There were
CLIMB GLOBAL SOLUTIONS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED September 30, 2024
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 the Private Securities Litigation Reform Act of 1995 (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,” “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, 2023, filed with the Securities and Exchange Commission (the “SEC”) on March 5, 2024.
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.
PART I — FINANCIAL INFORMATION
Climb Global Solutions, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(Unaudited)
(Amounts in thousands, except share and per share amounts)
| | September 30, | December 31, | ||||||
| | 2024 | 2023 | ||||||
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| ASSETS | | | ||||||
| Current assets: | | | ||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts of $ and $, respectively | ||||||||
| Inventory, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
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| Equipment and leasehold improvements, net | ||||||||
| Goodwill | ||||||||
| Other intangibles, net | ||||||||
| Right-of-use assets, net | ||||||||
| Accounts receivable, net of current portion | ||||||||
| Other assets | ||||||||
| Deferred income tax assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | ||||||
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| Current liabilities: | | | ||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Lease liability, current portion | ||||||||
| Term loan, current portion | ||||||||
| Total current liabilities | ||||||||
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| Lease liability, net of current portion | ||||||||
| Deferred income tax liabilities | ||||||||
| Term loan, net of current portion | ||||||||
| Other non-current liabilities | ||||||||
| Total liabilities | ||||||||
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| Commitments and contingencies | | | ||||||
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| Stockholders’ equity: | | | ||||||
| Common stock, $ par value; shares authorized; shares issued: and shares outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost, and shares, respectively | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income (loss) | ( | ) | ||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Climb Global Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Earnings
(Unaudited)
(Amounts in thousands, except per share data)
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| Net sales |
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| Cost of sales, excluding depreciation and amortization expense |
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| Gross profit |
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| Selling, general, and administrative expenses |
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| Acquisition related costs |
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| Depreciation and amortization expense |
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| Income from operations |
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| Other income: |
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| Interest, net |
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| Foreign currency transaction loss |
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| Change in fair value of acquisition contingent consideration |
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| Income before provision for income taxes |
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| Provision for income taxes |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Income per common share-Basic |
$ | $ | $ | $ | ||||||||||||
| Income per common share-Diluted |
$ | $ | $ | $ | ||||||||||||
| Weighted average common shares outstanding — Basic |
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| Weighted average common shares outstanding — Diluted |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
Climb Global Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(Unaudited)
(Amounts in thousands)
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Other comprehensive income (loss): |
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| Foreign currency translation adjustments, net of taxes |
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| Other comprehensive income (loss) |
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| Comprehensive income |
$ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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 | Income (Loss) | Total | |||||||||||||||||||||||||
| Balance at January 1, 2024 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||
| Translation adjustment | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Dividends paid (per common share $) | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | |||||||||||||||||||||||||||||
| Restricted stock grants (net of forfeitures) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Treasury shares repurchased | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||
| Translation adjustment | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Dividends paid (per common share $) | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | |||||||||||||||||||||||||||||
| Restricted stock grants (net of forfeitures) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Treasury shares repurchased | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at June 30, 2024 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||
| Translation adjustment | — | — | ||||||||||||||||||||||||||||||
| Dividends paid (per common share $) | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Share-based compensation expense | — | — | ||||||||||||||||||||||||||||||
| Restricted stock grants (net of forfeitures) | — | — | ||||||||||||||||||||||||||||||
| Treasury shares repurchased | — | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Balance at September 30, 2024 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Treasury | Retained | Comprehensive | ||||||||||||||||||||||||||||
| Shares | Amount | Capital | Shares | Amount | Earnings | Income (Loss) | Total | |||||||||||||||||||||||||
| Balance at January 1, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||
| Translation adjustment | — | — | ||||||||||||||||||||||||||||||
| Dividends paid (per common share $) | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | |||||||||||||||||||||||||||||
| Restricted stock grants (net of forfeitures) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Treasury shares repurchased | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||
| Translation adjustment | — | — | ||||||||||||||||||||||||||||||
| Dividends paid (per common share $) | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | |||||||||||||||||||||||||||||
| Restricted stock grants (net of forfeitures) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Treasury shares repurchased | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||
| Net income | — | — | ||||||||||||||||||||||||||||||
| Translation adjustment | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Dividends paid (per common share $) | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
| Share-based compensation expense | — | — | ||||||||||||||||||||||||||||||
| Restricted stock grants (net of forfeitures) | ( | ) | ( | ) | ||||||||||||||||||||||||||||
| Treasury shares repurchased | — | ( | ) | ( | ) | |||||||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Climb Global Solutions, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Amounts in thousands)
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Nine months ended |
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| Cash flows from operating activities |
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| Net income |
$ | $ | ||||||
| Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: |
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| Depreciation and amortization expense |
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| Provision for doubtful accounts |
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| Deferred income tax benefit |
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| Share-based compensation expense |
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| Amortization of discount on accounts receivable |
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| Amortization of right-of-use assets |
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| Change in fair value of contingent earn-out consideration |
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| Changes in operating assets and liabilities: |
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| Accounts receivable |
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| Inventory |
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| Prepaid expenses and other current assets |
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| Vendor prepayments |
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| Accounts payable and accrued expenses |
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| Lease liability, net |
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| Other assets and liabilities |
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| Net cash and cash equivalents provided by operating activities |
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| Cash flows from investing activities |
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| Purchase of equipment and leasehold improvements |
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| Payment for acquisition |
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| Net cash and cash equivalents used in investing activities |
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| Cash flows from financing activities |
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| Purchase of treasury stock |
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| Borrowings under credit facilities |
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| Repayments of borrowings under credit facilities |
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| Repayments of borrowings under term loan |
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| Dividends paid |
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| Contingent consideration paid |
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| Payments of deferred financing costs |
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| Net cash and cash equivalents used in financing activities |
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| Effect of foreign exchange rate on cash and cash equivalents |
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| Net increase in cash and cash equivalents |
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| Cash and cash equivalents at beginning of period |
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| Cash and cash equivalents at end of period |
$ | $ | ||||||
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| Supplementary disclosure of cash flow information: |
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| Income taxes paid |
$ | $ | ||||||
| Interest paid |
$ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
Climb Global Solutions, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2024
(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, 2023.
