Table of Contents

   

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2019

 

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. 000-26408

 

Wayside Technology Group, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

13-3136104

(State or other jurisdiction of

 

(I.R.S. Employer Identification No.)

incorporation or organization)

 

 

 

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

(Address of principal executive offices)

 

(732) 389-8950

Registrant’s Telephone Number

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

 

Check One:

Large Accelerated Filer ☐

 

Accelerated Filer ☐

 

 

Smaller Reporting Company ☒

Non-Accelerated Filer ☐

 

Emerging Growth Company ☐

 

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

 

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

There were 4,507,190 outstanding shares of common stock, par value $.01 per share (“Common Stock”) as of August 6, 2019, not including 777,310 shares classified as treasury stock. 

 

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

 

 

 

 

 

Title of each class:

    

Trading Symbol

    

Name of each exchange on which registered:

Common stock,  $.01 par value

 

WSTG

 

The NASDAQ Global Market

 

 

 

 

 

Table of Contents

Wayside Technology Group, Inc. and Subsidiaries

Table of Contents

 

 

 

 

 

Page

 

 

 

 

PART I FINANCIAL INFORMATION 

 

 

 

 

Item 1 

Financial Statements (unaudited)

 

 

 

 

 

Condensed Consolidated Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018 

3

 

 

 

 

Condensed Consolidated Statements of Earnings for the three and six months ended June 30, 2019 and 2018 (unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2019 and 2018 (unaudited)

5

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity for the three and six months ended June 30, 2019 and 2018 (unaudited)

6

 

   

 

 

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (unaudited)

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

8

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures about Market Risk

30

 

 

 

Item 4. 

Controls and Procedures

30

 

 

 

 

PART II OTHER INFORMATION

 

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

 

Item 6. 

Exhibits, Financial Statement Schedules

31

 

 

SIGNATURES 

32

 

 

2

Table of Contents

PART I — FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

Wayside Technology Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

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

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

 

    

2019

    

2018

    

 

 

(Unaudited)

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

9,374

 

$

14,883

 

Accounts receivable, net of allowances of $722 and $785, respectively

 

 

86,043

 

 

81,351

 

Inventory, net

 

 

1,447

 

 

1,473

 

Vendor prepayments

 

 

 —

 

 

3,172

 

Prepaid expenses and other current assets

 

 

2,534

 

 

1,988

 

Total current assets

 

 

99,398

 

 

102,867

 

 

 

 

 

 

 

 

 

Equipment and leasehold improvements, net

 

 

1,420

 

 

1,588

 

Right-of-use assets, net

 

 

1,975

 

 

 —

 

Accounts receivable-long-term, net

 

 

2,705

 

 

3,156

 

Other assets

 

 

156

 

 

215

 

Deferred income taxes

 

 

10

 

 

145

 

 

 

$

105,664

 

$

107,971

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

60,086

 

$

66,653

 

Lease liability, current portion

 

 

404

 

 

 —

 

Total current liabilities

 

 

60,490

 

 

66,653

 

 

 

 

 

 

 

 

 

Lease liability, net of current portion

 

 

2,358

 

 

 —

 

Deferred rent and tenant allowances

 

 

 —

 

 

745

 

Total liabilities

 

 

62,848

 

 

67,398

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Common stock, $.01 par value; 10,000,000 shares authorized; 5,284,500 shares issued: 4,507,982 and 4,496,494 shares outstanding, respectively

 

 

53

 

 

53

 

Additional paid-in capital

 

 

32,467

 

 

32,392

 

Treasury stock, at cost, 776,518 and 788,006 shares, respectively

 

 

(13,232)

 

 

(13,447)

 

Retained earnings

 

 

24,780

 

 

22,994

 

Accumulated other comprehensive loss

 

 

(1,252)

 

 

(1,419)

 

Total stockholders’ equity

 

 

42,816

 

 

40,573

 

 

 

$

105,664

 

$

107,971

 

 

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

3

Table of Contents

Wayside Technology Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Earnings

(Unaudited)

(Amounts in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended

 

Three months ended

 

 

 

June 30,

 

June 30,

 

 

    

2019

    

2018

    

2019

    

2018

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

95,534

 

$

84,466

 

$

50,676

 

$

43,914

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

80,481

 

 

71,073

 

 

42,857

 

 

37,416

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

15,053

 

 

13,393

 

 

7,819

 