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.
Reclassifications
Certain reclassifications and immaterial revisions have been made to the prior period financial statements to conform to the current-year presentation.
2. Recently Issued Accounting Standards:
In November 2023, the FASB issued Accounting Standards Update 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." The amendments in this ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The Company adopted the update in the first quarter of 2024 and it did not have a material effect on our consolidated financial statements.
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, 2024 and 2023 were $
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 three 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. The Company recognized an unrealized loss of approximately $
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 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 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:
Acquisition of Douglas Stewart Software & Services, LLC
On July 31, 2024, Climb Global Solutions DSS, LLC, a wholly-owned subsidiary of the Company, entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) and purchased the entire share capital of Douglas Stewart Software & Services, LLC ("DSS"), a Florida limited liability company, for an aggregate purchase price of approximately $
The financial position and operating results of DSS is included in the Company’s consolidated financial statements from the date of the acquisition. The Company recorded net revenue for DSS of approximately $
The impact of the acquisition’s preliminary purchase price allocations on the Company’s consolidated balance sheet and the acquisition date fair value of the total consideration transferred is depicted in the table below. Due to the timing of the closing of the transaction in the third quarter of 2024, the Company has not yet completed its evaluation and determination of certain assets acquired and liabilities assumed, primarily the final valuation of goodwill and intangible assets; therefore, the final fair value of the assets acquired and liabilities assumed, which will be completed within the measurement period of up to one year from the acquisition date, may vary from the Company’s preliminary estimates:
| (in thousands) | ||||
| Prepaid expenses and other current assets | $ | |||
| Inventory | ||||
| Right-of-use asset | ||||
| Other assets | ||||
| Accounts payable and accrued expenses | ( | ) | ||
| Lease liability, current portion | ( | ) | ||
| Lease liability, non-current portion | ( | ) | ||
| Intangibles - Vendor Relationships | ||||
| Goodwill | ||||
| Net assets | $ |
| (in thousands) | ||||
| Supplementary information: | ||||
| Cash paid to sellers | $ | |||
| Contingent earn-out | ||||
| Total purchase consideration | $ | |||
Intangible assets are comprised of approximately $
The Company used the income approach to value the intangible assets, representing acquired vendor relationships. The fair value measurements were primarily based on significant inputs that are not observable, which are categorized as a Level 3 measurement in the fair value hierarchy (See Note 18 – Fair Value Measurements). Inputs used to value these intangible assets include the discount rate, projection of all future cash flows, long-term growth rates, vendor attrition rates and applicable income tax rates. The excess purchase price recorded to goodwill primarily represents the future economic benefits the Company expects to achieve as a result of combining operations and expanding vendor relationships.
The purchase consideration included approximately $
Acquisition of Data Solutions Holdings Limited
The purchase consideration included approximately $
In connection with the acquisition of Data Solutions on October 6, 2023, the Company acquired an invoice discounting facility (“IDF”) that is with recourse to the Company (See Note 11 – Credit Facilities). The balance outstanding under the IDF at September 30, 2024 was
During the three months ended September 30, 2024 and 2023, the Company recognized acquisition related costs of $
Pro Forma Results (unaudited)
The following unaudited pro forma financial information summarizes the results of operations for the three and nine months ended September 30, 2024 and 2023 as if the acquisition of DSS and Data Solutions has been completed as of the beginning of the three and nine months ended September 30, 2024 and 2023, respectively. The pro forma results are based upon certain assumptions and estimates, and they give effect to actual operating results prior to the acquisitions and adjustments to reflect income taxes at a rate consistent with the tax rates of the local jurisdictions. As a result, these pro forma results do not necessarily represent results that would have occurred if the acquisitions had taken place on the basis assumed above, nor are they indicative of the results of future combined periods.
| Nine months ended | Three months ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
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, 2024:
| | Distribution | Solutions | Consolidated | |||||||||
| Balance December 31, 2023 | $ | $ | $ | |||||||||
| Goodwill acquired | $ | $ | ||||||||||
| Translation adjustments | ||||||||||||
| Balance September 30, 2024 | $ | $ | $ | |||||||||
Information related to the Company’s other intangibles, net is as follows:
| | As of September 30, 2024 | |||||||||||
| | Gross | Net | ||||||||||
| Carrying | Accumulated | Carrying | ||||||||||
| Amount | Amortization | Amount | ||||||||||
| Customer and vendor relationships | $ | $ | $ | |||||||||
| Trade name | ||||||||||||
| Total | $ | $ | $ | |||||||||
| | As of December 31, 2023 | |||||||||||
| | Gross | Net | ||||||||||
| Carrying | Accumulated | Carrying | ||||||||||
| Amount | Amortization | Amount | ||||||||||
| Customer and vendor relationships | $ | $ | $ | |||||||||
| Trade name | ||||||||||||
| Total | $ | $ | $ | |||||||||
Customer relationships are amortized over years. Vendor relationships are amortized between and years. Trade name is amortized over years.