 

6,498

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general, and administrative expenses

 

 

10,988

 

 

10,346

 

 

5,472

 

 

5,298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Separation expenses

 

 

100

 

 

2,446

 

 

100

 

 

2,446

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

3,965

 

 

601

 

 

2,247

 

 

(1,246)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

298

 

 

449

 

 

129

 

 

210

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency transaction gain (loss)

 

 

91

 

 

(2)

 

 

29

 

 

(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before provision for income taxes

 

 

4,354

 

 

1,048

 

 

2,405

 

 

(1,039)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

1,035

 

 

568

 

 

548

 

 

78

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

3,319

 

$

480

 

$

1,857

 

$

(1,117)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share-Basic

 

$

0.74

 

$

0.10

 

$

0.41

 

$

(0.25)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share-Diluted

 

$

0.74

 

$

0.10

 

$

0.41

 

$

(0.25)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — Basic

 

 

4,408

 

 

4,323

 

 

4,412

 

 

4,344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding — Diluted

 

 

4,408

 

 

4,323

 

 

4,412

 

 

4,344

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid per common share

 

$

0.34

 

$

0.34

 

$

0.17

 

$

0.17

 

 

 

 

 

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

4

Table of Contents

Wayside Technology Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended

 

Three months ended

 

 

 

June 30,

 

June 30,

 

 

    

2019

    

2018

    

2019

    

2018

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

3,319

 

$

480

 

$

1,857

 

$

(1,117)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

167

 

 

(327)

 

 

40

 

 

(147)

 

Other comprehensive income (loss)

 

 

167

 

 

(327)

 

 

40

 

 

(147)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

$

3,486

 

$

153

 

$

1,897

 

$

(1,264)

 

 

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

5

Table of Contents

Wayside Technology Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

(Amounts in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid-In

 

Treasury

 

Retained

 

Comprehensive

 

 

 

 

   

Shares

   

Amount

   

Capital

   

Shares

   

Amount

   

Earnings

   

Loss

   

Total

Balance at January 1, 2019

 

5,284,500

 

 

53

 

 

32,392

 

788,006

 

 

(13,447)

 

 

22,994

 

 

(1,419)

 

 

40,573

Net income

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,463

 

 

 —

 

 

1,463

Translation adjustment

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

127

 

 

127

Dividends paid

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(767)

 

 

 —

 

 

(767)

Share-based compensation expense

 

 —

 

 

 —

 

 

165

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

165

Restricted stock grants (net of forfeitures)

 

 —

 

 

 —

 

 

(318)

 

(18,780)

 

 

318

 

 

 —

 

 

 —

 

 

 —

Treasury shares repurchased

 

 —

 

 

 —

 

 

 —

 

1,905

 

 

(20)

 

 

 —

 

 

 —

 

 

(20)

Balance at April 1, 2019

 

5,284,500

 

 

53

 

 

32,239

 

771,131

 

 

(13,149)

 

 

23,690

 

 

(1,292)

 

 

41,541

Net income

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,857

 

 

 —

 

 

1,857

Translation adjustment

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

40

 

 

40

Dividends paid

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(767)

 

 

 —

 

 

(767)

Share-based compensation expense

 

 —

 

 

 —

 

 

169

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

169

Restricted stock grants (net of forfeitures)

 

 —

 

 

 —

 

 

59

 

3,500

 

 

(59)

 

 

 —

 

 

 —

 

 

 —

Treasury shares repurchased

 

 —

 

 

 —

 

 

 —

 

1,887

 

 

(24)

 

 

 —

 

 

 —

 

 

(24)

Balance at June 30, 2019

 

5,284,500

 

$

53

 

$

32,467

 

776,518

 

$

(13,232)

 

$

24,780

 

$

(1,252)

 

$

42,816

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

Paid-In

 

Treasury

 

Retained

 

Comprehensive

 

 

 

 

   

Shares

   

Amount

   

Capital

   

Shares

   

Amount

   

Earnings

   

Loss

   

Total

Balance at January 1, 2018

 

5,284,500

 

 

53

 

 

31,257

 

829,671

 

 

(14,207)

 

 

22,522

 

 

(913)

 

 

38,712

Net income

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,597

 

 

 —

 

 

1,597

Translation adjustment

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(180)

 

 

(180)

Dividends paid

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(764)

 

 

 —

 

 

(764)