During the three months ended September 30, 2024 and 2023, the Company recognized total amortization expense for other intangibles, net of $
Estimated future amortization expense of the Company’s other intangibles, net as of September 30, 2024 is as follows:
| 2024 (excluding the nine months ended September 30, 2024) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| Total | $ |
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
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, | |||||||
| | 2024 | 2023 | ||||||
| Cash paid for operating lease liabilities | $ | $ | ||||||
| Right-of-use assets obtained in exchange for new operating lease obligations | $ | $ | ||||||
| Weighted-average remaining lease term (years) | ||||||||
| Weighted-average discount rate | % | % | ||||||
Maturities of lease liabilities as of September 30, 2024 were as follows:
| 2024 (excluding the nine months ended September 30, 2024) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| | ||||
| Less: imputed interest | ( | ) | ||
| Total lease liabilities | $ | |||
| | | |||
| Lease liabilities, current portion | ||||
| Lease liabilities, net of current portion | ||||
| Total lease liabilities | $ | |||
9. Fair Value:
The carrying amounts of financial instruments, including cash and cash equivalents, short-term accounts receivable, accounts payable and term loan approximated fair value at September 30, 2024 and December 31, 2023 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.
10. Balance Sheet Detail:
Equipment and leasehold improvements consist of the following:
| | September 30, | December 31, | ||||||
| | 2024 | 2023 | ||||||
| Equipment | $ | $ | ||||||
| Capitalized software | ||||||||
| Buildings | ||||||||
| Leasehold improvements | ||||||||
| | ||||||||
| Less accumulated depreciation and amortization | ( | ) | ( | ) | ||||
| | $ | $ | ||||||
During the three months ended September 30, 2024 and 2023, depreciation and amortization expense remained consistent at $
In limited circumstances, the Company offers extended payment terms to customers for periods of
| | September 30, | December 31, | ||||||
| | 2024 | 2023 | ||||||
| Total amount due from customer | $ | $ | ||||||
| Less: unamortized discount | ( | ) | ( | ) | ||||
| Less: current portion included in accounts receivable | ( | ) | ( | ) | ||||
| | $ | $ | ||||||
The undiscounted cash flows to be received by the Company relating to these accounts receivable long-term is expected to be $
Accounts payable and accrued expenses consist of the following:
| | September 30, | December 31, | ||||||
| | 2024 | 2023 | ||||||
| Trade accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Other accounts payable and accrued expenses | ||||||||
| | $ | $ | ||||||
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 $
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, 2024.
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
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 the date of termination, the Company had no borrowings outstanding under the Previous Credit Facility.
On April 8, 2022, the Company entered into a $
At September 30, 2024 and December 31, 2023, the Company had$
| 2024 (excluding the nine months ended September 30, 2024) | ||||
| 2025 | ||||
| 2026 | ||||
| Total | $ |
In connection with the acquisition of Data Solutions (See Note 6– Acquisition), the Company acquired an IDF that is with recourse to the Company. Data Solutions had previously entered into the IDF with AIB Commercial Finance Limited (“AIB”) pursuant to a Debt Purchase Agreement. The Company subsequently terminated the IDF during the nine months ended September 30, 2024. The proceeds from the IDF were used for working capital needs of Data Solutions. Borrowings under the IDF were based on accounts receivable up to
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.
A reconciliation of the numerators and denominators of the basic and diluted per share computations follows:
| | Nine months ended | Three months ended | ||||||||||||||
| | September 30, | September 30, | ||||||||||||||
| | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Numerator: | | | | | ||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Less distributed and undistributed income allocated to participating securities | ||||||||||||||||
| Net income attributable to common shareholders | ||||||||||||||||
| Denominator: | ||||||||||||||||
| Weighted average common shares (Basic) | ||||||||||||||||
| Weighted average common shares including assumed conversions (Diluted) | ||||||||||||||||
| Basic net income per share | $ | $ | $ | $ | ||||||||||||
| Diluted net income per share | $ | $ | $ | $ | ||||||||||||
13. Major Customers and Vendors:
The Company had major vendor that accounted for
The Company had
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 $
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
During the nine months ended September 30, 2024, the Company granted a total of
During the nine months ended September 30, 2023, the Company granted a total of
A summary of nonvested shares of Restricted Stock awards outstanding under the 2012 and 2021 Plans as of September 30, 2024, and changes during the nine months then ended is as follows:
| | | Weighted | ||||||
| | | Average Grant | ||||||
| | | Date | ||||||
| | Shares | Fair Value | ||||||
| Nonvested shares at January 1, 2024 | $ | |||||||
| Granted in 2024 | ||||||||
| Vested in 2024 | ( | ) | ||||||
| Forfeited in 2024 | ( | ) | ||||||
| Nonvested shares at September 30, 2024 | $ | |||||||
As of September 30, 2024, there is approximately $
During the three months ended September 30, 2024 and 2023, the Company recognized share-based compensation expense of $
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 Chief Executive Officer, who has been identified as the Company’s CODM, primarily uses operating income as the measure of profit or loss to assess segment performance and allocate resources. Operating income represents net sales less costs of sales, excluding depreciation and amortization expense and operating expenses. Net sales and cost of sales, excluding depreciation and amortization expense are directly attributed to each segment. The majority of operating expenses are also directly attributed to each segment, while certain other operating expenses are allocated to the segments in a reasonable manner considering the specific facts and circumstances of the expenses being allocated.
The Company is organized into 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 provider of cloud solutions and value-added reseller of software, hardware and services to customers worldwide. The Company's reportable segments are based on products and services delivered, and the Company's CODM decides how to assess performance and allocate resources based on segment.