Share-based compensation expense

 

 —

 

 

 —

 

 

349

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

349

Restricted stock grants (net of forfeitures)

 

 —

 

 

 —

 

 

(706)

 

(60,500)

 

 

871

 

 

 —

 

 

 —

 

 

165

Treasury shares repurchased

 

 —

 

 

 —

 

 

 —

 

9,126

 

 

(127)

 

 

 —

 

 

 —

 

 

(127)

Balance at April 1, 2018

 

5,284,500

 

 

53

 

 

30,900

 

778,297

 

 

(13,463)

 

 

23,355

 

 

(1,093)

 

 

39,752

Net loss

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(1,117)

 

 

 —

 

 

(1,117)

Translation adjustment

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(147)

 

 

(147)

Dividends paid

 

 —

 

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(771)

 

 

 —

 

 

(771)

Share-based compensation expense

 

 —

 

 

 —

 

 

2,038

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

2,038

Restricted stock grants (net of forfeitures)

 

 —

 

 

 —

 

 

(584)

 

(35,000)

 

 

584

 

 

 —

 

 

 —

 

 

 —

Treasury shares repurchased

 

 —

 

 

 —

 

 

 —

 

61,416

 

 

(866)

 

 

 —

 

 

 —

 

 

(866)

Balance at June 30, 2018

 

5,284,500

 

$

53

 

$

32,354

 

804,713

 

$

(13,745)

 

$

21,467

 

$

(1,240)

 

$

38,889

 

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

 

 

6

Table of Contents

Wayside Technology Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(Amounts in thousands)

 

 

 

 

 

 

 

 

 

 

 

Six months ended

 

 

 

June 30,

 

 

    

2019

    

2018

    

Cash flows from operating activities

 

 

 

 

 

 

 

Net income

 

$

3,319

 

$

480

 

Adjustments to reconcile net income to net cash and cash equivalents (used in) provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization expense

 

 

261

 

 

236

 

Deferred income tax expense

 

 

135

 

 

 7

 

Share-based compensation expense

 

 

334

 

 

2,387

 

Loss on disposal of fixed assets

 

 

 —

 

 

10

 

Amortization of discount on accounts receivable

 

 

(287)

 

 

(439)

 

Amortization of right-of-use assets

 

 

188

 

 

 —

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(3,776)

 

 

7,514

 

Inventory

 

 

28

 

 

453

 

Prepaid expenses and other current assets

 

 

(542)

 

 

(25)

 

Vendor prepayments

 

 

3,172

 

 

1,994

 

Accounts payable and accrued expenses

 

 

(6,610)

 

 

(4,723)

 

Lease liability, net

 

 

(146)

 

 

 —

 

Other assets and liabilities

 

 

53

 

 

(110)

 

Net cash and cash equivalents (used in) provided by operating activities

 

 

(3,871)

 

 

7,784

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchase of equipment and leasehold improvements

 

 

(86)

 

 

(189)

 

Net cash and cash equivalents used in investing activities

 

 

(86)

 

 

(189)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Purchase of treasury stock

 

 

(44)

 

 

(993)

 

Borrowings under revolving credit facility

 

 

 —

 

 

2,000

 

Repayments of borrowings under revolving credit facility

 

 

 —

 

 

(2,000)

 

Dividends paid

 

 

(1,534)

 

 

(1,535)

 

Net cash and cash equivalents used in financing activities

 

 

(1,578)

 

 

(2,528)

 

 

 

 

 

 

 

 

 

Effect of foreign exchange rate on cash and cash equivalents

 

 

26

 

 

(188)

 

 

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

 

(5,509)

 

 

4,879

 

Cash and cash equivalents at beginning of period

 

 

14,883

 

 

5,530

 

Cash and cash equivalents at end of period

 

$

9,374

 

$

10,409

 

 

 

 

 

 

 

 

 

Supplementary disclosure of cash flow information:

 

 

 

 

 

 

 

Income taxes paid

 

$

1,483

 

$

1,368

 

 

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

7

Table of Contents

 

Wayside Technology Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

June 30, 2019

(Unaudited)

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

 

1.           Basis of Presentation:

 

The accompanying unaudited condensed consolidated financial statements of Wayside Technology Group, 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, 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, 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, 2018.

 

 

2.           Recently Issued Accounting Standards:

 

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 supersedes the lease guidance under FASB ASC Topic 840, Leases, resulting in the creation of FASB ASC Topic 842, Leases. ASU 2016-02 requires a lessee to recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use (“ROU”) asset representing its right to use the underlying asset for the lease term from operating leases. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors were originally required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. In July 2018, FASB issued ASU No. 2018-11, Targeted Improvements. This update still requires modified retrospective transition; however, it adds the option to initially apply the new standard at the adoption date and recognize a cumulative-effect adjustment in the current period instead of at the beginning of the earliest period presented. Under this option, comparative periods presented in the financial statements in which the new lease standard is adopted will continue to be presented in accordance with prior guidance.

 

The Company adopted the new accounting standard on January 1, 2019 using the modified retrospective transition option. The new standard provides optional practical expedients in transition, which the Company has elected as a package permitting the Company to not reassess under the new standard prior conclusions regarding lease identification, lease classification and initial direct costs. Also, in accordance with the new standard, the Company has elected in transition and for an ongoing basis not to apply the recognition requirements for all short-term leases.

 

The adoption of the new standard had a material effect on the Company’s financial statements, with the most significant effects of adoption relating to (1) the recognition of new right-of-use assets and lease liabilities on its balance sheet for real estate operating leases; and (2) providing significant new disclosures about its leasing activities. Upon adoption, the Company recognized operating lease liabilities of approximately $3.0 million based on the present value of the remaining minimum rental payments for existing operating leases. The Company also recognized corresponding ROU assets, net of lease incentives of approximately $2.2 million. There was no impact to stockholders’ equity from the adoption.

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In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses (Topic 326) ("ASU No. 2016-13"). ASU No. 2016-13 revises the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU No. 2016-13 is effective for the Company in the first quarter of 2020, with early adoption permitted, and is to be applied using a modified retrospective approach. The Company is currently evaluating the potential effects of adopting the provisions of ASU No. 2016-13 on its Consolidated Financial Statements, particularly its recognition of allowances for accounts receivable.

 

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”), which permits the reclassification of stranded tax effects resulting from the Tax Cuts and Jobs Act (the “TCJA” or “U.S. tax reform”) from accumulated other comprehensive income (loss) to retained earnings. The new standard became effective for the Company beginning with the first quarter of 2019. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.

 

In June 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-07, “Compensation — Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting” (“ASU 2018-07”), which aligns the measurement and classification guidance for share-based payments to nonemployees with that for employees, with certain exceptions. It expands the scope of ASC 718 to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in the entity’s own operations and supersedes the guidance in ASC 505-50. The ASU retains the existing cost attribution guidance, which requires entities to recognize compensation cost for nonemployee awards in the same period and in the same manner (i.e., capitalize or expense) they would if they paid cash for the goods or services, but it moves the guidance to ASC 718. The new standard became effective for the Company beginning with the first quarter of 2019. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements.

 

In July 2018, the FASB issued ASU 2018-09 – Codification Improvements (“ASU 2018-09”), which facilitates amendments to a variety of topics to clarify, correct errors in, or make minor improvements to the accounting standards codification. The effective date of the standard is dependent on the facts and circumstances of each amendment. Some amendments do not require transition guidance and will be effective upon the issuance of this standard. A majority of the amendments in ASU 2018-09 became effective for the Company beginning with the first quarter of 2019. The adoption of this guidance did not have a material impact on the Company’s 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. 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 June 30, 2019 and 2018 were $4.2 million and $4.5 million, respectively. The net sales from our foreign operations for the six months ended June 30, 2019 and 2018 were $9.4 million and $9.9 million, respectively. 

 

4.          Comprehensive Income:

 

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

 

5.          Revenue Recognition:

 

The core principle of the revenue recognition criteria is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled in exchange for those goods or services. This principle is achieved through applying the following five-step approach:

Identification of the contract, or contracts, with a customer — A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and, (iii) we determine that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the

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case of a new customer, published credit and financial information pertaining to the customer. The Company considers customer purchase orders, which in some cases are governed by master agreements or general terms and conditions of sale, to be contracts with customers. All revenue is generated from contracts with customers.

Identification of the performance obligations in the contract — Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract. To the extent a contract includes multiple promised goods or services, we apply judgment to determine whether promised goods or services are capable of being distinct in the context of the contract. If these criteria are not met the promised goods or services are accounted for as a single performance obligation.