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, inventory, goodwill and intangible assets 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, | ||||||||||||||
| | 2024 | 2023 | 2024 | 2023 | ||||||||||||
| Net Sales: | | | | | ||||||||||||
| Distribution | $ | $ | $ | $ | ||||||||||||
| Solutions | ||||||||||||||||
| | ||||||||||||||||
| Gross Profit: | | | | | ||||||||||||
| Distribution | $ | $ | $ | $ | ||||||||||||
| Solutions | ||||||||||||||||
| | ||||||||||||||||
| Direct Costs: | | | | | ||||||||||||
| Distribution | $ | $ | $ | $ | ||||||||||||
| Solutions | ||||||||||||||||
| | ||||||||||||||||
| Segment Income Before Taxes: (1) | | | | | ||||||||||||
| Distribution | $ | $ | $ | $ | ||||||||||||
| Solutions | ||||||||||||||||
| Segment Income Before Taxes | ||||||||||||||||
| | | | | | ||||||||||||
| General and administrative | $ | $ | $ | $ | ||||||||||||
| Acquisition related costs | ||||||||||||||||
| Depreciation and amortization expense | ||||||||||||||||
| Interest, net | ||||||||||||||||
| Foreign currency transaction loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of acquisition contingent consideration | ( | ) | ( | ) | ||||||||||||
| Income before taxes | $ | $ | $ | $ | ||||||||||||
| (1) | Excludes general corporate expenses including interest and foreign currency transaction loss |
| | As of | As of | ||||||
| | September 30, | December 31, | ||||||
| Selected Assets by Segment: | 2024 | 2023 | ||||||
| | | | ||||||
| Distribution | $ | $ | ||||||
| Solutions | ||||||||
| Segment Select Assets | ||||||||
| Corporate Assets | ||||||||
| Total Assets | $ | $ | ||||||
Geographic areas and net sales mix related to operations for the three and nine months ended September 30, 2024 and 2023 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, 2024 | September 30, 2024 | |||||||||||||||||||||||
| | Distribution | Solutions | Total | Distribution | Solutions | Total | ||||||||||||||||||
| Geography | | | ||||||||||||||||||||||
| USA | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Europe and United Kingdom | ||||||||||||||||||||||||
| Canada | ||||||||||||||||||||||||
| Total net sales | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| | | | | | | | ||||||||||||||||||
| Timing of Revenue Recognition | | | ||||||||||||||||||||||
| Transferred at a point in time where the Company is principal (1) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Transferred at a point in time where the Company is agent (2) | ||||||||||||||||||||||||
| Total net sales | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Nine months ended | Three months ended | |||||||||||||||||||||||
| September 30, 2023 | September 30, 2023 | |||||||||||||||||||||||
| | Distribution | Solutions | Total | Distribution | Solutions | Total | ||||||||||||||||||
| Geography | | | ||||||||||||||||||||||
| USA | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Europe and United Kingdom | ||||||||||||||||||||||||
| Canada | ||||||||||||||||||||||||
| Total net sales | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| | | | | | | | ||||||||||||||||||
| Timing of Revenue Recognition | | | ||||||||||||||||||||||
| Transferred at a point in time where the Company is principal (1) | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Transferred at a point in time where the Company is agent (2) | ||||||||||||||||||||||||
| Total net sales | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| (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, 2024 and December 31, 2023 were as follows.
| | September 30, | December 31, | ||||||
| Identifiable Assets by Geographic Areas | 2024 | 2023 | ||||||
| USA | $ | $ | ||||||
| Canada | ||||||||
| Europe and United Kingdom | ||||||||
| Total | $ | $ | ||||||
17. Related Party Transactions:
The Company made sales to a customer where a family member of one of our executives previously had a minority ownership position. The minority ownership position terminated during the nine months ended September 30, 2024. During the three months ended September 30, 2024, there were
18. Fair Value Measurements
Fair value is defined under US GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy has been established for valuation inputs to prioritize the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
Level 1 – observable inputs such as quoted prices for identical instruments traded in active markets.
Level 2 – inputs are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models and similar techniques.
The Company’s assets and liabilities that are measured at fair value on a recurring basis, by level, within the fair value hierarchy as of September 30, 2024 and December 31, 2023, respectively, are as follows:
| | As of September 30, 2024 | |||||||||||||||
| | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Assets: | | | | | ||||||||||||
| Treasury bills | $ | $ | $ | $ | ||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| | | | | | ||||||||||||
| Liabilities: | | | | | ||||||||||||
| Contingent earn-out | $ | $ | $ | $ | ||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||
| | As of December 31, 2023 | |||||||||||||||
| Assets: | | | | | ||||||||||||
| Treasury bills | $ | $ | $ | $ | ||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||
| | | | | | ||||||||||||
| Liabilities: | | | | | ||||||||||||
| Contingent earn-out | $ | $ | $ | $ | ||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. Observable or market inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s assumptions based on the best information available. The approach to estimating the contingent earn-out associated with the Company’s business combinations uses unobservable factors such as projected cash flows over the term of the contingent earn-out periods.
The Company’s investment in treasury bills are measured at fair value on a recurring basis based on quoted market prices in active markets and are classified as level 1 within the fair value hierarchy. The Company’s contingent earn-out liability is measured at fair value on a recurring basis and is classified as level 3 within the fair value hierarchy. During the fourth quarter of each year, the Company evaluates goodwill for impairment at the reporting unit level. The Company uses qualitative factors to determine whether it is “more likely than not” that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a goodwill impairment test. This measurement is classified based on level 3 input.
The following table presents the changes in the Company’s level 3 financial instruments measured at fair value on a recurring basis:
| Balance December 31, 2023 | $ | |||
| DSS acquisition - contingent earn-out | ||||
| Contingent earnout paid | ( | ) | ||
| Change in fair value of acquisition contingent consideration | ||||
| Translation adjustments | ||||
| Balance September 30, 2024 | $ |
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 Quarterly Report and the audited consolidated financial statements and notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, contained in the Company’s Annual Report on Form 10-K filed with the SEC on for the fiscal year ended December 31, 2023. 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, direct e-mail, and printed materials.
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, discounts and returns as a component of net sales and record vendor rebates, discounts and returns 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.
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 the dollar value of the shares repurchased were $0.8 million and $0.3 million, respectively, during the three months ended September 30, 2024. Total dividends paid and the dollar value of the shares repurchased were $0.8 million and $0.2 million, respectively, during the three months ended September 30, 2023. 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 52%, or $40.8 million, to $119.3 million for the three months ended September 30, 2024 compared to $78.5 million for the same period in the prior year. Gross profit increased 70%, or $10.0 million, to $24.3 million for the three months ended September 30, 2024, compared to $14.3 million for the same period in the prior year. Selling, general and administrative (“SG&A”) expenses increased 38%, or $3.8 million, to $13.9 million for the three months ended September 30, 2024 compared to $10.1 million for the same period in the prior year. Depreciation and amortization expense increased 94%, or $0.6 million, to $1.2 million for the three months ended September 30, 2024 compared to $0.6 million for the same period in the prior year. Net income increased 130%, or $3.1 million, to $5.5 million for the three months ended September 30, 2024 compared to $2.4 million for the same period in the prior year. Diluted income per share increased 129%, or $0.67 to $1.19 for the three months ended September 30, 2024 compared to $0.52 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 generally accepted accounting principles in the United States of America (“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 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 Expected Credit Losses
The Company maintains allowances for expected credit losses for estimated losses resulting from the inability of its customers to make required payments. Management determines the estimate of the allowance for expected credit losses by considering a number of factors, including historical experience, aging of the accounts receivable, as well as current market conditions and future forecasts of our customers’ ability to make payments for goods and services. 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 on the Consolidated Balance Sheets. If actual sales returns are greater than estimated by management, additional expense may be incurred.
Business Combinations
We apply the provisions of ASC 805, Business Combinations (“ASC 805”), in accounting for our acquisitions. ASC 805 requires that we evaluate whether a transaction pertains to an acquisition of assets, or to an acquisition of a business. A business is defined as an integrated set of assets and activities that is capable of being conducted and managed for the purpose of providing a return to investors. Asset acquisitions are accounted for by allocating the cost of the acquisition to the individual assets and liabilities assumed on a relative fair value basis; whereas the acquisition of a business requires us to recognize separately from goodwill the assets acquired and the liabilities assumed at the acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed.
Our valuation of acquired assets and assumed liabilities requires estimates, especially with respect to intangible assets that was derived using valuation techniques and models such as the income approach. Such models require use of estimates including discount rates, and future expected revenue. The approach to estimating an initial contingent consideration associated with the purchase price also uses similar unobservable factors such as projected cash flows over the term of the contingent earn-out period, discounted for the period over which the initial contingent consideration is measured and expected volatility. Based upon these assumptions, the initial contingent consideration is then valued using a Monte Carlo simulation.
We have used third-party qualified specialists to assist management in determining the fair value of assets acquired and liabilities assumed. This includes assistance with the determination of economic useful lives and valuation of identifiable intangibles.
We estimate the fair value based upon assumptions we believe to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from our estimates. Estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired and liabilities assumed. As a result, during the measurement period, which may be up to one year from the business acquisition date, we record certain adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill.
All acquisition-related costs are accounted for as expenses in the period in which they are incurred. Contingent consideration is remeasured each reporting period using Level 3 inputs, and the change in fair value, including accretion for the passage of time, is recognized in acquisition related costs in the consolidated statement of earnings.
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. The Company performs an evaluation of goodwill, utilizing either a qualitative or quantitative impairment test. The annual test for impairment is conducted as of October 1. The Company’s reporting units included in the assessment of potential goodwill impairment are the same as its operating segments. Goodwill is not amortized but is subject to periodic testing for impairment at the reporting unit level.
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.
Determining the fair value of a reporting unit is judgmental in nature and requires the use of significant estimates and assumptions, including net sales growth rates, gross profit margins, operating margins, discount rates and future market conditions, among others. Any changes in the judgments, estimates or assumptions used could produce significantly different results.
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 has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance related to deferred tax assets. In the event the Company were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination was made.
Share-Based Payments
Under the fair value recognition provision, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period. We make certain assumptions in order to value and expense our various share-based payment awards. In connection with our restricted stock programs we record the forfeitures when they occur. We review our valuation assumptions periodically and, as a result, we may change our valuation assumptions used to value stock-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. The Company recognized an unrealized loss of approximately $0.1 million on contracts outstanding as of September 30, 2024.
Recently Issued Accounting Pronouncements
In November 2023, the FASB issued Accounting Standards Update 2023-07 “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”. The amendments in this ASU are intended to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. The Company adopted the update in the first quarter of 2024 and it did not have a material effect on our consolidated financial statements.