Determination of the transaction price —The transaction price is determined based on the consideration to which we will be entitled in exchange for transferring goods or services to the customer. Net sales are recorded net of estimated discounts, rebates, and returns. Vendor rebates are recorded when earned as a reduction to cost of sales or inventory, as applicable.

Allocation of the transaction price to the performance obligations in the contract — If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price, or SSP, basis. We determine SSP 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. Contracts with a significant financing component are discounted to their present value at contract inception and accreted up to the expected payment amounts. These contracts generally offer customers extended payment terms of up to three years.

 

Recognition of revenue when, or as, we satisfy a performance obligation — The Company recognizes revenue when its performance obligations are complete, and control of the specified goods or services pass to the customer. The Company considers the following indicators in determining when control passes to the customer: (i) the Company has a right to payment for the product or service, (ii) the customer has legal title to the product, (iii) the Company has transferred physical possession of the product, (iv) the Customer has the significant risk and rewards of ownership of the product, and (v) the customer has accepted the product. Substantially all our performance obligations are satisfied at a point in time, as our obligation is to deliver a product or fulfill an order for a third party to deliver ongoing services, maintenance or support.

 

Disaggregation of Revenue

 

We generate revenue from the re-sale of third-party software licenses, subscriptions, hardware, and related service contracts. Finance fees related to sales are classified as interest income. The following table depicts the disaggregation of revenue according to revenue type and is consistent with how we evaluate our financial performance:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Unaudited)

 

(Unaudited)

 

 

 

Six months ended

 

Three months ended

 

Net sales:

 

June 30,

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

 

2019

 

2018

 

 

2019

 

 

2018

 

Hardware, software and other products

 

$

85,974

 

$

75,973

 

$

45,784

 

$

40,111

 

Software - security & highly interdependent with support

 

 

3,620

 

 

3,596

 

 

1,727

 

 

1,493

 

Maintenance, support & other services

 

 

5,940

 

 

4,897

 

 

3,165

 

 

2,310

 

Net sales

 

$

95,534

 

$

84,466

 

$

50,676

 

$

43,914

 

 

Hardware, software and other products - Hardware product consists of sales of hardware manufactured by third parties. Hardware product is delivered from our warehouse or drop shipped directly from the vendor. Revenue from our hardware products is recognized on a gross basis, with the selling price to the customer as net sales, and the cost of the related product as cost of sales, upon transfer of control to the customer, as the Company is acting as a principal in the transaction. Control is generally deemed to have passed to the customer upon transfer of title and risk of ownership.

 

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Software product consists of sales of perpetual and term software licenses for products developed by third party vendors, which are distinct from related maintenance and support. Software licenses are delivered via electronic license keys provided by the vendor to the end user. Revenue from the sale of software products is recognized on a gross basis, with the selling price to the customer as net sales, and the cost of the related product as cost of sales, upon transfer of control to our customers as the Company is a principal in the transaction. Control 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. Other products include marketing revenues that are recorded on a gross basis as the Company is a principal in the arrangement.

 

Software maintenance and support, commonly known as software assurance or post contract support, consists of software updates and technical support provided by the software vendor to the licensor over a period. In cases where the software maintenance is distinct from the related software license, software maintenance is accounted for as a separate performance obligation. In cases where the software maintenance is not distinct from the related software license, it is accounted for as a single performance obligation with the related license. We utilize judgement in determining whether the maintenance is distinct from the software itself. This involves considering if the software provides its original intended functionality without the updates, or is dependent on frequent, or continuous updates to maintain its functionality. See Allocation of the transaction price to the performance obligations in the contract for a discussion of the allocation of maintenance and support costs when they are distinct from the related software licenses and Software - security and highly interdependent with support for a discussion of maintenance and support costs when they are not distinct from the related software license.

 

Software - security and highly interdependent with support - Software - security software and software highly interdependent with support consists of sales of security subscriptions and other licensed software products whose functionality is highly interdependent with, and therefore not distinct from, related software maintenance. Delivery of the software license and related support over time is considered a single performance obligation of the third-party vendor for these products. The Company is an agent in these transactions, with revenue being recorded on a net basis when its performance obligation of processing a valid order between the supplier and customer contracting for the services is complete.