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:
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| Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
| Cost of sales |
80.3 | 82.4 | 79.7 | 81.8 | ||||||||||||
| Gross profit |
19.7 | 17.6 | 20.3 | 18.2 | ||||||||||||
| Selling, general and administrative expenses |
13.0 | 13.0 | 11.7 | 12.9 | ||||||||||||
| Acquisition related costs |
0.4 | 0.1 | 0.5 | 0.3 | ||||||||||||
| Depreciation and amortization expense |
1.0 | 0.8 | 1.0 | 0.8 | ||||||||||||
| Income from operations |
5.4 | 3.7 | 7.1 | 4.2 | ||||||||||||
| Other income |
0.0 | 0.3 | (0.2 | ) | 0.2 | |||||||||||
| Income before income taxes |
5.0 | 4.0 | 6.0 | 4.4 | ||||||||||||
| Income tax provision |
1.2 | 1.1 | 1.4 | 1.4 | ||||||||||||
| Net income |
3.8 | % | 2.9 | % | 4.6 | % | 3.0 | % | ||||||||
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.
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| Net sales |
$ | 303,847 | $ | 245,229 | $ | 119,349 | $ | 78,457 | ||||||||
| Adjusted gross billings (Non-GAAP) |
$ | 1,180,294 | $ | 863,339 | $ | 465,184 | $ | 281,915 | ||||||||
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| Gross profit |
$ | 59,833 | $ | 43,176 | $ | 24,257 | $ | 14,274 | ||||||||
| Gross profit - Distribution |
$ | 51,454 | $ | 35,472 | $ | 21,557 | $ | 11,671 | ||||||||
| Gross profit - Solutions |
$ | 8,379 | $ | 7,704 | $ | 2,700 | $ | 2,603 | ||||||||
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| Adjusted EBITDA (Non-GAAP) |
$ | 22,391 | $ | 15,422 | $ | 9,933 | $ | 5,062 | ||||||||
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| Gross margin % - Adjusted gross billings (Non-GAAP) |
5.1 | % | 5.0 | % | 5.2 | % | 5.1 | % | ||||||||
| Effective margin % - Adjusted EBITDA (Non-GAAP) |
37.4 | % | 35.7 | % | 40.9 | % | 35.5 | % | ||||||||
We consider gross profit growth and effective margin to be key metrics in evaluating our business. During the three months ended September 30, 2024, gross profit increased 70%, or $10.0 million, to $24.3 million compared to $14.3 million for the same period in the prior year while effective margin increased to 40.9% compared to 35.5% for the same period in the prior year. During the nine months ended September 30, 2024, gross profit increased 39%, or $16.6 million, to $59.8 million compared to $43.2 million for the same period in the prior year while effective margin increased to 37.4% compared to 35.7% for the same period in the prior year.
Reconciliations of Non-GAAP Financial Measures
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| Net sales |
$ | 303,847 | $ | 245,229 | $ | 119,349 | $ | 78,457 | ||||||||
| Costs of sales related to sales where the Company is an agent |
876,447 | 618,110 | 345,835 | 203,458 | ||||||||||||
| Adjusted gross billings |
$ | 1,180,294 | $ | 863,339 | $ | 465,184 | $ | 281,915 | ||||||||
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.
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| Net income |
$ | 11,620 | $ | 7,077 | $ | 5,459 | $ | 2,372 | ||||||||
| Provision for income taxes |
3,561 | 2,618 | 1,659 | 1,095 | ||||||||||||
| Depreciation and amortization |
2,933 | 1,934 | 1,197 | 617 | ||||||||||||
| Interest expense |
266 | 94 | 105 | 45 | ||||||||||||
| EBITDA |
18,380 | 11,723 | 8,420 | 4,129 | ||||||||||||
| Share-based compensation |
2,810 | 3,422 | 904 | 687 | ||||||||||||
| Acquisition related costs |
1,201 | 277 | 609 | 246 | ||||||||||||
| Adjusted EBITDA |
$ | 22,391 | $ | 15,422 | $ | 9,933 | $ | 5,062 | ||||||||
We define adjusted EBITDA, as net income, plus provision for income taxes, depreciation, amortization, share-based compensation, interest, and acquisition related costs. 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.
Acquisitions
On July 31, 2024, we completed the acquisition of DSS for an aggregate purchase price of approximately $20.3 million (subject to certain adjustments) plus a potential post-closing earnout payment. On October 6, 2023, we completed the acquisition of Data Solutions for an aggregate purchase price of approximately €15.0 million (equivalent to $15.9 million USD), subject to certain working capital and other adjustments, paid at closing plus a potential post-closing earn-out. The operating results of DSS and Data Solutions are included in our operating results from the dates of acquisition.
The operating results of DSS and Data Solutions are included in our Distribution segment.
Three Months Ended September 30, 2024 Compared to Three Months Ended September 30, 2023
Net Sales and Adjusted Gross Billings
Net sales for the three months ended September 30, 2024 increased 52%, or $40.8 million, to $119.3 million compared to $78.5 million for the same period in the prior year. Adjusted gross billings for the three months ended September 30, 2024 increased 65%, or $183.3 million, to $465.2 million compared to $281.9 million for the same period in the prior year. Net sales and adjusted gross billings increased due to both organic growth from our existing vendor partnerships as well as the impact of the acquisitions of DSS and Data Solutions. Adjusted gross billings increased at a greater rate than net sales due to differences in the product mix between the two periods. During the three months ended September 30, 2024, 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, 2023, 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, 2024 increased 55%, or $39.7 million, to $111.9 million compared to $72.2 million for the same period in the prior year. Adjusted gross billings for the Distribution segment for the three months ended September 30, 2024 increased 69%, or $179.8 million, to $441.4 million compared to $261.6 million for the same period in the prior year. Net sales increased at a lesser rate than adjusted gross billings increased due to the aforementioned differences in the product mix between the two periods.
Solutions segment net sales for the three months ended September 30, 2024, increased 20%, or $1.3 million, to $7.5 million compared to $6.2 million for the same period in the prior year. Adjusted gross billings for the Solutions segment for the three months ended September 30, 2024 increased 17%, or $3.5 million, to $23.8 million compared to $20.3 million for the same period in the prior year. Net sales increased at a lesser rate than adjusted gross billings due to differences in the product mix between the two periods.
During the three months ended September 30, 2024, the Company had two major customers that accounted for 16% and 13%, respectively, of our total net sales. 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. The Company had one major vendor that accounted for 8% of total purchases during the three months ended September 30, 2024 and 15% of total purchases during the three months ended September 30, 2023.
Gross Profit
Gross profit for the three months ended September 30, 2024 increased 70%, or $10.0 million, to $24.3 million compared to $14.3 million for the same period in the prior year. Gross profit increased due to both organic growth from our existing vendor partnerships as well as the impact of the acquisitions of DSS and Data Solutions.
Distribution segment gross profit for the three months ended September 30, 2024 increased 85%, or $9.9 million, to $21.6 million compared to $11.7 million for the same period in the prior year. The increase in Distribution segment gross profit was due to the aforementioned organic growth from our existing vendor partnerships as well as the contribution from the acquisitions of DSS and Data Solutions, 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, 2024 increased 4%, or $0.1 million, to $2.7 million compared to $2.6 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, 2024 were $3.9 million compared to $2.8 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 three months ended September 30, 2024 were $0.8 million compared to $2.3 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, 2024 increased 38%, or $3.8 million, to $13.9 million compared to $10.1 million for the same period in the prior year primarily due to the impact of the acquisition of DSS. SG&A expenses were 3.0% of adjusted gross billings for the three months ended September 30, 2024, compared to 3.6% for the same period in the prior year. 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, 2024, increased 94%, or $0.6 million, to $1.2 million compared to $0.6 million for the same period in the prior year, primarily due to the amortization of intangible assets acquired in the DSS and Data Solutions acquisitions.
Acquisition Related Costs
Acquisition related costs for the three months ended September 30, 2024 were $0.6 million, which were primarily costs incurred in conjunction with the acquisition of DSS, compared to $0.2 million for the same period in the prior year, which were costs incurred in conjunction with the acquisition of Data Solutions.
Income Taxes
For the three months ended September 30, 2024 and 2023, the Company recorded a provision for income taxes of $1.7 million and $1.1 million, respectively. The effective tax rate for the three months ended September 30, 2024 and 2023 was 23.3% and 31.6%, respectively. The change in effective tax rate for the three months ended September 30, 2024 compared to the same period in the prior year was impacted by changes in the mix of jurisdictions in which taxable income was earned, as well as the prior year period included limitations on the deductibility of certain executive compensation amounts.
Nine Months Ended September 30, 2024 Compared to Nine Months Ended September 30, 2023
Net Sales and Adjusted Gross Billings
Net sales for the nine months ended September 30, 2024 increased 24%, or $58.6 million, to $303.8 million compared to $245.2 million for the same period in the prior year. Adjusted gross billings for the nine months ended September 30, 2024 increased 37%, or $317.0 million, to $1,180.3 million compared to $863.3 million for the same period in the prior year. Net sales and adjusted gross billings increased due to both organic growth from our existing vendor partnerships as well as the impact of the acquisitions of DSS and Data Solutions. 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, 2024, 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, 2023, 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, 2024 increased 26%, or $59.6 million, to $286.5 million compared to $226.9 million for the same period in the prior year. Adjusted gross billings for the Distribution segment for the nine months ended September 30, 2024 increased 38%, or $308.4 million, to $1113.6 million compared to $805.2 million for the same period in the prior year. Net sales increased at a lesser rate than adjusted gross billings due to the aforementioned differences in the product mix between the two periods.
Solutions segment net sales for the nine months ended September 30, 2024, decreased 6%, or $1.0 million, to 17.3 million compared to $18.3 million for the same period in the prior year. Adjusted gross billings for the Solutions segment for the nine months ended September 30, 2024 increased 15%, or $8.6 million, to $66.7 million compared to $58.1 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 nine months ended September 30, 2024, the Company had two major customers that accounted for 15% and 18%, respectively, of our total net sales. 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. The Company had one major vendor that accounted for11%,respectively, of total purchases during the nine months ended September 30, 2024 and 16% of total purchases during the nine months ended September 30, 2023.
Gross Profit
Gross profit for the nine months ended September 30, 2024 increased 39%, or $16.6 million, to $59.8 million compared to $43.2 million for the same period in the prior year. Gross profit increased due to both organic growth from our existing vendor partnerships as well as the impact of the acquisitions of DSS and Data Solutions.
Distribution segment gross profit for the nine months ended September 30, 2024 increased 45%, or $16.0 million, to $51.5 million compared to $35.5 million for the same period in the prior year. The increase in Distribution segment gross profit was due to the aforementioned organic growth from our existing vendor partnerships as well as the contribution from the acquisitions of DSS and Data Solutions, 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, 2024 increased 9%, or $0.7 million, to $8.4 million compared to $7.7 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, 2024 were$10.4 million compared to $9.2 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, 2024 were $4.4 million compared to $6.1 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, 2024 increased 23%, or $7.4 million, to $39.4 million compared to $31.9 million for the same period in the prior year, primarily due to the impact of the acquisition of DSS. SG&A expenses were 3.3% of adjusted gross billings for the nine months ended September 30, 2024, compared to 3.7% for the same period in the prior year. 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 nine months ended September 30, 2024, increased 54%, or $1.1 million, to $3.0 million compared to $1.9 million for the same period in the prior year, primarily due to the amortization of intangible assets acquired in the DSS acquisition.