 

Maintenance, support and other services revenue - Maintenance, support and other services revenue consists of third-party post-contract support that is not critical or essential to the core functionality of the related licensed software, and, to a lesser extent, from third-party professional services, software as a service, and cloud subscriptions. Revenue from maintenance, support and other service revenues is recognized on a net basis, upon fulfillment of an order to the customer, as the Company is an agent in the transaction, and its performance obligations are complete at the time a valid order between the parties is processed.

Costs to obtain and fulfill a contract - We pay 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.

 

Contract balances - Accounts receivable is recorded at the invoiced amount, net of an allowance for doubtful accounts. A receivable is recognized in the period we deliver goods or provide services or when our right to consideration is unconditional. Payment terms on invoiced amounts are typically 30-75 days. The balance of accounts receivable, net of allowance for doubtful accounts as of June 30, 2019 and December 31, 2018 is presented in the accompanying consolidated balance sheets. Accounts receivable-long-term result from product sales with extended payment terms that are discounted to their present values at the Company’s estimates of prevailing market rates at the time of the sale. The Company has determined that these amounts do not represent variable consideration as the amount earned is fixed. In subsequent periods, the accounts receivable is increased to the amounts due and payable by the customers through the accretion of interest income on the unpaid accounts receivable due in future years. The amounts due under these long-term accounts receivable due within one year are reclassified to the current portion of accounts receivable and are shown net of reserves. As our revenues are generally recognized at a point in time in the same period as they are billed, we have no deferred revenue balances. Provisions for doubtful accounts including long-term accounts receivable and returns are estimated based on historical write offs, sales returns and credit memo analysis which are adjusted to actual on a periodic basis.

 

Refund liability – The Company records a refund liability for expected product returns with a corresponding asset for an amount representing any expected recovery from vendors regarding the return.

 

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Principal versus agent considerations – The Company determines whether it is acting as a principal or agent in a transaction by assessing whether it controls a good or service prior to it being transferred to a customer, with control being defined as having the ability to direct the use of and obtain the benefits from the asset. The Company considers the following indicators, among others, in making the determination: 1) the Company is primarily responsible for fulfilling the promise to provide the promised good or service, 2) the Company has inventory risk, before or after the specified good or service has been transferred to the customer, and 3) the Company has discretion in establishing price for the specified good or service. Generally, we conclude that we are a principal in transactions where software or hardware products containing their core functionality are delivered to the customer at the time of sale and are agents in transactions where we are arranging for the provision of future performance obligations by a third party. As we enter into distribution agreements with third-party service providers, we evaluate whether we are acting as a principal or agent for each product sold under the agreement based on the nature of the product or service, and our performance obligations. Products for which there are significant ongoing third-party performance obligations include software maintenance, which includes periodic software updates and support, security software that is highly interdependent with maintenance, software as a service, cloud and third-party professional services. Sales of hardware, software and other products where we are a principal are recorded on a gross basis with the selling price to the customer recorded as sales and the cost of the product or software recorded as cost of sales. Sales where we are acting as an agent are recognized on a net basis at the date our performance obligations are complete. Under net revenue recognition, the cost paid to the vendor or third-party service provider is recorded as a reduction to sales, resulting in revenue being equal to the gross profit on the transaction.

 

6.            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 3 years to 11 years. The Company determines if an arrangement is a lease at inception. Leases with an initial term of 12 months or less are not recorded on the Condensed Consolidated Balance Sheets and lease expense for these leases is recognized on a straight-line basis over the lease term.

 

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 right-of-use assets and related lease liabilities were as follows:

 

 

 

 

 

 

 

Six months ended

 

 

June 30,

 

 

2019

Cash paid for operating lease liabilities

 

$

248

Right-of-use assets obtained in exchange for new operating lease obligations (1)

 

$

2,163

Weighted-average remaining lease term

 

 

7.6 years

Weighted-average discount rate

 

 

3.4%

 

(1)

Represents operating leases existing on January 1, 2019 and recognized as part of the Company’s adoption of ASU 2016-02. No new operating leases commenced during the six months ended June 30, 2019.

 

 

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Maturities of lease liabilities as of June 30, 2019 were as follows:

 

 

 

 

 

2019 (excluding the six months ended June 30, 2019)

    

$

212

2020

 

 

438

2021

 

 

405

2022

 

 

414

2023

 

 

463

Thereafter

 

 

1,573

 

 

 

3,505

Less: imputed interest

 

 

(743)

Total lease liabilities

 

$

2,762

 

 

 

 

Lease liabilities, current portion