Acquisition Related Costs
Acquisition related costs for the nine months ended September 30, 2024 were $1.2 million, which were primarily costs incurred in conjunction with the acquisition of DSS, compared to $0.3 million for the same period in the prior year, which were costs incurred in conjunction with the acquisition of Data Solutions.
Income Taxes
For the nine months ended September 30, 2024 and 2023, the Company recorded a provision for income taxes of $3.6 million and $2.6 million, respectively. The effective tax rate for the nine months ended September 30, 2024 and 2023 was 23.5% and 27.0%, respectively. The change in the effective tax rate for the nine months ended September 30, 2024 compared to the same period in the prior year was impacted by changes in the mix of jurisdictions in which taxable income was earned, as well as the prior year period included limitations on the deductibility of certain executive compensation amounts.
Liquidity and Capital Resources
Our cash and cash equivalents as of September 30, 2024 decreased 39%, or $14.2 million, to $22.1 million compared to $36.3 million as of December 31, 2023.
Net cash and cash equivalents provided by operating activities for the nine months ended September 30, 2024 was $17.8 million, comprised primarily of net income adjusted for non-cash items of $18.7 million, partially offset by changes in operating assets and liabilities of $0.9 million.
Net cash and cash equivalents used in investing activities during the nine months ended September 30, 2024 was $24.3 million, comprised of $3.6 million purchases of fixed assets supporting our ongoing ERP project and $20.7 million payment for the DSS acquisition.
Net cash and cash equivalents used in financing activities during the nine months ended September 30, 2024 was $8.1 million, comprised of dividend payments on our Common Stock of $2.3 million, purchases of treasury stock of $1.0 million, repayments of borrowings under term loan of $0.4 million and repayments of borrowings under credit facilities of $4.2 million.
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. 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, 2024.
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 was 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, 2024, the Company had $0.9 million outstanding under the Term Loan.
In connection with the acquisition of Data Solutions, the Company acquired an invoice discounting facility (“IDF”) that was with recourse to the Company. Data Solutions had previously entered into the IDF with AIB Commercial Finance Limited (“AIB”) pursuant to a Debt Purchase Agreement. The proceeds from the IDF were used for working capital needs of Data Solutions. Borrowings under the IDF are based on accounts receivable up to 80% of the outstanding accounts receivable balance. The discount rate under the IDF is equal to 2.5% above AIB’s applicable lending rates that vary based on the currency of the accounts receivable. At September 30, 2024, the outstanding balance under the IDF at was zero, as the Company terminated the IDF during the period.
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 at least 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.
Off-Balance Sheet Arrangements
As of September 30, 2024, 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 SEC’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 Quarterly 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 Quarterly 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 SEC’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.
As described above, on July 31, 2024, we completed the acquisition of DSS. SEC guidance permits management to omit an assessment of an acquired business’ internal control over financial reporting from management’s assessment of internal control over financial reporting for a period not to exceed one year from date of acquisition. We are in the process of integrating DSS operations within our internal control structure. In executing this integration, we are analyzing, evaluating, and where necessary, making changes in controls and procedures related to the DSS business. Accordingly, management has excluded controls relating to DSS in this quarter’s evaluation of disclosure controls and procedures.
Changes in Internal Control Over Financial Reporting. Except for the acquisition of DSS described above, 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, 2024, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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 2024.
ISSUER PURCHASE OF EQUITY SECURITIES
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| July 1, 2024 - July 31, 2024 |
— | $ | — | — | $ | — | 545,786 | |||||||||||||
| August 1, 2024 - August 31, 2024 |
— | $ | — | — | $ | — | 545,786 | |||||||||||||
| September 1, 2024 - September 30, 2024 |
— | $ | — | — | $ | — | 545,786 | |||||||||||||
| Total |
— | $ | — | — | $ | — | 545,786 | |||||||||||||
| (1) |
Does not include 4,737 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, 2024, 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. |
During the three months ended September 30, 2024, of our directors or officers (as defined in Rule 16a-1(f) of the Exchange Act) informed us of the adoption or termination of a “Rule 10b5-1 trading arrangement,” as defined in Item 408 of Regulation S-K.
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Incorporated by Reference |
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| Exhibit No. |
Description of Exhibit |
Form |
Exhibit or Annex |
Filing Date |
File Number |
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| 3.1 |
Form of Amended and Restated Certificate of Incorporation of the Company. |
S-1 |
3.1 |
May 30, 1995 July 7, 1995 July 18, 1995 |
333-92810 |
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| 3.1(a) |
Certificate of Amendment of Restated Certificate of Incorporation of the Company. |
10-Q |
3.1(a) |
November 3, 2006 |
000-26408 |
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| 3.1(b) |
Certificate of Amendment of Restated Certificate of Information of the Company. |
8-K |
3.1 |
October 27, 2022 |
000-26408 |
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| 3.2 |
8-K |
3.1 |
December 8, 2022 |
000-26408 |
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| 31.1* |
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| 32.1# |
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| 101 |
The following financial information from Climb Global Solutions, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, filed with the SEC on November 1, 2024, 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. |
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| 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. |
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| * | Filed herewithin | ||||
| # | Furnished herewithin. This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act. | ||||
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.
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CLIMB GLOBAL SOLUTIONS, INC |
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| November 1, 2024 |
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By: |
/s/ Dale Foster |
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Dale Foster, Chief Executive Officer (Principal Executive Officer) |
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| November 1, 2024 | |
By: |
/s/ Andrew Clark |
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Andrew Clark, Vice President and Chief Financial Officer (Principal Financial Officer) |
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| November 1, 2024 | |
By: |
/s/ Matthew Sullivan |
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Matthew Sullivan, Vice President and Chief Accounting Officer (Principal Accounting Officer) |